UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

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

For the quarterly period ended ~~September 30, 2017~~March 31, 2019

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

For the transition period from to

Commission file number 000-09439

INTERNATIONAL BANCSHARES CORPORATION

(Exact name of registrant as specified in its charter)


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

1200 San Bernardo Avenue, Laredo, Texas 78042-1359

(Address of principal executive offices)

(Zip Code)

(956) 722-7611

(Registrant’s telephone number, including area code)

None

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

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


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

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

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

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


Large accelerated filer ☒		Accelerated filer ☐

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

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

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

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


Class		Shares Issued and Outstanding
Common Stock, $1.00 par value		~~66,074,545~~65,647,503 shares outstanding at ~~November 3, 2017~~May 6, 2019

PART I - FINANCIAL INFORMATION

Item 1. Financial Statements

INTERNATIONAL BANCSHARES CORPORATION AND SUBSIDIARIES

Consolidated Statements of Condition (Unaudited)

(Dollars in Thousands)


	September 30,		December 31,		March 31,		December 31,
	2017		2016		2019		2018
Assets
Cash and cash equivalents	$	290,575	$	269,198	$	349,164	$	316,797
Investment securities:
Held to maturity (Market value of $2,400 on September 30, 2017 and $2,400 on December 31, 2016)		2,400		2,400
Available-for-sale (Amortized cost of $4,290,577 on September 30, 2017 and $4,218,841 on December 31, 2016)		4,280,188		4,177,349
Held to maturity debt securities (Market value of $2,400 on March 31, 2019 and $1,200 on December 31, 2018)						2,400		1,200
Available for sale debt securities (Amortized cost of $3,447,719 on March 31, 2019 and $3,481,165 on December 31, 2018)						3,410,088		3,411,350
Equity securities with readily determinable fair values						6,075		5,937
Total investment securities		4,282,588		4,179,749		3,418,563		3,418,487
Loans		6,202,264		5,964,688		6,707,343		6,561,289
Less allowance for probable loan losses		(67,852)		(64,661)		(67,030)		(61,384)
Net loans		6,134,412		5,900,027		6,640,313		6,499,905
Bank premises and equipment, net		516,786		527,583		504,581		506,899
Accrued interest receivable		32,278		32,172		37,406		36,803
Other investments		555,067		517,162		303,950		337,507
Identified intangible assets, net		—		25
Cash surrender value of life insurance policies						284,327		282,646
Goodwill		282,532		282,532		282,532		282,532
Other assets		79,413		95,593		206,867		190,376
Total assets	$	12,173,651	$	11,804,041	$	12,027,703	$	11,871,952

INTERNATIONAL BANCSHARES CORPORATION AND SUBSIDIARIES

Consolidated Statements of Condition, continued (Unaudited)

(Dollars in Thousands)


	September 30,		December 31,		March 31,		December 31,
	2017		2016		2019		2018
Liabilities and Shareholders’ Equity
Liabilities:
Deposits:
Demand—non-interest bearing	$	3,244,829	$	3,158,051	$	3,558,719	$	3,454,840
Savings and interest bearing demand		3,253,382		3,203,728		3,346,749		3,268,237
Time		2,115,330		2,248,310		1,990,462		1,973,468
Total deposits		8,613,541		8,610,089		8,895,930		8,696,545
Securities sold under repurchase agreements		378,033		504,985		278,630		229,989
Other borrowed funds		1,067,500		733,375		510,895		705,665
Junior subordinated deferrable interest debentures		160,416		160,416		160,416		160,416
Other liabilities		138,977		70,509		197,128		139,755
Total liabilities		10,358,467		10,079,374		10,042,999		9,932,370
Shareholders’ equity:
Common shares of $1.00 par value. Authorized 275,000,000 shares; issued 96,003,077 shares on September 30, 2017 and 95,910,143 shares on December 31, 2016		96,003		95,910
Common shares of $1.00 par value. Authorized 275,000,000 shares; issued 96,137,257 shares on March 31, 2019 and 96,104,029 shares on December 31, 2018						96,137		96,104
Surplus		171,358		169,567		146,113		145,283
Retained earnings		1,846,570		1,777,963		2,083,218		2,064,134
Accumulated other comprehensive loss (including $0 on September 30, 2017 and $(3,287) on December 31, 2016 of comprehensive loss related to other-than-temporary impairment for non-credit related issues)		(6,539)		(26,697)
Accumulated other comprehensive loss						(29,405)		(54,634)
		2,107,392		2,016,743		2,296,063		2,250,887
Less cost of shares in treasury, 29,938,170 shares on September 30, 2017 and 29,934,675 on December 31, 2016		(292,208)		(292,076)
Less cost of shares in treasury, 30,495,448 shares on March 31, 2019 and 30,494,143 on December 31, 2018						(311,359)		(311,305)
Total shareholders’ equity		1,815,184		1,724,667		1,984,704		1,939,582
Total liabilities and shareholders’ equity	$	12,173,651	$	11,804,041	$	12,027,703	$	11,871,952

See accompanying notes to consolidated financial statements.

INTERNATIONAL BANCSHARES CORPORATION AND SUBSIDIARIES

Consolidated Statements of Income (Unaudited)

(Dollars in Thousands, except per share data)


	Three Months Ended				Nine Months Ended				Three Months Ended
	September 30,				September 30,				March 31,
	2017		2016		2017		2016		2019		2018
Interest income:
Loans, including fees	$	83,394	$	74,388	$	238,261	$	223,245	$	102,805	$	87,833
Investment securities:
Taxable		21,003		19,630		60,998		60,346		19,300		21,214
Tax-exempt		2,409		2,561		7,357		7,835		1,649		2,195
Other interest income		139		45		484		151		309		165
Total interest income		106,945		96,624		307,100		291,577		124,063		111,407

Interest expense:
Savings deposits		1,599		1,173		4,241		3,333		4,243		2,228
Time deposits		2,426		2,551		7,203		7,519		4,378		2,669
Securities sold under repurchase agreements		1,177		5,480		5,391		16,591		589		1,023
Other borrowings		3,396		812		7,234		2,196		3,494		4,689
Junior subordinated deferrable interest debentures		1,395		1,159		3,967		3,377		1,950		1,526

Total interest expense		9,993		11,175		28,036		33,016		14,654		12,135

Net interest income		96,952		85,449		279,064		258,561		109,409		99,272

Provision for probable loan losses		6,591		(1,347)		9,096		14,884		7,420		1,662

Net interest income after provision for probable loan losses		90,361		86,796		269,968		243,677		101,989		97,610

Non-interest income:
Service charges on deposit accounts		18,706		19,035		54,494		54,999		17,260		17,712
Other service charges, commissions and fees
Banking		13,095		13,722		34,505		35,056		10,876		11,122
Non-banking		1,853		1,803		5,052		4,794		1,509		1,360
Investment securities transactions, net		—		(1,345)		(1,612)		(1,705)		(4)		—
Other investments, net		4,938		4,082		12,036		14,699		3,948		4,726
Other income		2,774		3,233		8,569		10,229		2,540		4,055

Total non-interest income	$	41,366	$	40,530	$	113,044	$	118,072	$	36,129	$	38,975

INTERNATIONAL BANCSHARES CORPORATION AND SUBSIDIARIES

Consolidated Statements of Income, continued (Unaudited)

(Dollars in Thousands, except per share data)


	Three Months Ended				Nine Months Ended				Three Months Ended
	September 30,				September 30,				March 31,
	2017		2016		2017		2016		2019		2018
Non-interest expense:
Employee compensation and benefits	$	33,787	$	33,908	$	99,256	$	95,846	$	36,409	$	34,618
Occupancy		6,416		6,153		18,824		18,225		6,377		6,075
Depreciation of bank premises and equipment		6,407		6,175		18,936		18,563		6,981		6,273
Professional fees		3,577		3,661		11,143		10,400		3,592		2,572
Deposit insurance assessments		1,007		1,332		2,310		4,333		783		1,000
Net expense, other real estate owned		(407)		2,320		989		4,575		995		(271)
Amortization of identified intangible assets		—		32		25		96
Advertising		2,064		1,921		6,448		6,345		2,082		1,839
Early termination fee—securities sold under repurchase agreements		—		1,799		5,765		1,799
Software and software maintenance		4,302		3,687		12,155		10,721		4,497		4,072
Impairment charges (Total other-than-temporary impairment charges, $0 net of $0, $(300) net of $(367), $0 net of $0, and $(332) net of $(523) included in other comprehensive loss)		—		90		—		281
Other		14,558		15,589		45,199		45,385		11,235		12,731

Total non-interest expense		71,711		76,667		221,050		216,569		72,951		68,909

Income before income taxes		60,016		50,659		161,962		145,180		65,167		67,676

Provision for income taxes		20,388		14,872		49,761		46,721		13,261		14,256

Net income	$	39,628	$	35,787	$	112,201	$	98,459	$	51,906	$	53,420

Basic earnings per common share:

Weighted average number of shares outstanding		66,060,829		65,948,815		66,036,501		65,968,975		65,617,977		66,092,379
Net income	$	0.60	$	0.54	$	1.70	$	1.49	$	0.79	$	0.81

Fully diluted earnings per common share:

Weighted average number of shares outstanding		66,745,350		66,291,556		66,736,250		66,189,507		65,831,162		66,863,895
Net income	$	0.59	$	0.54	$	1.68	$	1.49	$	0.79	$	.80

See accompanying notes to consolidated financial statements

INTERNATIONAL BANCSHARES CORPORATION AND SUBSIDIARIES

Consolidated Statements of Comprehensive Income (Unaudited)

(Dollars in Thousands)


	Three Months Ended				Nine Months Ended				Three Months Ended
	September 30,				September 30,				March 31,
	2017		2016		2017		2016		2019		2018

Net income	$	39,628	$	35,787	$	112,201	$	98,459	$	51,906	$	53,420
Other comprehensive income, net of tax:

Net unrealized holding gains (losses) on securities available-for-sale arising during period (net of tax effects of $198, $(5,371), $10,290, and $15,334)		368		(9,975)		19,110		28,477
Reclassification adjustment for losses on securities available-for-sale included in net income (net of tax effects of $0, $471, $564, and $597)		—		874		1,048		1,108
Reclassification adjustment for impairment charges on available-for-sale securities included in net income (net of tax effects of $0, $31, $0, and $98)		—		59		—		183
Net unrealized holding gains (losses) on securities available for sale arising during period (net of tax effects of $6,706, and $(9,427))										25,226		(39,953)
Reclassification adjustment for losses on securities available for sale included in net income (net of tax effects of $1, and $0)										3		—
		368		(9,042)		20,158		29,768		25,229		(39,953)

Comprehensive income	$	39,996	$	26,745	$	132,359	$	128,227	$	77,135	$	13,467

See accompanying notes to consolidated financial statements.

INTERNATIONAL BANCSHARES CORPORATION AND SUBSIDIARIES

Consolidated Statements of Shareholders’ Equity

Quarters ended March 31, 2019 and 2018

(in Thousands, except per share amounts)


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


	Number							Other
	of	Common				Retained		Comprehensive		Treasury
	Shares	Stock		Surplus		Earnings		Income (Loss)		Stock		Total
Balance at December 31, 2017	96,019	$	96,019	$	171,816	$	1,891,805	$	(28,397)	$	(292,263)	$	1,838,980
Net Income	—		—		—		53,420		—		—		53,420
Dividends:
Payable ($.33 per share)	—		—		—		(21,814)		—		—		(21,814)
Purchase of treasury (0 shares)	—		—		—		—		—		—		—
Exercise of stock options	25		25		415		—		—		—		440
Stock compensation expense recognized in earnings	—		—		185		—		—		—		185
Other comprehensive income, net of tax:
Net change in unrealized gains and losses on available for sale securities, net of reclassification adjustments	—		—		—		—		(39,953)		—		(39,953)
Balance at March 31, 2018	96,044	$	96,044	$	172,416	$	1,923,411	$	(68,350)	$	(292,263)	$	1,831,258

See accompanying notes to consolidated financial statements.

INTERNATIONAL BANCSHARES CORPORATION AND SUBSIDIARIES

Consolidated Statements of Cash Flows (Unaudited)

(Dollars in Thousands)


	Nine Months Ended				Three Months Ended
	September 30,				March 31,
	2017		2016		2019		2018
Operating activities:

Net income	$	112,201	$	98,459	$	51,906	$	53,420

Adjustments to reconcile net income to net cash provided by operating activities:
Provision for probable loan losses		9,096		14,884		7,420		1,662
Specific reserve, other real estate owned		330		2,116		8		71
Depreciation of bank premises and equipment		18,936		18,563		6,981		6,273
Gain on sale of bank premises and equipment		(30)		(226)		(43)		(8)
(Gain) loss on sale of other real estate owned		(267)		42
Gain on sale of other real estate owned						(469)		(2)
Accretion of investment securities discounts		(307)		(406)		(55)		(75)
Amortization of investment securities premiums		18,068		19,142		4,024		5,700
Investment securities transactions, net		1,612		1,705		4		—
Impairment charges on available for sale securities		—		281
Amortization of identified intangible assets		25		96
Unrealized (gain) loss on equity securities with readily determinable fair values						(138)		774
Stock based compensation expense		699		822		265		185
Earnings from affiliates and other investments		(9,538)		(9,134)		(3,444)		(4,303)
Deferred tax (benefit) expense		(26)		6,752		(1,435)		269
(Increase) decrease in accrued interest receivable		(106)		2,616		(603)		1,683
Decrease in other assets		6,516		2,023
Net increase (decrease)in other liabilities		17,314		(1,028)
Increase in other assets						(20,685)		(42,473)
Increase in other liabilities						23,962		30,001

Net cash provided by operating activities		174,523		156,707		67,698		53,177

Investing activities:

Proceeds from maturities of securities						—		1,075
Proceeds from sales and calls of available for sale securities		279,419		326,037		41,420		18,145
Purchases of available for sale securities		(944,241)		(1,190,066)		(145,966)		(1,075)
Principal collected on mortgage backed securities		573,713		661,261		132,820		188,893
Net (increase) decrease in loans		(245,019)		43,857
Net increase in loans						(147,124)		(107,206)
Purchases of other investments		(10,282)		(45,622)		(13,045)		(17,963)
Distributions from other investments		349		18,368		46,677		5,367
Purchases of bank premises and equipment		(10,303)		(12,580)		(6,130)		(3,519)
Proceeds from sales of bank premises and equipment		2,194		310		1,510		12
Proceeds from sales of other real estate owned		11,139		7,956		707		376

Net cash used in investing activities	$	(343,031)	$	(190,479)
Net cash (used in) provided by investing activities					$	(89,131)	$	84,105

INTERNATIONAL BANCSHARES CORPORATION AND SUBSIDIARIES

Consolidated Statements of Cash Flows, continued (Unaudited)

(Dollars in Thousands)


	Nine Months Ended				Three Months Ended
	September 30,				March 31,
	2017		2016		2019		2018
Financing activities:

Net increase in non-interest bearing demand deposits	$	86,778	$	59,525	$	103,879	$	196,102
Net increase in savings and interest bearing demand deposits		49,654		62,415		78,512		148,635
Net decrease in time deposits		(132,980)		(111,878)
Net decrease in securities sold under repurchase agreements		(126,952)		(94,873)
Net increase in other borrowed funds		334,125		121,250
Net increase (decrease) in time deposits						16,994		(34,717)
Net increase (decrease) in securities sold under repurchase agreements						48,641		(94,852)
Net decrease in other borrowed funds						(194,770)		(363,625)
Purchase of treasury stock		(132)		(7,959)		(54)		—
Proceeds from stock transactions		1,185		259		598		440
Payments of cash dividends - common		(21,793)		(19,123)

Net cash provided by financing activities		189,885		9,616
Net cash provided by (used in) financing activities						53,800		(148,017)

Increase (decrease) in cash and cash equivalents		21,377		(24,156)		32,367		(10,735)

Cash and cash equivalents at beginning of period		269,198		273,053		316,797		265,357

Cash and cash equivalents at end of period	$	290,575	$	248,897	$	349,164	$	254,622

Supplemental cash flow information:
Interest paid	$	9,735	$	33,345	$	13,982	$	12,052
Income taxes paid		54,442		41,489		—		—
Non-cash investing and financing activities:
Net transfers from loans to other real estate owned		1,538		1,983	$	704	$	80
Dividends declared, not yet paid on common stock	$	21,801	$	20,446		32,822		21,814
Establishment of lease liability and right-of-use asset						6,171		—

See accompanying notes to consolidated financial statements.

INTERNATIONAL BANCSHARES CORPORATION AND SUBSIDIARIES

Notes to Consolidated Financial Statements

(Unaudited)

As used in this report, the words “Company,” “we,” “us” and “our” refer to International Bancshares Corporation, a Texas corporation, its five wholly-owned subsidiary banks, and other subsidiaries. The information that follows may contain forward-looking statements, which are qualified as indicated under “Cautionary Notice Regarding Forward-Looking Statements” in Item 2 (Management’s Discussion and Analysis of Financial Condition and Results of Operations) of this report. Our website address is www.ibc.com.

Note 1 — Basis of Presentation

~~The~~Our accounting and reporting policies ~~of International Bancshares Corporation (the “Corporation”) and Subsidiaries (the Corporation and Subsidiaries collectively referred to herein as the “Company”)~~ conform to accounting principles generally accepted in the United States of America and to general practices within the banking industry. ~~The~~Our consolidated financial statements include the accounts of ~~the~~International Bancshares Corporation, and ~~its~~our wholly-owned bank subsidiaries, International Bank of Commerce, Laredo (“IBC”), Commerce Bank, International Bank of Commerce, Zapata, International Bank of Commerce, Brownsville, International Bank of Commerce, Oklahoma (the “Subsidiary Banks”) and ~~the Corporation’s~~our wholly-owned non-bank subsidiaries, ~~IBC Subsidiary Corporation,~~ IBC Trading Company, Premier Tierra Holdings, Inc., IBC Charitable and Community Development Corporation, and IBC Capital Corporation. Effective January 1, 2019, we dissolved one of our non-bank subsidiaries, IBC Subsidiary Corporation, a second-tier bank holding company incorporated in the State of Delaware. All significant inter-company balances and transactions have been eliminated in consolidation. ~~The~~Our consolidated financial statements are unaudited, but include all adjustments, which, in the opinion of management, are necessary for a fair presentation of the results of the periods presented. All such adjustments were of a normal and recurring nature. These financial statements should be read in conjunction with the financial statements and the notes thereto in ~~the Company’s~~our latest Annual Report on Form 10-K. ~~The~~Our consolidated statement of condition at December 31, ~~2016~~2018 has been derived from the audited financial statements at that date but does not include all of the information and footnotes required by accounting principles generally accepted in the United States of America (“US GAAP”) for complete financial statements. Certain reclassifications have been made to make prior periods comparable. Operating results for the three ~~and nine~~ months ended ~~September 30, 2017~~March 31, 2019 are not necessarily indicative of the results for the year ending December 31, ~~2017~~2019 or any future period.

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

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

On January 1, 2019, we adopted the provisions of ASU 2016-02, “Leases.” ASU 2016-02 amends existing standards for accounting for leases by lessees, with accounting for leases by lessors remaining mainly unchanged from current guidance. The update requires that lessees recognize a lease liability and a right of use asset for all leases (with the exception of short-term leases) at the commencement date of the lease and disclose key information about leasing arrangements. The update is to be applied on a modified retrospective basis for leases existing at, or entered into after, the beginning of the earliest comparative period presented in the consolidated financial statements. In January 2018, the FASB issued a proposal that provides an additional transition method that would allow entities to not apply the guidance in the update in the comparative periods presented in the consolidated financial statements, but instead recognize a cumulative-effect adjustment to the opening balance of retained earnings in the period of adoption. As part of our business model, we primarily own all property we occupy, with the exception of certain branches operating in grocery stores or shopping centers and certain ATM locations and were classified as operating leases under previous guidance. The adoption of the standard did not have a significant impact on our consolidated financial statements. As of the date of

adoption, we recorded a right of use asset and a lease liability of approximately $6.4 million. The right of use asset and lease liability are included in other assets and other liabilities, respectively, on our consolidated statement of condition. Amortization of the right of use asset for the three months ended March 31, 2019 was approximately $214,000 and is included as a part of occupancy expense in our consolidated income statement.

Note 2 — Fair Value Measurements

ASC Topic 820, “Fair Value Measurements and Disclosures” (“ASC 820”), defines fair value, establishes a framework for measuring fair value in generally accepted accounting principles, and expands disclosures about fair value measurements. ASC 820 applies to all financial instruments that are being measured and reported on a fair value basis. ASC 820 defines fair value as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date; it also establishes a fair value hierarchy that prioritizes the inputs used in valuation methodologies into the following three levels:

Level 1 Inputs - Unadjusted quoted prices in active markets for identical assets or liabilities.

Level 2 Inputs - Observable inputs other than Level 1 inputs, such as quoted prices for similar assets or liabilities; quoted prices in markets that are not active; or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities.

Level 3 Inputs - Unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities. Level 3 assets and liabilities include financial

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

A description of the valuation methodologies used for instruments measured at fair value, as well as the general classification of such instruments pursuant to the valuation hierarchy is set forth below.

The following table represents assets and liabilities reported on the consolidated balance sheets at their fair value on a recurring basis as of ~~September 30, 2017~~March 31, 2019 by level within the fair value measurement hierarchy:


			Fair Value Measurements at								Fair Value Measurements at
			Reporting Date Using								Reporting Date Using
			(in Thousands)								(in Thousands)
			Quoted								Quoted
			Prices in								Prices in
			Active		Significant						Active		Significant
	Assets/Liabilities		Markets for		Other		Significant		Assets/Liabilities		Markets for		Other		Significant
	Measured at		Identical		Observable		Unobservable		Measured at		Identical		Observable		Unobservable
	Fair Value		Assets		Inputs		Inputs		Fair Value		Assets		Inputs		Inputs
	September 30, 2017		(Level 1)		(Level 2)		(Level 3)		March 31, 2019		(Level 1)		(Level 2)		(Level 3)
Measured on a recurring basis:
Assets:
Available-for-sale securities
Available for sale debt securities
Residential mortgage-backed securities	$	4,011,566	$	—	$	4,011,566	$	—	$	3,263,030	$	—	$	3,263,030	$	—
States and political subdivisions		240,546		—		240,546		—		147,058		—		147,058		—
Equity Securities		28,076		28,076		—		—		6,075		6,075		—		—
	$	4,280,188	$	28,076	$	4,252,112	$	—	$	3,416,163	$	6,075	$	3,410,088	$	—

The following table represents assets and liabilities reported on the consolidated balance sheets at their fair value on a recurring basis as of December 31, ~~2016~~2018 by level within the fair value measurement hierarchy:


			Fair Value Measurements at								Fair Value Measurements at
			Reporting Date Using								Reporting Date Using
			(in Thousands)								(in Thousands)
			Quoted								Quoted
			Prices in								Prices in
			Active		Significant						Active		Significant
	Assets/Liabilities		Markets for		Other		Significant		Assets/Liabilities		Markets for		Other		Significant
	Measured at		Identical		Observable		Unobservable		Measured at		Identical		Observable		Unobservable
	Fair Value		Assets		Inputs		Inputs		Fair Value		Assets		Inputs		Inputs
	December 31, 2016		(Level 1)		(Level 2)		(Level 3)		December 31, 2018		(Level 1)		(Level 2)		(Level 3)
Measured on a recurring basis:
Assets:
Available-for-sale securities
Available for sale securities
Residential mortgage - backed securities	$	3,894,470	$	—	$	3,876,865	$	17,605	$	3,223,010	$	—	$	3,223,010	$	—
States and political subdivisions		254,972		—		254,972		—		188,340		—		188,340		—
Equity Securities		27,907		27,907		—		—		5,937		5,937		—		—
	$	4,177,349	$	27,907	$	4,131,837	$	17,605	$	3,417,287	$	5,937	$	3,411,350	$	—

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

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

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


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

Certain financial assets and financial liabilities are measured at fair value on a non-recurring basis. The instruments are not measured at fair value on an ongoing basis but are subject to fair value adjustments in certain circumstances (for example, when there is evidence of impairment).

The following table represents financial instruments measured at fair value on a non-recurring basis as of and for the period ended ~~September 30, 2017~~March 31, 2019 by level within the fair value measurement hierarchy:

Fair Value Measurements at Reporting

Date Using

(in thousands)

Quoted

Assets/Liabilities

Prices in

Assets/Liabilities

Prices in

Measured at

Active

Significant

Measured at

Active

Significant

Fair Value

Markets for

Other

Significant

Net Provision

Fair Value

Markets for

Other

Significant

Net Provision

Year ended

Identical

Observable

Unobservable

(Credit)

Year ended

Identical

Observable

Unobservable

(Credit)

September 30,

Assets

Inputs

During

March 31,

Assets

Inputs

During

2017

(Level 1)

(Level 2)

(Level 3)

Period

2019

(Level 1)

(Level 2)

(Level 3)

Period

Measured on a non-recurring basis:

Assets:

Impaired loans

12,452

—

12,452

1,681

34,552

—

34,552

9,510

Other real estate owned

238

—

238

330

—

The following table represents financial instruments measured at fair value on a non-recurring basis as of and for the period ended December 31, ~~2016~~2018 by level within the fair value measurement hierarchy:

Fair Value Measurements at Reporting

Date Using

(in thousands)

Quoted

Assets/Liabilities

Prices in

Assets/Liabilities

Prices in

Measured at

Active

Significant

Measured at

Active

Significant

Fair Value

Markets

Other

Significant

Net (Credit)

Fair Value

Markets

Other

Significant

Net (Credit)

Year ended

for Identical

Observable

Unobservable

Provision

Year ended

for Identical

Observable

Unobservable

Provision

December 31,

Assets

Inputs

During

December 31,

Assets

Inputs

During

2016

(Level 1)

(Level 2)

(Level 3)

Period

2018

(Level 1)

(Level 2)

(Level 3)

Period

Measured on a non-recurring basis:

Assets:

Impaired loans

38,794

—

38,794

19,699

1,563

—

1,563

356

Other real estate owned

9,445

—

9,445

2,351

38,871

—

38,871

3,071

~~The Company’s~~Our assets measured at fair value on a non-recurring basis are limited to impaired loans and other real estate owned. Impaired loans are classified within Level 3 of the valuation hierarchy. The fair value of impaired loans is derived in accordance with FASB ASC 310, “Receivables”. Impaired loans are primarily comprised of collateral-dependent commercial loans. As the primary sources of loan repayments decline, the secondary repayment source, the collateral, takes on greater significance. Correctly evaluating the fair value becomes even more important. Re-measurement of the impaired loan to fair value is done through a specific valuation allowance included in the allowance for probable loan losses. The fair value of impaired loans is based on the fair value of the collateral, as determined through either an appraisal or evaluation process. The basis for ~~the Company’s~~our appraisal and appraisal review process is based on regulatory guidelines and strives to comply with all regulatory appraisal laws, regulations, and the Uniform Standards of Professional Appraisal Practice. All appraisals and evaluations are “as is” (the property’s highest and best use) valuations based on the current conditions of the property/project at that point in time. The determination of the fair value of the collateral is based on the net realizable value, which is the appraised value less any closing costs, when applicable. As of ~~September 30, 2017, the Company~~March 31, 2019, we had ~~$28,621,000~~$46,706,000 of impaired commercial collateral dependent loans, of which ~~$12,571,000~~$33,889,000 had an appraisal performed within the immediately preceding twelve months, and of which ~~$2,133,000~~$9,407,000 had an evaluation performed within the immediately preceding twelve months. As of December 31, ~~2016, the Company~~2018, we had ~~$38,108,000~~approximately $14,306,000 of impaired commercial collateral dependent loans, of which ~~$26,162,000~~$10,911,000 had an appraisal performed within the immediately preceding twelve months and of which ~~$6,836,000~~$0 had an evaluation performed within the immediately preceding twelve months.

~~The~~Our determination to either seek an appraisal or to perform an evaluation begins in weekly credit quality meetings, where the committee analyzes the existing collateral values of the impaired loans and where obsolete appraisals are identified. In order to determine whether ~~the Company~~we would obtain a new appraisal or perform an internal evaluation to determine the fair value of the collateral, the credit committee reviews the existing appraisal to determine if the collateral value is reasonable in view of the current use of the collateral and the economic environment related to the collateral. If the analysis of the existing appraisal does not find that the collateral value is reasonable under the current circumstances, ~~the Company~~we would obtain a new appraisal on the collateral or perform an internal evaluation of the collateral. The ultimate decision to get a new appraisal rests with the independent credit administration group. A new appraisal is not required if an internal evaluation, as performed by in-house experts, is able to appropriately update the original appraisal assumptions to reflect current market conditions and provide an estimate of the collateral’s market value for impairment analysis. The internal evaluations must be in writing and contain sufficient information detailing the analysis, assumptions and conclusions, and they must support performing an evaluation in lieu of ordering a new appraisal.

Other real estate owned is comprised of real estate acquired by foreclosure and deeds in lieu of foreclosure. Other real estate owned is carried at the lower of the recorded investment in the property or its fair value less estimated costs to sell such property (as determined by independent appraisal) within Level 3 of the fair value hierarchy. Prior to foreclosure, the value of the underlying loan is written down to the fair value of the real estate to be acquired by a charge to the allowance for probable loan losses, if necessary. The fair value is reviewed periodically and subsequent write-downs are made, accordingly, through a charge to operations. Other real estate owned is included in other assets on the

consolidated financial statements. For the three ~~and nine~~ months ended ~~September 30, 2017,~~March 31, 2019 and the ~~Company~~twelve months ended December 31, 2018, we recorded $0$51,000, and ~~$30,000,~~$170,000, respectively, in charges to the allowance for probable loan losses in connection with loans transferred to other real estate owned. For the three ~~and nine~~ months ended ~~September 30, 2017,~~March 31, 2019 and the ~~Company~~twelve months ended December 31, 2018, we recorded ~~$13,000~~$8,000, and ~~$330,000,~~$3,071,000, respectively, in adjustments to fair value in connection with other real estate owned.

The fair value estimates, methods, and assumptions for ~~the Company’s~~our financial instruments at ~~September 30, 2017~~March 31, 2019 and December 31, ~~2016~~2018 are outlined below.

Cash and Cash Equivalents

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

Time Deposits with Banks

The carrying amounts of time deposits with banks approximate fair value.

Investment Securities Held-to-Maturity

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

Investment Securities

For investment securities, which include U.S. Treasury securities, obligations of other U.S. government agencies, obligations of states and political subdivisions and mortgage ~~pass through~~pass-through and related securities, fair values are from an independent pricing service. The fair value measurements consider observable data that may include dealer quotes, market spreads, cash flows, the U.S. Treasury yield curve, live trading levels, trade execution data, market consensus prepayment speeds, credit information and the bond’s terms and conditions, among other things. See disclosures of fair value of investment securities in Note 6.

Loans

Fair values are estimated for portfolios of loans with similar financial characteristics. Loans are segregated by type, such as commercial, real estate and consumer loans, as outlined by regulatory reporting guidelines. Each category is segmented into fixed and variable interest rate terms and by performing and non-performing categories.

For variable rate performing loans, the carrying amount approximates the fair value. For fixed-rate performing loans, except residential mortgage loans, the fair value is calculated by discounting scheduled cash flows through the estimated maturity using estimated market discount rates that reflect the credit and interest rate risk inherent in the loan. For performing residential mortgage loans, fair value is estimated by discounting contractual cash flows adjusted for prepayment estimates using discount rates based on secondary market sources or the primary origination market. Fixed-rate performing loans are within Level 3 of the fair value hierarchy. At ~~September 30, 2017,~~March 31, 2019 and December 31, ~~2016,~~2018, the carrying amount of fixed-rate performing loans was ~~$1,479,403,000~~$1,512,111,000 and ~~$1,411,272,000,~~$1,515,437,000, respectively, and the estimated fair value was ~~$1,433,467,000~~$1,476,879,000 and ~~$1,375,807,000,~~$1,469,231,000, respectively.

Accrued Interest

The carrying amounts of accrued interest approximate fair value.

Deposits

The fair value of deposits with no stated maturity, such as non-interest bearing demand deposit accounts, savings accounts and interest bearing demand deposit accounts, was equal to the amount payable on demand as of ~~September 30, 2017~~March 31, 2019 and December 31, ~~2016.~~2018. The fair value of time deposits is based on the discounted value of contractual ~~cash flows.~~

cashflows. The discount rate is based on currently offered rates. Time deposits are within Level 3 of the fair value hierarchy. At ~~Septmeber 30, 2017~~March 31, 2019 and December 31, ~~2016,~~2018, the carrying amount of time deposits was ~~$2,115,330,000~~$1,990,462,000 and ~~$2,248,310,000,~~$1,973,468,000, respectively, and the estimated fair value was ~~$2,116,040,000~~$1,993,376,000 and ~~$2,247,648,000,~~$1,976,156,000, respectively.

Securities Sold Under Repurchase Agreements

Securities sold under repurchase agreements include ~~both~~ short- and long-term maturities. Due to the contractual terms of the short-term instruments, the carrying amounts approximated fair value at ~~September 30, 2017~~March 31, 2019 and December 31, 2016. The fair value of the long-term instruments is based on established market spreads using option adjusted spread methodology. Long-term repurchase agreements are within Level 3 of the fair value hierarchy. At September 30, 2017 and December 31, 2016, the carrying amount of long-term repurchase agreements was $100,000,000 and $300,000,000, respectively, and the estimated fair value was $98,728,000 and $289,324,000, respectively.2018.

Junior Subordinated Deferrable Interest Debentures

~~The Company~~We currently ~~has~~have floating-rate junior subordinated deferrable interest debentures outstanding. Due to the contractual terms of the floating-rate junior subordinated deferrable interest debentures, the carrying amounts approximated fair value at ~~September 30, 2017~~March 31, 2019 and December 31, ~~2016.~~2018.

Other Borrowed Funds

~~The Company~~We currently ~~has short~~have short- and long-term borrowings issued from the Federal Home Loan Bank (“FHLB”). Due to the contractual terms of the short-term borrowings, the carrying amounts approximated fair value at ~~September 30, 2017~~March 31, 2019 and December 31, ~~2016.~~2018. The long-term borrowings outstanding at ~~September 30, 2017~~March 31, 2019 and December 31, 2018 are fixed-rate borrowings and the fair value is based on established market spreads for similar types of borrowings. The fixed rate long-term borrowings are included in Level 2 of the fair value hierarchy. At ~~September 30, 2017,~~March 31, 2019 and December 31, 2018, the carrying amount of the fixed rate long-term FHLB borrowings was ~~$100,000,000~~$436,645,000 and $436,690,000, respectively, and the estimated fair value was ~~$99,925,400.~~$439,218,000 and $436,238,000, respectively.

Commitments to Extend Credit and Letters of Credit

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

Limitations

Fair value estimates are made at a point in time, based on relevant market information and information about the financial instrument. These estimates do not reflect any premium or discount that could result from offering for sale at one time ~~the Company’s~~our entire holdings of a particular financial instrument. Because no market exists for a significant portion of ~~the Company’s~~our financial instruments, fair value estimates are based on judgments regarding future expected loss experience, current economic conditions, risk characteristics of various financial instruments and other factors. These estimates are subjective in nature and involve uncertainties and matters of significant judgment and therefore cannot be determined with precision. Changes in assumptions could significantly affect the estimates.

Fair value estimates are based on existing on- and off-statement of condition financial instruments without attempting to estimate the value of anticipated future business and the value of assets and liabilities that are not considered financial instruments. Other significant assets and liabilities that are not considered financial assets or liabilities include the bank premises and equipment and core deposit value. In addition, the tax ramifications related to the effect of fair value estimates have not been considered in the above estimates.

Note 3 — Loans

A summary of loans, by loan type at ~~September 30, 2017~~March 31, 2019 and December 31, ~~2016~~2018 is as follows:


	September 30,		December 31,		March 31,		December 31,
	2017		2016		2019		2018
	(Dollars in Thousands)				(Dollars in Thousands)
Commercial, financial and agricultural	$	3,172,260	$	2,993,203	$	3,404,309	$	3,305,124
Real estate - mortgage		1,108,371		1,032,222		1,178,026		1,173,101
Real estate - construction		1,704,804		1,716,875		1,934,346		1,886,231
Consumer		53,959		55,168		46,073		46,316
Foreign		162,870		167,220		144,589		150,517
Total loans	$	6,202,264	$	5,964,688	$	6,707,343	$	6,561,289

Note 4 — Allowance for Probable Loan Losses

The allowance for probable loan losses primarily consists of the aggregate loan loss allowances of the ~~bank subsidiaries.~~Subsidiary Banks. The allowances are established through charges to operations in the form of provisions for probable loan losses. Loan losses or recoveries are charged or credited directly to the allowances. The allowance for probable loan

losses of each ~~bank subsidiary~~Subsidiary Bank is maintained at a level considered appropriate by management, based on estimated probable losses in the loan portfolio. The allowance for probable loan losses is derived from the following elements: (i) allowances established on specific impaired loans, which are based on a review of the individual characteristics of each loan, including the customer’s ability to repay the loan, the underlying collateral values, and the industry in which the customer operates; (ii) allowances based on actual historical loss experience for similar types of loans in ~~the Company’s~~our loan portfolio; and (iii) allowances based on general economic conditions, changes in the mix of loans, company resources, border risk and credit quality indicators, among other things. All segments of the loan portfolio continue to be impacted by economic uncertainty as the economy recovers from the recent prolonged economic recovery. Loans secured by real estate could be impacted negatively by the continued economic environment and resulting decrease in collateral values. Consumer loans may be impacted by continued and prolonged unemployment rates.downturn.

~~The Company’s~~Our management continually reviews the allowance for loan losses of the ~~bank subsidiaries~~Subsidiary Banks using the amounts determined from the allowances established on specific impaired loans, the allowance established on quantitative historical loss percentages, and the allowance based on qualitative data to establish an appropriate amount to maintain in ~~the Company’s~~our allowance for loan losses. Should any of the factors considered by management in evaluating the adequacy of the allowance for probable loan losses change, ~~the Company’s~~our estimate of probable loan losses could also change, which could affect the level of future provisions for probable loan losses. While the calculation of the allowance for probable loan losses utilizes management’s best judgment and all information reasonably available, the adequacy of the allowance is dependent on a variety of factors beyond ~~the Company’s~~our control, including, among other things, the performance of the entire loan portfolio, the economy, changes in interest rates and the view of regulatory authorities towards loan classifications.

The loan loss provision is determined using the following methods. On a weekly basis, loan past due reports are reviewed by the credit quality committee to determine if a loan has any potential problems and if a loan should be placed on the ~~Company’s~~ internal classified ~~report.~~report of the Subsidiary Banks. Additionally, the ~~Company’s~~ credit department of each Subsidiary Bank reviews the majority of ~~the Company’s~~our loans for proper internal classification purposes, regardless of whether they are past due, and segregates any loans with potential problems for further review. The credit department will discuss the potential problem loans with the servicing loan officers to determine any relevant issues that were not discovered in the evaluation. Also, an analysis of loans that is provided through examinations by regulatory authorities is considered in the review process. After the above analysis is completed, ~~the Company determines~~we determine if a loan should be placed on an internal classified report because of issues related to the analysis of the credit, credit documents, collateral and/or payment history.

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

Three Months Ended September 30, 2017

Domestic

Foreign




Commercial














Real Estate:

Other

Commercial

Construction &

Real Estate:

Commercial

Land

Farmland &

Real Estate:

Residential:

Residential:

Commercial

Development

Commercial

Multifamily

First Lien

Junior Lien

Consumer

Foreign

Total

(Dollars in Thousands)

Balance at June 30,

$
25,140

$
13,249

$
17,472

$
997

$
2,314

$
4,357

$
488

$
902

$
64,919

Losses charged to allowance

(4,249)

(213)

—

—

(16)

(202)

(63)

—

(4,743)

Recoveries credited to allowance

631

17

341

—

—

85

6

5

1,085

Net (losses) recoveries  charged to allowance

(3,618)

(196)

341

—

(16)

(117)

(57)

5

(3,658)

Provision charged (credited) to operations

5,473

(1,168)

371

—

817

995

82

21

6,591

Balance at September 30,

$
26,995

$
11,885

$
18,184

$
997

$
3,115

$
5,235

$
513

$
928

$
67,852

Three Months Ended September 30, 2016

Domestic

Foreign




Commercial














Real Estate:

Other

Commercial

Construction &

Real Estate:

Commercial

Land

Farmland &

Real Estate:

Residential:

Residential:

Commercial

Development

Commercial

Multifamily

First Lien

Junior Lien

Consumer

Foreign

Total

(Dollars in Thousands)

Balance at June 30,

$
25,982

$
11,109

$
16,942

$
855

$
2,277

$
3,400

$
532

$
936

$
62,033

Losses charged to allowance

(3,485)

(14)

(497)

—

(27)

—

(124)

(41)

(4,188)

Recoveries credited to allowance

791

6,073

512

—

11

74

11

—

7,472

Net (losses) recoveries charged to allowance

(2,694)

6,059

15

—

(16)

74

(113)

(41)

3,284

Provision charged (credited)to operations

2,602

(4,659)

291

(65)

126

221

98

39

(1,347)

Balance at September 30,

$
25,890

$
12,509

$
17,248

$
790

$
2,387

$
3,695

$
517

$
934

$
63,970


	Nine Months Ended September 30, 2017																		Three Months Ended March 31, 2019
	Domestic														Foreign				Domestic														Foreign
			Commercial																		Commercial
			Real Estate:																		Real Estate:
			Other		Commercial																Other		Commercial
			Construction &		Real Estate:		Commercial														Construction &		Real Estate:		Commercial
			Land		Farmland &		Real Estate:		Residential:		Residential:										Land		Farmland &		Real Estate:		Residential:		Residential:
	Commercial		Development		Commercial		Multifamily		First Lien		Junior Lien		Consumer		Foreign		Total		Commercial		Development		Commercial		Multifamily		First Lien		Junior Lien		Consumer		Foreign		Total
	(Dollars in Thousands)																		(Dollars in Thousands)

Balance at December 31,	$	25,649	$	13,889	$	16,731	$	806	$	2,455	$	3,716	$	531	$	884	$	64,661	$	12,596	$	15,123	$	19,353	$	1,808	$	3,467	$	7,719	$	447	$	871	$	61,384
Losses charged to allowance		(9,248)		(213)		(40)		—		(77)		(340)		(223)		—		(10,141)		(2,764)		—		(1)		—		(1)		(6)		(63)		—		(2,835)
Recoveries credited to allowance		3,484		20		488		—		7		182		35		20		4,236		638		20		283		—		1		102		17		—		1,061
Net (losses) recoveries charged to allowance		(5,764)		(193)		448		—		(70)		(158)		(188)		20		(5,905)		(2,126)		20		282		—		—		96		(46)		—		(1,774)

Provision charged (credited) to operations		7,110		(1,811)		1,005		191		730		1,677		170		24		9,096
Provision charged to operations																				942		(354)		6,245		537		79		(70)		61		(20)		7,420

Balance at September 30,	$	26,995	$	11,885	$	18,184	$	997	$	3,115	$	5,235	$	513	$	928	$	67,852
Balance at March 31,																			$	11,412	$	14,789	$	25,880	$	2,345	$	3,546	$	7,745	$	462	$	851	$	67,030


	Nine Months Ended September 30, 2016																		Three Months Ended March 31, 2018
	Domestic														Foreign				Domestic														Foreign
			Commercial																		Commercial
			Real Estate:																		Real Estate:
			Other		Commercial																Other		Commercial
			Construction &		Real Estate:		Commercial														Construction &		Real Estate:		Commercial
			Land		Farmland &		Real Estate:		Residential:		Residential:										Land		Farmland &		Real Estate:		Residential:		Residential:
	Commercial		Development		Commercial		Multifamily		First Lien		Junior Lien		Consumer		Foreign		Total		Commercial		Development		Commercial		Multifamily		First Lien		Junior Lien		Consumer		Foreign		Total
	(Dollars in Thousands)																		(Dollars in Thousands)

Balance at December 31,	$	21,431	$	13,920	$	19,769	$	1,248	$	3,509	$	5,321	$	638	$	1,152	$	66,988	$	27,905	$	11,675	$	16,663	$	1,109	$	2,950	$	6,103	$	440	$	842	$	67,687
Losses charged to allowance		(27,952)		(16)		(2,387)		(180)		(57)		(324)		(341)		(41)		(31,298)		(2,715)		(1)		—		—		(14)		(30)		(117)		—		(2,877)
Recoveries credited to allowance		6,447		6,080		598		—		18		188		53		12		13,396		583		2		18		—		1		66		12		—		682
Net (losses) recoveries charged to allowance		(21,505)		6,064		(1,789)		(180)		(39)		(136)		(288)		(29)		(17,902)		(2,132)		1		18		—		(13)		36		(105)		—		(2,195)

Provision charged (credited) to operations		25,964		(7,475)		(732)		(278)		(1,083)		(1,490)		167		(189)		14,884
Provision charged to operations																				(5,082)		122		8,122		(162)		69		(1,450)		102		(59)		1,662

Balance at September 30,	$	25,890	$	12,509	$	17,248	$	790	$	2,387	$	3,695	$	517	$	934	$	63,970

Balance at March 31,																			$	20,691	$	11,798	$	24,803	$	947	$	3,006	$	4,689	$	437	$	783	$	67,154

The allowance for probable loan losses is a reserve established through a provision for probable loan losses charged to expense, which represents management’s best estimate of probable loan losses when evaluating loans individually or collectively. The ~~decrease~~increase in the provision for probable loan losses charged to expense for the nine months ended September 30, 2017 can be attributed to a decrease in the historical loss experience in the commercial category of the calculation. The difference in the provision for probable loan losses charged to expense for the three months ended ~~September 30, 2017 compared to the same period of 2016~~March 31, 2019 can be attributed to a ~~large recovery~~specific reserve on a loan charged off in prior years of approximately $6,000,000 and the increase in qualitative factors as discussed below. As discussed in prior periods, charge-offs increased from historical levels due to the deterioration of one relationship that is secured by multiple pieces of ~~transportation equipment beginning~~real property on which car dealerships are operated. The deterioration was triggered by significant fraud by a high level insider of the car dealership resulting in the ~~fourth~~dealerships unexpectedly filing for bankruptcy and creating a potential exposure since the source of repayment from the borrower were the operations of the car dealerships. The relationship further deteriorated in the first quarter of ~~2014.~~2019 after the sponsor of the court approved debtor in possession plan discontinued its role in the process and thus did not fulfill its obligation to assume full responsibility of the accrued and unpaid interest. Although the relationship is secured by real property (the dealerships’ real estate), the real property has specialized use, contributing to a potential exposure for probable loss. In light of the new circumstances and management’s evaluation of the relationship, the decision was made to place the relationship on impaired, non-accrual status and place a specific reserve on the relationship in the amount of $9.5 million. The ~~Company uses~~impact of the specific reserve on the provision for probable loan loss charged to expense is not fully demonstrated in the charge for the quarter because we use a three year historical charge-off experience in the calculation, ~~therefore,~~and, as ~~those~~large charge-offs ~~begin to be~~in prior periods are eliminated from the calculation, the allowance for probable loan losses ~~will be~~is impacted. ~~On August 26, 2017, Hurricane Harvey made landfall~~As fluctuations occur in ~~Rockport, Texas as a category four storm and followed~~historical loss factors, management evaluates the ~~Gulf Coast of Texas north~~need to the Houston metro area and finally the State of Louisiana. The Texas Gulf Coast is an area where the Company serves many consumer and commercial customers. The Company has reviewed the exposure to losses of property arising from the impact of Hurricane Harvey and has determined that the impact is not significant to warrant a specific reserve; however, it is still evaluating the impact, therefore, the Company’s allowance for probable loan losses at September 30, 2017 includes factors inadjust the qualitative ~~ratios~~factors used in the calculation to ~~incorporate the potential impact of losses arising from the impact of Hurricane Harvey on certain portions of the loan portfolio. The increase in losses charged to allowance for~~properly reflect probable loan losses for the three and nine months ended September 30, 2016 can be attributed to further deterioration in the above identified and charged down relationship primarily secured by multiple pieces of transportation equipment. In March 2016, litigation against the management of the borrower was filed in the State of Nevada, resulting in a going concern issue with the operations of the borrower and the future use of the transportation equipment pledged as collateral on the relationship. As a result, management, in accordance with its credit review procedures, re-evaluated the collateral values on the equipment in light of the new circumstances and reduced the collateral values accordingly, resulting in a further charge-down of the relationship of approximately $16.8 million, which is included in the losses charged to the allowance in the commercial category in the tables detailing the three and nine months ended September 30, 2016 activity. The increase in recoveries for the three and nine months ended September 30, 2016 can be attributed to a large recovery on a loan charged off in prior years and is included in the Commercial Real Estate: Other Construction and Land Development category. losses.

The table below provides additional information on the balance of loans individually or collectively evaluated for impairment and their related allowance, by loan class as of ~~September 30, 2017~~March 31, 2019 and December 31, ~~2016:~~2018:


	September 30, 2017								March 31, 2019
	Loans Individually				Loans Collectively				Loans Individually				Loans Collectively
	Evaluated For				Evaluated For				Evaluated For				Evaluated For
	Impairment				Impairment				Impairment				Impairment
	Recorded				Recorded				Recorded				Recorded
	Investment		Allowance		Investment		Allowance		Investment		Allowance		Investment		Allowance
	(Dollars in Thousands)								(Dollars in Thousands)
Domestic
Commercial	$	20,193	$	300	$	1,008,849	$	26,695	$	18,608	$	666	$	1,194,931	$	10,746
Commercial real estate: other construction & land development		2,428		116		1,702,376		11,769		2,059		116		1,932,287		14,673
Commercial real estate: farmland & commercial		5,966		18		1,969,876		18,166		26,391		9,500		1,870,267		16,380
Commercial real estate: multifamily		496		—		166,881		997		507		—		293,605		2,345
Residential: first lien		6,651		—		421,204		3,115		6,216		—		450,698		3,546
Residential: junior lien		762		—		679,754		5,235		908		—		720,204		7,745
Consumer		1,318		—		52,641		513		1,074		—		44,999		462
Foreign		355		—		162,515		928		286		—		144,303		851

Total	$	38,169	$	434	$	6,164,096	$	67,418	$	56,049	$	10,282	$	6,651,294	$	56,748


	December 31, 2016								December 31, 2018
	Loans Individually				Loans Collectively				Loans Individually				Loans Collectively
	Evaluated For				Evaluated For				Evaluated For				Evaluated For
	Impairment				Impairment				Impairment				Impairment
	Recorded				Recorded				Recorded				Recorded
	Investment		Allowance		Investment		Allowance		Investment		Allowance		Investment		Allowance
	(Dollars in Thousands)								(Dollars in Thousands)
Domestic
Commercial	$	22,412	$	—	$	887,255	$	25,649	$	9,179	$	656	$	1,119,790	$	11,940
Commercial real estate: other construction & land development		4,776		371		1,712,099		13,518		2,092		116		1,884,139		15,007
Commercial real estate: farmland & commercial		10,810		546		1,932,260		16,185		3,509		—		1,946,389		19,353
Commercial real estate: multifamily		552		—		139,914		806		507		—		225,750		1,808
Residential: first lien		6,836		44		415,068		2,411		6,244		—		439,556		3,467
Residential: junior lien		978		—		609,340		3,716		901		—		726,400		7,719
Consumer		1,295		—		53,873		531		1,175		—		45,141		447
Foreign		746		—		166,474		884		293		—		150,224		871

Total	$	48,405	$	961	$	5,916,283	$	63,700	$	23,900	$	772	$	6,537,389	$	60,612

The table below provides additional information on loans accounted for on a non-accrual basis by loan class at ~~September 30, 2017~~March 31, 2019 and December 31, ~~2016:~~2018:


	September 30, 2017		December 31, 2016		March 31, 2019		December 31, 2018
	(Dollars in Thousands)				(Dollars in Thousands)
Domestic
Commercial	$	20,152	$	22,369	$	18,573	$	9,143
Commercial real estate: other construction & land development		2,428		4,776		2,059		2,092
Commercial real estate: farmland & commercial		5,966		8,314		26,391		3,509
Commercial real estate: multifamily		496		552		507		507
Residential: first lien		464		655		319		347
Residential: junior lien		12		166		165		171
Consumer		52		26		14		22
Foreign		—		387
Total non-accrual loans	$	29,570	$	37,245	$	48,028	$	15,791

Impaired loans are those loans where it is probable that all amounts due according to contractual terms of the loan agreement will not be collected. ~~The Company has~~We have identified these loans through ~~its~~our normal loan review procedures. Impaired loans are measured based on (i) the present value of expected future cash flows discounted at the loan’s effective interest rate; (ii) the loan’s observable market price; or (iii) the fair value of the collateral if the loan is collateral dependent. Substantially all of ~~the Company’s~~our impaired loans are measured at the fair value of the collateral. In limited cases, ~~the Company~~we may use other methods to determine the level of impairment of a loan if such loan is not collateral dependent.

The following tables detail key information regarding ~~the Company’s~~our impaired loans by loan class at ~~September 30, 2017~~March 31, 2019 and December 31, ~~2016:~~2018:


	September 30, 2017														March 31, 2019
							Quarter to Date				Year to Date										Quarter to Date
			Unpaid				Average				Average						Unpaid				Average
	Recorded		Principal		Related		Recorded		Interest		Recorded		Interest		Recorded		Principal		Related		Recorded		Interest
	Investment		Balance		Allowance		Investment		Recognized		Investment		Recognized		Investment		Balance		Allowance		Investment		Recognized
	(Dollars in Thousands)														(Dollars in Thousands)
Loans with Related Allowance
Domestic
Commercial	$	1,760	$	3,865	$	300	$	2,215	$	—	$	2,439	$	—	$	1,325	$	1,908	$	666	$	1,327	$	—
Commercial real estate: other construction & land development		148		169		116		149		—		151		—		134		169		116		135		—
Commercial real estate: farmland & commercial		500		590		18		500		—		496		—		24,463		24,774		9,500		24,480
Total impaired loans with related allowance	$	2,408	$	4,624	$	434	$	2,864	$	—	$	3,086	$	—	$	25,922	$	26,851	$	10,282	$	25,942	$	—


	March 31, 2019
					Quarter to Date
			Unpaid		Average
	Recorded		Principal		Recorded		Interest
	Investment		Balance		Investment		Recognized
	(Dollars in Thousands)
Loans with No Related Allowance
Domestic
Commercial	$	17,283	$	17,420	$	17,370	$	1
Commercial real estate: other construction & land development		1,925		2,167		1,924		—
Commercial real estate: farmland & commercial		1,928		2,493		2,305		—
Commercial real estate: multifamily		507		539		506		—
Residential: first lien		6,216		6,268		6,239		75
Residential: junior lien		908		918		912		11
Consumer		1,074		1,075		1,075		—
Foreign		286		286		288		3
Total impaired loans with no related allowance	$	30,127	$	31,166	$	30,619	$	90

September 30, 2017

Quarter to Date

Year to Date

Unpaid

Average



Average


Recorded

Principal

Recorded

Interest

Recorded

Interest

Investment

Balance

Investment

Recognized

Investment

Recognized

(Dollars in Thousands)

Loans with No Related Allowance













Domestic

Commercial

$
18,433

$
45,878

$
18,547

$
1

$
18,931

$
2

Commercial real estate: other construction & land development

2,280

2,397

2,296

—

3,456

—

Commercial real estate: farmland & commercial

5,466

6,235

7,936

21

9,456

79

Commercial real estate: multifamily

496

518

502

—

521

—

Residential: first lien

6,651

6,765

6,733

81

6,903

241

Residential: junior lien

762

774

765

11

975

35

Consumer

1,318

1,319

1,317

2

1,278

2

Foreign

355

355

759

4

753

12

Total impaired loans with no related allowance

$
35,761

$
64,241

$
38,855

$
120

$
42,273

$
371


	December 31, 2018
			Unpaid				Average
	Recorded		Principal		Related		Recorded		Interest
	Investment		Balance		Allowance		Investment		Recognized
	(Dollars in Thousands)
Loans with Related Allowance
Domestic
Commercial	$	1,563	$	2,161	$	656	$	1,741	$	—
Commercial real estate: other construction & land development		135		169		116		141		—
Total impaired loans with related allowance	$	1,698	$	2,330	$	772	$	1,882	$	—


	December 31, 2018
			Unpaid		Average
	Recorded		Principal		Recorded		Interest
	Investment		Balance		Investment		Recognized
	(Dollars in Thousands)
Loans with No Related Allowance
Domestic
Commercial	$	7,616	$	7,730	$	16,194	$	3
Commercial real estate: other construction & land development		1,957		2,205		2,151		—
Commercial real estate: farmland & commercial		3,509		4,031		36,632		—
Commercial real estate: multifamily		507		538		565		—
Residential: first lien		6,244		6,386		7,136		305
Residential: junior lien		901		911		976		44
Consumer		1,175		1,190		1,211		2
Foreign		293		293		327		14
Total impaired loans with no related allowance	$	22,202	$	23,284	$	65,192	$	368

December 31, 2016

Unpaid

Average

Recorded

Principal

Related

Recorded

Interest

Investment

Balance

Allowance

Investment

Recognized

(Dollars in Thousands)
Loans with Related Allowance











Domestic

Commercial real estate: other construction & land development

$
1,958

$
1,971

$
371

$
2,512

$
—

Commercial real estate: farmland & commercial

2,808

3,948

546

3,247

—

Commercial real estate: multifamily

62

62

44

62

—

Total impaired loans with related allowance

$
4,828

$
5,981

$
961

$
5,821

$
—

December 31, 2016

Unpaid

Average

Recorded

Principal

Recorded

Interest

Investment

Balance

Investment

Recognized

(Dollars in Thousands)
Loans with No Related Allowance

Domestic

Commercial

$
21,412

$
50,737

$
19,354

$
3

Commercial real estate: other construction & land development

2,818

4,419

2,336

67

Commercial real estate: farmland & commercial

8,002

9,054

8,523

110

Commercial real estate: multifamily

552

562

401

—

Residential: first lien

6,774

6,847

6,860

298

Residential: junior lien

978

1,017

1,011

52

Consumer

1,295

1,295

1,214

1

Foreign

746

746

751

16

Total impaired loans with no related allowance

$
42,577

$
74,677

$
40,450

$
547

The following table details key information regarding ~~the Company’s~~our impaired loans by loan class at ~~September 30, 2016:~~

September 30, 2016

Quarter to Date

Year to Date

Average

Average

Recorded

Interest

Recorded

Interest

Investment

Recognized

Investment

Recognized

(Dollars in Thousands)

Loans with Related Allowance








Domestic

Commercial

$
2,247

$
—

$
3,239

$
—

Commercial real estate: other construction & land development

159

—

162

—

Commercial real estate: farmland & commercial

5,036

24

5,639

73

Total impaired loans with related allowance

$
7,442

$
24

$
9,040

$
73

March 31, 2018:

September 30, 2016

Quarter to Date

Year to Date

Average

Average

Recorded

Interest

Recorded

Interest

Investment

Recognized

Investment

Recognized

(Dollars in Thousands)
Loans with No Related Allowance

Domestic

Commercial

$
13,813

$
1

$
15,234

$
3
Commercial real estate: other construction & land development

3,924

14

4,927

53
Commercial real estate: farmland & commercial

5,513

3

6,469

10
Commercial real estate: multifamily

577

—

349

—
Residential: first lien

6,712

75

6,644

220
Residential: junior lien

1,012

12

1,011

39
Consumer

1,229

—

1,191

1
Foreign

752

4

752

12
Total impaired loans with no related allowance

$
33,532

$
109

$
36,577

$
338


	March 31, 2018
	Quarter to Date
	Average
	Recorded		Interest
	Investment		Recognized
	(Dollars in Thousands)
Loans with Related Allowance
Domestic
Commercial	$	1,717	$	—
Commercial real estate: other construction & land development		144		—
Commercial real estate: farmland & commercial		15,103		—
Total impaired loans with related allowance	$	16,964	$	—


	March 31, 2018
	Quarter to Date
	Average
	Recorded		Interest
	Investment		Recognized
	(Dollars in Thousands)
Loans with No Related Allowance
Domestic
Commercial	$	16,820	$	1
Commercial real estate: other construction & land development		2,284		—
Commercial real estate: farmland & commercial		21,488		—
Commercial real estate: multifamily		471		—
Residential: first lien		6,960		77
Residential: junior lien		708		10
Consumer		1,208		1
Foreign		341		4
Total impaired loans with no related allowance	$	50,280	$	93

A portion of the impaired loans have adequate collateral and credit enhancements not requiring a related allowance for loan ~~loss, and management of the Company~~loss. Management recognizes the risks associated with these impaired loans, however, management

is confident ~~the Company’s~~our loss exposure regarding these credits will be significantly reduced due to ~~the Company’s~~our long-standing practices that ~~emphasize secured lending with~~encompass the following principles: (i) the financial strength of the borrower, including strong ~~collateral positions~~earnings, a high net worth, significant liquidity and an acceptable debt to worth ratio, (ii) managerial and business competence, (iii) the ability to repay, (iv) for a new business, projected cash flows, (v) loan to value, (vi) in the case of a secondary guarantor, support. Management is likewise confident the reserve for probable loan losses is adequate. The Company has no direct exposure to sub-prime loans in its loan portfolio, but the sub-prime crisis has affected the credit markets on a ~~national level,~~guarantor financial statement, and ~~as a result, the Company has experienced an increasing amount of impaired loans; however, management’s~~(vii) financial and/or other character references. Management’s decision to place loans in this category does not necessarily mean that ~~the Company~~we will experience significant losses from these loans or significant increases in impaired loans from these levels.

The following table details loans accounted for as “troubled debt restructuring,” segregated by loan class. Loans accounted for as troubled debt restructuring are included in impaired loans.


	September 30, 2017		December 31, 2016		March 31, 2019		December 31, 2018
		(Dollars in Thousands)				(Dollars in Thousands)
Domestic
Commercial	$	9,072	$	10,710	$	34	$	35
Commercial real estate: farmland & commercial		590		3,086
Residential: first lien		6,187		6,181		5,951		5,947
Residential: junior lien		750		812		743		730
Consumer		1,266		1,269		1,060		1,153
Foreign		355		360		286		293

Total troubled debt restructuring	$	18,220	$	22,418	$	8,074	$	8,158

The ~~bank subsidiaries charge off~~Subsidiary Banks charge-off that portion of any loan which management considers to represent a loss as well as that portion of any other loan which is classified as a “loss” by bank examiners. Commercial and industrial or real estate loans are generally considered by management to represent a loss, in whole or part, when an exposure beyond any collateral coverage is apparent and when no further collection of the loss portion is anticipated based on the borrower’s financial condition and general economic conditions in the borrower’s industry. Generally, unsecured consumer loans are charged-off when 90 days past due.

While our management ~~of the Company~~ believes that it is generally able to identify borrowers with financial problems reasonably early and to monitor credit extended to such borrowers carefully, there is no precise method of predicting loan losses. The determination that a loan is likely to be uncollectible and that it should be wholly or partially charged-off as a loss is an exercise of judgment. Similarly, the determination of the adequacy of the allowance for probable loan losses can be made only on a subjective basis. It is the judgment of ~~the Company’s~~our management that the allowance for probable loan losses at ~~September 30, 2017~~March 31, 2019 was adequate to absorb probable losses from loans in the portfolio at that date.

The following tables present information regarding the aging of past due loans by loan class at ~~September 30, 2017~~March 31, 2019 and December 31, ~~2016:~~2018:


	September 30, 2017														March 31, 2019
							90 Days or		Total												90 Days or		Total
	30 - 59		60 - 89		90 Days or		greater &		Past				Total		30 - 59		60 - 89		90 Days or		greater &		Past				Total
	Days		Days		Greater		still accruing		Due		Current		Portfolio		Days		Days		Greater		still accruing		Due		Current		Portfolio
	(Dollars in Thousands)														(Dollars in Thousands)
Domestic
Commercial	$	3,604	$	352	$	20,248	$	706	$	24,204	$	1,004,837	$	1,029,041	$	7,139	$	1,412	$	18,727	$	844	$	27,278	$	1,186,261	$	1,213,539
Commercial real estate: other construction & land development		444		—		864		49		1,308		1,703,496		1,704,804		7,451		1,111		1,865		1,041		10,427		1,923,919		1,934,346
Commercial real estate: farmland & commercial		9,117		29,568		4,062		676		42,747		1,933,095		1,975,842		6,486		5,292		25,328		401		37,106		1,859,552		1,896,658
Commercial real estate: multifamily		149		—		496		—		645		166,732		167,377		1,122		938		507		—		2,567		291,545		294,112
Residential: first lien		3,161		964		4,651		4,382		8,776		419,079		427,855		3,610		1,516		4,512		4,272		9,638		447,276		456,914
Residential: junior lien		1,369		420		682		682		2,471		678,045		680,516		982		815		1,739		1,574		3,536		717,576		721,112
Consumer		713		124		553		523		1,390		52,569		53,959		351		73		25		16		449		45,624		46,073
Foreign		1,468		267		262		262		1,997		160,873		162,870		3,018		726		144		144		3,888		140,701		144,589
Total past due loans	$	20,025	$	31,695	$	31,818	$	7,280	$	83,538	$	6,118,726	$	6,202,264	$	30,159	$	11,883	$	52,847	$	8,292	$	94,889	$	6,612,454	$	6,707,343


	December 31, 2016														December 31, 2018
							90 Days or		Total												90 Days or		Total
	30 - 59		60 - 89		90 Days or		greater &		Past				Total		30 - 59		60 - 89		90 Days or		greater &		Past				Total
	Days		Days		Greater		still accruing		Due		Current		Portfolio		Days		Days		Greater		still accruing		Due		Current		Portfolio
		(Dollars in Thousands)														(Dollars in Thousands)
Domestic
Commercial	$	4,081	$	829	$	21,123	$	392	$	26,033	$	883,634	$	909,667	$	4,651	$	1,089	$	19,851	$	10,890	$	25,591	$	1,103,378	$	1,128,969
Commercial real estate: other construction & land development		1,502		396		4,456		9		6,354		1,710,521		1,716,875		727		1,707		922		16		3,356		1,882,875		1,886,231
Commercial real estate: farmland & commercial		3,454		3,054		6,150		289		12,658		1,930,412		1,943,070		2,928		784		27,239		24,910		30,951		1,918,947		1,949,898
Commercial real estate: multifamily		44		—		552		—		596		139,870		140,466		927		—		578		71		1,505		224,752		226,257
Residential: first lien		5,615		1,350		4,143		3,756		11,108		410,796		421,904		3,998		1,677		3,362		3,079		9,037		436,763		445,800
Residential: junior lien		762		178		540		382		1,480		608,838		610,318		1,155		618		1,108		937		2,881		724,420		727,301
Consumer		910		95		413		387		1,418		53,750		55,168		486		19		45		32		550		45,766		46,316
Foreign		931		425		397		11		1,753		165,467		167,220		1,106		117		739		739		1,962		148,555		150,517
Total past due loans	$	17,299	$	6,327	$	37,774	$	5,226	$	61,400	$	5,903,288	$	5,964,688	$	15,978	$	6,011	$	53,844	$	40,674	$	75,833	$	6,485,456	$	6,561,289

The ~~increase in past due loans~~decrease in the ~~30 – 59 day category~~90 days or greater and still accruing at ~~September 30, 2017~~March 31, 2019 compared to December 31, ~~2016 can be primarily attributed to a commercial real estate transction involving a relationship that is secured by a retail building. The increase in the 60 – 89 day category for the same period~~2018 can be attributed to athe previously discussed relationship ~~that is~~ secured by ~~a water park that is currently classified as Substandard. The Company’s~~real property on which car dealerships are operated and the placement of the relationship on non-accrual impaired status.

Our internal classified report is segregated into the following categories: (i) “Special Review Credits,” (ii) “Watch List-Pass Credits,” and (iii) “Watch List-Substandard Credits.” The loans placed in the “Special Review Credits” category reflect management’s opinion that the loans reflect potential weakness which requires monitoring on a more frequent basis. The “Special Review Credits” are reviewed and discussed on a regular basis with the credit department and the lending staff to determine if a change in category is warranted. The loans placed in the “Watch List-Pass Credits” category reflect ~~the Company’s~~our opinion that the credit contains weaknesses which represent a greater degree of risk, which warrant “extra attention.” The “Watch List-Pass Credits” are reviewed and discussed on a regular basis with the credit department and the lending staff to determine if a change in category is warranted. The loans placed in the “Watch List-Substandard Credits” classification are considered to be potentially inadequately protected by the current sound worth and debt service capacity of the borrower or of any pledged collateral. These credit obligations, even if apparently protected by collateral value, have shown defined weaknesses related to adverse financial, managerial, economic, market or political conditions which may jeopardize repayment of principal and interest. Furthermore, there is the possibility that we could sustain some future loss ~~could be sustained by the Company~~ if such weaknesses are not corrected. For loans that are classified as impaired, management evaluates these credits in accordance with the provisions of ASC 310-10, “Receivables,” and, if deemed necessary, a specific reserve is allocated to the credit. The specific reserve allocated under ASC 310-10 is based on

(i) the present value of expected future cash flows discounted at the loan’s effective interest rate; (ii) the loan’s observable market price; or (iii) the fair value of the collateral if the loan is collateral dependent. Substantially all of ~~the Company’s~~our loans evaluated as impaired under ASC 310-10 are measured using the fair value of collateral method. In limited cases, ~~the Company~~we may use other methods to determine the specific reserve of a loan under ASC 310-10 if such loan is not collateral dependent.

The allowance based on historical loss experience on ~~the Company’s~~our remaining loan portfolio, which includes the “Special Review Credits,” “Watch List - Pass Credits,” and “Watch List - Substandard Credits” is determined by segregating the remaining loan portfolio into certain categories such as commercial loans, installment loans, international loans, loan concentrations and overdrafts. Installment loans are then further segregated by number of days past due. A historical loss percentage, adjusted for (i) management’s evaluation of changes in lending policies and procedures, (ii) current economic conditions in the market area ~~served by the Company,~~we serve, (iii) other risk factors, (iv) the effectiveness of the internal loan review function, (v) changes in loan portfolios, and (vi) the composition and concentration of credit volume is applied to each category. Each category is then added together to determine the allowance allocated under ASC 450-20.

A summary of the loan portfolio by credit quality indicator by loan class at ~~September 30, 2017~~March 31, 2019 and December 31, ~~2016~~2018 is as follows:


			September 30, 2017										March 31, 2019
			Special		Watch		Watch List—		Watch List—				Special		Watch		Watch List—		Watch List—
	Pass		Review		List—Pass		Substandard		Impaired		Pass		Review		List—Pass		Substandard		Impaired
			(Dollars in Thousands)										(Dollars in Thousands)
Domestic
Commercial	$	855,329	$	52	$	3,128	$	150,339	$	20,193	$	1,130,988	$	19	$	3,061	$	60,863	$	18,608
Commercial real estate: other construction & land development		1,638,432		912		—		63,032		2,428		1,865,359		1,640		9,284		56,004		2,059
Commercial real estate: farmland & commercial		1,799,806		10,608		36,800		122,662		5,966		1,669,873		62,012		39,269		99,113		26,391
Commercial real estate: multifamily		166,881		—		—		—		496		292,687		—		—		918		507
Residential: first lien		420,606		41		—		557		6,651		449,291		—		142		1,265		6,216
Residential: junior lien		679,604		150		—		—		762		719,334		—		870		—		908
Consumer		52,641		—		—		—		1,318		44,999		—		—		—		1,074
Foreign		162,515		—		—		—		355		144,303		—		—		—		286
Total	$	5,775,814	$	11,763	$	39,928	$	336,590	$	38,169	$	6,316,834	$	63,671	$	52,626	$	218,163	$	56,049


			December 31, 2016										December 31, 2018
			Special		Watch		Watch List—		Watch List—				Special		Watch		Watch List—		Watch List—
	Pass		Review		List—Pass		Substandard		Impaired		Pass		Review		List—Pass		Substandard		Impaired
			(Dollars in Thousands)										(Dollars in Thousands)
Domestic
Commercial	$	720,350	$	90,746	$	1,121	$	75,038	$	22,412	$	998,625	$	441	$	44,544	$	76,180	$	9,179
Commercial real estate: other construction & land development		1,648,633		1,986		—		61,480		4,776		1,817,098		1,648		9,055		56,338		2,092
Commercial real estate: farmland & commercial		1,792,542		7,983		59,872		71,863		10,810		1,726,711		62,046		38,373		119,259		3,509
Commercial real estate: multifamily		139,914		—		—		—		552		224,823		—		—		927		507
Residential: first lien		413,638		814		—		616		6,836		438,773		—		142		641		6,244
Residential: junior lien		609,190		150		—		—		978		725,538		—		862		—		901
Consumer		53,873		—		—		—		1,295		45,141		—		—		—		1,175
Foreign		166,474		—		—		—		746		150,224		—		—		—		293
Total	$	5,544,614	$	101,679	$	60,993	$	208,997	$	48,405	$	6,126,933	$	64,135	$	92,976	$	253,345	$	23,900

The decrease in ~~Special Review~~Watch List – Pass credits ~~for September 30, 2017 compared to December~~at March 31, ~~2016~~2019 from Decmeber 31, 2018 can be ~~primarily attributed~~attirubuted to the reclassification of a relationship secured by ~~barges used in the transportation of petroleum products from Special Review to Substandard and by the reclassification of a relationship secured by equipment used in~~ oil and gas ~~production from the Special Review~~properties to ~~the Pass category.~~Pass. The decrease in Watch List- Substandard and increase in ~~Watch-List Substandard Credits for September 30, 2017 compared to December 31, 2016~~Watch List – Impaired can be ~~primarily~~ attributed ~~to the relationship mentioned above, in addition~~ to the reclassification of ~~three additional relationships from Pass to Watch-List Substandard. One such~~the previously discussed relationship ~~is in the oil and gas production business, one is in the water park business and is~~ secured by ~~a water park and related hotel, and one is secured~~commercial real estate leased by construction equipment. Additionally, there was an increase in the outstanding balance on a relationship primarily secured by transportation equipment, which was already classified as Substandard at December 31, 2016.car dealerships.

Note 5 — Stock Options

On April 5, 2012, the Board of Directors adopted the 2012 International Bancshares Corporation Stock Option Plan (the “2012 Plan”). There are 800,000 shares of common stock available for stock option grants under the 2012 ~~Plan. Under the 2012~~ Plan, ~~both~~which may be qualified incentive stock options (“ISOs”) ~~and~~or non-qualified stock ~~options (“NQSOs”) may be granted.~~options. Options granted may be exercisable for a period of up to 10 years from the date of grant, excluding ISOs granted to 10% shareholders, which may be exercisable for a period of up to only five years. As of ~~September 30, 2017, 210,375~~March 31, 2019, 23,175 shares were available for future grants under the 2012 Plan.

A summary of option activity under the stock option plan for the ~~nine~~three months ended ~~September 30, 2017~~March 31, 2019 is as follows:


				Weighted						Weighted
		Weighted		average				Weighted		average
		average		remaining	Aggregate			average		remaining	Aggregate
	Number of	exercise		contractual	intrinsic		Number of	exercise		contractual	intrinsic
	options	price		term (years)	value ($)		options	price		term (years)	value ($)
					(in Thousands)						(in Thousands)
Options outstanding at December 31, 2016	800,502	$	19.43
Options outstanding at December 31, 2018							788,977	$	25.91
Plus: Options granted	—		—				6,000		36.94
Less:
Options exercised	92,934		12.72				33,225		18.01
Options expired	2,188		10.40				—		—
Options forfeited	15,238		20.30				19,975		24.85
Options outstanding at September 30, 2017	690,142		20.34	5.75	$	13,637
Options outstanding at March 31, 2019							741,777		26.38	5.99	$	8,699

Options fully vested and exercisable at September 30, 2017	256,801	$	18.92	4.88	$	5,439
Options fully vested and exercisable at March 31, 2019							372,409	$	20.53	4.34	$	6,517

Stock-based compensation expense included in the consolidated statements of income for the three ~~and nine~~ months ended ~~September 30, 2017~~March 31, 2019 and March 31, 2018 was ~~approximately $215,000~~$265,000 and $699,000, respectively. Stock-based compensation expense included in the consolidated statements of income for the three and nine months ended September 30, 2016 was approximately $268,000 and $822,000,$184,800, respectively. As of ~~September 30, 2017,~~March 31, 2019, there was approximately ~~$1,623,000~~$2,532,000 of total unrecognized stock-based compensation cost related to non-vested options granted under ~~the~~our Company plans that will be recognized over a weighted average period of ~~1.5~~2.0 years.

Note 6 — Investment Securities and Equity Securities with Readily Determinable Fair Values

~~The Company classifies~~We classify debt ~~and equity~~ securities into one of three categories: held-to maturity, available-for-sale, or trading. Such debt securities are reassessed for appropriate classification at each reporting date. Securities classified as “held-to-maturity” are carried at amortized cost for financial statement reporting, while securities classified as “available-for-sale” and “trading” are carried at their fair value. Unrealized holding gains and losses are included in net income for those securities classified as “trading,” while unrealized holding gains and losses related to those securities classified as “available-for-sale” are excluded from net income and reported net of tax as other comprehensive income (loss) and accumulated other comprehensive income (loss) until realized, or in the case of losses, when deemed other than temporary. In accordance with the provisions of ASU 2016-01, which we adopted on January 1, 2018, unrealized holding gains and losses related to equity securities with readily determinable fair values are included in net income.

2423

The amortized cost and estimated fair value by type of investment security at ~~September 30, 2017~~March 31, 2019 are as follows:


	Held to Maturity
			Gross		Gross
	Amortized		unrealized		unrealized		Estimated		Carrying
	cost		gains		losses		fair value		value
	(Dollars in Thousands)
Other securities	$	2,400	$	—	$	—	$	2,400	$	2,400
Total investment securities	$	2,400	$	—	$	—	$	2,400	$	2,400

Available-for-Sale

Gross

Gross

Amortized

unrealized

unrealized

Estimated

Carrying

cost

gains

losses

fair value

value(1)

(Dollars in Thousands)

Residential mortgage-backed securities

$
4,031,240

$
21,637

$
(41,311)

$
4,011,566

$
4,011,566

Obligations of states and political subdivisions

231,262

9,393

(109)

240,546

240,546

Equity securities

28,075

357

(356)

28,076

28,076

Total investment securities

$
4,290,577

$
31,387

$
(41,776)

$
4,280,188

$
4,280,188

~~(1)~~

~~Included in the carrying value of residential mortgage-backed securities are $700,593 of mortgage-backed securities issued by Ginnie Mae and $3,310,97~~3 ~~of mortgage-backed securities issued by Fannie Mae and Freddie Mac.~~

~~The amortized cost and estimated fair value by type of investment security at December 31, 2016 are as follows:~~

Held to Maturity

Gross

Gross

Amortized

unrealized

unrealized

Estimated

Carrying

cost

gains

losses

fair value

value

(Dollars in Thousands)

Other securities

$
2,400

$
—

$
—

$
2,400

$
2,400

Total investment securities

$
2,400

$
—

$
—

$
2,400

$
2,400


	Available-for-Sale										Available for Sale Debt Securities
			Gross		Gross		Estimated						Gross		Gross
	Amortized		unrealized		unrealized		fair		Carrying		Amortized		unrealized		unrealized		Estimated		Carrying
	cost		gains		losses		value		value(1)		cost		gains		losses		fair value		value(1)
	(Dollars in Thousands)										(Dollars in Thousands)
Residential mortgage-backed securities	$	3,946,144	$	18,246	$	(69,920)	$	3,894,470	$	3,894,470	$	3,303,579	$	9,002	$	(49,551)	$	3,263,030	$	3,263,030
Obligations of states and political subdivisions		244,622		10,783		(433)		254,972		254,972		144,140		2,933		(15)		147,058		147,058
Equity securities		28,075		314		(482)		27,907		27,907
Total investment securities	$	4,218,841	$	29,343	$	(70,835)	$	4,177,349	$	4,177,349	$	3,447,719	$	11,935	$	(49,566)	$	3,410,088	$	3,410,088

(1)

Included in the carrying value of residential mortgage-backed securities are ~~$850,033~~$574,588 of mortgage-backed securities issued by Ginnie Mae ~~$3,026,832~~and $2,688,442 of mortgage-backed securities issued by Fannie Mae and Freddie ~~Mac and $17,605~~Mac.

The amortized cost and estimated fair value by type of investment security at December 31, 2018 are as follows:


	Held to Maturity
			Gross		Gross
	Amortized		unrealized		unrealized		Estimated		Carrying
	cost		gains		losses		fair value		value
	(Dollars in Thousands)
Other securities	$	1,200	$	—	$	—	$	1,200	$	1,200
Total investment securities	$	1,200	$	—	$	—	$	1,200	$	1,200


	Available for Sale
			Gross		Gross		Estimated
	Amortized		unrealized		unrealized		fair		Carrying
	cost		gains		losses		value		value(1)
	(Dollars in Thousands)
Residential mortgage-backed securities	$	3,295,366	$	6,813	$	(79,169)	$	3,223,010	$	3,223,010
Obligations of states and political subdivisions		185,799		2,646		(105)		188,340		188,340
Total investment securities	$	3,481,165	$	9,459	$	(79,274)	$	3,411,350	$	3,411,350

(1)

Included in the carrying value of residential mortgage-backed securities are $501,293 of mortgage-backed securities issued by ~~non-government entities.~~Ginnie Mae and $2,721,717 of mortgage-backed securities issued by Fannie Mae and Freddie.

2524

The amortized cost and estimated fair value of investment securities at ~~September 30, 2017,~~March 31, 2019, by contractual maturity, are shown below. Expected maturities will differ from contractual maturities because borrowers may have the right to prepay obligations with or without prepayment penalties.


	Held to Maturity				Available-for-Sale				Held to Maturity				Available for Sale
	Amortized		Estimated		Amortized		Estimated		Amortized		Estimated		Amortized		Estimated
	Cost		fair value		Cost		fair value		Cost		fair value		Cost		fair value
	(Dollars in Thousands)								(Dollars in Thousands)
Due in one year or less	$	1,075	$	1,075	$	—	$	—	$	1,075	$	1,075	$	—	$	—
Due after one year through five years		1,325		1,325		—		—		1,325		1,325		—		—
Due after five years through ten years		—		—		1,939		1,990		—		—		2,246		2,296
Due after ten years		—		—		229,323		238,556		—		—		141,894		144,762
Residential mortgage-backed securities		—		—		4,031,240		4,011,566		—		—		3,303,579		3,263,030
Equity securities		—		—		28,075		28,076
Total investment securities	$	2,400	$	2,400	$	4,290,577	$	4,280,188	$	2,400	$	2,400	$	3,447,719	$	3,410,088

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

The amortized cost and fair value of available-for-sale debt investment securities pledged to qualify for fiduciary powers, to secure public monies as required by law, repurchase agreements and short-term fixed borrowings was ~~$1,484,916,000~~$1,183,510,000 and ~~$1,472,254,000,~~$1,165,856,000, respectively, at ~~September 30, 2017.~~March 31, 2019.

Proceeds from the sale and calls of debt securities available-for-sale were ~~$7,235,000 and $279,419,000~~$41,420,000 for the three ~~and nine~~ months ended ~~September 30, 2017, respectively,~~March 31, 2019, which included $0 ~~and $266,967,000~~ of mortgage-backed securities. Gross gains of $2 and gross losses of $6 were realized on the sales and calls for the three months ended March 31, 2019. Proceeds from the sale and call of debt securities ~~respectively.~~available-for-sale were $18,145,000 for the three months ended March 31, 2018, which included $0 of mortgage-backed securities. Gross gains of $0 and ~~$1,186,000 and~~ gross losses of $0 ~~and $2,798,000~~ were realized on the sales and calls for the three ~~and nine~~ months ended September 30, 2017, respectively. Proceeds from the sale of securities available-for-sale were $130,499,000 and $326,037,000 for the three and nine months ended September 30, 2016, respectively, which included $117,713,000 and $311,931,000 of mortgage-backed securities, respectively. Gross gains of $2,000 and $586,000 and gross losses of $1,347,000 and $2,291,000 were realized on the sales for the three and nine months ended September 30, 2016, respectively.March 31, 2018.

Gross unrealized losses on debt investment securities and the fair value of the related securities, aggregated by investment category and length of time that individual debt securities have been in a continuous unrealized loss position at ~~September 30, 2017,~~March 31, 2019, were as follows:


	Less than 12 months				12 months or more				Total				Less than 12 months				12 months or more				Total
			Unrealized				Unrealized				Unrealized				Unrealized				Unrealized				Unrealized
	Fair Value		Losses		Fair Value		Losses		Fair Value		Losses		Fair Value		Losses		Fair Value		Losses		Fair Value		Losses
	(Dollars in Thousands)												(Dollars in Thousands)
Available-for-sale:
Available for sale:
Residential mortgage-backed securities	$	2,026,450	$	(24,622)	$	857,381	$	(16,689)	$	2,883,831	$	(41,311)	$	20	$	—	$	2,533,666	$	(49,551)	$	2,533,686	$	(49,551)
Obligations of states and political subdivisions		12,612		(101)		524		(8)		13,136		(109)		—		—		4,402		(15)		4,402		(15)
Equity securities		16,743		(257)		2,151		(99)		18,894		(356)
	$	2,055,805	$	(24,980)	$	860,056	$	(16,796)	$	2,915,861	$	(41,776)	$	20	$	—	$	2,538,068	$	(49,566)	$	2,538,088	$	(49,566)

2625

Gross unrealized losses on investment securities and the fair value of the related securities, aggregated by investment category and length of time that individual securities have been in a continuous unrealized loss position, at December 31, ~~2016~~2018 were as follows:


	Less than 12 months				12 months or more				Total				Less than 12 months				12 months or more				Total
			Unrealized				Unrealized				Unrealized				Unrealized				Unrealized				Unrealized
	Fair Value		Losses		Fair Value		Losses		Fair Value		Losses		Fair Value		Losses		Fair Value		Losses		Fair Value		Losses
	(Dollars in Thousands)												(Dollars in Thousands)
Available-for-sale:
Available for sale:
Residential mortgage-backed securities	$	2,513,872	$	(52,245)	$	396,695	$	(17,675)	$	2,910,567	$	(69,920)	$	208,384	$	(2,124)	$	2,537,181	$	(77,045)	$	2,745,565	$	(79,169)
Obligations of states and political subdivisions		31,104		(433)		—		—		31,104		(433)		12,756		(99)		512		(6)		13,268		(105)
Equity securities		14,066		(184)		5,452		(298)		19,518		(482)
	$	2,559,042	$	(52,862)	$	402,147	$	(17,973)	$	2,961,189	$	(70,835)	$	221,140	$	(2,223)	$	2,537,693	$	(77,051)	$	2,758,833	$	(79,274)

The unrealized losses on investments in residential mortgage-backed securities are primarily caused by changes in market interest rates. Residential mortgage-backed securities are primarily securities issued by Freddie Mac, Fannie Mae and Ginnie Mae. The contractual cash obligations of the securities issued by Ginnie Mae are fully guaranteed by the U.S. Government. The contractual cash obligations of the securities issued by Freddie Mac and Fannie Mae are not fully guaranteed by the U.S. Government; however, ~~the Company believes~~we believe that the quality of the bonds is similar to other AAA rated bonds with limited credit risk, particularly given the placement of Fannie Mae and Freddie Mac into conservatorship by the federal government in early September 2008, and because securities issued by others that are collateralized by residential mortgage-backed securities issued by Fannie Mae and Freddie Mac are rated consistently as AAA rated securities. The decrease in fair value on residential mortgage-backed securities issued by Freddie Mac, Fannie Mae and Ginnie Mae is due to market interest rates. ~~The Company has~~We have no intent to sell and will more than likely not be required to sell before a market price recovery or maturity of the securities; therefore, it is ~~the~~our conclusion ~~of the Company~~ that the investments in residential mortgage-backed securities issued by Freddie Mac, Fannie Mae and Ginnie Mae are not considered other-than-temporarily impaired. ~~The Company had a small investment~~

Equity securities with readily determinable fair values consist primarily of Community Reinvestment Act funds. At March 31, 2019 and December 31, 2018, the balance in ~~non-agency residential mortgage-backed~~equity securities ~~that have additional market volatility beyond economically induced interest rate events, which~~with readily determinable fair values recorded at fair value were ~~sold in~~$6,075,000 and $5,937,000, respectively. Prior to January 1, 2018, the ~~first quarter of 2017. The Company concluded that the investments in non-agency residential mortgage-backed~~equity securities were ~~other-than-temporarily impaired due to both credit~~included in available-for-sale securities, with the related unrealized gain or loss recorded as a component of other comprehensive income. The following is a summary of unrealized and ~~other than credit issues for~~realized gains and losses recognized in net income on equity securities during the three ~~and nine~~ months ended September 30, 2016. Impairment charges of $90,000 ($58,500, after tax) and $281,000 ($182,650, after tax) were recorded for the three and nine months ended September 30, 2016, respectively. The impairment charge represents the credit related impairment on the securities.

The unrealized losses on investments in other securities are caused by fluctuations in market interest rates. The underlying cash obligations of the securities are guaranteed by the entity underwriting the debt instrument. The Company believes that the entity issuing the debt will honor its interest payment schedule, as well as the full debt at maturity. The decrease in fair value is primarily due to market interest rates and not other factors, and because the Company has no intent to sell and will more than likely not be required to sell before a market price recovery or maturity of the securities, it is the conclusion of the Company that the investments are not considered other-than-temporarily impaired.

~~The following tables present a reconciliation of credit-related impairment charges on available-for-sale investment recognized in earnings for the nine months ended September 30, 2017~~March 31, 2019 and the three ~~and nine~~ months ended ~~September 30, 2016 (Dollars in Thousands):~~March 31, 2018:

Balance at December 31, 2016

$
13,931
Sale of other-than-temporarily impaired available-for-sale securities during period

(13,931)
Balance at September 30, 2017

$
—


	Three Months Ended
	March 31, 2019
	(Dollars in Thousands)


Net gains (losses) recognized during the period on equity securities	$	138
Less: Net gains and (losses) recognized during the period on equity securities sold during the period		—

Unrealized gains (losses) recognized during the reporting period on equity securities still held at the reporting date	$	138

Balance at June 30, 2016

$
13,768
Impairment charges recognized during period

90
Balance at September 30, 2016

$
13,858

2726


	Three Months Ended
	March 31, 2018
	(Dollars in Thousands)

Net losses recognized during the period on equity securities	$	(774)
Less: Net gains and (losses) recognized during the period on equity securities sold during the period		—

Unrealized losses recognized during the reporting period on equity securities still held at the reporting date	$	(774)

Balance at December 31, 2015

$
13,577
Impairment charges recognized during period

281
Balance at September 30, 2016

$
13,858

Note 7 — Other Borrowed Funds

Other borrowed funds include FHLB borrowings, which are short-term and long-term borrowings issued by the FHLB of Dallas and the FHLB of Topeka at the market price offered at the time of funding. These borrowings are secured by residential mortgage-backed investment securities and a portion of ~~the Company’s~~our loan portfolio. At ~~September 30, 2017,~~March 31, 2019, other borrowed funds totaled ~~$1,067,500,000, an increase~~$510,895,000, a decrease of ~~45.6%~~27.6% from ~~$733,375,000~~$705,665,000 at December 31, ~~2016.~~2018. The ~~increase~~decrease in borrowings can be attributed to an increase in cash ~~needs to fund daily operations, purchases of~~arising from principal pay downs on available-for-sale debt securities and ~~the termination of a portion of the lead bank subsidiary’s long-term outstanding repurchase agreements.~~deposits.

Note 8 — Junior Subordinated Interest Deferrable Debentures

~~The Company has formed~~We have six statutory business trusts under the laws of the State of Delaware, for the purpose of issuing trust preferred securities. The six statutory business trusts we formed ~~by the Company~~ (the “Trusts”) have each issued Capital and Common Securities and invested the proceeds thereof in an equivalent amount of junior subordinated debentures ~~(the “Debentures”~~(“Debentures”) ~~issued by the Company.~~that we issued. As of ~~September 30, 2017~~March 31, 2019 and December 31, ~~2016,~~2018, the principal amount of ~~debentures~~Debentures outstanding totaled $160,416,000.

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

For financial reporting purposes, the Trusts are treated as our investments ~~of the Company~~ and not consolidated in ~~the~~our consolidated financial statements. Although the Capital and Common Securities issued by each of the Trusts are not included as a component of shareholders’ equity on the consolidated statement of condition, the Capital and Common Securities are treated as capital for regulatory purposes. Specifically, under applicable regulatory guidelines, the Capital and Common Securities issued by the Trusts qualify as Tier 1 capital up to a maximum of 25% of Tier 1 capital on an aggregate basis. Any amount that exceeds the 25% threshold would qualify as Tier 2 capital. At ~~September 30, 2017~~March 31, 2019 and December 31, ~~2016,~~2018, the total $160,416,000 of the Capital and Common Securities outstanding qualified as Tier 1 capital.

2827

The following table illustrates key information about each of the Capital and Common Securities and their interest rate at ~~September 30, 2017:~~March 31, 2019:

Junior

Subordinated

Deferrable

Interest

Repricing

Interest

Optional

Interest

Repricing

Interest

Optional

Debentures

Frequency

Rate

Rate Index(1)

Maturity Date

Redemption Date(1)

Debentures

Frequency

Rate

Rate Index(1)

Maturity Date

Redemption Date(1)

(Dollars in Thousands)

Trust VI

25,774

Quarterly

4.77

LIBOR

3.45

November 2032

February 2008

25,774

Quarterly

6.13

LIBOR

3.45

November 2032

February 2008

Trust VIII

25,774

Quarterly

4.35

LIBOR

3.05

October 2033

October 2008

25,774

Quarterly

5.84

LIBOR

3.05

October 2033

October 2008

Trust IX

41,238

Quarterly

2.92

LIBOR

1.62

October 2036

October 2011

41,238

Quarterly

4.42

LIBOR

1.62

October 2036

October 2011

Trust X

21,021

Quarterly

2.96

LIBOR

1.65

February 2037

February 2012

21,021

Quarterly

4.39

LIBOR

1.65

February 2037

February 2012

Trust XI

25,990

Quarterly

2.92

LIBOR

1.62

July 2037

July 2012

25,990

Quarterly

4.42

LIBOR

1.62

July 2037

July 2012

Trust XII

20,619

Quarterly

2.77

LIBOR

1.45

September 2037

September 2012

20,619

Quarterly

4.08

LIBOR

1.45

September 2037

September 2012

160,416

(1)

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

Note 9 — Common Stock and Dividends

In connection with the Company’s participation in the Troubled Asset Relief Program Capital Purchase Program (the “TARP Capital Purchase Program”) in 2008, the US Treasury received a warrant (the “Warrant”) to purchase 1,326,238 shares of the Company’s common stock (the “Warrant Shares”) at $24.43 per share. The term of the Warrant is ten years and was immediately exercisable. The Warrant is included as a component of Tier 1 capital. On June 12, 2013, the U. S. Treasury sold the Warrant to a third party. As of November 6, 2017, the Warrant is still outstanding, but expires on December 23, 2018. Adjustments to the $24.43 per share Exercise Price of the Warrant will be made if the Company pays cash dividends in excess of $.33 per semi‑annual period or makes certain other shareholder distributions before the Warrant expires on December 23, 2018.

~~The Company~~April 15, 2019 we paid cash dividends ~~to the common shareholders~~ of ~~$.33~~$0.50 per share to record holders of our common stock on April ~~17, 2017 and October~~1, 2019. On April 16, ~~2017 to all holders of record on April 3, 2017 and September 29, 2017, respectively. The Company~~2018 we paid cash dividends ~~to the common shareholders~~ of ~~$.29~~$0.33 per share to record holders of our common stock on April ~~18, 2016 to all holders of record on April 1, 2016 and $.31 per share on October 17, 2016 to all holders of record on September 30, 2016.~~2, 2018,

In April 2009, ~~following receipt of the Treasury Department’s consent,~~ the Board of Directors re‑established a formal stock repurchase program that authorized the repurchase of up to $40 million of common stock within the following 12 ~~months, and~~months. Annually since then, including on ~~April 3, 2017,~~March 11, 2019, the Board of Directors extended the repurchase program and ~~again~~this year authorized ~~the repurchase of~~an increase to purchase up to ~~$40~~$50 million of common stock during the 12 month period commencing again on April 9, ~~2017. Stock repurchases~~ 2019. Shares of common stock may be ~~made~~purchased from time to time on the open market or through ~~private~~privately negotiated transactions. Shares ~~repurchased~~purchased in this program will be held in treasury for reissue for various corporate purposes, including employee ~~stock option~~compensation plans. During the ~~third~~first quarter of ~~2017,~~2019, the ~~Company’s~~ Board of Directors adopted a Rule 10b5‑1 trading plan, and intends to adopt additional Rule 10b5‑1 trading plans, that will allow ~~the Company~~us to purchase ~~its~~ shares of our common stock during certain trading blackout periods when ~~the Company~~we ordinarily would not be in the market due to trading restrictions in ~~its internal~~our insider trading policy. During the term of a Rule 10b5‑1 trading plan, purchases of common stock are automatic to the extent the conditions of the ~~10b5‑1~~ plan’s trading instructions are met. Shares ~~repurchased in this program~~purchased under the Rule 10b5-1 trading plan will be held in treasury for reissue for various corporate purposes, including employee stock ~~option~~compensation plans. As of ~~November 3, 2017,~~May 6, 2019, a total of ~~9,244,283~~9,801,561 shares had been repurchased under all programs at a cost of ~~$271,235,000. The Company is~~$311,359,000. We are not obligated to ~~repurchase~~purchase shares under ~~its~~our stock repurchase program or to enter into additional Rule 10b5‑1 plans. The timing, actual number and value of shares purchased will depend on many factors, including the Company’s cash flow and the liquidity and price performanceoutside of its ~~shares of common stock.~~Rule 10b5-1 trading plan.

Note 10 — Commitments and Contingent Liabilities and Other Tax Matters

~~The Company is~~We are involved in various legal proceedings that are in various stages of litigation. ~~The Company has~~We have determined, based on discussions with its counsel, that any material loss in such actions, individually or in the aggregate, is remote or the damages sought, even if fully recovered, would not be considered material to ~~the~~our consolidated financial position or results of ~~operations of the Company.~~operations. However, many of these matters are in various stages of proceedings and further developments could cause management to revise its assessment of these matters.

In September 2014, the Company amended its 2012 federal income tax return as a result of a tax opinion obtained regarding a judgment against the Company paid in 2012 after litigation related to tax matters in the Company’s 2004 acquisition of Local Financial Corporation (“LFIN”). Litigation against the Company was initiated by the former controlling shareholders of LFIN with respect to such tax matters. On March 5, 2010, a judgement against the Company was entered on a jury verdict in the U.S. District Court for the Western District of Oklahoma. The Company subsequently appealed the decision and on January 5, 2012 the United States Court of Appeals Tenth Circuit affirmed the judgement and it became final and unappealable and the Company recorded the majority of the payment of the judgement as a non-deductible expense in the Company’s 2012 federal income tax return. The Company engaged legal counsel to review the deductibility of the judgement and, upon receiving the tax opinion, amended the 2012 tax return to report the payment as a deduction. The Internal Revenue Service examined the amended return and at the conclusion of the exam, allowed a certain portion of the judgement to be deducted as a necessary and ordinary business expense, resulting in a tax refund of approximately $4.9 million, which is included as a credit to income tax expense on the consolidated income statement. The Internal Revenue Service also paid taxable statutory interest of $163,000, which is included in other interest income on the consolidated income statement.

Note 11 — Capital Ratios

regulatory accounting practices. Capital amount and classifications are also subject to qualitative judgements by regulators about components, risk-weighting and other factors.

In July 2013, the Federal Deposit Insurance Corporation (“FDIC”) and other regulatory bodies established a new, comprehensive capital framework for U.S. banking organizations, consisting of minimum requirements that increase both the quantity and quality of capital held by banking organizations. The final rules are a result of the implementation of the BASEL III capital reforms and various Dodd-Frank Wall Street Reform and Consumer Protection Act (“Dodd Frank”) related capital provisions. Consistent with the Basel international framework, the rules include a new minimum ratio of Common Equity Tier 1 (“CET1”) to risk-weighted assets of 4.5% and a CET1 capital conservation buffer of 2.5% of risk-weighted assets. The capital conservation buffer began phasing-in on January 1, 2016 at .625% and ~~will increase~~increased each year until January 1, 2019, when ~~the Company will be~~we were required to have a 2.5% capital conservation buffer, effectively resulting in a minimum ratio of CET1 capital to risk-weighted assets of at least 7% upon full implementation. The rules also raised the minimum ratio of Tier 1 capital to risk-weighted assets from 4% to 6% and include a minimum leverage ratio of 4% for all banking organizations. Regarding the quality of capital, the rules emphasize CET1 capital and implements strict eligibility criteria for regulatory capital instruments. The rules also improve the methodology for calculating risk-weighted assets to enhance risk sensitivity. The rules ~~are~~were subject to a ~~four year~~four-year phase in period for mandatory compliance and ~~the Company was~~we were required to begin to phase in the new rules beginning on January 1, ~~2016.~~2015. Management believes, as of ~~September 30,~~March 31, 2019, that we meet all fully phased-in capital adequacy requirements.

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

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

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

As of March 31, 2019, our capital levels exceed all capital adequacy requirements ~~once~~under the ~~capital conservation is fully phased-in.~~ Basel III Capital Rules as currently applicable to us.

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

loans will generally be subject to heightened risk weights, certain exceptions will apply. On September 18, 2018, the federal banking agencies issued a proposed rule modifying the agencies’ capital rules for HVCRE.

We had a CET1 to risk-weighted assets ratio of ~~16.93%~~18.17% on ~~September 30, 2017~~March 31, 2019 and ~~16.95%~~17.55% on December 31, ~~2016. The Company~~2018. We had a Tier 1 capital-to-average-total-asset (leverage) ratio of ~~14.32%~~16.06% and ~~13.91%~~15.87%, risk-weighted Tier 1 capital ratio of ~~18.57%~~19.71% and ~~18.68%~~19.06% and risk-weighted total capital ratio of ~~19.37%~~20.46% and ~~19.47%~~19.74% at ~~September 30, 2017~~March 31, 2019 and December 31, ~~2016,~~2018, respectively. ~~The Company’s~~Our CET1 capital consists of common stock and related surplus, net of treasury stock, and retained earnings. ~~The Company~~We and ~~its subsidiary banks~~our Subsidiary Banks elected to opt-out of the requirement to include most components of accumulated other comprehensive income (loss) in the calculation of

CET1 capital. CET1 is reduced by goodwill and other intangible assets, net of associated deferred tax liabilities and subject to transition provisions. Tier 1 capital includes CET1 capital and additional Tier 1 capital. Additional Tier 1 capital ~~of the Company~~ includes the Capital and Common Securities issued by the Trusts (see Note 8 above) up to a maximum of 25% of Tier 1 capital on an aggregate basis. Any amount that exceeds the 25% threshold qualifies as Tier 2 capital. As of ~~September 30, 2017,~~March 31, 2019, the total of $160,416,000 of the Capital and Common Securities outstanding qualified as Tier 1 capital. ~~The Company~~We actively ~~monitors~~monitor the regulatory capital ratios to ensure that ~~the Company’s bank subsidiaries~~our Subsidiary Banks are well-capitalized under the regulatory framework.

The CET1, Tier 1 and Total capital ratios are calculated by dividing the respective capital amounts by risk-weighted assets. Risk-weighted assets are calculated based on regulatory requirements and include total assets, excluding goodwill and other intangible assets, allocated by risk-weight category, and certain off-balance-sheet items, among other things. The leverage ratio is calculated by dividing Tier 1 capital by adjusted quarterly average total assets, which exclude goodwill and other intangible assets, among other things.

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

As of September 30, 2017, capital levels at the Company exceed all capital adequacy requirements under the Basel III Capital Rules as currently applicable to the Company, including the capital conservation buffer. Based on the ratios presented above, capital levels as of September 30, 2017 at the Company exceed the minimum levels necessary to be considered “well-capitalized.”

~~The Company and its subsidiary banks~~our Subsidiary Banks are subject to the regulatory capital requirements administered by the Federal Reserve, and, for ~~the subsidiary banks,~~our Subsidiary Banks, the FDIC. Regulatory authorities can initiate certain mandatory actions if ~~the Company~~we or any of ~~the subsidiary banks~~our Subsidiary Banks fail to meet the minimum capital requirements, which could have a direct material effect on our financial statements. Management believes, as of ~~September 30, 2017,~~March 31, 2019, that ~~the Company~~we and each of ~~its subsidiary banks~~our Subsidiary Banks meet all capital adequacy requirements to which ~~they~~we are subject.

3130

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

The following discussion should be read in conjunction with ~~the Company’s~~our consolidated financial statements, and notes thereto, for the year ended December 31, ~~2016,~~2018, included in ~~the Company’s 2016~~our 2018 Form 10-K. Operating results for the three ~~and nine~~ months ended ~~September 30, 2017~~March 31, 2019 are not necessarily indicative of the results for the year ending December 31, ~~2017,~~2019, or any future period.

Special Cautionary Notice Regarding Forward Looking Information

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

Risk factors that could cause actual results to differ materially from any results that ~~are projected, forecasted, estimated~~we project, forecast, estimate or ~~budgeted by the Company~~budget in forward-looking statements include, among others, the following possibilities:

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

Volatility and disruption in national and international financial markets.

Government intervention in the U.S. financial system.

The ~~Company relies, in part, on external financing to fund the Company’s operations~~unavailability of funding from the FHLB, ~~the~~ Fed ~~and~~or other ~~sources, and the unavailability of such funding~~ sources in the future could adversely impact ~~the Company’s~~our growth strategy, prospects and performance.

Changes in consumer spending, borrowing and saving habits.

Changes in interest rates and market prices, ~~which could reduce the Company’s net interest margins, asset valuations and expense expectations,~~ including, ~~without limitation,~~ the repeal of federal prohibitions on the payment of interest on demand deposits.

Changes in the capital markets ~~utilized by the Company and its subsidiaries,~~we utilize, including changes in the interest rate environment that may reduce margins.

Changes in state and/or federal laws and regulations, ~~to which the Company and its subsidiaries, as well as their customers, competitors and potential competitors, are subject,~~ including ~~without limitation,~~ the impact of the Consumer Financial Protection Bureau (“CFPB”) as a regulator of financial institutions, changes in the accounting, tax and regulatory treatment of trust preferred securities, as well as changes in banking, tax, securities, insurance, employment, environmental and immigration laws and regulations and the risk of litigation that may follow.

Changes in ~~our liquidity position.~~

~~Changes in~~ U.S.—Mexico trade, including, ~~without limitation,~~ reductions in border crossings and commerce, ~~resulting from~~renegotiation and recent changes made to the ~~Homeland Security Programs called “US‑VISIT,” which is derived from Section 110 of~~North American Free Trade Agreement, set to be replaced by the ~~Illegal Immigration Reform and Immigrant Responsibility Act of 1996,~~2018 United States-Mexico-Canada Agreement or the possible imposition of tariffs on imported goods.

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

The loss of senior management or operating personnel.

~~Increased competition from both within~~The timing, impact and ~~outside the banking industry.~~other uncertainties of potential future acquisitions as well as our ability to maintain our current branch network and enter new markets to capitalize on growth opportunities.

3231

The timing, impact and other uncertainties of the Company’s potential future acquisitions, including the Company’s ability to identify suitable potential future acquisition candidates, the success or failure in the integration of their operations and the Company’s ability to maintain its current branch network and to enter new markets successfully and capitalize on growth opportunities.

~~Changes in the Company’s ability to pay dividends on its Common Stock.~~

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

Additions to ~~the Company’s~~our loan loss allowance as a result of changes in local, national or international conditions which adversely affect ~~the Company’s customers, including, without limitation, lower real estate values, lower oil prices or environmental liability risks associated with foreclosed properties.~~our customers.

Greater than expected costs or difficulties related to the development and integration of new products and lines of ~~business, including the restrictions of arbitration clauses by the CFPB related to the CFPB proposal to restrict such clauses.~~business.

Increased labor costs and effects related to health care reform and other laws, regulations and legal developments impacting labor costs.

Impairment of carrying value of goodwill could negatively impact our earnings and capital.

Changes in the soundness of other financial institutions with which ~~the Company interacts.~~we interact.

Political instability in the United States or Mexico.

Technological changes or system failures or breaches of our network security, as well as other cyber security risks, could subject us to increased operating costs, litigation and other liabilities.

Acts of war or terrorism.

Natural disasters.

Reduced earnings resulting from the write down of the carrying value of securities held in our securities available‑for‑sale ~~portfolio following a determination that the securities are other‑than‑temporarily impaired.~~portfolios.

The effect of changes in accounting policies and practices ~~as may be adopted~~ by ~~the regulatory agencies, as well as~~ the Public Company Accounting Oversight Board, the Financial Accounting Standards Board and other accounting standards setters.

The costs and effects of regulatory developments ~~including the resolution of legal proceedings~~ or regulatory or other governmental inquiries and the results of regulatory examinations or reviews and ~~the ability to obtain~~obtaining required regulatory approvals.

The effect of final rules amending Regulation E that prohibit financial institutions from charging consumer fees for paying overdrafts on ATM and one‑time debit card ~~transactions, unless the consumer consents or opts‑in to the overdraft service for those types of~~ transactions, as well as the effect of any other regulatory or legal developments that limit overdraft services.

The reduction of income and possible increase in required capital levels related to the adoption of legislation ~~including, without limitation, the Dodd‑Frank Regulatory Reform Act (the “Dodd‑Frank Act”)~~ and the implementing rules and regulations, including ~~the Federal Reserve’s rule~~those that ~~establishes~~establish debit card interchange fee standards and ~~prohibits~~prohibit network exclusivity arrangements and routing ~~restrictions that is negatively affecting interchange revenue from debit card transactions as well as revenue from consumer services.~~restrictions.

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

The enhanced due diligence burden imposed on banks related to the banks’ inability to rely on credit ratings under Dodd‑~~Frank, which may result in a limitation on the types of securities certain banks will be able to purchase as a result of the due diligence burden.~~Frank.

~~The Company’s success at managing the risks involved in the foregoing items, or a~~Our failure or circumvention of ~~the Company’s internal~~ourinternal controls and risk management, policies and procedures.

Forward‑looking statements speak only as of the date on which such statements are made. It is not possible to foresee or identify all such factors. ~~The Company makes~~We make no commitment to update any forward‑looking statement, or to

disclose any facts, events or circumstances after the date hereof that may affect the accuracy of any forward‑looking statement, unless required by law.

Overview

~~The Company, which is~~We are headquartered in Laredo, Texas, with ~~193~~189 facilities and ~~296~~286 ATMs, ~~provides~~and provide banking services for commercial, consumer and international customers of North, South, Central and Southeast Texas and the State of Oklahoma. ~~The Company is~~We are one of the largest independent commercial bank holding companies headquartered in Texas. ~~The Company,~~We, through ~~its bank subsidiaries, is~~our Subsidiary Banks, are in the business of gathering funds from various sources and investing those funds in order to earn a return. ~~The Company,~~We either directly or through a ~~bank subsidiary, owns one~~Subsidiary Bank, own an insurance agency, a liquidating subsidiary, a broker/dealer and a fifty percent interest in an investment banking unit that owns a broker/dealer. ~~The Company’s~~Our primary earnings come from the spread between the interest earned on interest-bearing assets and the interest paid on interest-bearing liabilities. In addition, ~~the Company generates~~we generate income from fees on products offered to commercial, consumer and international customers. The sales team of each of ~~the Company’s bank subsidiaries~~our Subsidiary Banks aims to match the right mix of products and services to each customer to best serve the customer’s needs. That process entails spending time with customers to assess those needs and servicing the sales arising from those discussions on a long-term basis. The ~~bank subsidiaries~~Subsidiary Banks have various compensation plans, including incentive based compensation, for fairly compensating employees. The ~~bank subsidiaries~~Subsidiary Banks also have a robust process in place to review sales that support the incentive based compensation plan

to monitor the quality of the sales and identify any significant irregularities, a process that has been in place for many years.

~~The Company is~~We are very active in facilitating trade along the United States border with Mexico. ~~The Company does~~We do a large amount of business with customers domiciled in 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. The Company~~our Subsidiary Banks. We also ~~serves~~serve the growing Hispanic population through ~~the Company’s~~our facilities located throughout South, Central and Southeast Texas and the State of Oklahoma.

Expense control is an essential element in ~~the Company’s~~our long-term profitability. As a result, ~~the Company monitors~~we monitor closely the efficiency ratio, which is a measure of non-interest expense to net interest income plus non-interest ~~income closely.~~income. As ~~the Company adjusts~~we adjust to regulatory changes related to ~~the~~ Dodd-Frank, ~~Act, the Company’s~~including congressional efforts to revamp or reform it, our efficiency ratio may suffer because the additional regulatory compliance costs are expected to increase non-interest expense. ~~The Company monitors~~We monitor this ratio over time to assess ~~the Company’s~~our efficiency relative to ~~its~~our peers. ~~The Company uses~~We use this measure as one factor in determining if ~~the Company is~~we are accomplishing ~~its~~our long-term goals of providing superior returns to ~~the Company’s~~our shareholders.

Results of Operations

Summary

Consolidated Statements of Condition Information



	September 30, 2017		December 31, 2016		Percent Increase		March 31, 2019		December 31, 2018		Percent Increase (Decrease)
	(Dollars in Thousands)						(Dollars in Thousands)
Assets	$	12,173,651	$	11,804,041	3.1	%	$	12,027,703	$	11,871,952	1.3	%
Net loans		6,134,412		5,900,027	4.0			6,640,313		6,499,905	2.2
Deposits		8,613,541		8,610,089	0.0			8,895,930		8,696,545	2.3
Securities sold under repurchase agreements		378,033		504,985	(25.1)			278,630		229,989	21.1
Other borrowed funds		1,067,500		733,375	45.6			510,895		705,665	(27.6)
Junior subordinated deferrable interest debentures		160,416		160,416	—			160,416		160,416	—
Shareholders’ equity		1,815,184		1,724,667	5.2			1,984,704		1,939,582	2.3

Consolidated Statements of Income Information


	Three Months Ended						Nine Months Ended						Three Months Ended
	September 30,				Percent		September 30,				Percent		March 31,				Percent
	(Dollars in Thousands)				Increase		(Dollars in Thousands)				Increase		(Dollars in Thousands)				Increase
	2017		2016		(Decrease)		2017		2016		(Decrease)		2019		2018		(Decrease)
Interest income	$	106,945	$	96,624	10.7	%	$	307,100	$	291,577	5.3	%	$	124,063	$	111,407	11.4	%
Interest expense		9,993		11,175	(10.6)			28,036		33,016	(15.1)			14,654		12,135	20.8
Net interest income		96,952		85,449	13.5			279,064		258,561	7.9			109,409		99,272	10.2
Provision for probable loan losses		6,591		(1,347)	589.3			9,096		14,884	(38.9)			7,420		1,662	(346.5)
Non-interest income		41,366		40,530	2.1			113,044		118,072	(4.3)			36,129		38,975	(7.3)
Non-interest expense		71,711		76,667	(6.5)			221,050		216,569	2.1			72,951		68,909	5.9
Net income		39,628		35,787	10.7	%		112,201		98,459	14.0	%		51,906		53,420	(2.8)	%

Per common share:
Basic	$	.60	$	.54	11.1	%	$	1.70	$	1.49	14.1	%	$	.79	$	.81	(2.5)	%
Diluted		.59		.54	9.3			1.68		1.49	12.8			.79		.80	(1.3)

Net Income

Net income for the three ~~and nine~~ months ended ~~September 30, 2017 increased~~March 31, 2019 decreased by ~~10.7% and 14.0%, respectively,~~2.8% compared to the same ~~periods~~period of ~~2016.~~2018. Net income for the ~~nine~~three months ended ~~September 30, 2017~~March 31, 2019 was positively ~~impacted~~affected by an increase in net interest income due to a ~~decrease~~higher volume of loans and an increase in the ~~provision for loan losses compared to the same periods of 2016 as a result of a decrease in the historical loss experience in the commercial category~~overall yield of the ~~allowance for probable~~ loan loss calculation. As discussed in prior periods, charge-offs had increased due to deterioration of one relationship that is secured by multiple pieces of transportation equipment beginning in the fourth quarter of 2014. The Company uses a three year historical charge-off experience in the calculation, therefore, as those charge-offs begin to be eliminated, the allowance for probable loan losses will be impacted. Net income in 2017 was also positively impacted by a tax refund of $4.9 million received in the second quarter as a result of an amended tax return for the 2012 tax year. In September 2014, the Company amended its 2012 federal income tax return as a result of a tax opinion obtained regarding a judgment against the Company paid in 2012 after litigation related to tax matters in the Company’s 2004 acquisition of Local Financial Corporation (“LFIN”). Litigation against the Company was initiated by the former controlling shareholders of LFIN with respect to such tax matters. On March 5, 2010, a judgement against the Company was entered on a jury verdict in the U.S. District Court for the Western District of Oklahoma. The Company subsequently appealed the decision and on January 5, 2012 the United States Court of Appeals Tenth Circuit affirmed the judgement and it became final and unappealable and the Company recorded the majority of the payment of the judgement as a non-deductibleportfolio. Interest expense in the Company’s 2012 federal income tax return. The Company engaged legal counsel to review the deductibility of the judgement and, upon receiving the tax opinion, amended the 2012 tax return to report the payment as a deduction. The Internal Revenue Service examined the amended return and at the conclusion of the exam, allowed a certain portion of the judgement to be deducted as a necessary and ordinary business expense. Net income for the first nine months of 2017 was negatively impacted by a charge of $5.8 million, $3.7 million after tax, taken by the lead bank subsidiary in connection with the termination of its long-term repurchase agreements outstanding in order to help manage its long-term funding costs, originally recorded in the first quarter of 2017. Non-interest income for the three and nine months ended September 30, 2016 was also impacted by the sale of two investments by a merchant banking entity in which the Company holds a majority interest.

3533

increased for the three months ended March 31, 2019 and can be attributed primarily to an increase in the cost of borrowings expense, and an increase in the interest paid on savings and time deposit accounts, which have increased because of recent Federal Reserve Board actions to raise interest rates. Net income for 2019 was negatively impacted by an increase in the provision for probable loan losses due to a specific reserve of $7.5 million, net of tax on a relationship secured by real property on which car dealerships are operated.

Net Interest Income


	Three Months Ended						Nine Months Ended						Three Months Ended
	September 30,				Percent		September 30,						March 31,				Percent
	(Dollars in Thousands)				Increase		(Dollars in Thousands)				Percent		(Dollars in Thousands)				Increase
	2017		2016		(Decrease)		2017		2016		Increase		2019		2018		(Decrease)
Interest Income:
Loans, including fees	$	83,394	$	74,388	12.1	%	$	238,261	$	223,245	6.7	%	$	102,805	$	87,833	17.0	%
Investment securities:
Taxable		21,003		19,630	7.0			60,998		60,346	1.1			19,300		21,214	(9.0)
Tax-exempt		2,409		2,561	(5.9)			7,357		7,835	(6.1)			1,649		2,195	(24.9)
Other interest income		139		45	208.9			484		151	220.5			309		165	87.3

Total interest income		106,945		96,624	10.7			307,100		291,577	5.3			124,063		111,407	11.4

Interest expense:
Savings deposits		1,599		1,173	36.3			4,241		3,333	27.2			4,243		2,228	90.4
Time deposits		2,426		2,551	(4.9)			7,203		7,519	(4.2)			4,378		2,669	64.0
Securities sold under Repurchase agreements		1,177		5,480	(78.5)			5,391		16,591	(67.5)			589		1,023	(42.4)
Other borrowings		3,396		812	318.2			7,234		2,196	229.4			3,494		4,689	(25.5)
Junior subordinated interest deferrable debentures		1,395		1,159	20.4			3,967		3,377	17.5			1,950		1,526	27.8

Total interest expense		9,993		11,175	(10.6)			28,036		33,016	(15.1)			14,654		12,135	20.8

Net interest income	$	96,952	$	85,449	13.5	%	$	279,064	$	258,561	7.9	%	$	109,409	$	99,272	10.2	%

The increase in net interest income for the three ~~and nine~~ months ended ~~September 30, 2017~~March 31, 2019 compared to the ~~same periods of 2016~~three months ended March 31, 2018 can be attributed to increased levels of interest income arising from ~~the repositioning of investments in the available-for-sale investment portfolio that the Company has undertaken in prior periods,~~ an increase in loans outstanding and a decrease in interest expense on securities sold under repurchase agreements. The decrease in interest expense on securities sold under repurchase agreements can be attributed to the early termination of some of the long-term repurchase agreements by the lead ~~bank subsidiary~~Subsidiary Bank in prior periods. Interest expense on other borrowings consists of interest expense on FHLB borrowings and has steadily increased in line with increases in market interest rates as a result of Federal Reserve Board actions. Interest expense on savings and time deposits for the same periods also increased in line with internal rate increases paid on such deposits in line with market interest rates as a result of Federal Reserve Board actions and to remain competitive with competitors in the markets we serve. Net interest income is the spread between income on interest earning assets, such as loans and securities, and the interest expense on liabilities used to fund those assets, such as deposits, repurchase agreements and funds borrowed. As part of ~~its~~our strategy to manage interest rate risk, ~~the Company strives~~we strive to manage both assets and liabilities so that interest sensitivities match. One method of calculating interest rate sensitivity is through gap analysis. A gap is the difference between the amount of interest rate sensitive assets and interest rate sensitive liabilities that re-price or mature in a given time ~~period.~~ period. Positive gaps occur when interest rate sensitive assets exceed interest rate sensitive liabilities, and negative gaps occur when interest rate sensitive liabilities exceed interest rate sensitive assets. A positive gap position in a period of rising interest rates should have a positive effect on net interest income as assets will re-price faster than liabilities. Conversely, net interest income should contract somewhat in a period of falling interest rates. ~~Management~~Our management can quickly change ~~the Company’s~~our interest rate position at any given point in time as market conditions dictate. Additionally, interest rate changes do not affect all categories of assets and liabilities equally or at the same time. Analytical techniques ~~employed by the Company~~we employ to supplement gap analysis include simulation analysis to quantify interest rate risk exposure. The gap analysis prepared by management is reviewed by ~~the~~our Investment Committee ~~of the Company~~ twice a year (see table on page 4240 for the ~~September 30, 2017~~March 31, 2019 gap analysis). ~~Management~~Our management currently believes that ~~the Company is~~we are properly positioned for interest rate changes; however if our management

determines at any time that the ~~Company is~~we are not properly positioned, itwe will strive to adjust the interest rate sensitive assets and liabilities in order to manage the effect of interest rate changes.

Non-Interest Income



	Three Months Ended						Nine Months Ended						Three Months Ended
	September 30,				Percent		September 30,				Percent		March 31,				Percent
	(Dollars in Thousands)				Increase		(Dollars in Thousands)				Increase		(Dollars in Thousands)				Increase
	2017		2016		(Decrease)		2017		2016		(Decrease)		2019		2018		(Decrease)

Service charges on deposit accounts	$	18,706	$	19,035	(1.7)	%	$	54,494	$	54,999	(0.9)	%	$	17,260	$	17,712	(2.6)	%
Other service charges, commissions and fees
Banking		13,095		13,722	(4.6)			34,505		35,056	(1.6)			10,876		11,122	(2.2)
Non-banking		1,853		1,803	2.8			5,052		4,794	5.4			1,509		1,360	11.0
Investment securities transactions, net		—		(1,345)	(100.0)			(1,612)		(1,705)	(5.5)			(4)		—	100.0
Other investments, net		4,938		4,082	21.0			12,036		14,699	(18.1)			3,948		4,726	(16.5)
Other income		2,774		3,233	(14.2)			8,569		10,229	(16.2)			2,540		4,055	(37.4)
Total non-interest income	$	41,366	$	40,530	2.1	%	$	113,044	$	118,072	(4.3)	%	$	36,129	$	38,975	(7.3)	%

Total non-interest income decreased ~~4.3% for the nine months ended September 30, 2017 and increased 2.1%~~7.3% for the three months ended ~~September 30, 2017~~March 31, 2019 compared to the same periods of ~~2016. Non-interest~~2018 due to non-recurring events that occurred in 2018. Other income for the three months ended ~~September 30, 2016 was negatively impacted by losses on available-for-sale investment securities. Non-interest income for the nine months ended September 30, 2016~~March 31, 2018 was positively impacted by ~~the sale~~our share of ~~two investments by the merchant banking entities~~income from a real estate development partnership in which ~~the Company~~it holds ~~an equity interest, resulting in income of approximately $2.4 million included in other investments in the table above and originally recorded in the first quarter of 2016.~~a majority interest.

Non-Interest Expense


	Three Months Ended						Nine Months Ended						Three Months Ended
	September 30,				Percent		September 30,				Percent		March 31,				Percent
	(Dollars in Thousands)				Increase		(Dollars in Thousands)				Increase		(Dollars in Thousands)				Increase
	2017		2016		(Decrease)		2017		2016		(Decrease)		2019		2018		(Decrease)

Employee compensation and benefits	$	33,787	$	33,908	(0.4)	%	$	99,256	$	95,846	3.6	%	$	36,409	$	34,618	5.2	%
Occupancy		6,416		6,153	4.3			18,824		18,225	3.3			6,377		6,075	5.0
Depreciation of bank premises and equipment		6,407		6,175	3.8			18,936		18,563	2.0			6,981		6,273	11.3
Professional fees		3,577		3,661	(2.3)			11,143		10,400	7.1			3,592		2,572	39.7
Deposit insurance assessments		1,007		1,332	(24.4)			2,310		4,333	(46.7)			783		1,000	(21.7)
Net expense, other real estate owned		(407)		2,320	(117.5)			989		4,575	(78.4)			995		(271)	(467.2)
Amortization of identified intangible assets		—		32	(100.0)			25		96	(74.0)
Advertising		2,064		1,921	7.4			6,448		6,345	1.6			2,082		1,839	13.2
Early termination fee—securities sold under repurchase agreements		—		1,799	(100.0)			5,765		1,799	220.5
Software and software maintenance		4,302		3,687	16.7			12,155		10,721	13.4			4,497		4,072	10.4
Impairment charges (Total other-than-temporary impairment charges, $0 net of $0, and $32, net of $(156), included in other comprehensive loss)		—		90	(100.0)			—		281	(100.0)
Other		14,558		15,589	(6.6)			45,199		45,385	(0.4)			11,235		12,731	(11.8)

Total non-interest expense	$	71,711	$	76,667	(6.5)	%	$	221,050	$	216,569	2.1	%	$	72,951	$	68,909	5.9	%

Non-interest expense ~~decreased 6.5%~~increased 5.9% for the three months ended ~~September 30, 2017 and increased 2.1% for the nine months ended September 30, 2017~~March 31, 2019 compared to the same ~~periods~~period of 2016. The increase in non-interest expense in 2017 can be primarily attributed to a charge taken by the Company’s lead bank subsidiary in the first quarter of $5.8 million to terminate $200 million of its long-term repurchase agreements outstanding in order to help manage its long term funding costs. The terminations of the portfolio of long-term repurchase agreements have been done periodically

~~beginning in 2014. A total of $900 million in long-term repurchase agreements have been terminated since 2014.~~2018. Non-interest expense for the three ~~and nine~~ months ended ~~September 30, 2017~~March 31, 2019 was ~~also positively~~negatively impacted by ~~a decrease in deposit insurance assessments, arising from a decrease in the assessment rate set by the FDIC and a decrease~~an increase in the net cost of operations on other real estate owned ~~as the underlying properties held~~due to an increase in the ~~portfolio were liquidated~~specific reserve on a property as part of the ~~bank subsidiaries’ normal operations.~~re-evaluation of the carrying value of said property. Non-interest expense for the three ~~and nine~~ months ended ~~September 30, 2017 continues to be~~March 31, 2019 was also negatively impacted by ~~increased technological~~an increase in costs ~~related~~on our compensation and benefit plans as a result of our continued review of the programs and increases, when necessary to ~~certain network infrastructure modifications.~~fairly compensate our staff based on their performance and remain competitive.

Financial Condition

Allowance for Probable Loan Losses

The allowance for probable loan losses increased ~~4.9%~~9.2% to ~~$67,852,000~~$67,030,000 at ~~September 30, 2017~~March 31, 2019 from ~~$64,661,000~~$61,384,000 at December 31, ~~2016.~~2018. The provision for probable loan losses charged to expense increased ~~589.3%~~346.5% for the three months ended ~~September 30, 2017~~March 31, 2019 to ~~$6,591,000~~$7,420,000, compared to ~~a credit of $1,347,000~~$1,662,000 for the same period of ~~2016.~~2018. The ~~provision for probable loan losses charged to expense decreased 38.9% to $9,096,000 for the nine months ended September 30, 2017 compared to $14,884,000 for the same period of 2016. The difference~~increase in ~~the~~ provision for probable loan losses charged to expense for the three months ended ~~September 30, 2017 compared to the same period of 2016~~March 31, 2019 can be attributed to a ~~large recovery~~specific reserve on a loan charged off in prior years of approximately $6,000,000. The recovery positively impacted the balance in the allowance for probable loan losses and resulted in a decreased allowance expense. The decrease in the allowance for probable loan losses charged to expense for the nine months ended September 30, 2017 can be attributed to a decrease in the historical loss experience in the commercial category of the calculation. As discussed in prior periods, charge-offs had increased due to the deterioration of one relationship that is secured by multiple pieces of ~~transportation equipment beginning~~real property on which car dealerships are operated. The deterioration was triggered by significant fraud by a high level insider of the car dealerships resulting in the ~~fourth~~dealerships unexpectedly filing for bankruptcy and creating a potential exposure since the source of repayment from the borrower were the operations of the car dealerships. The relationship further deteriorated in the first quarter of ~~2014.~~2019 after the sponsor of the court approved debtor in possession plan discontinued its role in the process and thus did not fulfill its obligation to assume full responsibility of the accrued and unpaid interest. Although the relationship is secured by real property (the dealerships’ real estate), the real property has specialized use, contributing to a potential exposure for probable loss. In light of the new circumstances and management’s evaluation of the relationship, the decision was made to place the relationship on impaired, non-accrual status and place a specific reserve on the relationship in the amount of $9.5 million. The ~~Company uses~~impact of the specific reserve on the provision for probable loan loss charged to expense is not fully demonstrated in the charge for the quarter because we use a three year historical charge-off experience in the calculation, ~~therefore,~~and, as ~~those~~large charge-offs ~~begin to be~~in prior periods are eliminated from the calculation, the allowance for probable loan losses ~~will be~~is impacted. ~~On August 26, 2017, Hurricane Harvey made landfall~~As fluctuations occur in ~~Rockport, Texas as a category four storm and followed~~historical loss factors, management evaluates the ~~Gulf Coast of Texas north~~need to the Houston metro area and finally the State of Louisiana. The Texas Gulf Coast is an area where the Company serves many consumer and commercial customers. The Company has reviewed the exposure to losses of property arising from the impact of Hurricane Harvey and has determined that the impact is not significant to warrant a specific reserve; however, it is still evaluating the impact, therefore, the Company’s allowance for probable loan losses at September 30, 2017 includes factors inadjust the qualitative ~~ratios~~factors used in the calculation to ~~incorporate the potential impact of losses arising from the impact of Hurricane Harvey on certain portions of the~~properly reflect probable loan ~~portfolio.The~~losses.The allowance for probable loan losses was ~~1.09%~~1.00% and ~~1.08%~~.94% of total loans at ~~September 30, 2017~~March 31, 2019 and December 31, ~~2016,~~2018, respectively.

Investment Securities

Residential mortgage-backed debt securities are securities primarily issued by Freddie Mac, Fannie Mae, or Ginnie Mae. Investments in debt residential mortgage-backed securities issued by Ginnie Mae are fully guaranteed by the U.S. Government. Investments in debt residential mortgage-backed securities issued by Freddie Mac and Fannie Mae are not fully guaranteed by the U.S. Government, however, ~~the Company believes~~we believe that the quality of the bonds is similar to other AAA rated bonds with limited credit risk, particularly given the placement of Fannie Mae and Freddie Mac into conservatorship by the federal government in early September 2008 and because securities issued by others that are collateralized by residential mortgage-backed securities issued by Fannie Mae or Freddie Mac are rated consistently as AAA rated securities.

Loans

Net loans increased by ~~4.0%~~2.2% to ~~$6,134,412,000~~$6,640,313,000 at ~~September 30, 2017,~~March 31, 2019, from ~~$5,900,027,000~~$6,499,905,000 at December 31, ~~2016.~~2018.

Deposits

Deposits ~~remained relatively flat~~increased by 2.3% to $8,895,930,000 at ~~$8,613,541,000 at September 30, 2017,~~March 31, 2019, compared to ~~$8,610,089,000~~$8,696,545,000 at December 31, ~~2016.~~2018. Although deposits at ~~September 30, 2017 remained at the same basic levels as~~March 31, 2019 increased from December 31, ~~2016~~

2018, and ~~the Company has~~we have experienced some growth in deposits over the last few years, ~~the Company is~~we are still experiencing a substantial amount of competition for deposits at higher than market rates. As a result, ~~the Company has~~we have attempted to maintain certain deposit relationships but ~~has~~have allowed certain deposits to leave as the result of aggressive pricing by competitors.

Foreign Operations

On ~~September 30, 2017, the Company~~March 31, 2019, we had ~~$12,173,651,000~~$12,027,703,000 of consolidated assets, of which approximately ~~$162,870,000,~~$144,589,000, or ~~1.3%~~1.2%, was related to loans outstanding to borrowers domiciled in foreign countries, compared to ~~$167,220,000,~~$150,517,000, or ~~1.4%~~1.3%, at December 31, ~~2016.~~2018. Of the ~~$162,870,000, 86.3%~~$144,589,000, 83.9% is directly or indirectly secured by U.S. assets, certificates of deposits and real estate; ~~12.9%~~15.7% is secured by foreign real estate or other assets; and ~~0.8%~~0.4% is unsecured.

Critical Accounting Policies

~~The Company has~~We have established various accounting policies that govern the application of accounting principles in the preparation of ~~the Company’s~~our consolidated financial statements. The significant accounting policies are described in the notes to the consolidated financial statements. Certain accounting policies involve significant subjective judgments and assumptions by management that have a material impact on the carrying value of certain assets and liabilities; management considers such accounting policies to be critical accounting policies.

~~The Company considers its~~We consider our allowance for probable loan losses as a policy critical to the sound operations of the ~~bank subsidiaries.~~Subsidiary Banks. The allowance for probable loan losses primarily consists of the aggregate loan loss allowances of the ~~bank subsidiaries.~~Subsidiary Banks. The allowances are established through charges to operations in the form of provisions for probable loan losses. Loan losses or recoveries are charged or credited directly to the allowances. The allowance for probable loan losses of each ~~bank subsidiary~~Subsidiary Bank is maintained at a level considered appropriate by management, based on estimated probable losses in the loan portfolio. The allowance is derived from the following elements: (i) allowances established on specific impaired loans, which are based on a review of the individual characteristics of each loan, including the customer’s ability to repay the loan, the underlying collateral values, and the industry in which the customer operates; (ii) allowances based on actual historical loss experience for similar types of loans in ~~the Company’s~~our loan portfolio; and (iii) allowances based on general economic conditions, changes in the mix of loans, ~~Company~~company resources, border risk and credit quality indicators, among other things. See also discussion regarding the allowance for probable loan losses and provision for probable loan losses included in the results of operations and “Provision and Allowance for Probable Loan Losses” included in Notes 1 and 4 of the notes to Consolidated Financial Statements in ~~the Company’s~~our latest Annual Report on Form 10-K for further information regarding ~~the Company’s~~our provision and allowance for probable loan losses policy.

Liquidity and Capital Resources

The maintenance of adequate liquidity provides ~~the Company’s bank subsidiaries~~our Subsidiary Banks with the ability to meet potential depositor withdrawals, provide for customer credit needs, maintain adequate statutory reserve levels and take full advantage of high-yield investment opportunities as they arise. Liquidity is afforded by access to financial markets and by holding appropriate amounts of liquid assets. ~~The Company’s bank subsidiaries~~Our Subsidiary Banks derive their liquidity largely from deposits of individuals and business entities. Deposits from persons and entities domiciled in Mexico comprise a stable portion of the deposit base of ~~the Company’s bank subsidiaries.~~our Subsidiary Banks. Other important funding sources for ~~the Company’s bank subsidiaries~~our Subsidiary Banks during ~~2017~~2019 and ~~2016~~2018 were borrowings from the FHLB, securities sold under repurchase agreements and large certificates of deposit, requiring management to closely monitor ~~its~~our asset/liability mix in terms of both rate sensitivity and maturity distribution. The borrowings from FHLB are primarily short-term in nature and are renewed at maturity. ~~The Company’s bank subsidiaries~~Our Subsidiary Banks have had a long-standing relationship with the FHLB and keep open unused lines of credit in order to fund liquidity needs. In the event that the FHLB bank indebtedness is not renewed, the repayment of the outstanding indebtedness would more than likely be repaid through proceeds generated from the sales of unpledged, available-for-sale securities. ~~The Company maintains~~We maintain a sizable, high quality investment portfolio to provide significant liquidity. These securities can be sold, or sold under agreements to repurchase, to provide immediate liquidity. ~~As in the past, the Company~~We will continue to monitor the volatility and cost of funds in an attempt

to match maturities of rate-sensitive assets and liabilities and respond accordingly to anticipated fluctuations in interest rates over reasonable periods of time.

~~The Company maintains~~We maintain an adequate level of capital as a margin of safety for ~~its~~our depositors and shareholders. At ~~September 30, 2017,~~March 31, 2019, shareholders’ equity was ~~$1,815,184,000~~$1,984,704,000 compared to ~~$1,724,667,000~~$1,939,582,000 at December 31, ~~2016.~~2018. The increase in shareholders’ equity can be primarily attributed to the retention of ~~earnings offset by the payment of cash dividends to common shareholders and a decrease in comprehensive loss.~~earnings.

Banks and bank holding companies are subject to various regulatory capital requirements administered by state and federal banking agencies. Capital adequacy guidelines and, additionally for banks, prompt corrective action regulations, involve quantitative measures of assets, liabilities, and certain off-balance sheet items calculated under regulatory accounting practices. Capital amount and classifications are also subject to qualitative judgements by regulators about components, risk-weighting and other factors.

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

the quantity and quality of capital held by banking organizations. The final rules are a result of the implementation of the BASEL III capital reforms and various Dodd-Frank Act related capital provisions. Consistent with the Basel international framework, the rules include a minimum ratio of Common Equity Tier 1 (“CET1”) to risk-weighted assets of 4.5% and a CET1 capital conservation buffer of 2.5% of risk-weighted assets. The capital conservation buffer began phasing-in on January 1, 2016 at .625% and ~~will increase~~increased each year until January 1, 2019, when ~~the Company will be~~we were required to have a 2.5% capital conservation buffer, effectively resulting in a minimum ratio of CET1 capital to risk-weighted assets of at least 7% upon full implementation. The rules also raised the minimum ratio of Tier 1 capital to risk-weighted assets from 4% to 6% and include a minimum leverage ratio of 4% for all banking organizations. Regarding the quality of capital, the rules emphasize CET1 capital and implements strict eligibility criteria for regulatory capital instruments. The rules also improve the methodology for calculating risk-weighted assets to enhance risk sensitivity. The rules ~~are~~were subject to a four year phase in period for mandatory compliance and ~~the Company was~~we were required to begin to phase in the ~~new~~ rules beginning on January 1, ~~2016.~~2015. Management believes, as of ~~September 30, 2017,~~March 31, 2019, that ~~the Company~~we and each of ~~the bank subsidiaries will~~our Subsidiary Banks meet all fully phased-in capital adequacy requirements.

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

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

~~The Company~~We had a CET1 to risk-weighted assets ratio of ~~16.93%~~18.17% on ~~September 30, 2017~~March 31, 2019 and ~~16.95%~~17.55% on December 31, ~~2016. The Company~~2018. We had a Tier 1 capital-to-average-total-asset (leverage) ratio of ~~14.32%~~16.06% and ~~13.91%~~15.87%, risk-weighted Tier 1 capital ratio of ~~18.57%~~19.71% and ~~18.68%~~19.06% and risk-weighted total capital ratio of ~~19.37%~~20.46% and ~~19.47%~~19.74% at ~~September 30, 2017~~March 31, 2019 and December 31, ~~2016,~~2018, respectively. ~~The Company’s~~Our CET1 capital consists of common stock and related surplus, net of treasury stock, and retained earnings. ~~The Company~~We and ~~its subsidiary banks~~our Subsidiary Banks elected to opt-out of the requirement to include most components of

accumulated other comprehensive income (loss) in the calculation of CET1 capital. CET1 is reduced by goodwill and other intangible assets, net of associated deferred tax liabilities and subject to transition provisions. Tier 1 capital includes CET1 capital and additional Tier 1 capital. Additional Tier 1 capital ~~of the Company~~ includes the Capital and Common Securities issued by the Trusts (see Note 8 above) up to a maximum of 25% of Tier 1 capital on an aggregate basis. Any amount that exceeds the 25% threshold qualifies as Tier 2 capital. As of ~~September 30, 2017,~~March 31, 2019, the total of $160,416,000 of the Capital and Common Securities outstanding qualified as Tier 1 capital. ~~The Company~~We actively ~~monitors~~monitor the regulatory capital ratios to ensure that ~~the Company’s bank subsidiaries~~our Subsidiary Banks are well-capitalized under the regulatory framework.

~~As in the past, the Company~~ We will continue to monitor the volatility and cost of funds in an attempt to match maturities of rate-sensitive assets and liabilities, and respond accordingly to anticipate fluctuations in interest rates by adjusting the balance between sources and uses of funds as deemed appropriate. The net-interest rate sensitivity as of ~~September 30, 2017~~March 31, 2019 is illustrated in the table entitled “Interest Rate ~~Sensitivity.~~Sensitivity,” below. This information reflects the balances of assets and liabilities for which rates are subject to change. A mix of assets and liabilities that are roughly equal in volume and re-pricing characteristics represents a matched interest rate sensitivity position. Any excess of assets or liabilities results in an interest rate sensitivity gap.

~~The Company undertakes~~We undertake an interest rate sensitivity analysis to monitor the potential risk on future earnings resulting from the impact of possible future changes in interest rates on currently existing net asset or net liability positions. However, this type of analysis is as of a point-in-time position, when in fact that position can quickly change as market conditions, customer needs, and management strategies change. Thus, interest rate changes do not affect all categories of assets and liabilities equally or at the same time. As indicated in the table, ~~the Company is liability sensitive during the early time periods and~~we are asset sensitive in both the ~~longer periods. The Company’s~~short and long term scenarios. Our Asset and Liability Committee semi-annually reviews the consolidated position along with simulation and duration models, and makes adjustments as needed to control ~~the Company’s~~our interest rate risk position. ~~The Company uses~~We use modeling of future events as a primary tool for monitoring interest rate risk.

4139

Interest Rate Sensitivity

(Dollars in Thousands)


	Rate/Maturity										Rate/Maturity
			Over 3		Over 1								Over 3		Over 1
	3 Months		Months to		Year to 5		Over 5				3 Months		Months to		Year to 5		Over 5
September 30, 2017	or Less		1 Year		Years		Years		Total
March 31, 2019											or Less		1 Year		Years		Years		Total
	(Dollars in Thousands)										(Dollars in Thousands)
Rate sensitive assets
Investment securities	$	280,355	$	819,596	$	2,942,091	$	240,546	$	4,282,588	$	181,003	$	595,622	$	2,494,880	$	147,058	$	3,418,563
Loans, net of non-accruals		4,699,728		188,903		325,934		958,130		6,172,695		5,179,902		226,685		138,323		1,114,405		6,659,315

Total earning assets	$	4,980,083	$	1,008,499	$	3,268,025	$	1,198,676	$	10,455,283	$	5,360,905	$	822,307	$	2,633,203	$	1,261,463	$	10,077,878

Cumulative earning assets	$	4,980,083	$	5,988,582	$	9,256,607	$	10,455,283			$	5,360,905	$	6,183,212	$	8,816,415	$	10,077,878

Rate sensitive liabilities

Time deposits	$	895,394	$	1,023,537	$	196,306	$	93	$	2,115,330	$	843,272	$	985,127	$	161,954	$	109	$	1,990,462
Other interest bearing deposits		3,253,382		—		—		—		3,253,382		3,346,749		—		—		—		3,346,749
Securities sold under repurchase agreements		278,033		100,000		—		—		378,033		278,630		—		—		—		278,630
Other borrowed funds		967,500		—		—		100,000		1,067,500		74,250		—		—		436,645		510,895
Junior subordinated deferrable interest debentures		160,416		—		—		—		160,416		160,416		—		—		—		160,416

Total interest bearing liabilities	$	5,554,725	$	1,123,537	$	196,306	$	100,093	$	6,974,661	$	4,703,317	$	985,127	$	161,954	$	436,754	$	6,287,152

Cumulative sensitive liabilities	$	5,554,725	$	6,678,262	$	6,874,568	$	6,974,661			$	4,703,317	$	5,688,444	$	5,850,398	$	6,287,152

Repricing gap	$	(574,642)	$	(115,038)	$	3,071,719	$	1,098,583	$	3,480,622	$	657,588	$	(162,820)	$	2,471,249	$	824,709	$	3,790,726
Cumulative repricing gap		(574,642)		(689,680)		2,382,039		3,480,622				657,588		494,768		2,966,017		3,790,726
Ratio of interest-sensitive assets to liabilities		0.90		0.90		16.65		11.98		1.50		1.14		0.83		16.26		2.89		1.60
Ratio of cumulative, interest-sensitive assets to liabilities		0.90		0.90		1.35		1.50				1.14		1.09		1.51		1.60

Item 3. Quantitative and Qualitative Disclosures about Market Risk

During the first ~~nine~~three months of ~~2017,~~2019, there were no material changes in market risk exposures that affected the quantitative and qualitative disclosures regarding market risk presented under the caption “Liquidity and Capital Resources” located on pages 18 through 2522 of ~~the Company’s 2016~~our 2018 Annual Report as filed as ~~an exhibit~~Exhibit 13 to ~~the Company’s~~our Form 10-K for the year ended December 31, ~~2016.~~2018.

4240

Item 4. Controls and Procedures

Disclosure Controls and Procedures

~~The Company maintains~~We maintain disclosure controls and procedures designed to ensure that information required to be disclosed in reports filed under the Securities Exchange Act of 1934, as amended, is recorded, processed, summarized and reported within specified time periods. As of the end of the period covered by this Quarterly Report on Form 10-Q, ~~the Company’s~~our principal executive officer and principal financial officer evaluated, with the participation of ~~the Company’s~~our management, the effectiveness of ~~the Company’s~~our disclosure controls and procedures (as defined in Exchange Act rules 13a-15(e) and 15d-15(e)). Based on the evaluation, which disclosed no material weaknesses, ~~the Company’s~~our principal executive officer and principal financial officer concluded that ~~the Company’s~~our disclosure controls and procedures were effective as of the end of the period covered by this report.

Internal Control Over Financial Reporting

There were no changes in ~~the Company’s~~our internal control over financial reporting that occurred during ~~the Company’s~~our most recent fiscal quarter that have materially affected or are reasonably likely to materially affect ~~the Company’s~~our internal control over financial reporting.

PART II - OTHER INFORMATION

Item 1. Legal Proceedings

~~The Company is~~We are involved in various legal proceedings that are in various stages of litigation. ~~The Company has~~We have determined, based on discussions with ~~its~~our counsel that any material loss in any current legal proceedings, individually or in the aggregate, is remote or the damages sought, even if fully recovered, would not be considered material to ~~the~~our consolidated financial position or results of ~~operations of the Company.~~operations. However, many of these matters are in various stages of proceedings and further developments could cause management to revise its assessment of these matters.

1A. Risk Factors

There were no material changes in the risk factors as previously disclosed in Item 1A to Part I of ~~the Company’s~~our Annual Report on Form 10-K for the fiscal year ended December 31, ~~2016.~~2018.

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds

~~From time to time, the Company’s Board of Directors has authorized stock repurchase plans.~~ In April 2009, following receipt of the Treasury Department’s consent, the Board of Directors re‑established a formal stock repurchase program that authorized the repurchase of up to $40 million of common stock within the following 12 ~~months, and~~months. Annually since then, including on ~~April 3, 2017,~~March 11, 2019, the Board of Directors extended the repurchase program and ~~again~~this year authorized ~~the repurchase of~~an increase to purchase up to ~~$40~~$50 million of common stock during the 12 month period commencing again on April 9, ~~2017. Stock repurchases~~ 2019. Shares of common stock may be ~~made~~purchased from time to time on the open market or through ~~private~~privately negotiated transactions. Shares purchased in this program will be held in treasury for reissue for various corporate purposes, including employee compensation plans. During the ~~third~~first quarter of 2019, the ~~Company’s~~ Board of Directors adopted a Rule ~~10b5-1~~10b5‑1 trading plan, and intends to adopt additional Rule ~~10b5-1~~10b5‑1 trading plans, that will allow ~~the Company~~us to purchase ~~its~~ shares of our common stock during certain trading blackout periods when ~~the Company~~we ordinarily would not be in the market due to trading restrictions in ~~its internal~~our insider trading policy. During the ~~terms~~term of a ~~10b5-1~~Rule 10b5‑1 trading plan, purchases of common stock are automatic to the extent the conditions of the plan’s trading instructions are met. Shares ~~repurchased in this program~~purchased under the Rule 10b5-1 trading plan will be held in treasury for reissue for various corporate purposes, including employee stock ~~option~~compensation plans. As of ~~November 3, 2017,~~May 6, 2019, a total of ~~9,244,283~~9,801,561 shares had been repurchased under all ~~repurchase~~ programs at a cost of ~~$271,235,000. The Company is~~$311,359,000 We are not obligated to ~~repurchase~~purchase shares under ~~its~~our stock ~~purchase~~repurchase program ~~or to enter into additional~~outside of its Rule 10b5-1 plans. The timing, actual number and value of shares purchased will depend on many factors, including the Company’s cash flow and the liquidity and price performance of its shares of common stock.trading plan.

Except for repurchases in connection with the administration of an employee benefit plan in the ordinary course of business and consistent with past practices, common stock repurchases are only conducted under publicly announced

repurchase programs approved by the Board of Directors. The following table includes information about common stock share repurchases for the quarter ended ~~September 30, 2017.~~March 31, 2019.

Total Number of


Shares

Purchased as

Approximate

Average

Part of a

Dollar Value of

Total Number

Price Paid

Publicly-

Shares Available

of Shares

Per

Announced

for

Purchased

Share

Program

Repurchase(1)

July 1 – July 31, 2017

—

$
—

—

$
39,976,600

August 1 – August 31, 2017

—

—

—

39,976,600

September 1 – September 30, 2017

284

38.90

284

39,966,000

Total

284

$
38.90

284


				Total Number of
				Shares
				Purchased as	Approximate
		Average		Part of a	Dollar Value of
	Total Number	Price Paid		Publicly-	Shares Available
	of Shares	Per		Announced	for
	Purchased	Share		Program	Repurchase(1)
January 1 – January 31, 2019	—	$	—	—	$	20,957,000
February 1 – February 28, 2019	106		40.29	—		20,953,000
March 1 – March 31, 2019	1,199		41.07	—		20,904,000
Total	1,305	$	41.01	—

(1)

The repurchase program was extended and increased on ~~April 3, 2017~~March 11, 2019 and allows for the ~~repurchase~~purchase of up to an additional ~~$40,000,000~~$50,000,000 of ~~treasury~~common stock through April 9, ~~2018.~~ 2020.

Item 6. Exhibits

The following exhibits are filed as a part of this Report:

31(a) —Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002

31(b) —Certification of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002

32(a) —Certification of Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

32(b) —Certification of Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

101++ — Interactive Data File

++ Attached as Exhibit 101 to this report are the following documents formatted in XBRL (Extensible Business Reporting Language): (i) the Condensed Consolidated Statement of Earnings for the three ~~and nine~~ months ended ~~September 30, 2017~~March 31, 2019 and ~~2016;~~2018; (ii) the Condensed Consolidated Balance Sheet as of ~~September 30, 2017~~March 31, 2019 and December 31, ~~2016;~~2018; and (iii) the Condensed Consolidated Statement of Cash Flows for the ~~nine~~three months ended ~~September 30, 2017~~March 31, 2019 and ~~September 30, 2016.~~March 31, 2018.

4442

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.


		INTERNATIONAL BANCSHARES CORPORATION


Date:	~~November 8, 2017~~May 9, 2019	/s/ Dennis E. Nixon
		Dennis E. Nixon
		President


Date:	~~November 8, 2017~~May 9, 2019	/s/ ~~Imelda Navarro~~Judith I. Wawroski
		~~Imelda Navarro~~Judith I. Wawroski
		Treasurer

4543


	Three Months Ended September 30, 2017
	Domestic														Foreign
			Commercial
			Real Estate:
			Other		Commercial
			Construction &		Real Estate:		Commercial
			Land		Farmland &		Real Estate:		Residential:		Residential:
	Commercial		Development		Commercial		Multifamily		First Lien		Junior Lien		Consumer		Foreign		Total
	(Dollars in Thousands)

Balance at June 30,	$	25,140	$	13,249	$	17,472	$	997	$	2,314	$	4,357	$	488	$	902	$	64,919
Losses charged to allowance		(4,249)		(213)		—		—		(16)		(202)		(63)		—		(4,743)
Recoveries credited to allowance		631		17		341		—		—		85		6		5		1,085
Net (losses) recoveries charged to allowance		(3,618)		(196)		341		—		(16)		(117)		(57)		5		(3,658)

Provision charged (credited) to operations		5,473		(1,168)		371		—		817		995		82		21		6,591

Balance at September 30,	$	26,995	$	11,885	$	18,184	$	997	$	3,115	$	5,235	$	513	$	928	$	67,852


	Three Months Ended September 30, 2016
	Domestic														Foreign
			Commercial
			Real Estate:
			Other		Commercial
			Construction &		Real Estate:		Commercial
			Land		Farmland &		Real Estate:		Residential:		Residential:
	Commercial		Development		Commercial		Multifamily		First Lien		Junior Lien		Consumer		Foreign		Total
	(Dollars in Thousands)

Balance at June 30,	$	25,982	$	11,109	$	16,942	$	855	$	2,277	$	3,400	$	532	$	936	$	62,033
Losses charged to allowance		(3,485)		(14)		(497)		—		(27)		—		(124)		(41)		(4,188)
Recoveries credited to allowance		791		6,073		512		—		11		74		11		—		7,472
Net (losses) recoveries charged to allowance		(2,694)		6,059		15		—		(16)		74		(113)		(41)		3,284

Provision charged (credited)to operations		2,602		(4,659)		291		(65)		126		221		98		39		(1,347)

Balance at September 30,	$	25,890	$	12,509	$	17,248	$	790	$	2,387	$	3,695	$	517	$	934	$	63,970



	September 30, 2016
	Quarter to Date					Year to Date
	Average				Average
	Recorded		Interest		Recorded		Interest
	Investment		Recognized		Investment		Recognized
	(Dollars in Thousands)
Loans with Related Allowance
Domestic
Commercial	$	2,247	$	—	$	3,239	$	—
Commercial real estate: other construction & land development		159		—		162		—
Commercial real estate: farmland & commercial		5,036		24		5,639		73
Total impaired loans with related allowance	$	7,442	$	24	$	9,040	$	73


Balance at December 31, 2016	$	13,931
Sale of other-than-temporarily impaired available-for-sale securities during period		(13,931)
Balance at September 30, 2017	$	—


Balance at June 30, 2016	$	13,768
Impairment charges recognized during period		90
Balance at September 30, 2016	$	13,858


Balance at December 31, 2015	$	13,577
Impairment charges recognized during period		281
Balance at September 30, 2016	$	13,858