INTERNATIONAL BANCSHARES CORP - Quarter Report: 2022 September (Form 10-Q)

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, 2022

☐

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		62,113,806 shares outstanding at October 31, 2022

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,
	2022		2021
Assets
Cash and cash equivalents	$	3,243,831	$	3,209,242
Investment securities:
Held to maturity debt securities (Market value of $3,400 on September 30, 2022 and $3,400 on December 31, 2021)		3,400		3,400
Available for sale debt securities (Amortized cost of $4,796,527 on September 30, 2022 and $4,254,960 on December 31, 2021)		4,215,390		4,213,920
Equity securities with readily determinable fair values		5,351		6,079
Total investment securities		4,224,141		4,223,399
Loans		7,050,750		7,209,151
Less allowance for credit losses		(119,195)		(110,374)
Net loans		6,931,555		7,098,777
Bank premises and equipment, net		431,952		447,082
Accrued interest receivable		37,076		30,593
Other investments		373,483		296,882
Cash surrender value of life insurance policies		300,183		297,218
Goodwill		282,532		282,532
Other assets		270,196		160,511
Total assets	$	16,094,949	$	16,046,236

INTERNATIONAL BANCSHARES CORPORATION AND SUBSIDIARIES

Consolidated Statements of Condition, continued (Unaudited)

(Dollars in Thousands)


	September 30,		December 31,
	2022		2021
Liabilities and Shareholders’ Equity
Liabilities:
Deposits:
Demand—non-interest bearing	$	6,001,129	$	5,838,526
Savings and interest bearing demand		4,749,213		4,590,548
Time		2,130,173		2,188,803
Total deposits		12,880,515		12,617,877
Securities sold under repurchase agreements		507,143		439,672
Other borrowed funds		435,993		436,138
Junior subordinated deferrable interest debentures		134,642		134,642
Other liabilities		182,382		109,426
Total liabilities		14,140,675		13,737,755
Shareholders’ equity:
Common shares of $1.00 par value. Authorized 275,000,000 shares; issued 96,385,002 shares on September 30, 2022 and 96,350,977 shares on December 31, 2021		96,385		96,351
Surplus		153,189		152,144
Retained earnings		2,590,155		2,470,710
Accumulated other comprehensive loss		(454,772)		(31,980)
		2,384,957		2,687,225
Less cost of shares in treasury, 34,276,371 shares on September 30, 2022 and 32,979,273 on December 31, 2021		(430,683)		(378,744)
Total shareholders’ equity		1,954,274		2,308,481
Total liabilities and shareholders’ equity	$	16,094,949	$	16,046,236

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
	September 30,				September 30,
	2022		2021		2022		2021
Interest income:
Loans, including fees	$	104,818	$	88,280	$	273,936	$	272,210
Investment securities:
Taxable		20,718		11,669		50,846		21,558
Tax-exempt		625		360		1,326		1,132
Other interest income		18,926		883		24,995		2,145
Total interest income		145,087		101,192		351,103		297,045

Interest expense:
Savings deposits		3,323		1,082		5,720		3,001
Time deposits		2,530		2,814		7,311		8,941
Securities sold under repurchase agreements		665		165		1,090		448
Other borrowings		1,926		1,929		5,721		5,726
Junior subordinated deferrable interest debentures		1,426		692		3,097		2,102

Total interest expense		9,870		6,682		22,939		20,218

Net interest income		135,217		94,510		328,164		276,827

Provision for credit losses		8,525		2,801		13,741		5,137

Net interest income after provision for credit losses		126,692		91,709		314,423		271,690

Non-interest income:
Service charges on deposit accounts		19,038		17,294		54,543		47,971
Other service charges, commissions and fees
Banking		15,995		15,750		41,446		41,166
Non-banking		2,618		2,046		6,425		5,831
Investment securities transactions, net		—		(12)		—		(16)
Other investments, net		6,962		5,490		11,063		68,495
Other income		9,989		6,641		27,879		17,905

Total non-interest income	$	54,602	$	47,209	$	141,356	$	181,352

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,
	2022		2021		2022		2021
Non-interest expense:
Employee compensation and benefits	$	34,341	$	30,552	$	96,505	$	91,262
Occupancy		7,821		6,491		20,282		18,638
Depreciation of bank premises and equipment		5,425		6,028		16,355		19,263
Professional fees		3,087		2,558		8,347		7,675
Deposit insurance assessments		2,026		1,026		5,062		2,840
Net operations, other real estate owned		(253)		438		(708)		5,351
Advertising		1,476		1,470		4,371		4,349
Software and software maintenance		4,089		4,115		12,638		13,081
Other		17,161		17,049		45,195		39,407

Total non-interest expense		75,173		69,727		208,047		201,866

Income before income taxes		106,121		69,191		247,732		251,176

Provision for income taxes		22,765		14,592		52,912		53,780

Net income	$	83,356	$	54,599	$	194,820	$	197,396

Basic earnings per common share:

Weighted average number of shares outstanding		62,226,521		63,372,777		62,838,831		63,347,922
Net income per common share	$	1.34	$	0.86	$	3.10	$	3.12

Fully diluted earnings per common share:

Weighted average number of shares outstanding		62,371,475		63,498,542		62,980,934		63,475,393
Net income per common share	$	1.34	$	0.86	$	3.09	$	3.11

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
	September 30,				September 30,
	2022		2021		2022		2021

Net income	$	83,356	$	54,599	$	194,820	$	197,396
Other comprehensive loss, net of tax:

Net unrealized holding losses on securities available for sale arising during period (net of tax effects of $(47,326), $(2,015), $(112,388), and $(2,689))		(178,037)		(7,578)		(422,792)		(10,115)
Reclassification adjustment for losses on securities available for sale included in net income (net of tax effects of $0, $3, $0 and $3)		—		9		—		13
		(178,037)		(7,569)		(422,792)		(10,102)

Comprehensive (loss) income	$	(94,681)	$	47,030	$	(227,972)	$	187,294

See accompanying notes to consolidated financial statements.

INTERNATIONAL BANCSHARES CORPORATION AND SUBSIDIARIES

Consolidated Statements of Shareholders’ Equity

Three and Nine Months ended September 30, 2022 and 2021

(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, 2022	96,368	$	96,368	$	152,743	$	2,544,148	$	(276,735)	$	(419,293)	$	2,097,231
Net income	—		—		—		83,356		—		—		83,356
Dividends:
Payable ($.60 per share)	—		—		—		(37,349)		—		—		(37,349)
Purchase of treasury stock (283,270 shares)	—		—		—		—		—		(11,390)		(11,390)
Exercise of stock options	17		17		328		—		—		—		345
Stock compensation expense recognized in earnings	—		—		118		—		—		—		118
Other comprehensive income, net of tax:
Net change in unrealized gains and losses on available for sale securities, net of reclassification adjustments	—		—		—		—		(178,037)		—		(178,037)
Balance at September 30, 2022	96,385	$	96,385	$	153,189	$	2,590,155	$	(454,772)	$	(430,683)	$	1,954,274


	Number							Other
	of	Common				Retained		Comprehensive		Treasury
	Shares	Stock		Surplus		Earnings		Income (Loss)		Stock		Total
Balance at June 30, 2021	96,332	$	96,332	$	151,512	$	2,397,610	$	18,292	$	(378,076)	$	2,285,670
Net income	—		—		—		54,599		—		—		54,599
Dividends:
Payable ($.60 per share)	—		—		—		(38,026)		—		—		(38,026)
Purchase of treasury (16,713 shares)	—		—	—	—	—	—	—	—		(656)		(656)
Exercise of stock options	11		11		225		—		—		—		236
Stock compensation expense recognized in earnings	—		—		118		—		—		—		118
Other comprehensive income, net of tax:
Net change in unrealized gains and losses on available for sale securities, net of reclassification adjustments	—		—		—		—		(7,569)		—		(7,569)
Balance at September 30, 2021	96,343	$	96,343	$	151,855	$	2,414,183	$	10,723	$	(378,732)	$	2,294,372


	Number							Other
	of	Common				Retained		Comprehensive		Treasury
	Shares	Stock		Surplus		Earnings		Income (Loss)		Stock		Total
Balance at December 31, 2021	96,351	$	96,351	$	152,144	$	2,470,710	$	(31,980)	$	(378,744)	$	2,308,481
Net income	—		—		—		194,820		—		—		194,820
Dividends:
Cash ($1.20 per share)	—		—		—		(75,375)		—		—		(75,375)
Purchase of treasury stock (1,297,098 shares)	—		—		—		—		—		(51,939)		(51,939)
Exercise of stock options	34		34		698		—		—		—		732
Stock compensation expense recognized in earnings	—		—		347		—		—		—		347
Other comprehensive income, net of tax:
Net change in unrealized gains and losses on available for sale securities, net of reclassification adjustments	—		—		—		—		(422,792)		—		(422,792)
Balance at September 30, 2022	96,385	$	96,385	$	153,189	$	2,590,155	$	(454,772)	$	(430,683)	$	1,954,274


	Number							Other
	of	Common				Retained		Comprehensive		Treasury
	Shares	Stock		Surplus		Earnings		Income (Loss)		Stock		Total
Balance at December 31, 2020	96,241	$	96,241	$	149,334	$	2,289,626	$	20,825	$	(378,028)	$	2,177,998
Net income	—		—		—		197,396		—		—		197,396
Dividends:
Cash ($1.15 per share)	—		—		—		(72,839)		—		—		(72,839)
Purchase of treasury stock (17,712 shares)	—		—		—		—		—		(704)		(704)
Exercise of stock options	102		102		2,130		—		—		—		2,232
Stock compensation expense recognized in earnings	—		—		391		—		—		—		391
Other comprehensive income, net of tax:
Net change in unrealized gains and losses on available for sale securities, net of reclassification adjustments	—		—		—		—		(10,102)		—		(10,102)
Balance at September 30, 2021	96,343	$	96,343	$	151,855	$	2,414,183	$	10,723	$	(378,732)	$	2,294,372

See accompanying notes to consolidated financial statements.

INTERNATIONAL BANCSHARES CORPORATION AND SUBSIDIARIES

Consolidated Statements of Cash Flows (Unaudited)

(Dollars in Thousands)


	Nine Months Ended
	September 30,
	2022		2021
Operating activities:

Net income	$	194,820	$	197,396

Adjustments to reconcile net income to net cash provided by operating activities:
Provision for credit loss		13,741		5,137
Specific reserve, other real estate owned		416		2,065
Depreciation of bank premises and equipment		16,355		19,263
(Gain) loss on sale of bank premises and equipment		(3,426)		5
(Gain) loss on sale of other real estate owned		(1,781)		160
Accretion of investment securities discounts		(1,257)		(400)
Amortization of investment securities premiums		11,617		29,749
Investment securities transactions, net		—		16
Unrealized loss on equity securities with readily determinable fair values		728		70
Proceeds from settlements of claims		—		2,870
Stock based compensation expense		347		391
Earnings from affiliates and other investments		(9,960)		(66,746)
Deferred income taxes		(1,838)		(792)
(Increase) decrease in accrued interest receivable		(6,483)		6,487
(Increase) decrease in other assets		(7,325)		7,436
Increase in other liabilities		82,553		21,381

Net cash provided by operating activities		288,507		224,488

Investing activities:

Proceeds from maturities of securities		2,200		1,200
Proceeds from sales and calls of available for sale securities		800		5,890
Purchases of available for sale securities		(1,160,632)		(2,856,135)
Principal collected on mortgage backed securities		605,706		1,333,256
Net decrease in loans		153,278		116,355
Purchases of other investments		(72,799)		(45,184)
Distributions from other investments		5,995		60,207
Purchases of bank premises and equipment		(12,798)		(6,070)
Proceeds from sales of bank premises and equipment		12,523		1,278
Proceeds from sales of other real estate owned		8,427		7,925

Net cash used in investing activities	$	(457,300)	$	(1,381,278)

INTERNATIONAL BANCSHARES CORPORATION AND SUBSIDIARIES

Consolidated Statements of Cash Flows, continued (Unaudited)

(Dollars in Thousands)


	Nine Months Ended
	September 30,
	2022		2021
Financing activities:

Net increase in non-interest bearing demand deposits	$	162,603	$	880,951
Net increase in savings and interest bearing demand deposits		158,665		608,052
Net (decrease) increase in time deposits		(58,630)		33,110
Net increase (decrease) in securities sold under repurchase agreements		67,471		(3,751)
Net decrease in other borrowed funds		(145)		(141)
Purchase of treasury stock		(51,939)		(704)
Proceeds from stock transactions		732		2,232
Payments of cash dividends		(75,375)		(72,839)

Net cash provided by financing activities		203,382		1,446,910

Increase in cash and cash equivalents		34,589		290,120

Cash and cash equivalents at beginning of period		3,209,242		1,997,238

Cash and cash equivalents at end of period	$	3,243,831	$	2,287,358

Supplemental cash flow information:
Interest paid	$	21,604	$	21,127
Income taxes paid		1,980		47,392
Non-cash investing and financing activities:
Net transfers from loans to other real estate owned		204		16,370
Net transfers from bank premises and equipment to other assets		2,476		—

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

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, IBC Capital Corporation, and Diamond Beach Holdings, LLC. 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, 2021 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, 2022 are not necessarily indicative of the results for the year ending December 31, 2022 or any future period.

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

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

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, 2022 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, 2022		(Level 1)		(Level 2)		(Level 3)
Measured on a recurring basis:
Assets:
Available for sale debt securities
U.S. Treasury securities	$	48,992	$	—	$	48,992	$	—
Residential mortgage-backed securities		4,063,289		—		4,063,289		—
States and political subdivisions		103,109		—		103,109		—
Equity Securities		5,351		5,351		—		—
	$	4,220,741	$	5,351	$	4,215,390	$	—

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, 2021 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, 2021		(Level 1)		(Level 2)		(Level 3)
Measured on a recurring basis:
Assets:
Available for sale securities
Residential mortgage - backed securities	$	4,169,363	$	—	$	4,169,363	$	—
States and political subdivisions		44,557		—		44,557		—
Equity Securities		6,079		6,079		—		—
	$	4,219,999	$	6,079	$	4,213,920	$	—

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

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

The following table represents financial instruments measured at fair value on a non-recurring basis as of and for the period ended September 30, 2022 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 (Credit)

Period ended

Identical

Observable

Unobservable

Provision

September 30,

Assets

Inputs

During

2022

(Level 1)

(Level 2)

(Level 3)

Period

Measured on a non-recurring basis:

Assets:

Watch-List doubtful loans

100

—

100

(29)

Other real estate owned

1,147

—

1,147

416

The following table represents financial instruments measured at fair value on a non-recurring basis as of and for the period ended December 31, 2021 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 Provision

Year ended

for Identical

Observable

Unobservable

(Credit)

December 31,

Assets

Inputs

During

2021

(Level 1)

(Level 2)

(Level 3)

Period

Measured on a non-recurring basis:

Assets:

Watch-List doubtful loans

—

209

Other real estate owned

18,095

—

18,095

2,655

Our assets measured at fair value on a non-recurring basis are limited to loans classified as Watch List – Doubtful and other real estate owned. 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 (“ACL”). The fair value of the loan is based on the fair value of the collateral, as determined through either an appraisal or internal 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 internal 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, 2022, we had $1,100,000 of doubtful commercial collateral dependent loans, of which $0 had an appraisal performed within the immediately preceding twelve months, and of which $1,100,000 had an internal evaluation performed within the immediately preceding twelve months. As of December 31, 2021, we had approximately $993,000 of doubtful commercial collateral dependent loans, of which $0 had an appraisal performed within the immediately preceding twelve months and of which $896,000 had an internal evaluation performed within the immediately preceding twelve months.

Our determination to either seek an appraisal or to perform an internal 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 ACL, 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, 2022 and the twelve months ended December 31, 2021, we recorded $0, $0 and $2,000, respectively, in charges to the ACL in connection with loans transferred to other real estate owned. For the three and nine months ended September 30, 2022 and the twelve months ended December 31, 2021, we recorded $400,000, $416,000 and $2,655,000, 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, 2022 and December 31, 2021 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.

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, 2022 and December 31, 2021, the carrying amount of fixed rate performing loans was $1,211,888,000 and $1,363,313,000, respectively, and the estimated fair value was $1,115,807,000 and $1,323,223,000, 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, 2022 and December 31, 2021. 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, 2022 and December 31, 2021, the carrying amount of time deposits was $2,130,173,000 and $2,188,803,000, respectively, and the estimated fair value was $2,136,982,000 and $2,186,547,000, 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, 2022 and December 31, 2021.

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, 2022 and December 31, 2021.

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, 2022 and December 31, 2021 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, 2022 and December 31, 2021, the carrying amount of the fixed rate long-term FHLB borrowings was $435,993,000 and $436,138,000, respectively, and the estimated fair value was $435,993,000 and $455,187,000, 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 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, 2022 and December 31, 2021 is as follows:


	September 30,		December 31,
	2022		2021

	(Dollars in Thousands)
Commercial, financial and agricultural	$	4,156,208	$	4,497,444
Real estate - mortgage		852,164		867,831
Real estate - construction		1,836,047		1,668,113
Consumer		41,786		40,966
Foreign		164,545		134,797
Total loans	$	7,050,750	$	7,209,151

Note 4 — Allowance for Credit Losses

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 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, (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. 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.

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.

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


	Three Months Ended September 30, 2022
	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, 2022	$	25,577	$	36,713	$	35,270	$	2,856	$	4,137	$	6,894	$	270	$	855	$	112,572
Losses charged to allowance		(2,568)		—		—		—		(3)		—		(55)		—		(2,626)
Recoveries credited to allowance		562		100		7		—		13		27		15		—		724
Net (losses) recoveries charged to allowance		(2,006)		100		7		—		10		27		(40)		—		(1,902)

Credit loss expense		1,273		5,255		(303)		237		540		1,351		62		110		8,525

Balance at September 30, 2022	$	24,844	$	42,068	$	34,974	$	3,093	$	4,687	$	8,272	$	292	$	965	$	119,195


	Three Months Ended September 30, 2021
	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, 2021	$	23,063	$	33,603	$	34,238	$	4,206	$	3,916	$	8,196	$	268	$	791	$	108,281

Losses charged to allowance		(2,287)		(2)		—		—		(73)		(4)		(64)		—		(2,430)
Recoveries credited to allowance		473		—		141		—		12		28		19		—		673
Net (losses) recoveries charged to allowance		(1,814)		(2)		141		—		(61)		24		(45)		—		(1,757)

Credit loss expense		1,955		503		871		9		(110)		(496)		47		22		2,801

Balance at September 30, 2021	$	23,204	$	34,104	$	35,250	$	4,215	$	3,745	$	7,724	$	270	$	813	$	109,325


	Nine Months Ended September 30, 2022
	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, 2021	$	23,178	$	35,390	$	35,654	$	3,291	$	4,073	$	7,754	$	272	$	762	$	110,374

Losses charged to allowance		(6,681)		(2)		—		—		(159)		(28)		(177)		—		(7,047)
Recoveries credited to allowance		1,672		103		21		—		211		89		31		—		2,127
Net (losses) recoveries charged to allowance		(5,009)		101		21		—		52		61		(146)		—		(4,920)

Credit loss expense		6,675		6,577		(701)		(198)		562		457		166		203		13,741

Balance at September 30, 2022	$	24,844	$	42,068	$	34,974	$	3,093	$	4,687	$	8,272	$	292	$	965	$	119,195


	Nine Months Ended September 30, 2021
	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, 2020	$	21,908	$	37,612	$	30,000	$	5,051	$	3,874	$	9,570	$	291	$	753	$	109,059

Losses charged to allowance		(5,835)		(2)		(356)		—		(262)		(25)		(151)		—		(6,631)
Recoveries credited to allowance		1,429		—		160		—		47		86		38		—		1,760
Net (losses) recoveries charged to allowance		(4,406)		(2)		(196)		—		(215)		61		(113)		—		(4,871)

Credit loss expense		5,702		(3,506)		5,446		(836)		86		(1,907)		92		60		5,137

Balance at September 30, 2021	$	23,204	$	34,104	$	35,250	$	4,215	$	3,745	$	7,724	$	270	$	813	$	109,325

The pool specific qualitative loss factors management deemed appropriate for the ACL calculation at December 31, 2021 remained constant in the September 30, 2022 ACL calculation.

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, 2022 and December 31, 2021:


	September 30, 2022
	Loans Individually				Loans Collectively
	Evaluated For				Evaluated For
	Impairment				Impairment
	Recorded				Recorded
	Investment		Allowance		Investment		Allowance

	(Dollars in Thousands)
Domestic
Commercial	$	108	$	—	$	1,448,415	$	24,844
Commercial real estate: other construction & land development		562		70		1,835,485		41,998
Commercial real estate: farmland & commercial		537		—		2,461,342		34,974
Commercial real estate: multifamily		121		—		245,685		3,093
Residential: first lien		81		—		412,271		4,687
Residential: junior lien		—		—		439,812		8,272
Consumer		—		—		41,786		292
Foreign		—		—		164,545		965

Total	$	1,409	$	70	$	7,049,341	$	119,125


	December 31, 2021
	Loans Individually				Loans Collectively
	Evaluated For				Evaluated For
	Impairment				Impairment
	Recorded				Recorded
	Investment		Allowance		Investment		Allowance

	(Dollars in Thousands)
Domestic
Commercial	$	298	$	29	$	1,501,554	$	23,149
Commercial real estate: other construction & land development		589		70		1,667,524		35,320
Commercial real estate: farmland & commercial		562		—		2,710,494		35,654
Commercial real estate: multifamily		131		—		284,405		3,291
Residential: first lien		87		—		403,571		4,073
Residential: junior lien		—		—		464,173		7,754
Consumer		—		—		40,966		272
Foreign		—		—		134,797		762

Total	$	1,667	$	99	$	7,207,484	$	110,275

The table below provides additional information on loans accounted for on a non-accrual basis by loan class at September 30, 2022 and December 31, 2021:


	September 30, 2022		December 31, 2021

	(Dollars in Thousands)
Domestic
Commercial	$	108	$	298
Commercial real estate: other construction & land development		562		589
Commercial real estate: farmland & commercial		537		562
Commercial real estate: multifamily		121		131
Residential: first lien		284		341
Total non-accrual loans	$	1,612	$	1,921

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, 2022		December 31, 2021

		(Dollars in Thousands)
Domestic
Residential: first lien	$	1,658	$	2,254
Residential: junior lien		323		105
Consumer		773		878
Foreign		57		16
Total troubled debt restructuring	$	2,811	$	3,253

We have worked with our customers affected by the prolonged economic crisis arising from COVID-19. We have offered and are prepared to continue to offer assistance in accordance with regulatory guidance. That includes continuously reaching out to our customers and, in some cases, offering deferral plans. As of October 31, 2022, we had approximately $54,405,000 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 $54,405,000 is comprised primarily of loans related to the hospitality sector, which has been significantly impacted by the COVID-19 pandemic.

With the passage of the Paycheck Protection Program (“PPP”), administered by the Small Business Association (“SBA”), we assisted 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 of 2020. PPP loans were 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 October 31, 2022, we had 223 PPP loans totaling approximately $9,292,000 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, 2022 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, 2022 and December 31, 2021:


	September 30, 2022
							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	$	3,255	$	119	$	50	$	50	$	3,424	$	1,445,098	$	1,448,522
Commercial real estate: other construction & land development		1,130		—		465		—		1,595		1,834,452		1,836,047
Commercial real estate: farmland & commercial		1,119		844		1,458		921		3,421		2,458,459		2,461,880
Commercial real estate: multifamily		970		—		71		71		1,041		244,765		245,806
Residential: first lien		1,854		575		5,122		4,896		7,551		404,801		412,352
Residential: junior lien		617		84		1,289		1,289		1,990		437,822		439,812
Consumer		224		131		7		7		362		41,424		41,786
Foreign		1,221		310		16		16		1,547		162,998		164,545
Total past due loans	$	10,390	$	2,063	$	8,478	$	7,250	$	20,931	$	7,029,819	$	7,050,750


	December 31, 2021
							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	$	2,534	$	303	$	577	$	577	$	3,414	$	1,498,438	$	1,501,852
Commercial real estate: other construction & land development		499		334		188		188		1,021		1,667,092		1,668,113
Commercial real estate: farmland & commercial		18,164		172		644		307		18,980		2,692,076		2,711,056
Commercial real estate: multifamily		—		—		—		—		—		284,536		284,536
Residential: first lien		2,342		1,212		5,129		4,937		8,683		394,975		403,658
Residential: junior lien		747		115		1,055		1,055		1,917		462,256		464,173
Consumer		231		88		4		4		323		40,643		40,966
Foreign		1,319		232		1,574		1,574		3,125		131,672		134,797
Total past due loans	$	25,836	$	2,456	$	9,171	$	8,642	$	37,463	$	7,171,688	$	7,209,151

The decrease in Commercial real estate – farmland & commercial loans past due 30 – 59 days at September 30, 2022 can be primarily attributed to a relationship secured by a commercial property used as retail space being brought current.

A summary of the loan portfolio by credit quality indicator by loan class and by year of origination at September 30, 2022 and December 31, 2021 is presented below:



		2022	2021		2020		2019		2018		Prior		Total

	(Dollars in Thousands)
Balance at September 30, 2022
Domestic
Commercial
Pass	$	511,978	$	680,788	$	100,975	$	45,000	$	44,685	$	30,337	$	1,413,763
Special Review		381		225		—		—		—		—		606
Watch List - Pass		3,052		—		—		680		—		—		3,732
Watch List - Substandard		29,863		164		233		—		52		1		30,313
Watch List - Doubtful		—		100		—		—		—		8		108
Total Commercial	$	545,274	$	681,277	$	101,208	$	45,680	$	44,737	$	30,346	$	1,448,522
Commercial real estate: other construction & land development
Pass	$	639,785	$	765,586	$	196,473	$	173,829	$	32,907	$	6,713	$	1,815,293
Special Review		—		—		—		210		—		—		210
Watch List - Substandard		19,982		—		—		—		—		—		19,982
Watch List - Doubtful		—		465		97		—		—		—		562
Total Commercial real estate: other construction & land development	$	659,767	$	766,051	$	196,570	$	174,039	$	32,907	$	6,713	$	1,836,047
Commercial real estate: farmland & commercial
Pass	$	575,325	$	611,346	$	479,814	$	263,504	$	355,473	$	96,759	$	2,382,221
Special Review		173		662		851		—		—		—		1,686
Watch List - Pass		17,139		252		—		2,906		—		—		20,297
Watch List - Substandard		—		—		54,166		685		—		2,288		57,139
Watch List - Doubtful		—		—		204		333		—		—		537
Total Commercial real estate: farmland & commercial	$	592,637	$	612,260	$	535,035	$	267,428	$	355,473	$	99,047	$	2,461,880
Commercial real estate: multifamily
Pass	$	64,755	$	86,768	$	60,342	$	12,178	$	6,211	$	15,431	$	245,685
Watch List - Doubtful		—		—		121		—		—		—		121
Total Commercial real estate: multifamily	$	64,755	$	86,768	$	60,463	$	12,178	$	6,211	$	15,431	$	245,806
Residential: first lien
Pass	$	110,081	$	84,544	$	51,752	$	42,580	$	35,871	$	86,906	$	411,734
Watch List - Substandard		100		437		—		—		—		—		537
Watch List - Doubtful		81		—		—		—		—		—		81
Total Residential: first lien	$	110,262	$	84,981	$	51,752	$	42,580	$	35,871	$	86,906	$	412,352
Residential: junior lien
Pass	$	72,963	$	117,776	$	95,206	$	42,720	$	22,661	$	88,486	$	439,812
Total Residential: junior lien	$	72,963	$	117,776	$	95,206	$	42,720	$	22,661	$	88,486	$	439,812
Residential: junior lien
Consumer
Pass	$	27,147	$	10,697	$	1,527	$	620	$	37	$	1,758	$	41,786
Total Consumer	$	27,147	$	10,697	$	1,527	$	620	$	37	$	1,758	$	41,786
Foreign
Pass	$	113,709	$	30,255	$	6,256	$	5,167	$	5,445	$	3,713	$	164,545
Total Foreign	$	113,709	$	30,255	$	6,256	$	5,167	$	5,445	$	3,713	$	164,545
Total Loans	$	2,186,514	$	2,390,065	$	1,048,017	$	590,412	$	503,342	$	332,400	$	7,050,750



		2021	2020		2019		2018		2017		Prior		Total

	(Dollars in Thousands)
Balance at December 31, 2021
Domestic
Commercial
Pass	$	1,041,763	$	167,691	$	77,579	$	58,439	$	37,104	$	5,144	$	1,387,720
Special Review		74,559		497		139		81		—		—		75,276
Watch List - Pass		33,920		—		—		—		—		10		33,930
Watch List - Substandard		3,581		273		716		57		—		1		4,628
Watch List - Doubtful		224		—		—		—		74		—		298
Total Commercial	$	1,154,047	$	168,461	$	78,434	$	58,577	$	37,178	$	5,155	$	1,501,852
Commercial
Commercial real estate: other construction & land development
Pass	$	966,946	$	312,389	$	308,673	$	37,124	$	16,642	$	2,439	$	1,644,213
Special Review		—		—		211		—		—		—		211
Watch List - Pass		—		23,100		—		—		—		—		23,100
Watch List - Doubtful		485		104		—		—		—		—		589
Total Commercial real estate: other construction & land development	$	967,431	$	335,593	$	308,884	$	37,124	$	16,642	$	2,439	$	1,668,113
Commercial real estate: farmland & commercial
Pass	$	1,001,335	$	680,777	$	288,333	$	417,353	$	96,096	$	97,119	$	2,581,013
Special Review		929		1,292		—		3,448		61		—		5,730
Watch List - Pass		18,790		44,059		—		—		94		1		62,944
Watch List - Substandard		—		54,097		3,899		—		2,355		456		60,807
Watch List - Doubtful		—		224		337		—		—		1		562
Total Commercial real estate: farmland & commercial	$	1,021,054	$	780,449	$	292,569	$	420,801	$	98,606	$	97,577	$	2,711,056
Commercial real estate: multifamily
Pass	$	133,152	$	40,766	$	78,609	$	10,632	$	14,217	$	7,029	$	284,405
Watch List - Doubtful		—		131		—		—		—		—		131
Total Commercial real estate: multifamily	$	133,152	$	40,897	$	78,609	$	10,632	$	14,217	$	7,029	$	284,536
Residential: first lien
Pass	$	128,742	$	52,725	$	57,249	$	49,259	$	29,477	$	85,838	$	403,290
Watch List - Substandard		56		—		103		—		122		—		281
Watch List - Doubtful		—		87		—		—		—		—		87
Total Residential: first lien	$	128,798	$	52,812	$	57,352	$	49,259	$	29,599	$	85,838	$	403,658
Residential: junior lien
Pass	$	130,629	$	123,062	$	59,113	$	30,603	$	40,855	$	79,911	$	464,173
Total Residential: junior lien	$	130,629	$	123,062	$	59,113	$	30,603	$	40,855	$	79,911	$	464,173
Consumer
Pass	$	32,053	$	5,693	$	1,370	$	189	$	9	$	1,652	$	40,966
Total Consumer	$	32,053	$	5,693	$	1,370	$	189	$	9	$	1,652	$	40,966
Foreign
Pass	$	74,811	$	33,360	$	9,223	$	8,852	$	4,790	$	3,761	$	134,797
Total Foreign	$	74,811	$	33,360	$	9,223	$	8,852	$	4,790	$	3,761	$	134,797
Total Loans	$	3,641,975	$	1,540,327	$	885,554	$	616,037	$	241,896	$	283,362	$	7,209,151

The decrease in Commercial Special Review loans at September 30, 2022 compared to December 31, 2021 can be primarily attributed to a relationship in the oil and gas production industry that was upgraded to Pass. The decrease in Commercial Watch-List Pass loans at September 30, 2022 compared to December 31, 2021 can be primarily attributed to a relationship in energy production that was downgraded to Watch-List Substandard. The decrease in Commercial real estate: farmland & commercial Watch-List Pass loans can be primarily attributed to a relationship securing commercial property that was downgraded to Watch-List Substandard. The decrease in Watch-List Pass loans at September 30, 2022 compared to December 31, 2021 can be primarily attributed to a loan secured by commercial buildings that was paid off.

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. On April 4, 2022 the 2012 plan expired and was not renewed.

A summary of option activity under the stock option plan for the nine months ended September 30, 2022 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, 2021	520,551	$	28.28
Plus: Options granted	31,150		38.92
Less:
Options exercised	34,025		21.54
Options expired	—		—
Options forfeited	12,400		32.64
Options outstanding at September 30, 2022	505,276		29.29	4.20	$	6,677

Options fully vested and exercisable at September 30, 2022	293,638	$	24.93	2.43	$	5,160

On April 18, 2022, the Board of Directors adopted the 2022 International Bancshares Corporation Stock Appreciation Rights Plan (the “SAR Plan”). There are 750,000 shares of underlying common stock that may be used for stock appreciation right (“SAR”) grants under the plan, however, no actual shares will be granted. Upon exercise, the SAR will be settled in cash. SARs granted may be exercisable for a period of up to 10 years from the date of grant and may vest over an eight-year period. As of September 30, 2022, a total of 500,250 SARs had been issued at a base value of $39.33 per unit. The SARs granted in the third quarter vest over an eight-year period beginning on the second anniversary of the grant date and expire 10 years after the grant date.

Stock-based compensation expense included in the consolidated statements of income for the three and nine months ended September 30, 2022 was $118,000 and $347,000, respectively. Stock-based compensation expense included in the consolidated statements of income for the three and nine months ended September 30, 2021 was $118,000 and $391,000, respectively. As of September 30, 2022, there was approximately $863,000 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, Equity Securities with Readily Determinable Fair Values and Other Investments

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. Available-for-sale and held-to-maturity debt securities in an unrealized loss position are 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 will be recorded as a charge to our ACL with subsequent changes in the amount of impairment, up or down, also recorded through our ACL. We have evaluated the debt securities classified as available-for-sale and held-to-maturity at September 30, 2022 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, 2022 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)
U.S. Treasury securities	$	49,533	$	—	$	(541)	$	48,992	$	48,992
Residential mortgage-backed securities		4,636,564		3		(573,278)		4,063,289		4,063,289
Obligations of states and political subdivisions		110,430		51		(7,372)		103,109		103,109
Total investment securities	$	4,796,527	$	54	$	(581,191)	$	4,215,390	$	4,215,390

(1)	Included in the carrying value of residential mortgage-backed securities are $600,731 of mortgage-backed securities issued by Ginnie Mae and $3,462,558 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, 2021 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
			Gross		Gross		Estimated
	Amortized		unrealized		unrealized		fair		Carrying
	cost		gains		losses		value		value⁽¹⁾

	(Dollars in Thousands)
Residential mortgage-backed securities	$	4,213,441	$	14,159	$	(58,237)	$	4,169,363	$	4,169,363
Obligations of states and political subdivisions		41,519		3,038		—		44,557		44,557
Total investment securities	$	4,254,960	$	17,197	$	(58,237)	$	4,213,920	$	4,213,920

(1)	Included in the carrying value of residential mortgage-backed securities are $824,474 of mortgage-backed securities issued by Ginnie Mae and $3,344,899 of mortgage-backed securities issued by Fannie Mae and Freddie.

The amortized cost and estimated fair value of investment securities at September 30, 2022, 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
	Amortized		Estimated		Amortized		Estimated
	Cost		fair value		Cost		fair value

	(Dollars in Thousands)
Due in one year or less	$	1,200	$	1,200	$	49,533	$	48,992
Due after one year through five years		2,200		2,200		—		—
Due after ten years		—		—		110,430		103,109
Residential mortgage-backed securities		—		—		4,636,564		4,063,289
Total investment securities	$	3,400	$	3,400	$	4,796,527	$	4,215,390

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, 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 $1,595,549,000 and $1,360,046,000, respectively, at September 30, 2022.

Proceeds from the sale and calls of debt securities available-for-sale were $800,000 and $800,000 for the three and nine months ended September 30, 2022, which included $0 and $0 of mortgage-backed securities. Gross gains of $0 and $0 and gross losses of $0 and $0 were realized on the sales and calls for the three and nine months ended September 30, 2022. Proceeds from the sale and call of debt securities available-for-sale were $3,025,000 and $5,890,000 for the three and nine months ended September 30, 2021, which included $0 and $0 of mortgage-backed securities. Gross gains of $0 and $0 and gross losses of $12,000 and $16,000 were realized on the sales and calls for the three and nine months ended September 30, 2021, respectively.

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, 2022, were as follows:


	Less than 12 months				12 months or more				Total
			Unrealized				Unrealized				Unrealized
	Fair Value		Losses		Fair Value		Losses		Fair Value		Losses

	(Dollars in Thousands)
Available for sale:
U.S. Treasury securities	$	48,992	$	(541)	$	—	$	—	$	48,992	$	(541)
Residential mortgage-backed securities		2,091,227		(230,060)		1,950,011		(343,218)		4,041,238		(573,278)
Obligations of states and political subdivisions		86,055		(7,372)		—		—		86,055		(7,372)
	$	2,226,274	$	(237,973)	$	1,950,011	$	(343,218)	$	4,176,285	$	(581,191)

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, 2021 were as follows:


	Less than 12 months				12 months or more				Total
			Unrealized				Unrealized				Unrealized
	Fair Value		Losses		Fair Value		Losses		Fair Value		Losses

	(Dollars in Thousands)
Available for sale:
Residential mortgage-backed securities	$	3,037,188	$	(53,060)	$	423,733	$	(5,177)	$	3,460,921	$	(58,237)
	$	3,037,188	$	(53,060)	$	423,733	$	(5,177)	$	3,460,921	$	(58,237)

The unrealized losses on investments in residential mortgage-backed securities are primarily caused by changes in market interest rates. 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 our conclusion that the investments in residential mortgage-backed securities issued by Freddie Mac, Fannie Mae and Ginnie Mae are not considered other-than-temporarily impaired.

Equity securities with readily determinable fair values consist primarily of Community Reinvestment Act funds. At September 30, 2022 and December 31, 2021, the balance in equity securities with readily determinable fair values recorded at fair value were $5,351,000 and $6,079,000, respectively. The following is a summary of unrealized and realized gains and losses recognized in net income on equity securities during the three and nine months ended September 30, 2022 and the three and nine months ended September 30, 2021:


	Three Months Ended
	September 30, 2022
	(Dollars in Thousands)


Net losses recognized during the period on equity securities	$	(230)
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	$	(230)


	Nine Months Ended
	September 30, 2022
	(Dollars in Thousands)

Net losses recognized during the period on equity securities	$	(728)
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	$	(728)


	Three Months Ended
	September 30, 2021
	(Dollars in Thousands)


Net losses recognized during the period on equity securities	$	(5)
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	$	(5)


	Nine Months Ended
	September 30, 2021
	(Dollars in Thousands)

Net losses recognized during the period on equity securities	$	(70)
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	$	(70)

Other investments include equity and merchant banking investments held by our subsidiary banks and non-banking entities. We hold ownership interests in limited partnerships for the purpose of investing in low-income housing tax credit (“LIHTC”) projects. The partnerships may acquire, construct or rehabilitate housing for low- and moderate-income individuals. We realize a return primarily from federal tax credits and other federal tax deductions associated with the underlying projects. We are a limited partner in the partnerships, and not required to consolidate the entities in our consolidated financial statements. Investments in LIHTC projects totaled $236,718,000 at September 30, 2022 and $179,543,000 at December 31, 2021, and are included in other investments on the consolidated financial statements. Unfunded commitments to LIHTC projects totaled $42,896,000 at September 30, 2022 and $40,094,000 at December 31, 2021, and are included in other liabilities on the consolidated financial statements.

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 our loan portfolio. At September 30, 2022, other borrowed funds totaled $435,993,000 compared to $436,138,000 at December 31, 2021.

Note 8 — Junior Subordinated Interest Deferrable Debentures

As of September 30, 2022, we have five statutory business trusts under the laws of the State of Delaware, for the purpose of issuing trust preferred securities. The five statutory business trusts we formed (the “Trusts”) have each issued Capital and Common Securities and invested the proceeds thereof in an equivalent amount of junior subordinated debentures (“Debentures”) that we issued. As of September 30, 2022 and December 31, 2021, the principal amount of Debentures outstanding totaled $134,642,000.

The Debentures are subordinated and junior in right of payment to all present and future senior indebtedness (as defined in the respective 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. We have fully and unconditionally guaranteed the obligations of each of the Trusts with respect to the Capital and Common Securities. 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 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 and not consolidated in 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, 2022 and December 31, 2021, the total $134,642,000 of the Capital and Common Securities outstanding qualified as Tier 1 capital.

The following table illustrates key information about each of the Capital and Common Securities and their interest rate at September 30, 2022:

Junior

Subordinated

Deferrable

Interest

Repricing

Interest

Optional

Debentures

Frequency

Rate

Rate Index(1)

Maturity Date

Redemption Date⁽¹⁾

(Dollars in Thousands)

Trust VIII

25,774

Quarterly

5.56

LIBOR

3.05

October 2033

October 2008

Trust IX

41,238

Quarterly

3.90

LIBOR

1.62

October 2036

October 2011

Trust X

21,021

Quarterly

4.43

LIBOR

1.65

February 2037

February 2012

Trust XI

25,990

Quarterly

3.90

LIBOR

1.62

July 2037

July 2012

Trust XII

20,619

Quarterly

4.53

LIBOR

1.45

September 2037

September 2012

134,642

(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

We paid cash dividends of $.60 per share on February 28 and August 29, 2022, respectively, to record holders of our common stock on February 15 and August 16, 2022, respectively. We paid cash dividends of $.60 and $.55 per share on February 17 and September 3, 2021, respectively, to record holders of our common Stock on February 5 and August 20, 2021, respectively.

In April 2009, 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. Annually since then, including on February 23, 2022, the Board of Directors extended and increased the repurchase program to purchase up to $150 million of common stock during the 12-month period commencing on March 15, 2022. Shares of common stock may be purchased from time to time on the open market or through 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 quarter of 2022, the Board of Directors adopted a Rule 10b-18 trading plan and a Rule 10b5-1 trading plan and intends to adopt additional Rule 10b-18 and Rule 10b5-1 trading plans, which will allow us to purchase shares of our common stock during certain open and blackout periods when we ordinarily would not be in the market due to trading restrictions in our insider trading policy. During the terms of both a Rule 10b-18 and 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 purchased under these trading plans will be held in treasury for reissue for various corporate purposes, including employee stock compensation plans. As of October 31, 2022, a total of 13,582,484 shares had been repurchased under all

programs at a cost of $409,710,000. We are not obligated to purchase shares under our stock repurchase program outside of the Rule 10b-18 and Rule 10b5-1trading plans.

Note 10 — Commitments and Contingent Liabilities and Other Tax Matters

We are involved in various legal proceedings that are in various stages of litigation. 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 our consolidated financial position or results of 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.

Note 11 — Capital Ratios

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 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 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 increased each year until January 1, 2019, when 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 were subject to a four-year phase in period for mandatory compliance and we were required to begin to phase in the rules beginning on January 1, 2015. We believe that as of September 30, 2022, we continue to 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 current treatment under the regulatory capital rules for certain regulatory capital deductions and 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 paused 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 shortfall.

As of September 30, 2022, our capital levels continue to exceed all capital adequacy requirements under the 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 20.11% on September 30, 2022 and 20.47% on December 31, 2021. We had a Tier 1 capital-to-average-total-asset (leverage) ratio of 13.65% and 13.94%, risk-weighted Tier 1 capital ratio of 20.99% and 21.59% and risk-weighted total capital ratio of 22.15% and 22.73% at September 30, 2022 and December 31, 2021, respectively. Our CET1 capital consists of common stock and related surplus, net of treasury stock, and retained earnings. We and 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 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, 2022, the total of $134,642,000 of the Capital and Common Securities outstanding qualified as Tier 1 capital. We actively monitor the regulatory capital ratios to ensure that 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.

We and our Subsidiary Banks are subject to the regulatory capital requirements administered by the Federal Reserve, and, for our Subsidiary Banks, the FDIC. Regulatory authorities can initiate certain mandatory actions if we or any of 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, 2022, that we and each of our Subsidiary Banks meet all capital adequacy requirements to which we are subject.

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

The following discussion should be read in conjunction with our consolidated financial statements, and notes thereto, for the year ended December 31, 2021, included in our 2021 Form 10-K. Operating results for the three and nine months ended September 30, 2022 are not necessarily indicative of the results for the year ending December 31, 2022, 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 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 we project, forecast, estimate or 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 us, our customers, and such customers’ ability to transact profitable business with us, including the ability of 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 unavailability of funding from the FHLB, Fed or other sources in the future could adversely impact our growth strategy, prospects and performance.

●

Changes in consumer spending, borrowing and saving habits.

●

Changes in interest rates and market prices, including, changes in federal regulations on the payment of interest on demand deposits.

●

Changes in the capital markets we utilize, including changes in the interest rate environment that may reduce margins.

●

Changes in state and/or federal laws and regulations, including 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 U.S.—Mexico trade, including, reductions in border crossings and commerce, integration and implementation of the United States-Mexico-Canada Agreement and 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 deposit interest payments made to such individuals.

●

The loss of senior management or operating personnel.

●

The timing, impact and 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.

●

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

●

Additions to our allowance for credit loss as a result of changes in local, national or international conditions which adversely affect our customers.

●

Greater than expected costs or difficulties related to the development and integration of new products and lines of 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 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 portfolios.

●

The effect of changes in accounting policies and practices by the Public Company Accounting Oversight Board, the Financial Accounting Standards Board and other accounting standards setters.

●

The costs and effects of regulatory developments or regulatory or other governmental inquiries and the results of regulatory examinations or reviews and 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, 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 and the implementing rules and regulations, including those that establish debit card interchange fee standards and prohibit network exclusivity arrangements and routing 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.

●

Our failure or circumvention of our internal controls and risk management, policies and procedures.

●

Potential direct and indirect impacts, risks, and uncertainties associated with the novel Coronavirus Disease 2019 (“COVID-19”) or similar global pandemics.

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. 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

We are headquartered in Laredo, Texas with 167 facilities and 257 ATMs, and provide banking services for commercial, consumer and international customers of North, South, Central and Southeast Texas and the State of Oklahoma. We are one of the largest independent commercial bank holding companies headquartered in Texas. We, through our Subsidiary Banks, are in the business of gathering funds from various sources and investing those funds in order to earn a return. We, either directly or through a Subsidiary Bank, own an insurance agency, a liquidating subsidiary, a fifty percent interest in an investment banking unit that owns a broker/dealer, a controlling interest in four merchant banking entities, and a majority ownership in a real-estate development partnership. 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, we generate income from fees on products offered to commercial, consumer and international

customers. The sales team of each of 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 Subsidiary Banks have various compensation plans, including incentive based compensation, for fairly compensating employees. The 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.

We are very active in facilitating trade along the United States border with Mexico. 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 our Subsidiary Banks. We also serve the growing Hispanic population through our facilities located throughout South, Central and Southeast Texas and the State of Oklahoma.

In March 2020, the World Health Organization recognized the outbreak of COVID-19 as a pandemic. The spread of COVID-19 and resulting global health crisis has created extreme negative consequences and disruption in global financial markets and has curtailed activity in the governmental, commercial and consumer sectors in recent years. Government responses at all levels have included ordering non-essential businesses be closed, mandating that individuals not working in essential businesses restrict their movement, observe social distancing and shelter in place. Although some of the governmental mandates have been lifted with the development of several vaccines for COVID-19, the long-term consequences of those actions, and the responses by individuals and businesses affected, remain to be seen. The rapid decreases in consumer and commercial activity, rapid increases in unemployment, disruption in global supply chains, market downturns and volatility, drastic changes in consumer behavior, new legislation in response to the emergency, decreases in interest rates, and most currently, inflationary pressures, have continued to impact our business.

We have worked with our customers over the last two years to assist them through these difficult times and we remain conscious of the economic uncertainty still prevalent in the U.S. and are ensuring that we are poised to respond quickly to our customers should the need arise. We continue to rely on our strong capital position and strong liquidity to ensure that we are correctly positioned and have the financial strength to continue to navigate the lingering effect of the COVID-19 pandemic and lingering economic impacts to protect our Company, our employees, our customers and our shareholders.

On March 27, 2020, the Coronavirus Aid, Relief and Economic Security (“CARES”) Act was signed into law. It contains substantial tax and spending provisions intended to address the impact of the COVID-19 pandemic. The CARES Act includes the Paycheck Protection Program (“PPP”), originally a nearly $350 billion program designed to aid small businesses through federally guaranteed loans distributed through banks. These loans were originally intended to support eight weeks of payroll and certain other costs to help those businesses remain viable and allow their employees to pay their bills. Subsequently, on April 24, 2020, the Paycheck Protection Program and Health Care Enhancement Act (“CARES Part II”) was signed into law. CARES Part II provides an additional funding of $320 billion for the PPP program. Then, on June 5, 2020, the Paycheck Protection Program Flexibility Act (“PPPFA”) was signed into law. The PPPFA, among other things, extended the period of time that businesses could spend PPP loan proceeds on payroll and other eligible costs from eight weeks to the earlier of 24 weeks or December 31, 2020. On December 27, 2020, the Economic Aid to Hard-Hit Small Businesses, Nonprofits and Venues Act (the “Economic Aid Act”) was enacted, which among other things, reauthorized lending under the PPP to first-time borrowers and for second draws by certain borrowers who have previously received PPP loans. The Economic Aid Act made available an additional $147 billion for PPP loans requested by March 31, 2021. We have been active participants in helping our customers obtain PPP loans under all the PPP programs, and as of October 31, 2022, have approximately 223 loans with an approximate value of $9,292,000 outstanding.

Future economic conditions remain uncertain and the impact of those conditions on our business also remains uncertain. Our business depends on the willingness and ability of our customers to conduct banking and other financial transactions. Our revenue streams including service charges on deposits and banking and non-banking service charges and fees (ATM and Interchange Income) have been impacted and may continue to be impacted in the future if economic conditions do not improve. Expense control has been a long-time focus and essential element to our long-term profitability. We have kept that focus in mind as we continue to look at operations and create efficiencies and institute cost-control protocols at all levels. We will continue to monitor our efficiency ratio, a measure of non-interest expense

to net interest income plus non-interest income and our overhead burden ratio, a ratio of our operating expenses against total assets, closely. We use these measures in determining if we are accomplishing our long-term goals of controlling our costs in order to provide superior returns to our shareholders.

Results of Operations

Summary

Consolidated Statements of Condition Information



	September 30, 2022		December 31, 2021		Percent Increase (Decrease)

	(Dollars in Thousands)
Assets	$	16,094,949	$	16,046,236	0.3	%
Net loans		6,931,555		7,098,777	(2.4)
Deposits		12,880,515		12,617,877	2.1
Securities sold under repurchase agreements		507,143		439,672	15.3
Other borrowed funds		435,993		436,138	(0.0)
Junior subordinated deferrable interest debentures		134,642		134,642	—
Shareholders’ equity		1,954,274		2,308,481	(15.3)

Consolidated Statements of Income Information


	Three Months Ended						Nine Months Ended
	September 30,				Percent		September 30,				Percent
	(Dollars in Thousands)				Increase		(Dollars in Thousands)				Increase
	2022		2021		(Decrease)		2022		2021		(Decrease)
Interest income	$	145,087	$	101,192	43.4	%	$	351,103	$	297,045	18.2	%
Interest expense		9,870		6,682	47.7			22,939		20,218	13.5
Net interest income		135,217		94,510	43.1			328,164		276,827	18.5
Provision for probable loan losses		8,525		2,801	204.4			13,741		5,137	167.5
Non-interest income		54,602		47,209	15.7			141,356		181,352	(22.1)
Non-interest expense		75,173		69,727	7.8			208,047		201,866	3.1
Net income		83,356		54,599	52.7	%		194,820		197,396	(1.3)	%

Per common share:
Basic	$	1.34	$	.86	55.8	%	$	3.10	$	3.12	(0.6)	%
Diluted		1.34		.86	55.8			3.09		3.11	(0.6)

Net Income

Net income for the three and nine months ended September 30, 2022 increased by 52.7% and decreased by 1.3%, respectively, compared to the same periods of 2021. Net income for the three and nine months ended September 30, 2022 was positively impacted by an increase in net interest income compared to the same periods of 2021 and can be attributed to an increase in the size of our investment securities portfolio, the interest earned on funds held at the Federal Reserve Bank, and an increase in loan interest income, of which the latter two have increased in line with recent Federal Reserve Board actions to raise interest rates. The increase in those revenue streams coupled with the cost control initiatives to streamline operations and increase efficiency in recent years have been the primary drivers in achieving the positive earnings results. Non-interest income for the same periods was also positively impacted by gains on the sale of some properties from our branch network as we continue to monitor and evaluate our retail branch footprint and align the footprint with customer activity. The decrease in net income for the first nine months of 2022 compared to the same period of 2021 is attributed to a non-recurring transaction in 2021 arising from the sale of an equity interest in a merchant banking investment held by one of our non-bank subsidiaries. The transaction resulted in income totaling $42.8 million, net of tax, and was recorded in the second quarter of 2021. Net income for the first nine months of 2021 without the non-recurring item was $154.6 million, after tax, compared to $194.8 million for the same period of 2022, representing a 26.0% increase.

Net Interest Income


	Three Months Ended						Nine Months Ended
	September 30,				Percent		September 30,				Percent
	(Dollars in Thousands)				Increase		(Dollars in Thousands)				Increase
	2022		2021		(Decrease)		2022		2021		(Decrease)
Interest Income:
Loans, including fees	$	104,818	$	88,280	18.7	%	$	273,936	$	272,210	0.6	%
Investment securities:
Taxable		20,718		11,669	77.5			50,846		21,558	135.9
Tax-exempt		625		360	73.6			1,326		1,132	17.1
Other interest income		18,926		883	2,043.4			24,995		2,145	1,065.3

Total interest income		145,087		101,192	43.4			351,103		297,045	18.2

Interest expense:
Savings deposits		3,323		1,082	207.1			5,720		3,001	90.6
Time deposits		2,530		2,814	(10.1)			7,311		8,941	(18.2)
Securities sold under Repurchase agreements		665		165	303.0			1,090		448	143.3
Other borrowings		1,926		1,929	(0.2)			5,721		5,726	(0.1)
Junior subordinated interest deferrable debentures		1,426		692	106.1			3,097		2,102	47.3

Total interest expense		9,870		6,682	47.7			22,939		20,218	13.5

Net interest income	$	135,217	$	94,510	43.1	%	$	328,164	$	276,827	18.5	%

The increase in net interest income for the three and nine months ended September 30, 2022 can be attributed to an increase in the size of our investment portfolio and the interest earned on funds held at the Federal Reserve from operations, which has increased in line with recent Federal Reserve Board actions to raise interest rates. The interest rate changes have positively impacted interest income generated by our loan portfolio; however, the overall size of our loan portfolio has decreased due to slow loan demand, thus reducing the benefit of the rate change on the floating rate loans in the portfolio. 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 our strategy to manage interest rate risk, 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. 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. Our management can quickly change 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 we employ to supplement gap analysis include simulation analysis to quantify interest rate risk exposure. The gap analysis prepared by management is reviewed by our Investment Committee twice a year (see table on page 45 for the September 30, 2022 gap analysis). Our management currently believes that we are properly positioned for interest rate changes; however if our management determines at any time that we are not properly positioned, we 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
	September 30,				Percent		September 30,				Percent
	(Dollars in Thousands)				Increase		(Dollars in Thousands)				Increase
	2022		2021		(Decrease)		2022		2021		(Decrease)

Service charges on deposit accounts	$	19,038	$	17,294	10.1	%	$	54,543	$	47,971	13.7	%
Other service charges, commissions and fees
Banking		15,995		15,750	1.6			41,446		41,166	0.7
Non-banking		2,618		2,046	28.0			6,425		5,831	10.2
Investment securities transactions, net		—		(12)	(100.0)			—		(16)	(100.0)
Other investments, net		6,962		5,490	26.8			11,063		68,495	(83.8)
Other income		9,989		6,641	50.4			27,879		17,905	55.7
Total non-interest income	$	54,602	$	47,209	15.7	%	$	141,356	$	181,352	(22.1)	%

Total non-interest income for the three and nine months ended September 30, 2022 increased by 15.7% and decreased by 22.1%, respectively, compared to the same periods of 2021. Non-interest income for the three and nine months ended September 30, 2022 compared to the same periods of 2021 was positively impacted due to an increase in service charges on deposits as customer activity continues to increase from previously depressed levels resulting from the COVID-19 pandemic and by gains on the sale of some properties from our branch network as we continue to monitor and evaluate our retail branch footprint and align the footprint with customer activity. The decrease in other investment income for the three and nine months ended September 30, 2022 compared to the same periods of 2021 can be primarily attributed to the sale of an equity interest in a merchant banking investment held by one of our non-bank subsidiaries in the second quarter of 2021.

Non-Interest Expense


	Three Months Ended						Nine Months Ended
	September 30,				Percent		September 30,				Percent
	(Dollars in Thousands)				Increase		(Dollars in Thousands)				Increase
	2022		2021		(Decrease)		2022		2021		(Decrease)

Employee compensation and benefits	$	34,341	$	30,552	12.4	%	$	96,505	$	91,262	5.7	%
Occupancy		7,821		6,491	20.5			20,282		18,638	8.8
Depreciation of bank premises and equipment		5,425		6,028	(10.0)			16,355		19,263	(15.1)
Professional fees		3,087		2,558	20.7			8,347		7,675	8.8
Deposit insurance assessments		2,026		1,026	97.5			5,062		2,840	78.2
Net operations, other real estate owned		(253)		438	(157.8)			(708)		5,351	(113.2)
Advertising		1,476		1,470	0.4			4,371		4,349	0.5
Software and software maintenance		4,089		4,115	(0.6)			12,638		13,091	(3.5)
Other		17,161		17,049	0.7			45,195		39,407	14.7

Total non-interest expense	$	75,173	$	69,727	7.8	%	$	208,047	$	201,876	3.1	%

Non-interest expense for the three and nine months ended September 30, 2022 increased by 7.8% and 3.1%, respectively, compared to the same periods of 2021. The increase in non-interest expense can be attributed to an increase in our employee compensation and benefits costs as we continue to review and adjust our compensation and benefit programs to recognize performance and retain our workforce. We continue to monitor and manage our controllable non-interest expenses through a variety of measures with the ultimate goal of ensuring we align non-interest expenses with our operations and revenue streams.

Financial Condition

Allowance for Credit Losses

The allowance for credit losses increased 8.0% to $119,195,000 at September 30, 2022 from $110,374,000 at December 31, 2021. The provision for credit losses charged to expense increased 204.4% and 167.5%, respectively for the three and nine months ended September 30, 2022 to $8,525,000 and $13,741,000, compared to $2,801,000 and $5,137,000, respectively for the same periods of 2021. The pool specific qualitative loss factors management deemed appropriate for the ACL calculation at December 31, 2021 remained constant in the September 30, 2022 ACL calculation. The allowance for credit losses was 1.69% of total loans at September 30, 2022 and 1.53% of total loans at December 31, 2021.

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, 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

Total loans decreased by 2.2% to $7,050,750,000 at September 30, 2022, from $7,209,151,000 at December 31, 2021.

Deposits

Deposits increased by 2.1% to $12,880,515,000 at September 30, 2022, compared to $12,617,877,000 at December 31, 2021. Deposits have continued to increase as customers have presumably decided to save and preserve cash earned and received from the various governmental stimulus programs instead of spending during these uncertain times.

Foreign Operations

On September 30, 2022, we had $16,094,949,000 of consolidated assets, of which approximately $164,545,000, or 1.0%, was related to loans outstanding to borrowers domiciled in foreign countries, compared to $134,797,000, or 0.8%, at December 31, 2021. Of the $164,545,000, 84.6% is directly or indirectly secured by U.S. assets, certificates of deposits and real estate; 2.5% is secured by foreign real estate or other assets; and 12.9% is unsecured.

Critical Accounting Policies

We have established various accounting policies that govern the application of accounting principles in the preparation of 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.

We consider our estimated ACL as a policy critical to the sound operations of our Subsidiary Banks. 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.

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.

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.

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.

Liquidity and Capital Resources

The maintenance of adequate liquidity provides 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. 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 our Subsidiary Banks. Other important funding sources for our Subsidiary Banks during 2022 and 2021 were borrowings from the FHLB, securities sold under repurchase agreements and large certificates of deposit, requiring management to closely monitor our asset/liability mix in terms of both rate sensitivity and maturity distribution. 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. 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. 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.

We maintain an adequate level of capital as a margin of safety for our depositors and shareholders. At September 30, 2022, shareholders’ equity was $1,954,274,000 compared to $2,308,481,000 at December 31, 2021. The decrease in shareholders’ equity can be primarily attributed to an increase in other comprehensive loss and an increase in treasury stock.

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 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 increased each year until January 1, 2019, when 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 were subject to a four-year phase in period for mandatory compliance and we were required to begin to phase in the rules beginning on January 1, 2015. Management believes, as of September 30, 2022, that we and each of our Subsidiary Banks continue to 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, as they apply to banking organizations that are not subject to the advanced approaches capital rules. Effective January 1, 2018, the rule also paused 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.

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.

our financial statements. Management believes, as of September 30, 2022, that we and each of our Subsidiary Banks continue to meet all capital adequacy requirements to which we are subject.

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, 2022 is illustrated in the table entitled “Interest Rate 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.

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, we are asset sensitive in both the 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 our interest rate risk position. We use modeling of future events as a primary tool for monitoring interest rate risk.

Interest Rate Sensitivity

(Dollars in Thousands)


	Rate/Maturity
			Over 3		Over 1
	3 Months		Months to		Year to 5		Over 5
September 30, 2022	or Less		1 Year		Years		Years		Total

	(Dollars in Thousands)
Rate sensitive assets
Investment securities	$	251,944	$	738,482	$	3,130,606	$	103,109	$	4,224,141
Loans, net of non-accruals		5,818,486		275,239		153,798		801,615		7,049,138

Total earning assets	$	6,070,430	$	1,013,721	$	3,284,404	$	904,724	$	11,273,279

Cumulative earning assets	$	6,070,430	$	7,084,151	$	10,368,555	$	11,273,279

Rate sensitive liabilities

Time deposits	$	998,346	$	994,465	$	137,362	$	—	$	2,130,173
Other interest bearing deposits		4,749,213		—		—		—		4,749,213
Securities sold under repurchase agreements		507,143		—		—		—		507,143
Other borrowed funds		—		—		—		435,993		435,993
Junior subordinated deferrable interest debentures		134,642		—		—		—		134,642

Total interest bearing liabilities	$	6,389,344	$	994,465	$	137,362	$	435,993	$	7,957,164

Cumulative sensitive liabilities	$	6,389,344	$	7,383,809	$	7,521,171	$	7,957,164

Repricing gap	$	(318,914)	$	19,256	$	3,147,042	$	468,731	$	3,316,115
Cumulative repricing gap		(318,914)		(299,658)		2,847,384		3,316,115
Ratio of interest-sensitive assets to liabilities		0.95		1.02		23.91		2.08		1.42
Ratio of cumulative, interest-sensitive assets to liabilities		0.95		0.96		1.38		1.42

Item 3. Quantitative and Qualitative Disclosures about Market Risk

During the three and nine months ended September 30, 2022, 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 17 through 21 of our 2021 Annual Report as filed as Exhibit 13 to our Form 10-K for the year ended December 31, 2021.

Item 4. Controls and Procedures

Disclosure Controls and Procedures

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, our principal executive officer and principal financial officer evaluated, with the participation of our management, the effectiveness of 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, our principal executive officer and principal financial officer concluded that 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 our internal control over financial reporting that occurred during our most recent fiscal quarter that have materially affected or are reasonably likely to materially affect our internal control over financial reporting.

PART II - OTHER INFORMATION

Item 1. Legal Proceedings

We are involved in various legal proceedings that are in various stages of litigation. We have determined, based on discussions with 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 our consolidated financial position or results of 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 Annual Report on Form 10-K for the fiscal year ended December 31, 2021.

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

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, 2022.


				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, 2022	136,163	$	39.37	136,163	$	107,470,000
August 1 – August 31, 2022	—		—	—		107,470,000
September 1 – September 30, 2022	147,107		40.99	147,107		101,440,000
Total	283,270	$	40.21	283,270

(1)	The repurchase program was extended and increased on February 23, 2022 and allows for the purchase of up to an additional $150,000,000 of common stock through March 15, 2023.

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

104++ — Cover Page Interactive Data File (included in Exhibit 101)

++ Attached as Exhibit 101 to this report are the following documents formatted in Inline XBRL (Extensible Business Reporting Language): (i) the Cover Page to this Form 10-Q; (ii) the Condensed Consolidated Statement of Earnings for the three and nine months ended September 30, 2022 and 2021; (iii) the Condensed Consolidated Balance Sheet as of September 30, 2022 and December 31, 2021; and (iv) the Condensed Consolidated Statement of Cash Flows for the nine months ended September 30, 2022 and September 30, 2021.

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 3, 2022	/s/ Dennis E. Nixon
		Dennis E. Nixon
		President


Date:	November 3, 2022	/s/ Judith I. Wawroski
		Judith I. Wawroski
		Treasurer