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IBOC International Bancshares

Filed: 5 Nov 20, 2:03pm

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, 2020

OR

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

For the transition period from              to           

Commission file number 000-09439

INTERNATIONAL BANCSHARES CORPORATION

(Exact name of registrant as specified in its charter)

Texas

74-2157138

(State or other jurisdiction of

(I.R.S. Employer Identification No.)

incorporation or organization)

1200 San Bernardo Avenue, Laredo, Texas 78042-1359

(Address of principal executive offices)

(Zip Code)

(956) 722-7611

(Registrant’s telephone number, including area code)

None

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

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

Title of each class:

    

Trading Symbol

    

Name of each exchange on which registered:

Common Stock, $1.00 par value

IBOC

NASDAQ

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

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes No

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

Large accelerated filer

Accelerated filer

Non-accelerated filer

Smaller reporting company

Emerging growth company

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

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

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

Class

Shares Issued and Outstanding

Common Stock, $1.00 par value

63,275,376 shares outstanding at November 3, 2020

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,

    

2020

    

2019

 

Assets

Cash and cash equivalents

$

1,249,396

$

256,820

Investment securities:

Held to maturity debt securities (Market value of $3,400 on September 30, 2020 and $2,400 on December 31, 2019)

 

3,400

 

2,400

Available for sale debt securities (Amortized cost of $3,257,601 on September 30, 2020 and $3,376,070 on December 31, 2019)

 

3,298,840

 

3,378,923

Equity securities with readily determinable fair values

6,182

6,095

Total investment securities

 

3,308,422

 

3,387,418

Loans

 

7,589,235

 

6,894,946

Less allowance for credit losses

 

(102,165)

 

(60,278)

Net loans

 

7,487,070

 

6,834,668

Bank premises and equipment, net

 

486,601

 

506,595

Accrued interest receivable

 

36,044

 

36,620

Other investments

 

266,484

 

318,427

Cash surrender value of life insurance policies

290,683

289,693

Goodwill

 

282,532

 

282,532

Other assets

 

184,542

 

200,121

Total assets

$

13,591,774

$

12,112,894

1

INTERNATIONAL BANCSHARES CORPORATION AND SUBSIDIARIES

Consolidated Statements of Condition, continued (Unaudited)

(Dollars in Thousands)

September 30,

December 31,

    

2020

    

2019

 

Liabilities and Shareholders’ Equity

Liabilities:

Deposits:

Demand—non-interest bearing

$

4,522,100

$

3,545,905

Savings and interest bearing demand

 

3,690,904

 

3,267,829

Time

 

2,093,729

 

2,012,300

Total deposits

 

10,306,733

 

8,826,034

Securities sold under repurchase agreements

 

375,849

 

236,536

Other borrowed funds

 

436,373

 

626,511

Junior subordinated deferrable interest debentures

 

134,642

 

134,642

Other liabilities

 

197,122

 

171,118

Total liabilities

 

11,450,719

 

9,994,841

Shareholders’ equity:

Common shares of $1.00 par value. Authorized 275,000,000 shares; issued 96,234,165 shares on September 30, 2020 and 96,214,967 shares on December 31, 2019

 

96,234

 

96,215

Surplus

 

149,034

 

148,075

Retained earnings

 

2,241,397

 

2,200,568

Accumulated other comprehensive income

 

32,418

 

2,345

 

2,519,083

 

2,447,203

Less cost of shares in treasury, 32,961,289 shares on September 30, 2020 and 31,015,061 on December 31, 2019

 

(378,028)

 

(329,150)

Total shareholders’ equity

 

2,141,055

 

2,118,053

Total liabilities and shareholders’ equity

$

13,591,774

$

12,112,894

See accompanying notes to consolidated financial statements.

2

INTERNATIONAL BANCSHARES CORPORATION AND SUBSIDIARIES

Consolidated Statements of Income (Unaudited)

(Dollars in Thousands, except per share data)

Three Months Ended

Nine Months Ended

    

September 30,

September 30,

2020

    

2019

    

2020

    

2019

Interest income:

Loans, including fees

$

90,614

$

104,688

$

287,608

$

313,057

Investment securities:

Taxable

8,469

18,040

 

40,049

56,942

Tax-exempt

 

605

1,019

 

2,024

4,045

Other interest income

 

295

372

 

564

998

Total interest income

 

99,983

124,119

 

330,245

375,042

Interest expense:

Savings deposits

 

1,028

4,023

 

5,424

12,515

Time deposits

 

4,292

5,680

 

15,581

15,102

Securities sold under repurchase agreements

 

164

640

 

777

1,820

Other borrowings

 

1,930

3,144

 

6,844

10,151

Junior subordinated deferrable interest debentures

 

756

1,414

 

3,109

5,045

Total interest expense

 

8,170

14,901

 

31,735

44,633

Net interest income

91,813

109,218

 

298,510

330,409

Provision for credit losses

 

8,770

5,278

 

36,595

15,363

Net interest income after provision for credit losses

 

83,043

103,940

 

261,915

315,046

Non-interest income:

Service charges on deposit accounts

 

15,037

18,723

 

45,554

53,593

Other service charges, commissions and fees

Banking

 

14,471

14,708

 

36,866

37,348

Non-banking

 

1,800

2,015

 

5,584

5,762

Investment securities transactions, net

 

(2)

 

(5)

(12)

Other investments, net

 

3,235

2,440

 

3,621

4,685

Other income

 

5,574

4,813

 

17,223

11,866

Total non-interest income

$

40,117

$

42,697

$

108,843

$

113,242

3

INTERNATIONAL BANCSHARES CORPORATION AND SUBSIDIARIES

Consolidated Statements of Income, continued (Unaudited)

(Dollars in Thousands, except per share data)

Three Months Ended

Nine Months Ended

    

September 30,

September 30,

2020

    

2019

    

2020

    

2019

Non-interest expense:

Employee compensation and benefits

$

31,718

$

37,038

$

100,367

$

110,693

Occupancy

 

6,677

 

7,294

 

19,346

 

20,251

Depreciation of bank premises and equipment

 

7,049

 

7,127

 

21,348

 

21,140

Professional fees

 

4,121

 

4,744

 

12,004

 

12,081

Deposit insurance assessments

 

810

 

829

 

1,012

 

2,471

Net expense, other real estate owned

 

1,341

 

1,578

 

7,178

 

3,776

Advertising

 

1,413

 

1,987

 

5,289

 

6,150

Software and software maintenance

4,964

4,691

14,712

14,191

Other

 

11,960

 

15,778

 

39,686

 

42,877

Total non-interest expense

 

70,053

 

81,066

 

220,942

 

233,630

Income before income taxes

53,107

 

65,571

 

149,816

 

194,658

Provision for income taxes

 

10,365

 

14,127

 

30,726

 

41,288

Net income

$

42,742

$

51,444

$

119,090

$

153,370

Basic earnings per common share:

Weighted average number of shares outstanding

 

63,269,966

 

65,449,159

 

63,876,496

 

65,571,124

Net income

$

0.68

$

0.79

$

1.86

$

2.34

Fully diluted earnings per common share:

 

 

 

 

Weighted average number of shares outstanding

 

63,386,292

 

65,636,116

64,001,883

65,777,552

Net income

$

0.67

$

0.78

$

1.86

$

2.33

See accompanying notes to consolidated financial statements

4

INTERNATIONAL BANCSHARES CORPORATION AND SUBSIDIARIES

Consolidated Statements of Comprehensive Income (Unaudited)

(Dollars in Thousands)

Three Months Ended

Nine Months Ended

    

September 30,

September 30,

2020

    

2019

    

2020

    

2019

Net income

$

42,742

$

51,444

$

119,090

$

153,370

Other comprehensive income, net of tax:

Net unrealized holding (losses) gains on securities available for sale arising during period (net of tax effects of $(2,366), $2,343, $7,993 and $15,733)

 

(8,901)

 

8,813

 

30,069

 

59,188

Reclassification adjustment for losses on securities available for sale included in net income (net of tax effects of $0, $0, $1 and $3)

 

 

2

 

4

 

9

 

(8,901)

 

8,815

 

30,073

 

59,197

Comprehensive income

$

33,841

$

60,259

$

149,163

$

212,567

See accompanying notes to consolidated financial statements.

5

INTERNATIONAL BANCSHARES CORPORATION AND SUBSIDIARIES

Consolidated Statements of Shareholders’ Equity

Three and Nine Months ended September 30, 2020 and 2019

(in Thousands, except per share amounts)

   

Number

   

   

   

   

Other

   

   

of

Common

Retained

Comprehensive

Treasury

Shares

Stock

Surplus

Earnings

Income (Loss)

Stock

Total

Balance at June 30, 2020

96,229

$

96,229

$

148,744

$

2,233,455

$

41,319

$

(377,887)

$

2,141,860

Net income

42,742

42,742

Dividends:

Payable ($.55 per share)

(34,800)

(34,800)

Purchase of treasury stock (740,598 shares)

(141)

(141)

Exercise of stock options

5

5

114

119

Stock compensation expense recognized in earnings

176

176

Other comprehensive income, net of tax:

Net change in unrealized gains and losses on available for sale securities, net of reclassification adjustments

(8,901)

(8,901)

Balance at September 30, 2020

96,234

$

96,234

$

149,034

$

2,241,397

$

32,418

$

(378,028)

$

2,141,055

   

Number

   

   

   

   

Other

   

   

of

Common

Retained

Comprehensive

Treasury

Shares

Stock

Surplus

Earnings

Income (Loss)

Stock

Total

Balance at June 30, 2019

96,151

$

96,151

$

146,614

$

2,133,239

$

(4,252)

$

(311,433)

$

2,060,319

Net income

51,444

51,444

Dividends:

Payable ($.55 per share)

(35,848)

(35,848)

Purchase of treasury (516,973 shares)

(17,689)

(17,689)

Exercise of stock options

41

41

602

643

Stock compensation expense recognized in earnings

240

240

Other comprehensive income, net of tax:

Net change in unrealized gains and losses on available for sale securities, net of reclassification adjustments

8,815

8,815

Balance at September 30, 2019

96,192

$

96,192

$

147,456

$

2,148,835

$

4,563

$

(329,122)

$

2,067,924

See accompanying notes to consolidated financial statements.

6

   

Number

   

   

   

   

Other

   

   

of

Common

Retained

Comprehensive

Treasury

Shares

Stock

Surplus

Earnings

Income (Loss)

Stock

Total

Balance at December 31, 2019

96,215

$

96,215

$

148,075

$

2,200,568

$

2,345

$

(329,150)

$

2,118,053

Net income

119,090

119,090

Dividends:

Cash ($1.10 per share)

(69,928)

(69,928)

Purchase of treasury stock (1,946,228 shares)

(48,878)

(48,878)

Exercise of stock options

19

19

388

407

Stock compensation expense recognized in earnings

571

571

Cumulative adjustment for adoption of new accounting standard, net of tax

(8,333)

(8,333)

Other comprehensive income, net of tax:

Net change in unrealized gains and losses on available for sale securities, net of reclassification adjustments

30,073

30,073

Balance at September 30, 2020

96,234

$

96,234

$

149,034

$

2,241,397

$

32,418

$

(378,028)

$

2,141,055

   

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

153,370

153,370

Dividends:

Cash ($1.05 per share)

(68,669)

(68,669)

Purchase of treasury stock (3,258 shares)

(17,817)

(17,817)

Exercise of stock options

88

88

1,429

1,517

Stock compensation expense recognized in earnings

744

744

Other comprehensive income, net of tax:

Net change in unrealized gains and losses on available for sale securities, net of reclassification adjustments

59,197

59,197

Balance at September 30, 2019

96,192

$

96,192

$

147,456

$

2,148,835

$

4,563

$

(329,122)

$

2,067,924

See accompanying notes to consolidated financial statements.

7

INTERNATIONAL BANCSHARES CORPORATION AND SUBSIDIARIES

Consolidated Statements of Cash Flows (Unaudited)

(Dollars in Thousands)

Nine Months Ended

    

September 30,

2020

    

2019

Operating activities:

Net income

$

119,090

$

153,370

Adjustments to reconcile net income to net cash provided by operating activities:

Provision for credit loss

36,595

15,363

Specific reserve, other real estate owned

702

154

Depreciation of bank premises and equipment

 

21,348

21,140

Gain on sale of bank premises and equipment

 

(248)

(207)

Gain on sale of other real estate owned

 

(361)

(1,246)

Accretion of investment securities discounts

 

(367)

(311)

Amortization of investment securities premiums

 

26,673

13,678

Investment securities transactions, net

 

5

12

Unrealized gain on equity securities with readily determinable fair values

(87)

(235)

Stock based compensation expense

 

571

744

Losses (earnings) from affiliates and other investments

 

1,270

(2,869)

Deferred income taxes

 

(17,443)

330

Increase in accrued interest receivable

 

576

1,444

Decrease (increase) in other assets

 

10,724

(17,430)

Increase in other liabilities

 

15,799

27,250

Net cash provided by operating activities

 

214,847

211,187

Investing activities:

Proceeds from maturities of securities

1,075

Proceeds from sales and calls of available for sale securities

28,795

92,980

Purchases of available for sale securities

(1,336,445)

(380,095)

Principal collected on mortgage backed securities

 

1,397,733

566,455

Net increase in loans

(684,471)

(372,121)

Purchases of other investments

 

(38,985)

(33,940)

Distributions from other investments

 

64,870

52,693

Purchases of bank premises and equipment

 

(6,245)

(23,809)

Proceeds from sales of bank premises and equipment

 

879

1,830

Proceeds from sales of other real estate owned

 

4,248

3,685

Net cash used in investing activities

$

(568,546)

$

(92,322)

8

INTERNATIONAL BANCSHARES CORPORATION AND SUBSIDIARIES

Consolidated Statements of Cash Flows, continued (Unaudited)

(Dollars in Thousands)

Nine Months Ended

    

September 30,

2020

    

2019

Financing activities:

Net increase in non-interest bearing demand deposits

$

976,195

$

121,090

Net increase (decrease) in savings and interest bearing demand deposits

 

423,075

 

(13,475)

Net increase in time deposits

 

81,429

 

7,901

Net increase in securities sold under repurchase agreements

 

139,313

 

59,345

Net decrease in other borrowed funds

 

(190,138)

 

(249,109)

Redemption of long-term debt

(25,774)

Purchase of treasury stock

 

(48,878)

 

(17,817)

Proceeds from stock transactions

 

407

 

1,517

Payments of cash dividends

 

(35,128)

 

(32,821)

Net cash provided by (used in) financing activities

 

1,346,275

 

(149,143)

Increase (decrease) in cash and cash equivalents

992,576

 

(30,278)

Cash and cash equivalents at beginning of period

 

256,820

 

316,797

Cash and cash equivalents at end of period

$

1,249,396

$

286,519

Supplemental cash flow information:

Interest paid

$

33,880

$

43,262

Income taxes paid

34,826

 

38,591

Non-cash investing and financing activities:

Net transfers from loans to other real estate owned

$

4,526

$

21,381

Dividends declared, not yet paid on common stock

34,800

35,848

Establishment of lease liability and right-of-use asset

 

6,171

Net transfers from bank premises and equipment to other assets

4,260

See accompanying notes to consolidated financial statements.

9

INTERNATIONAL BANCSHARES CORPORATION AND SUBSIDIARIES

Notes to Consolidated Financial Statements

(Unaudited)

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

Note 1 — Basis of Presentation

Our accounting and reporting policies conform to accounting principles generally accepted in the United States of America and to general practices within the banking industry. Our consolidated financial statements include the accounts of International Bancshares Corporation, and our wholly-owned bank subsidiaries, International Bank of Commerce, Laredo (“IBC”), Commerce Bank, International Bank of Commerce, Zapata, International Bank of Commerce, Brownsville, International Bank of Commerce, Oklahoma (the “Subsidiary Banks”) and our wholly-owned non-bank subsidiaries, IBC Trading Company, Premier Tierra Holdings, Inc., IBC Charitable and Community Development Corporation, Emerald Galveston Holdings, LLC and IBC Capital Corporation. Our consolidated financial statements are unaudited, but include all adjustments, which, in the opinion of management, are necessary for a fair presentation of the results of the periods presented. All such adjustments were of a normal and recurring nature. These financial statements should be read in conjunction with the financial statements and the notes thereto in our latest Annual Report on Form 10-K. Our consolidated statement of condition at December 31, 2019 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, 2020 are not necessarily indicative of the results for the year ending December 31, 2020 or any future period.

We operate as 1 segment. The operating information used by our chief executive officer for purposes of assessing performance and making operating decisions is the consolidated statements presented in this report. We have 5 active operating subsidiaries, the Subsidiary Banks. We apply the provisions of Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”), FASB ASC 280, “Segment Reporting,” in determining our reportable segments and related disclosures.

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

On January 1, 2019, we adopted the provisions of ASU 2016-02, “Leases.” ASU 2016-02 amends existing standards for accounting for leases by lessees, with accounting for leases by lessors remaining mainly unchanged from current guidance. The update requires that lessees recognize a lease liability and a right of use asset for all leases (with the exception of short-term leases) at the commencement date of the lease and disclose key information about leasing arrangements. The update is to be applied on a modified retrospective basis for leases existing at, or entered into after, the beginning of the earliest comparative period presented in the consolidated financial statements. In January 2018, the FASB issued a proposal that provides an additional transition method that would allow entities to not apply the guidance in the update in the comparative periods presented in the consolidated financial statements, but instead recognize a cumulative-effect adjustment to the opening balance of retained earnings in the period of adoption. As part of our business model, we primarily own all property we occupy, with the exception of certain branches operating in grocery stores or shopping centers and certain ATM locations that were classified as operating leases under previous guidance. The adoption of the standard did not have a significant impact on our consolidated financial statements. As of the date of adoption, we recorded a right of use asset and a lease liability of approximately $6.4 million. The right of use asset and lease liability are included in other assets and other liabilities, respectively, on our consolidated statement of condition.

10

Amortization of the right of use asset for the three and nine months ended September 30, 2020 was $340,000 and $997,000, respectively. Amortization of the right of use asset for the three and nine months ended September 30, 2019 was approximately $267,000 and $726,000, respectively, and is included as a part of occupancy expense in our consolidated income statement.

In June 2016, the FASB issued Accounting Standards Update No. 2016-13 to ASC 326, “Financial Instruments – Credit Losses.” The update amends existing standards for accounting for credit losses for financial assets. The update requires that the expected credit losses on the financial instruments held as of the end of the period being reported be measured based on historical experience, current conditions, and reasonable and supportable forecasts. The update also expands the required disclosures related to significant estimates and judgements used in estimating credit losses, as well as the credit quality and underwriting standards of an organization’s financial assets. The update also amended the accounting for credit losses on available-for-sale debt securities and purchased financial assets with credit deterioration. The impact of the adoption of the standard is to be recorded as a cumulative-effect adjustment to retained earnings as of the beginning of the first reporting period in which the guidance is adopted. The accounting standard was effective for us on January 1, 2020. The task force formed last year, which includes key members of the teams that work with the current calculation of the allowance for probable loan losses plus members representing the corporate accounting and risk management areas, has worked with the implementation of the update and validation to complete our model/tool. Based on the composition of the portfolio at December 31, 2019 and after finalizing the methodology, the adoption of the update increased our allowance for probable loan losses (referred to as the allowance for credit losses under ASU 2016-13), by approximately 17.2%, resulting in a cumulative-effect adjustment to retained earnings of approximately $8.3 million, net of tax. Please refer to Note 4 – Allowance for Credit Losses and the Critical Accounting Policies discussion in Management’s Discussion and Analysis.

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.

11

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, 2020 by level within the fair value measurement hierarchy:

Fair Value Measurements at

Reporting Date Using

(in Thousands)

Quoted

Prices in

Active

Significant

Assets/Liabilities

Markets for

Other

Significant

Measured at

Identical

Observable

Unobservable

Fair Value

Assets

Inputs

Inputs

September 30, 2020

(Level 1)

(Level 2)

(Level 3)

Measured on a recurring basis:

    

    

    

    

    

    

    

    

Assets:

Available for sale debt securities

Residential mortgage-backed securities

$

3,234,735

$

$

3,234,735

$

States and political subdivisions

 

64,105

 

 

64,105

 

Equity Securities

 

6,182

 

6,182

 

 

$

3,305,022

$

6,182

$

3,298,840

$

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, 2019 by level within the fair value measurement hierarchy:

Fair Value Measurements at

Reporting Date Using

(in Thousands)

Quoted

Prices in

Active

Significant

Assets/Liabilities

Markets for

Other

Significant

Measured at

Identical

Observable

Unobservable

Fair Value

Assets

Inputs

Inputs

December 31, 2019

(Level 1)

(Level 2)

(Level 3)

Measured on a recurring basis:

    

    

    

    

    

    

    

    

Assets:

Available for sale securities

Residential mortgage - backed securities

$

3,285,548

$

$

3,285,548

$

States and political subdivisions

 

93,375

 

 

93,375

 

Equity Securities

 

6,095

 

6,095

 

 

$

3,385,018

$

6,095

$

3,378,923

$

Available-for-sale debt securities are classified within Level 2 of the valuation hierarchy. Equity securities with readily determinable fair values are classified within Level 1. For debt investments classified as Level 2 in the fair value hierarchy, we obtain fair value measurements from an independent pricing service. The fair value measurements consider observable data that may include dealer quotes, market spreads, cash flows, the U.S. Treasury yield curve, live trading levels, trade execution data, market consensus prepayment speeds, credit information and the bond’s terms and conditions, among other things.

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

12

The following table represents financial instruments measured at fair value on a non-recurring basis as of and for the period ended September 30, 2020 by level within the fair value measurement hierarchy:

Fair Value Measurements at Reporting

Date Using

(in thousands)

Quoted

Assets/Liabilities

Prices in

Measured at

Active

Significant

Fair Value

Markets for

Other

Significant

Net Provision

Period ended

Identical

Observable

Unobservable

(Credit)

September 30,

Assets

Inputs

Inputs

During

2020

(Level 1)

(Level 2)

(Level 3)

Period

Measured on a non-recurring basis:

    

    

    

    

    

    

    

    

    

    

Assets:

Watch-List doubtful loans

$

393

$

$

$

393

$

156

Other real estate owned

 

1,594

 

 

 

1,594

 

702

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

Fair Value Measurements at Reporting

Date Using

(in thousands)

Quoted

Assets/Liabilities

Prices in

Measured at

Active

Significant

Fair Value

Markets

Other

Significant

Net (Credit)

Year ended

for Identical

Observable

Unobservable

Provision

December 31,

Assets

Inputs

Inputs

During

2019

(Level 1)

(Level 2)

(Level 3)

Period

Measured on a non-recurring basis:

    

    

    

    

    

    

    

    

    

    

Assets:

Impaired loans

$

826

$

$

$

826

$

43

Other real estate owned

 

21,614

 

 

 

21,614

 

322

Equity investment without a readily determinable fair value

28,166

28,166

4,775

Our assets measured at fair value on a non-recurring basis at September 30, 2020 are limited to loans classified as Watch List – Doubtful and other real estate owned. At December 31, 2019, asset measured at fair value on a non-recurring basis also included an equity investment without a readily determinable fair value. The fair value of Watch-List Doubtful loans is derived in accordance with FASB ASC 310, “Receivables”. They are primarily comprised of collateral-dependent commercial loans. As the primary sources of loan repayments decline, the secondary repayment source, the collateral, takes on greater significance. Correctly evaluating the fair value becomes even more important. Re-measurement of the loan to fair value is done through a specific valuation allowance included in the allowance for credit losses. The fair value of the loan is based on the fair value of the collateral, as determined through either an appraisal or evaluation process. The basis for our appraisal and appraisal review process is based on regulatory guidelines and strives to comply with all regulatory appraisal laws, regulations, and the Uniform Standards of Professional Appraisal Practice. All appraisals and evaluations are “as is” (the property’s highest and best use) valuations based on the current conditions of the property/project at that point in time. The determination of the fair value of the collateral is based on the net realizable value, which is the appraised value less any closing costs, when applicable. As of September 30, 2020, we had $1,814,000 of doubtful commercial collateral dependent loans, of which $0 had an appraisal performed within the immediately preceding twelve months, and of which $1,300,000 had an evaluation performed within the immediately preceding twelve months. As of December 31, 2019, we had approximately $2,955,000 of doubtful commercial collateral dependent loans, of which $1,426,000 had an appraisal performed within the immediately preceding twelve months and of which $847,000 had an evaluation performed within the immediately preceding twelve months.

13

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 doubtful loans and where obsolete appraisals are identified. In order to determine whether we would obtain a new appraisal or perform an internal evaluation to determine the fair value of the collateral, the credit committee reviews the existing appraisal to determine if the collateral value is reasonable in view of the current use of the collateral and the economic environment related to the collateral. If the analysis of the existing appraisal does not find that the collateral value is reasonable under the current circumstances, we would obtain a new appraisal on the collateral or perform an internal evaluation of the collateral. The ultimate decision to get a new appraisal rests with the independent credit administration group. A new appraisal is not required if an internal evaluation, as performed by in-house experts, is able to appropriately update the original appraisal assumptions to reflect current market conditions and provide an estimate of the collateral’s market value for analysis of the doubtful loan. 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 credit 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, 2020 and the twelve months ended December 31, 2019, we recorded $0, $22,000 and $9,611,000, respectively, in charges to the allowance for credit losses in connection with loans transferred to other real estate owned. For the three and nine months ended September 30, 2020 and the twelve months ended December 31, 2019, we recorded $165,000, $702,000 and $322,000, respectively, in adjustments to fair value in connection with other real estate owned.

The fair value estimates, methods, and assumptions for our financial instruments at September 30, 2020 and December 31, 2019 are outlined below.

Cash and Cash Equivalents

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

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 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.

14

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, 2020 and December 31, 2019, the carrying amount of fixed rate performing loans was $1,887,310,000 and $1,503,811,000, respectively, and the estimated fair value was $1,820,865,000 and $1,481,239,000, respectively.

Accrued Interest

The carrying amounts of accrued interest approximate fair value.

Deposits

The fair value of deposits with no stated maturity, such as non-interest bearing demand deposit accounts, savings accounts and interest bearing demand deposit accounts, was equal to the amount payable on demand as of September 30, 2020 and December 31, 2019. The fair value of time deposits is based on the discounted value of contractual cashflows. The discount rate is based on currently offered rates. Time deposits are within Level 3 of the fair value hierarchy. At September 30, 2020 and December 31, 2019, the carrying amount of time deposits was $2,093,729,000 and $2,012,300,000, respectively, and the estimated fair value was $2,088,830,000 and $2,011,950,000, respectively.

Securities Sold Under Repurchase Agreements

Securities sold under repurchase agreements are short-term maturities. Due to the contractual terms of the instruments, the carrying amounts approximated fair value at September 30, 2020 and December 31, 2019.

Junior Subordinated Deferrable Interest Debentures

We currently have floating-rate junior subordinated deferrable interest debentures outstanding. Due to the contractual terms of the floating-rate junior subordinated deferrable interest debentures, the carrying amounts approximated fair value at September 30, 2020 and December 31, 2019.

Other Borrowed Funds

We currently have long-term borrowings issued from the Federal Home Loan Bank (“FHLB”). The long-term borrowings outstanding at September 30, 2020 and December 31, 2019 are fixed-rate borrowings and the fair value is based on established market spreads for similar types of borrowings. The fixed rate long-term borrowings are included in Level 2 of the fair value hierarchy. At September 30, 2020 and December 31, 2019, the carrying amount of the fixed rate long-term FHLB borrowings was $436,373,000 and $436,511,000, respectively, and the estimated fair value was $494,099,000 and $465,017,000, respectively.

Commitments to Extend Credit and Letters of Credit

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

Limitations

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

15

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, 2020 and December 31, 2019 is as follows:

September 30,

December 31,

2020

2019

(Dollars in Thousands)

Commercial, financial and agricultural

    

$

4,426,866

    

$

3,379,837

Real estate - mortgage

 

1,033,646

 

1,140,377

Real estate - construction

 

1,943,430

 

2,185,883

Consumer

 

41,110

 

47,800

Foreign

 

144,183

 

141,049

Total loans

$

7,589,235

$

6,894,946

Note 4 — Allowance for Credit Losses

We adopted the provisions of ASU 2016-13 on January 1, 2020 on a modified retrospective basis. Results and information regarding our allowance for credit losses (“ACL”) included in this Note are calculated and presented in accordance with that accounting standards update. Results and information prior to January 1, 2020 are calculated and presented in accordance with previously applicable U.S. GAAP.

ASU 2016-13 replaces the long-standing incurred loss model with an expected credit loss model that recognizes credit losses over the life of a financial asset. Expected credit losses capture historical information, current conditions, and reasonable and supportable forecasts of future conditions. The ACL is deducted from the amortized cost of an instrument to present the net amount expected to be collected on the financial asset. Our ACL primarily consists of the aggregate ACL estimates of our Subsidiary Banks. The estimates are established through charges to operations in the form of charges to provisions for credit loss expense. Loan losses or recoveries are charged or credited directly to the ACL. The ACL of each Subsidiary Bank is maintained at a level considered appropriate by management, based on estimated current expected credit losses in the current loan portfolio, including information about past events, current conditions and reasonable and supportable forecasts.

The estimation of the ACL is based on a loss-rate methodology that measures lifetime losses on loan pools that have similar risk characteristics. Loans that do not have similar risk characteristics are evaluated on an individual basis. The segmentation of the loan portfolio into pools requires a balancing process between capturing similar risk characteristics and containing sufficient loss history to provide meaningful results.  Our segmentation starts at the general loan category with further sub-segmentation based on collateral types that may be of meaningful size and/or may contain sufficient differences in risk characteristics based on management’s judgement that would warrant further segmentation. The general loan categories along with primary risk characteristics used in our calculation are as follows:

Commercial and industrial loans. This category includes loans extended to a diverse array of businesses for working capital or equipment purchases. These loans are mostly secured by the collateral pledged by the borrower that is directly related to the business activities of the company such as equipment, accounts receivable and inventory. The borrower’s abilities to generate revenues from equipment purchases, collect accounts receivable, and to turn inventory

16

into sales are risk factors in the repayment of the loan. A small portion of this loan category is related to loans secured by oil & gas production and loans secured by aircraft.

Construction and land development loans. This category includes the development of land from unimproved land to lot development for both residential and commercial use and vertical construction across residential and commercial real estate classes. These loans carry risk of repayment when projects incur cost overruns, have an increase in the price of construction materials, encounter zoning, entitlement and environmental issues, or encounter other factors that may affect the completion of a project on time and on budget. Additionally, repayment risk may be negatively impacted when the market experiences a deterioration in the value of real estate. Risks specifically related to 1-4 family development loans also include mortgage rate risk and the practice by the mortgage industry of more restrictive underwriting standards, which inhibits the buyer from obtaining long term financing creating excessive housing and lot inventory in the market.

Commercial real estate loans. This category includes loans secured by farmland, multifamily properties, owner occupied commercial properties, and non-owner occupied commercial properties.  Owner occupied commercial properties include warehouses often along the border for import/export operations, office space where the borrower is the primary tenant, restaurants and other single-tenant retail. Non-owner occupied commercial properties include hotels, retail centers, office and professional buildings, and leased warehouses. These loans carry risk of repayment when market values deteriorate, the business experiences turnover in key management, the business has an inability to attract or keep occupancy levels stable, or when the market experiences an exit of a specific business type that is significant to the local economy, such as a manufacturing plant.

1-4 family mortgages. This category includes both first and second lien mortgages for the purpose of home purchases or refinancing of existing mortgage loans. A small portion of this loan category is related to home equity lines of credits, lots purchases, and home construction.  Loan repayments may be affected by unemployment or underemployment and deteriorating market values of real estate.

Consumer loans. This category includes deposit secured, vehicle secured, and unsecured loans, including overdrafts, made to individuals. Repayment is primarily affected by unemployment or underemployment.

The loan pools are further broken down using a risk-based segmentation based on internal classifications for commercial loans and past due status for consumer mortgage loans.  Non-mortgage consumer loans are evaluated as one segment.  On a weekly basis, commercial loan past due reports are reviewed by the credit quality committee to determine if a loan has any potential problems and if a loan should be placed on our internal Watch List report. Additionally, our credit department reviews the majority of our loans for proper internal classification purposes regardless of whether they are past due and segregates any loans with potential problems for further review. The credit department will discuss the potential problem loans with the servicing loan officers to determine any relevant issues that were not discovered in the evaluation. Also, an analysis of loans that is provided through examinations by regulatory authorities is considered in the review process. After the above analysis is completed, we will determine if a loan should be placed on an internal Watch List report because of issues related to the analysis of the credit, credit documents, collateral and/or payment history.

Our internal Watch List report is segregated into the following categories: (i) Pass, (ii) Economic Monitoring, (iii) Special Review, (iv) Watch List—Pass, or (v) Watch List—Substandard, and (vi) Watch List—Doubtful.  The loans placed in the Special Review category and lower rated credits reflect our opinion that the loans reflect potential weakness which require monitoring on a more frequent basis. Credits in those categories are reviewed and discussed on a regular basis, no less frequently than quarterly, with the credit department and the lending staff to determine if a change in category is warranted. The loans placed in the Watch List—Pass category and lower rated credits reflect our opinion that the credit contains weaknesses which represent a greater degree of risk, which warrant “extra attention.” Credits in this category are reviewed and discussed on a regular basis with the credit department and the lending staff to determine if a change in category is warranted. The loans placed in the Watch List—Substandard category are considered to be potentially inadequately protected by the current sound worth and debt service capacity of the borrower or of any pledged collateral. These credit obligations, even if apparently protected by collateral value, have shown defined weaknesses related to adverse financial, managerial, economic, market or political conditions which may jeopardize repayment of principal and interest. Furthermore, there is the possibility that we may sustain some future loss if such weaknesses are not corrected.

17

The loans placed in the Watch List—Doubtful category have shown defined weaknesses and it is likely, based on current information and events, that we will be unable to collect all principal and/or interest amounts contractually due.  Watch List—Doubtful loans are placed on non-accrual when they are moved to that category.  

For the purposes of the ACL, in order to maintain segments with sufficient history for meaningful results, the credits in the Pass and Economic Monitoring categories are aggregated, the credits in the Special Review and Watch List—Pass credits are aggregated, and the credits in the Watch List—Substandard category remain in their own segment.  For loans that are classified as Watch List—Doubtful, management evaluates these credits in accordance with ASC 310-10, “Receivables,” and, if deemed necessary, a specific reserve is allocated to the loan. The specific reserve allocated under ASC 310-10, is based on (i) the present value of expected future cash flows discounted at the loan’s effective interest rate; (ii) the loan’s observable market price; or (iii) net realizable value of the fair value of the collateral if the loan is collateral dependent. Substantially all of our loans evaluated as Watch List—Doubtful under ASC 310-10 are measured using the fair value of collateral method. In rare cases, we may use other methods to determine the specific reserve of a loan under ASC 310-10 if such loan is not collateral dependent.

Within each collectively evaluated pool, the robustness of the lifetime historical loss-rate is evaluated and, if needed, is supplemented with peer loss rates through a model risk adjustment.  Certain qualitative loss factors are then evaluated to incorporate management’s two-year reasonable and supportable forecast period followed by a reversion to the pool’s average lifetime loss-rate. Those qualitative loss factors are: (i) trends in portfolio volume and composition, (ii) volume and trends in classified loans, delinquencies, non-accruals and TDR’s, (iii) concentration risk, (iv) trends in underlying collateral value, (v) changes in policies, procedures, and strategies, and (vi) economic conditions.  Qualitative factors also include potential losses stemming from operational risk factors arising from fraud, natural disasters, pandemics and geopolitical events.  Should any of the factors considered by management in evaluating the adequacy of the ACL change, our estimate could also change, which could affect the level of future credit loss expense.

We have elected to not measure an ACL for accrued interest receivable given our timely approach in identifying and writing off uncollectible accrued interest.  An ACL for off-balance sheet exposure is derived from a projected usage rate of any unfunded commitment multiplied by the historical loss rate, plus model risk adjustment, if any, of the on-balance sheet loan pools.

Our management continually reviews the ACL of the Subsidiary Banks using the amounts determined from the estimates established on specific doubtful loans, the estimate established on quantitative historical loss percentages, and the estimate based on qualitative current conditions and reasonable and supportable two-year forecasted data. Our methodology reverts to the average lifetime loss-rate beyond the forecast period when we can no longer develop reasonable and supportable forecasts.  Should any of the factors considered by management in evaluating the adequacy of the estimate for current expected credit losses change, our estimate of current expected credit losses could also change, which could affect the level of future credit loss expense. While the calculation of our ACL utilizes management’s best judgment and all information reasonably available, the adequacy of the ACL is dependent on a variety of factors beyond our control, including, among other things, the performance of the entire loan portfolio, the economy, government actions, changes in interest rates and the view of regulatory authorities towards loan classifications.

18

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

Three Months Ended September 30, 2020

Domestic

Foreign

 

    

    

Commercial

    

    

    

    

    

    

    

Real Estate:

Other

Commercial

Construction &

Real Estate:

Commercial

Land

Farmland &

Real Estate:

Residential:

Residential:

Commercial

Development

Commercial

Multifamily

First Lien

Junior Lien

Consumer

Foreign

Total

(Dollars in Thousands)  

Balance at June 30, 2020

$

20,079

$

40,924

$

18,711

$

1,864

$

3,208

$

8,964

$

288

$

516

$

94,554

Losses charged to allowance

 

(1,735)

(87)

(3)

(62)

 

(1,887)

Recoveries credited to allowance

 

523

14

86

8

51

46

 

728

Net (losses) recoveries charged to allowance

 

(1,212)

 

14

 

86

 

 

(79)

 

48

 

(16)

 

 

(1,159)

Provision charged (credited) to operations

 

3,277

(2,855)

4,892

2,639

400

293

2

122

 

8,770

Balance at September 30, 2020

$

22,144

$

38,083

$

23,689

$

4,503

$

3,529

$

9,305

$

274

$

638

$

102,165

Three Months Ended September 30, 2019

Domestic

Foreign

 

    

    

Commercial

    

    

    

    

    

    

    

Real Estate:

Other

Commercial

Construction &

Real Estate:

Commercial

Land

Farmland &

Real Estate:

Residential:

Residential:

Commercial

Development

Commercial

Multifamily

First Lien

Junior Lien

Consumer

Foreign

Total

(Dollars in Thousands)  

Balance at June 30, 2019

$

11,780

$

15,273

$

17,029

$

1,849

$

3,627

$

7,312

$

488

$

845

$

58,203

Losses charged to allowance

 

(3,231)

 

 

(468)

 

(164)

 

(214)

 

(216)

 

 

(4,293)

Recoveries credited to allowance

 

585

 

4

 

10

 

 

3

 

65

 

5

 

 

672

Net (losses) recoveries charged to allowance

 

(2,646)

 

4

 

(458)

 

 

(161)

 

(149)

 

(211)

 

 

(3,621)

Provision charged (credited) to operations

 

1,837

 

1,573

 

230

 

350

 

263

 

852

 

199

 

(26)

 

5,278

Balance at September 30, 2019

$

10,971

$

16,850

$

16,801

$

2,199

$

3,729

$

8,015

$

476

$

819

$

59,860

Nine Months Ended September 30, 2020

Domestic

Foreign

    

    

Commercial

    

    

    

    

    

    

    

Real Estate:

Other

Commercial

Construction &

Real Estate:

Commercial

Land

Farmland &

Real Estate:

Residential:

Residential:

Commercial

Development

Commercial

Multifamily

First Lien

Junior Lien

Consumer

Foreign

Total

(Dollars in Thousands)  

Balance at December 31, 2019

$

11,145

$

18,152

$

16,533

$

1,786

$

3,762

$

7,535

$

542

$

823

$

60,278

Adoption of ASU 2016-13

4,247

13,391

(4,292)

(355)

(1,580)

(429)

(225)

(410)

10,347

Losses charged to allowance

 

(6,696)

(19)

(55)

(123)

(124)

(192)

 

(7,209)

Recoveries credited to allowance

 

1,793

15

107

10

171

58

 

2,154

Net (losses) recoveries charged to allowance

 

(4,903)

 

(4)

 

52

 

 

(113)

 

47

 

(134)

 

 

(5,055)

Provision charged to operations

 

11,655

6,544

11,396

3,072

1,460

2,152

91

225

 

36,595

19

Balance at September 30, 2020

$

22,144

$

38,083

$

23,689

$

4,503

$

3,529

$

9,305

$

274

$

638

$

102,165

Nine Months Ended September 30, 2019

Domestic

Foreign

 

    

    

Commercial

    

    

    

    

    

    

    

Real Estate:

Other

Commercial

Construction &

Real Estate:

Commercial

Land

Farmland &

Real Estate:

Residential:

Residential:

Commercial

Development

Commercial

Multifamily

First Lien

Junior Lien

Consumer

Foreign

Total

(Dollars in Thousands)  

Balance at December 31, 2018

$

12,596

$

15,123

$

19,353

$

1,808

$

3,467

$

7,719

$

447

$

871

$

61,384

Losses charged to allowance

 

(11,011)

 

(7,347)

 

 

(166)

 

(314)

 

(334)

 

 

(19,172)

Recoveries credited to allowance

 

1,631

 

80

 

308

 

 

14

 

222

 

30

 

 

2,285

Net (losses) recoveries charged to allowance

 

(9,380)

 

80

 

(7,039)

 

 

(152)

 

(92)

 

(304)

 

 

(16,887)

Provision charged (credited) to operations

 

7,755

 

1,647

 

4,487

 

391

 

414

 

388

 

333

 

(52)

 

15,363

Balance at September 30, 2019

$

10,971

$

16,850

$

16,801

$

2,199

$

3,729

$

8,015

$

476

$

819

$

59,860

The increase in credit loss expense for the three and nine months ended September 30, 2020 can be primarily attributed to the deteriorating economic conditions occurring in those periods as a result of COVID-19 and the impact of those conditions on certain segments of our ACL calculation for those periods. We adopted the provisions of ASU 2016-13 on January 1, 2020, resulting in a transition from the long-standing incurred loss model to an expected credit loss model. Impacting the provision for loan loss for the nine months ended September 30, 2019 is a relationship that is secured by multiple pieces of real property on which car dealerships are operated. The relationship began deteriorating in the fourth quarter of 2018, triggered by significant fraud by a high level insider of the car dealership resulting in the dealerships unexpectedly filing for bankruptcy and creating an exposure for potential loss since the operations of the dealerships were the source of repayment from the borrower. The relationship further deteriorated in the first quarter of 2019 after the court approved debtor in possession plan sponsor discontinued its role in the process and thus did not fulfill its obligation to assume full responsibility of the accrued and unpaid interest. Although the relationship is secured by real property (the dealerships’ real estate), the real property has specialized use, contributing to the potential exposure for probable loss. During the first quarter of 2019, in light of the circumstances and management’s evaluation of the relationship, the decision was made to classify the relationship as doubtful (previously referred to as impaired prior to the adoption of ASU 2016-13), non-accrual status and place a specific reserve on the relationship in the amount of $9.5 million. During the second quarter of 2019, management continued to evaluate the relationship and decided to foreclose on the underlying real estate collateral, resulting in a charge-off of approximately $9,500,000, reflected in the tables above as part of the Commercial and Commercial Real Estate: Farmland and Commercial categories.

20

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, 2020 and December 31, 2019:

September 30, 2020

Loans Individually

Loans Collectively

Evaluated For

Evaluated For

Impairment

Impairment

Recorded

Recorded

Investment

Allowance

Investment

Allowance

(Dollars in Thousands)

Domestic

Commercial

    

$

1,444

    

$

411

    

$

1,876,535

    

$

21,733

Commercial real estate: other construction & land development

 

911

 

70

 

1,942,519

 

38,013

Commercial real estate: farmland & commercial

 

501

 

 

2,110,448

 

23,689

Commercial real estate: multifamily

 

137

 

 

437,801

 

4,503

Residential: first lien

 

243

 

 

409,772

 

3,529

Residential: junior lien

 

38

 

 

623,593

 

9,305

Consumer

 

3

 

 

41,107

 

274

Foreign

 

 

 

144,183

 

638

Total

$

3,277

$

481

$

7,585,958

$

101,684

December 31, 2019

Loans Individually

Loans Collectively

Evaluated For

Evaluated For

Impairment

Impairment

Recorded

Recorded

Investment

Allowance

Investment

Allowance

(Dollars in Thousands)

Domestic

Commercial

    

$

1,935

    

$

249

    

$

1,290,725

    

$

10,895

Commercial real estate: other construction & land development

 

938

 

116

 

2,184,945

 

18,037

Commercial real estate: farmland & commercial

 

1,208

 

 

1,895,539

 

16,533

Commercial real estate: multifamily

 

165

 

 

190,265

 

1,786

Residential: first lien

 

6,278

 

 

427,623

 

3,762

Residential: junior lien

 

692

 

 

705,784

 

7,535

Consumer

 

1,195

 

 

46,605

 

542

Foreign

 

264

 

 

140,785

 

823

Total

$

12,675

$

365

$

6,882,271

$

59,913

21

The table below provides additional information on loans accounted for on a non-accrual basis by loan class at September 30, 2020 and December 31, 2019:

September 30, 2020

December 31, 2019

(Dollars in Thousands)

Domestic

Commercial

    

$

1,444

    

$

1,901

Commercial real estate: other construction & land development

 

911

 

938

Commercial real estate: farmland & commercial

 

501

 

1,208

Commercial real estate: multifamily

 

137

 

165

Residential: first lien

 

727

 

670

Residential: junior lien

 

38

 

Consumer

 

3

 

4

Total non-accrual loans

$

3,761

$

4,886

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

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

December 31, 2019

Unpaid

Average

Recorded

Principal

Related

Recorded

Interest

Investment

Balance

Allowance

Investment

Recognized

(Dollars in Thousands)

Loans with Related Allowance

    

    

    

    

    

    

Domestic

Commercial

$

510

$

516

$

249

$

514

$

Commercial real estate: other construction & land development

126

169

116

131

Total impaired loans with related allowance

$

636

$

685

$

365

$

645

$

December 31, 2019

Unpaid

 

Average

Recorded

Principal

 

Recorded

Interest

Investment

Balance

 

Investment

Recognized

(Dollars in Thousands)

Loans with No Related Allowance

Domestic

Commercial

    

$

1,425

$

1,516

$

16,194

$

3

Commercial real estate: other construction & land development

 

812

 

1,133

 

2,151

 

Commercial real estate: farmland & commercial

 

1,208

 

1,841

 

36,632

 

Commercial real estate: multifamily

 

165

 

168

 

565

 

Residential: first lien

 

6,278

 

6,445

 

7,136

 

305

Residential: junior lien

 

692

 

692

 

976

 

44

Consumer

 

1,195

 

1,196

 

1,211

 

2

Foreign

 

264

 

264

 

327

 

14

Total impaired loans with no related allowance

$

12,039

$

13,255

$

65,192

$

368

22

The following table details key information regarding our doubtful (previously referred to as impaired prior to the adoption of ASU 2016-13) loans by loan class at September 30, 2019, in accordance with ASC 310 prior to the adoption of ASU 2016-13:

September 30, 2019

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

$

602

$

$

616

$

Commercial real estate: other construction & land development

 

129

 

 

132

 

Total impaired loans with related allowance

$

731

$

$

748

$

September 30, 2019

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

    

$

8,002

$

1

$

17,945

$

2

Commercial real estate: other construction & land development

 

1,674

 

 

1,767

 

Commercial real estate: farmland & commercial

 

3,222

 

 

22,389

 

Commercial real estate: multifamily

 

653

 

 

656

 

Residential: first lien

 

6,427

 

78

 

6,698

 

231

Residential: junior lien

 

914

 

10

 

1,028

 

32

Consumer

 

1,131

 

 

1,088

 

Foreign

 

274

 

3

 

281

 

9

Total impaired loans with no related allowance

$

22,297

$

92

$

51,852

$

274

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 Watch List—Doubtful loans.

    

September 30, 2020

    

December 31, 2019

(Dollars in Thousands)

Domestic

Commercial

 

$

 

$

32

Residential: first lien

4,149

5,608

Residential: junior lien

557

692

Consumer

888

1,192

Foreign

241

264

Total troubled debt restructuring

$

5,835

$

7,788

We are actively working with our customers affected by the current economic crisis arising from COVID-19. We have been offering and are prepared to continue to offer assistance in accordance with current regulatory guidance. That includes continuously reaching out to our customers and, in some cases, offering short-term payment deferral plans. As of November 3, 2020, we had approximately $1,799,000,000 in loans with some degree of payment deferrals in our system. In accordance with interagency regulatory guidance, these short-term deferrals are not considered troubled debt restructurings. The end of the deferral period on these loans will primarily be in the fourth quarter of 2020, and we anticipate that approximately 83% of the loans will resume regular payments at the end of their deferral period. We

23

expect that approximately 17% of the loans in some sort of deferral program will be requesting additional relief. The loans requesting additional relief will include some customers in the industries that have been significantly impacted by the COVID-19 pandemic, including the hospitality sector, the oil and gas industry, and retail developments.

With the passage of the Paycheck Protection Program (“PPP”), administered by the Small Business Association (“SBA”), we are actively assisting our customers with applications for loans through the PPP. PPP loans earn interest at 1% and PPP loans made prior to June 5, 2020 have a two-year term, while those made after June 5, 2020 have a five-year term; however, PPP loans also include forgiveness provisions that we expect most customers will utilize. Customers began submitting applications for the forgiveness program in the third quarter. PPP loans are intended to support up to 24 weeks of payroll and certain other costs to help those businesses remain viable and allow their employees to pay their bills. As of November 3, 2020, we had 4,944 PPP loans totaling approximately $455,347,000 outstanding. The PPP loans are fully guaranteed by the U.S. government through the SBA.

The Subsidiary Banks charge-off that portion of any loan which management considers to represent a loss as well as that portion of any other loan which is classified as a “loss” by bank examiners. Commercial 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 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 ACL can be made only on a subjective basis. It is the judgment of our management that the ACL at September 30, 2020 was adequate to absorb probable losses from loans in the portfolio at that date.

24

The following tables present information regarding the aging of past due loans by loan class at September 30, 2020 and December 31, 2019:

September 30, 2020

90 Days or

Total

30 - 59

60 - 89

90 Days or

greater &

Past

Total

Days

Days

Greater

still accruing

Due

Current

Portfolio

(Dollars in Thousands)

Domestic

Commercial

    

$

3,079

    

$

238

    

$

1,439

    

$

971

    

$

4,756

    

$

1,873,223

    

$

1,877,979

Commercial real estate: other construction & land development

 

2,242

 

16,603

 

142

 

142

 

18,987

 

1,924,443

 

1,943,430

Commercial real estate: farmland & commercial

 

1,702

 

259

 

 

 

1,961

 

2,108,989

 

2,110,950

Commercial real estate: multifamily

 

22

 

137

 

 

 

159

 

437,778

 

437,937

Residential: first lien

 

2,288

 

910

 

6,427

 

5,963

 

9,625

 

400,390

 

410,015

Residential: junior lien

 

564

 

722

 

945

 

945

 

2,231

 

621,400

 

623,631

Consumer

 

460

 

35

 

36

 

33

 

531

 

40,579

 

41,110

Foreign

 

461

 

250

 

205

 

205

 

916

 

143,267

 

144,183

Total past due loans

$

10,818

$

19,154

$

9,194

$

8,259

$

39,166

$

7,550,069

$

7,589,235

December 31, 2019

90 Days or

Total

30 - 59

60 - 89

90 Days or

greater &

Past

Total

Days

Days

Greater

still accruing

Due

Current

Portfolio

 

(Dollars in Thousands)

Domestic

    

    

    

    

    

    

    

    

    

    

    

    

    

    

Commercial

$

3,134

    

$

626

    

$

1,292

    

$

421

    

$

5,052

    

$

1,287,608

    

$

1,292,660

Commercial real estate: other construction & land development

 

509

 

55

 

 

 

564

 

2,185,319

 

2,185,883

Commercial real estate: farmland & commercial

 

8,058

 

2,031

 

54,928

 

54,878

 

65,017

 

1,831,730

 

1,896,747

Commercial real estate: multifamily

 

313

 

 

165

 

 

478

 

189,952

 

190,430

Residential: first lien

 

3,229

 

1,670

 

3,660

 

3,107

 

8,559

 

425,342

 

433,901

Residential: junior lien

 

1,112

 

477

 

1,200

 

1,200

 

2,789

 

703,687

 

706,476

Consumer

 

467

 

75

 

88

 

88

 

630

 

47,170

 

47,800

Foreign

 

1,347

 

3

 

11

 

11

 

1,361

 

139,688

 

141,049

Total past due loans

$

18,169

$

4,937

$

61,344

$

59,705

$

84,450

$

6,810,496

$

6,894,946

The increase in Commercial Real Estate - Other Construction and Land Development loans 60-89 days past due at September 30, 2020 can be attributed a loan secured by a commercial pad site. This loan is currently classified as a Watch-List Substandard loan. The decrease in Commercial Real Estate - Farmland and Commercial loans 90 days or greater for the same period can be attributed to a relationship secured by real estate on which children’s learning centers are operated.

25

A summary of the loan portfolio by credit quality indicator by loan class and by year of origination at September 30, 2020 is presented below. A summary of the loan portfolio by credit quality indicator presented at December 31, 2019, based on guidance prior to the adoption of ASU 2016-13, is also presented below:

    

2020

    

2019

    

2018

    

2017

    

2016

    

Prior

    

Total

(Dollars in Thousands)

Balance at September 30, 2020

Domestic

Commercial

    

Pass

$

1,092,774

$

307,257

$

171,592

$

133,566

$

19,838

$

11,571

$

1,736,598

Special Review

72,904

393

73,297

Watch List - Pass

1,227

34,757

29,658

22

65,664

Watch List - Substandard

653

323

976

Watch List - Doubtful

799

314

163

168

1,444

Total Commercial

$

1,167,704

$

342,721

$

202,066

$

133,734

$

20,161

$

11,593

$

1,877,979

Commercial real estate: other construction & land development

Pass

$

613,492

$

665,095

$

450,605

$

132,837

$

13,965

$

7,602

$

1,883,596

Special Review

12,625

12,625

Watch List - Pass

2,344

25,185

27,529

Watch List - Substandard

18,769

18,769

Watch List - Doubtful

118

793

911

Total Commercial real estate: other construction & land development

$

647,348

$

691,073

$

450,605

$

132,837

$

13,965

$

7,602

$

1,943,430

Commercial real estate: farmland & commercial

 

Pass

$

561,310

$

524,354

$

333,348

$

201,824

$

200,296

$

143,109

$

1,964,241

Special Review

1,368

4,792

179

3,228

9,567

Watch List - Pass

25,467

8,885

20,482

8,879

7,448

1

71,162

Watch List - Substandard

3,315

55,728

168

2,293

478

3,497

65,479

Watch List - Doubtful

221

38

242

501

Total Commercial real estate: farmland & commercial

$

591,460

$

589,188

$

358,790

$

213,213

$

211,450

$

146,849

$

2,110,950

Commercial real estate: multifamily

 

Pass

$

49,110

$

220,573

$

83,584

$

64,674

$

8,392

$

11,467

$

437,800

Watch List - Doubtful

137

137

Total Commercial real estate: multifamily

$

49,247

$

220,573

$

83,584

$

64,674

$

8,392

$

11,467

$

437,937

Residential: first lien

Pass

$

58,068

$

65,854

$

77,011

$

58,475

$

35,966

$

114,140

$

409,514

Watch List - Pass

14

131

1

146

Watch List - Substandard

62

50

112

Watch List - Doubtful

89

88

66

243

Total Residential: first lien

$

58,157

$

65,868

$

77,204

$

58,475

$

36,104

$

114,207

$

410,015

Residential: junior lien

Pass

$

158,909

$

123,056

$

72,302

$

88,890

$

67,720

$

111,075

$

621,952

Special Review

830

811

1,641

Watch List- Doubtful

38

38

Total Residential: junior lien

$

158,909

$

123,886

$

72,340

$

89,701

$

67,720

$

111,075

$

623,631

Consumer

Pass

$

25,683

$

12,392

$

1,360

$

266

$

95

$

1,311

$

41,107

Watch List - Doubtful

3

3

Total Consumer

$

25,683

$

12,392

$

1,360

$

266

$

95

$

1,314

$

41,110

Foreign

 

Pass

$

82,393

$

32,680

$

12,738

$

6,786

$

3,711

$

5,875

$

144,183

Total Foreign

$

82,393

$

32,680

$

12,738

$

6,786

$

3,711

$

5,875

$

144,183

Total Loans

$

2,780,901

$

2,078,381

$

1,258,687

$

699,686

$

361,598

$

409,982

$

7,589,235

26

December 31, 2019

Special

Watch

Watch List—

Watch List—

Pass

Review

List—Pass

Substandard

Impaired

(Dollars in Thousands)

Domestic

Commercial

    

$

1,228,110

    

$

569

    

$

39

    

$

62,007

    

$

1,935

Commercial real estate: other construction & land development

 

2,090,370

 

18,721

 

41,949

 

33,905

 

938

Commercial real estate: farmland & commercial

 

1,710,446

 

13,184

 

20,183

 

151,726

 

1,208

Commercial real estate: multifamily

 

190,265

 

 

 

 

165

Residential: first lien

 

426,546

 

253

 

144

 

680

 

6,278

Residential: junior lien

 

704,958

 

826

 

 

 

692

Consumer

 

46,605

 

 

 

 

1,195

Foreign

 

140,785

 

 

 

 

264

Total

$

6,538,085

$

33,553

$

62,315

$

248,318

$

12,675

The increase in Special Review Commercial loans at September 30, 2020 can be attributed to the movement of a relationship in the oil and gas production business from the Pass category. The increase in Watch-List Pass Commercial loans at September 30, 2020 can be attributed to the downgrade of a relationship in the oil and gas production business from Pass. The decrease in Watch-List Substandard loans for the same period can be attributed to the upgrade of a relationship in the aircraft purchasing and leasing business to Pass. The decrease in Watch-List Pass Commercial Real Estate Construction and Land Development loans at September 30, 2020 can be attributed to the downgrade of a loan secured commercial pad site to Watch-List Substandard. The change in Watch-List Substandard loans in this category is also being impacted by the upgrade of a relationship in the real estate development business to Pass. The increase in Watch-List Pass Commercial Real Estate Farmland and Commercial loans can be attributed to the downgrade of a relationship secured by commercial real estate from Pass. The decrease in Watch-List Substandard loans in the same category can be attributed to the upgrade of a relationship secured by a resort to Pass.

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, which may be qualified incentive stock options (“ISOs”) or non-qualified stock 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, 2020, 4,352 shares were available for future grants under the 2012 Plan.

A summary of option activity under the stock option plan for the nine months ended September 30, 2020 is as follows:

    

    

    

Weighted

    

    

Weighted

average

average

remaining

Aggregate

Number of

exercise

contractual

intrinsic

options

price

term (years)

value ($)

(in Thousands)

Options outstanding at December 31, 2019

 

658,588

$

27.55

Plus: Options granted

 

35,000

 

18.79

Less:

Options exercised

 

19,198

 

21.23

Options expired

 

 

Options forfeited

 

10,701

 

31.28

Options outstanding at September 30, 2020

 

663,689

 

27.21

 

5.29

$

3,928

Options fully vested and exercisable at September 30, 2020

 

414,632

$

22.90

 

3.84

$

3,416

27

Stock-based compensation expense included in the consolidated statements of income for the three and nine months ended September 30, 2020 was $176,000 and $571,000, respectively. Stock-based compensation expense included in the consolidated statements of income for the three and nine months ended September 30, 2019 was $240,000 and $744,000, respectively. As of September 30, 2020, there was approximately $1,401,000 of total unrecognized stock-based compensation cost related to non-vested options granted under our plans that will be recognized over a weighted average period of 1.7 years.

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

We classify debt 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 ASU 2016-13, which we adopted on January 1, 2020, available-for-sale and held-to-maturity debt securities in an unrealized loss position must be evaluated for the underlying cause of the loss. In the event that the deterioration in value is attributable to credit related reasons, then the amount of credit-related impairment would be recorded as a charge to our ACL with subsequent changes in the amount of impairment, up or down, also recorded through our ACL. The exception to this process will occur if we intend to sell an impaired available-for-sale debt security or if we will more likely than not be required to sell a credit impaired available-for-sale debt security prior to the value recovering to the security’s amortized cost. In those situations, the entire credit-related impairment amount would be required to be recognized in earnings. We have evaluated the debt securities classified as available-for-sale and held-to-maturity at September 30, 2020 and have determined that no debt securities in an unrealized loss position are arising from credit related reasons and have therefore not recorded any allowances for debt securities in our ACL for the period. Unrealized gains and losses related to equity securities with readily determinable fair values are included in net income.

The amortized cost and estimated fair value by type of investment security at September 30, 2020 are as follows:

Held to Maturity

Gross

Gross

Amortized

unrealized

unrealized

Estimated

Carrying

cost

gains

losses

fair value

value

(Dollars in Thousands)

Other securities

    

$

3,400

    

$

    

$

    

$

3,400

    

$

3,400

Total investment securities

$

3,400

$

$

$

3,400

$

3,400

Available for Sale Debt Securities

Gross

Gross

Amortized

unrealized

unrealized

Estimated

Carrying

cost

gains

losses

fair value

value(1)

(Dollars in Thousands)

Residential mortgage-backed securities

    

$

3,196,279

    

$

42,525

    

$

(4,069)

    

$

3,234,735

    

$

3,234,735

Obligations of states and political subdivisions

 

61,322

 

2,797

 

(14)

 

64,105

 

64,105

Total investment securities

$

3,257,601

$

45,322

$

(4,083)

$

3,298,840

$

3,298,840

(1)Included in the carrying value of residential mortgage-backed securities are $438,961of mortgage-backed securities issued by Ginnie Mae and $2,795,774 of mortgage-backed securities issued by Fannie Mae and Freddie Mac.

28

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

Held to Maturity

Gross

Gross

Amortized

unrealized

unrealized

Estimated

Carrying

cost

gains

losses

fair value

<