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,
|
|
|
|
2007
|
|
2006
|
|
Assets
|
|
|
|
|
|
|
|
|
|
|
|
Cash and due from banks
|
|
$
|
233,119
|
|
$
|
268,207
|
|
Federal funds sold
|
|
18,000
|
|
29,000
|
|
|
|
|
|
|
|
Total cash and cash equivalents
|
|
251,119
|
|
297,207
|
|
|
|
|
|
|
|
Time deposits with banks
|
|
11,375
|
|
396
|
|
|
|
|
|
|
|
Investment securities:
|
|
|
|
|
|
Held-to-maturity (Market value of $2,300 on September 30, 2007 and
$2,375 on December 31, 2006)
|
|
2,300
|
|
2,375
|
|
Available-for-sale (Amortized cost of $4,050,691 on September 30,
2007 and $4,548,236 on December 31, 2006)
|
|
4,028,436
|
|
4,488,078
|
|
|
|
|
|
|
|
Total investment securities
|
|
4,030,736
|
|
4,490,453
|
|
|
|
|
|
|
|
Loans, net of unearned discounts
|
|
5,235,303
|
|
5,034,810
|
|
Less allowance for possible loan losses
|
|
(63,075
|
)
|
(64,537
|
)
|
|
|
|
|
|
|
Net loans
|
|
5,172,228
|
|
4,970,273
|
|
|
|
|
|
|
|
Bank premises and equipment, net
|
|
420,106
|
|
390,323
|
|
Accrued interest receivable
|
|
55,036
|
|
57,288
|
|
Other investments
|
|
314,050
|
|
345,988
|
|
Identified intangible assets, net
|
|
32,833
|
|
34,358
|
|
Goodwill, net
|
|
283,198
|
|
282,246
|
|
Other assets
|
|
46,189
|
|
42,922
|
|
|
|
|
|
|
|
Total assets
|
|
$
|
10,616,870
|
|
$
|
10,911,454
|
|
1
INTERNATIONAL
BANCSHARES CORPORATION AND SUBSIDIARIES
Consolidated
Statements of Condition, continued (Unaudited)
(Dollars
in Thousands)
|
|
September 30,
|
|
December 31,
|
|
|
|
2007
|
|
2006
|
|
Liabilities and Shareholders
Equity
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
Deposits:
|
|
|
|
|
|
Demand - non-interest bearing
|
|
$
|
1,420,527
|
|
$
|
1,453,476
|
|
Savings and interest bearing demand
|
|
2,316,113
|
|
2,204,451
|
|
Time
|
|
3,284,956
|
|
3,331,991
|
|
|
|
|
|
|
|
Total deposits
|
|
7,021,596
|
|
6,989,918
|
|
|
|
|
|
|
|
Securities sold under repurchase agreements
|
|
1,241,260
|
|
706,335
|
|
Other borrowed funds
|
|
1,141,333
|
|
2,095,576
|
|
Junior subordinated deferrable interest debentures
|
|
211,199
|
|
210,908
|
|
Other liabilities
|
|
91,762
|
|
66,661
|
|
|
|
|
|
|
|
Total liabilities
|
|
9,707,150
|
|
10,069,398
|
|
|
|
|
|
|
|
Commitments, Contingent Liabilities and Other Tax Matters (Note 10)
|
|
|
|
|
|
|
|
|
|
|
|
Shareholders equity:
|
|
|
|
|
|
|
|
|
|
|
|
Common shares of $1.00 par value. Authorized 275,000,000 shares;
issued 95,437,489 shares on September 30, 2007 and 86,224,046 shares on
December 31, 2006
|
|
95,437
|
|
86,224
|
|
Surplus
|
|
143,908
|
|
138,247
|
|
Retained earnings
|
|
916,383
|
|
861,251
|
|
Accumulated other comprehensive loss
|
|
(14,339
|
)
|
(40,390
|
)
|
|
|
1,141,389
|
|
1,045,332
|
|
|
|
|
|
|
|
Less cost of shares in treasury, 26,785,619 shares on September 30,
2007 and 25,643,564 shares on December 31, 2006
|
|
(231,669
|
)
|
(203,276
|
)
|
|
|
|
|
|
|
Total shareholders equity
|
|
909,720
|
|
842,056
|
|
|
|
|
|
|
|
Total liabilities and shareholders equity
|
|
$
|
10,616,870
|
|
$
|
10,911,454
|
|
See accompanying notes to
consolidated financial statements.
2
INTERNATIONAL
BANCSHARES CORPORATION AND SUBSIDIARIES
Consolidated
Statements of Income (Unaudited)
(Dollars
in Thousands, except per share data)
|
|
Three Months Ended
September 30,
|
|
Nine Months Ended
September 30,
|
|
|
|
2007
|
|
2006
|
|
2007
|
|
2006
|
|
Interest income:
|
|
|
|
|
|
|
|
|
|
Loans, including fees
|
|
$
|
112,214
|
|
$
|
104,837
|
|
$
|
334,193
|
|
$
|
292,441
|
|
Federal funds sold
|
|
700
|
|
748
|
|
2,217
|
|
2,942
|
|
Investment securities:
|
|
|
|
|
|
|
|
|
|
Taxable
|
|
44,862
|
|
49,728
|
|
142,300
|
|
149,094
|
|
Tax-exempt
|
|
1,046
|
|
1,136
|
|
3,255
|
|
3,452
|
|
Other interest income
|
|
336
|
|
103
|
|
2,456
|
|
315
|
|
|
|
|
|
|
|
|
|
|
|
Total interest income
|
|
159,158
|
|
156,552
|
|
484,421
|
|
448,244
|
|
|
|
|
|
|
|
|
|
|
|
Interest expense:
|
|
|
|
|
|
|
|
|
|
Savings deposits
|
|
14,233
|
|
9,743
|
|
41,024
|
|
28,786
|
|
Time deposits
|
|
36,297
|
|
32,759
|
|
107,570
|
|
88,379
|
|
Securities sold under repurchase agreements
|
|
11,718
|
|
7,319
|
|
30,253
|
|
22,867
|
|
Other borrowings
|
|
14,821
|
|
29,423
|
|
60,203
|
|
74,157
|
|
Junior subordinated interest deferrable debentures
|
|
4,281
|
|
7,356
|
|
13,226
|
|
17,741
|
|
|
|
|
|
|
|
|
|
|
|
Total interest expense
|
|
81,350
|
|
86,600
|
|
252,276
|
|
231,930
|
|
|
|
|
|
|
|
|
|
|
|
Net interest income
|
|
77,808
|
|
69,952
|
|
232,145
|
|
216,314
|
|
|
|
|
|
|
|
|
|
|
|
Provision (credit) for possible loan losses
|
|
(3,916
|
)
|
1,954
|
|
(1,357
|
)
|
2,633
|
|
|
|
|
|
|
|
|
|
|
|
Net interest income after provision (credit) for possible loan losses
|
|
81,724
|
|
67,998
|
|
233,502
|
|
213,681
|
|
|
|
|
|
|
|
|
|
|
|
Non-interest income:
|
|
|
|
|
|
|
|
|
|
Service charges on deposit accounts
|
|
23,318
|
|
21,324
|
|
64,602
|
|
63,839
|
|
Other service charges, commissions and fees
|
|
|
|
|
|
|
|
|
|
Banking
|
|
8,800
|
|
7,451
|
|
25,761
|
|
21,680
|
|
Non-banking
|
|
5,061
|
|
6,000
|
|
13,892
|
|
14,011
|
|
Investment securities transactions, net
|
|
(1,031
|
)
|
(1,353
|
)
|
(15,941
|
)
|
(943
|
)
|
Other investments, net
|
|
4,226
|
|
3,389
|
|
14,794
|
|
15,346
|
|
Other income
|
|
5,243
|
|
3,247
|
|
16,017
|
|
13,764
|
|
|
|
|
|
|
|
|
|
|
|
Total non-interest income
|
|
45,617
|
|
40,058
|
|
119,125
|
|
127,697
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
3
INTERNATIONAL BANCSHARES CORPORATION AND SUBSIDIARIES
Consolidated
Statements of Income, continued (Unaudited)
(Dollars
in Thousands, except per share data)
|
|
Three
Months Ended
September 30,
|
|
Nine
Months Ended
September 30,
|
|
|
|
2007
|
|
2006
|
|
2007
|
|
2006
|
|
Non-interest expense:
|
|
|
|
|
|
|
|
|
|
Employee compensation and benefits
|
|
$
|
34,645
|
|
$
|
31,418
|
|
$
|
97,800
|
|
$
|
91,042
|
|
Occupancy
|
|
8,172
|
|
6,919
|
|
23,515
|
|
19,667
|
|
Depreciation of bank premises and equipment
|
|
8,178
|
|
7,201
|
|
23,547
|
|
21,006
|
|
Professional fees
|
|
3,014
|
|
2,819
|
|
8,483
|
|
8,289
|
|
Stationery and supplies
|
|
1,466
|
|
1,568
|
|
4,437
|
|
4,469
|
|
Amortization of identified intangible assets
|
|
1,332
|
|
1,217
|
|
3,861
|
|
3,650
|
|
Advertising
|
|
3,391
|
|
2,891
|
|
9,811
|
|
8,935
|
|
Other
|
|
18,154
|
|
14,995
|
|
52,397
|
|
58,547
|
|
|
|
|
|
|
|
|
|
|
|
Total non-interest expense
|
|
78,352
|
|
69,028
|
|
223,851
|
|
215,605
|
|
|
|
|
|
|
|
|
|
|
|
Income before income taxes
|
|
48,989
|
|
39,028
|
|
128,776
|
|
125,773
|
|
|
|
|
|
|
|
|
|
|
|
Provision for income taxes
|
|
16,327
|
|
12,435
|
|
42,880
|
|
40,547
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
32,662
|
|
$
|
26,593
|
|
$
|
85,896
|
|
$
|
85,226
|
|
|
|
|
|
|
|
|
|
|
|
Basic earnings per common share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average number of shares outstanding:
|
|
68,898,059
|
|
69,287,481
|
|
69,174,016
|
|
69,507,388
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
.47
|
|
$
|
.38
|
|
$
|
1.24
|
|
$
|
1.23
|
|
|
|
|
|
|
|
|
|
|
|
Fully diluted earnings per common share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average number of shares outstanding:
|
|
69,090,549
|
|
69,977,891
|
|
69,575,373
|
|
70,225,403
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
.47
|
|
$
|
.38
|
|
$
|
1.23
|
|
$
|
1.21
|
|
See accompanying notes to
consolidated financial statements.
4
INTERNATIONAL
BANCSHARES CORPORATION AND SUBSIDIARIES
Consolidated
Statements of Comprehensive Income (Unaudited)
(Dollars
in Thousands)
|
|
Three
Months Ended
September 30,
|
|
Nine
Months Ended
September 30,
|
|
|
|
2007
|
|
2006
|
|
2007
|
|
2006
|
|
Net income
|
|
$
|
32,662
|
|
$
|
26,593
|
|
$
|
85,896
|
|
$
|
85,226
|
|
|
|
|
|
|
|
|
|
|
|
Other comprehensive income (loss), net of tax
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net unrealized holding (losses) gains on securities available for
sale arising during period
|
|
13,110
|
|
14,933
|
|
36,413
|
|
(8,348
|
)
|
Reclassification adjustment for (losses) gains on securities
available for sale included in net income
|
|
(670
|
)
|
(879
|
)
|
(10,362
|
)
|
(613
|
)
|
|
|
|
|
|
|
|
|
|
|
Comprehensive income
|
|
$
|
45,102
|
|
$
|
40,647
|
|
$
|
111,947
|
|
$
|
76,265
|
|
See accompanying notes to
consolidated financial statements.
5
INTERNATIONAL
BANCSHARES CORPORATION AND SUBSIDIARIES
Consolidated
Statements of Cash Flows (Unaudited)
(Dollars
in Thousands)
|
|
Nine Months Ended
September 30,
|
|
|
|
2007
|
|
2006
|
|
Operating activities:
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
85,896
|
|
$
|
85,226
|
|
|
|
|
|
|
|
Adjustments to reconcile net income to net cash provided by operating
activities:
|
|
|
|
|
|
(Credit) provision for possible loan losses
|
|
(1,357
|
)
|
2,633
|
|
Amortization of loan premiums
|
|
239
|
|
965
|
|
Accretion of time deposit discounts
|
|
(9
|
)
|
|
|
Accretion of time deposits with banks
|
|
(49
|
)
|
|
|
Decrease in loans held for sale
|
|
19,251
|
|
3,554
|
|
Depreciation of bank premises and equipment
|
|
23,547
|
|
21,006
|
|
Gain on sale of bank premises and equipment
|
|
(3,409
|
)
|
(487
|
)
|
Depreciation and amortization of leased assets
|
|
1,625
|
|
1,625
|
|
Accretion of investment securities discounts
|
|
(439
|
)
|
(334
|
)
|
Amortization of investment securities premiums
|
|
3,173
|
|
3,075
|
|
Investment securities transactions, net
|
|
15,941
|
|
943
|
|
Amortization of junior subordinated debenture discounts
|
|
292
|
|
441
|
|
Amortization of identified intangible assets
|
|
3,861
|
|
3,650
|
|
Stock based compensation expense
|
|
581
|
|
689
|
|
Earnings from affiliates and other investments
|
|
(7,852
|
)
|
(8,772
|
)
|
Deferred tax (benefit) expense
|
|
(2,261
|
)
|
616
|
|
Decrease (increase) in accrued interest receivable
|
|
2,770
|
|
(6,352
|
)
|
Net decrease in other assets
|
|
(5,015
|
)
|
(47,635
|
)
|
Net increase in other liabilities
|
|
14,087
|
|
87,610
|
|
|
|
|
|
|
|
Net cash provided by operating activities
|
|
150,872
|
|
148,453
|
|
|
|
|
|
|
|
Investing activities:
|
|
|
|
|
|
|
|
|
|
|
|
Proceeds from maturities of securities
|
|
21,903
|
|
5,270
|
|
Proceeds from sales of available for sale securities
|
|
841,081
|
|
61,360
|
|
Purchases of available for sale securities
|
|
(1,103,277
|
)
|
(851,186
|
)
|
Principal collected on mortgage-backed securities
|
|
738,989
|
|
653,314
|
|
Maturities of time deposits with banks
|
|
35,643
|
|
568
|
|
Net increase in loans
|
|
(187,484
|
)
|
(305,150
|
)
|
Purchases of other investments
|
|
(54,922
|
)
|
(8,002
|
)
|
Distributions of other investments
|
|
97,262
|
|
10,014
|
|
Purchases of bank premises and equipment
|
|
(56,513
|
)
|
(65,165
|
)
|
Proceeds from sale of bank premises and equipment
|
|
7,917
|
|
9,497
|
|
Adjustment to goodwill related to prior acquisition (Note 10)
|
|
5,885
|
|
|
|
Cash paid in purchase transaction
|
|
(23,470
|
)
|
|
|
Cash acquired in purchase transaction
|
|
30,772
|
|
|
|
|
|
|
|
|
|
Net cash provided by (used in) investing activities
|
|
353,786
|
|
(489,480
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
6
INTERNATIONAL BANCSHARES CORPORATION AND SUBSIDIARIES
Consolidated
Statements of Cash Flows, continued (Unaudited)
(Dollars
in Thousands)
|
|
Nine Months Ended
September 30,
|
|
|
|
2007
|
|
2006
|
|
|
|
|
|
|
|
Financing activities:
|
|
|
|
|
|
|
|
|
|
|
|
Net (decrease) increase in non-interest bearing demand deposits
|
|
$
|
(62,287
|
)
|
$
|
33,262
|
|
Net increase (decrease) in savings and interest bearing demand
deposits
|
|
55,041
|
|
(93,929
|
)
|
Net (decrease) increase in time deposits
|
|
(79,068
|
)
|
119,403
|
|
Net increase (decrease) in securities sold under repurchase agreements
|
|
534,925
|
|
(139,848
|
)
|
Net (decrease) increase in other borrowed funds
|
|
(954,490
|
)
|
296,797
|
|
Proceeds of issuance of long-term debt
|
|
53,609
|
|
41,238
|
|
Principal payments of long term-debt
|
|
(53,610
|
)
|
(67,269
|
)
|
Purchase of treasury stock
|
|
(28,393
|
)
|
(24,335
|
)
|
Proceeds from stock transactions
|
|
5,640
|
|
1,488
|
|
Payment of cash dividends
|
|
(22,086
|
)
|
(22,113
|
)
|
Payment of cash dividends in lieu of fractional shares
|
|
(27
|
)
|
|
|
|
|
|
|
|
|
Net cash (used in) provided by financing activities
|
|
(550,746
|
)
|
144,694
|
|
|
|
|
|
|
|
Decrease in cash and cash equivalents
|
|
(46,088
|
)
|
(196,333
|
)
|
|
|
|
|
|
|
Cash and cash equivalents at beginning of period
|
|
297,207
|
|
458,118
|
|
|
|
|
|
|
|
Cash and cash equivalents at end of period
|
|
$
|
251,119
|
|
$
|
261,785
|
|
|
|
|
|
|
|
Supplemental cash flow information:
|
|
|
|
|
|
Interest paid
|
|
$
|
250,212
|
|
$
|
226,301
|
|
Income taxes paid
|
|
51,508
|
|
38,231
|
|
Adjustment to goodwill arising from prior acquisition (Note 10)
|
|
2,076
|
|
7,016
|
|
See accompanying notes to
consolidated financial statements.
7
INTERNATIONAL
BANCSHARES CORPORATION AND SUBSIDIARIES
Notes
to Consolidated Financial Statements
(Unaudited)
Note 1 - Basis of Presentation
The accounting and reporting policies of International
Bancshares Corporation (Corporation) and Subsidiaries (the Corporation and
Subsidiaries collectively referred to herein as the Company) conform to
accounting principles generally accepted in the United States of America and to
general practices within the banking industry.
The consolidated financial statements include the accounts of the
Corporation and its wholly-owned subsidiaries, International Bank of Commerce,
Laredo (IBC), Commerce Bank, International Bank of Commerce, Zapata,
International Bank of Commerce, Brownsville and the Corporations wholly-owned
non-bank subsidiaries, IBC Subsidiary Corporation, IBC Life Insurance Company,
IBC Trading Company, and IBC Capital Corporation, as well as the GulfStar Group
in which the Company owns a controlling interest. All significant inter-company balances and
transactions have been eliminated in consolidation. The 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. It is
suggested that these financial statements be read in conjunction with the
financial statements and the notes thereto in the Companys latest Annual
Report on Form 10-K. The consolidated
statement of condition at December 31, 2006 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 for complete financial statements. Certain reclassifications have been made to
make prior periods comparable.
The Company operates as one
segment. The operating information used
by the Companys chief executive officer for purposes of assessing performance
and making operating decisions about the Company is the consolidated statements
presented in this report. The Company
has four active operating subsidiaries, namely, the bank subsidiaries,
otherwise known as International Bank of Commerce, Laredo, Commerce Bank,
International Bank of Commerce, Zapata and International Bank of Commerce,
Brownsville. The Company applies the
provisions of SFAS No. 131, Disclosures about Segments of an Enterprise and
Related Information, in determining its reportable segments and related
disclosures. None of the Companys other
subsidiaries meets the 10% threshold for disclosure under SFAS No. 131.
All per share data
presented has been restated to reflect the stock splits effected through stock
dividends, Note 9.
On
January 1, 2007, the Company changed its accounting policy related to
accounting for contingencies in connection with the adoption of Financial
Accounting Standards Board (FASB) Interpretation No. 48, Accounting for
Uncertainty in Income Taxes, an Interpretation of FASB Statement 109. See Note 10 Commitments, Contingent
Liabilities and Other Tax Matters.
Note 2 Acquisition
On March 16, 2007, the Company
completed its acquisition of Southwest First Community, Inc. (Southwest
Community), a bank holding company with approximately $133 million in assets
that owned State Bank & Trust in Beeville, Texas and Commercial State Bank
in Sinton, Texas. The transaction was
pursuant to the Agreement and Plan of Merger dated December 1, 2006 (the Merger
Agreement). The Company paid
consideration totaling $23.5 million in cash.
8
Note 3 Loans
A summary of net loans, by loan
type at September 30, 2007 and December 31, 2006 is as follows:
|
|
September 30,
|
|
December 31,
|
|
|
|
2007
|
|
2006
|
|
|
|
(Dollars
in thousands)
|
|
Commercial, financial and agricultural
|
|
$
|
2,341,448
|
|
$
|
2,337,573
|
|
Real estate mortgage
|
|
742,205
|
|
785,401
|
|
Real estate construction
|
|
1,691,382
|
|
1,404,186
|
|
Consumer
|
|
182,622
|
|
198,580
|
|
Foreign
|
|
277,648
|
|
309,144
|
|
|
|
|
|
|
|
Total loans
|
|
5,235,305
|
|
5,034,884
|
|
|
|
|
|
|
|
Unearned discount
|
|
(2
|
)
|
(74
|
)
|
|
|
|
|
|
|
Loans, net of unearned discount
|
|
$
|
5,235,303
|
|
$
|
5,034,810
|
|
Note 4 - Allowance for Possible Loan
Losses
A
summary of the transactions in the allowance for possible loan losses is as
follows:
|
|
September 30,
|
|
September 30,
|
|
|
|
2007
|
|
2006
|
|
|
|
(Dollars
in Thousands)
|
|
Balance at December 31,
|
|
$
|
64,537
|
|
$
|
77,796
|
|
|
|
|
|
|
|
Losses charged to allowance
|
|
(5,297
|
)
|
(16,387
|
)
|
Recoveries credited to allowance
|
|
4,138
|
|
891
|
|
Net losses charged to allowance
|
|
(1,159
|
)
|
(15,496
|
)
|
|
|
|
|
|
|
Provision (credit) charged to operations
|
|
(1,357
|
)
|
2,633
|
|
Allowance acquired in acquisition (Note 2)
|
|
1,054
|
|
|
|
|
|
|
|
|
|
Balance at September 30,
|
|
$
|
63,075
|
|
$
|
64,933
|
|
Impaired loans are those loans
where it is probable that all amounts due according to contractual terms of the
loan agreement will not be collected.
The Company has identified these loans through its normal loan review
procedures. Impaired loans are
measured based on (1) the present value of expected future cash flows
discounted at the loans effective interest rate; (2) the loans observable
market price; or (3) the fair value of the collateral if the loan is collateral
dependent. Substantially all of the
Companys impaired loans are measured at the fair value of the collateral. In
limited cases the Company may use other methods to determine the level of
impairment of a loan if such loan is not collateral dependent.
9
The following table details key
information regarding the Companys impaired loans:
|
|
September 30,
|
|
December 31,
|
|
|
|
2007
|
|
2006
|
|
|
|
(Dollars in Thousands)
|
|
Balance of impaired loans where there is a
related allowance for loan loss
|
|
$
|
11,142
|
|
$
|
22,909
|
|
Balance of impaired loans where there is no
related allowance for loan loss
|
|
|
|
|
|
|
|
|
|
|
|
Total impaired loans
|
|
$
|
11,142
|
|
$
|
22,909
|
|
|
|
|
|
|
|
Allowance allocated to impaired loans
|
|
$
|
2,205
|
|
$
|
7,171
|
|
The impaired loans included in
the table above were primarily comprised of collateral dependent commercial
loans, which have not been fully charged off.
The average recorded investment in impaired loans was $18,413,000 and
$25,684,000 for the nine months and year ended September 30, 2007 and December
31, 2006, respectively. The interest
recognized on impaired loans was not significant.
Management of the Company
recognizes the risks associated with these impaired loans. However, managements decision to place loans
in this category does not necessarily mean that losses will occur.
The bank
subsidiaries 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 borrowers financial condition and general
economic conditions in the borrowers industry. Generally, unsecured consumer
loans are charged-off when 90 days past due.
While
management of the Company considers that it is generally able to identify
borrowers with financial problems reasonably early and to monitor credit
extended to such borrowers carefully, there is no precise method of predicting
loan losses. The determination that a
loan is likely to be uncollectible and that it should be wholly or partially
charged-off as a loss is an exercise of judgment. Similarly, the determination of the adequacy
of the allowance for possible loan losses can be made only on a subjective basis. It is the judgment of the Companys
management that the allowance for possible loan losses at September 30, 2007
was adequate to absorb probable losses from loans in the portfolio at that
date.
Note 5 Stock Options
On April 1, 2005, the Board of Directors adopted the
2005 International Bancshares Corporation Stock Option Plan (the 2005 Plan). The 2005 Plan replaced the 1996 International
Bancshares Corporation Key Contributor Stock Option Plan (the 1996 Plan). Under the 2005 Plan, both qualified incentive
stock options (ISOs) and non-qualified stock options (NQSOs) may be
granted. Options granted may be
exercisable for a period of up to 10 years from the date of grant, excluding
ISOs granted to 10% shareholders, which may be exercisable for a period of up
to only five years. As of September 30,
2007, 36,247 shares were available for future grants under the 2005 Plan.
Prior to September
30, 2007, the Company had granted non-qualified stock options exercisable for a
total of 154,420 shares, adjusted for stock dividends, of Common Stock to
certain employees of the GulfStar Group.
All options were exercised in 2007.
The grants were not made under either the 1996 Plan or the 2005
Plan. The options are exercisable for a
period of seven years and vested in equal increments over a period of five
years. All options granted to the
GulfStar Group employees had an option price of not less than the fair market
value of the Common Stock on the date of grant.
On January 1,
2006, the Company adopted the provisions of Statement of Financial Accounting
Standards No. 123R, (SFAS No. 123R), Share-Based Payment, (Revised 2004). SFAS No. 123R sets accounting requirements
for share-based compensation to employees and non-employee directors, including
employee stock purchase plans, and requires companies to recognize in the
statement of operations the grant-date fair value of stock options and other
equity-based compensation.
10
A summary of option
activity under the stock option plans for the nine months ended September 30,
2007 is as follows:
|
|
Number of options
|
|
Weighted average exercise price
|
|
Weighted average remaining contractual term
(years)
|
|
Aggregate intrinsic
value ($)
|
|
|
|
|
|
|
|
|
|
|
|
Options outstanding at December 31, 2006
|
|
1,515,965
|
|
$
|
15.65
|
|
|
|
|
|
Plus: Options granted
|
|
152,275
|
|
23.83
|
|
|
|
|
|
Less:
|
|
|
|
|
|
|
|
|
|
Options exercised
|
|
591,199
|
|
9.33
|
|
|
|
|
|
Options expired
|
|
|
|
|
|
|
|
|
|
Options forfeited
|
|
138,182
|
|
15.59
|
|
|
|
|
|
Options outstanding at September 30, 2007
|
|
938,859
|
|
$
|
20.98
|
|
4.74
|
|
$
|
2,910,000
|
|
|
|
|
|
|
|
|
|
|
|
Options fully vested and exercisable at September 30, 2007
|
|
426,562
|
|
$
|
15.41
|
|
2.69
|
|
$
|
2,864,000
|
|
|
|
|
|
|
|
|
|
|
|
Stock-based
compensation expense included in the consolidated statements of income for the
three and nine months ended September 30, 2007 was approximately $211,000 and
$581,000, respectively. As of September
30, 2007 there was approximately $1,945,000, of total unrecognized stock-based
compensation cost related to non-vested options granted under the Company plans
that will be recognized over a weighted average period of 1.8 years.
Note 6 - Investment Securities
The Company classifies debt and equity securities into
one of three categories: held-to
maturity, available-for-sale, or trading.
Such securities are reassessed for appropriate classification at each
reporting date. Securities classified as
held-to-maturity are carried at amortized cost for financial statement
reporting, while securities classified as available-for-sale and trading
are carried at their fair value.
Unrealized holding gains and losses are included in net income for those
securities classified as trading, while unrealized holding gains and losses
related to those securities classified as available-for-sale are excluded
from net income and reported net of tax as other comprehensive income (loss)
and accumulated other comprehensive income (loss) until realized, or in the
case of losses, when deemed other than temporary.
In the first quarter 2007, the Company wrote down
approximately $732.0 million of investment securities to fair value, which
resulted in an impairment charge of approximately $17.0 million. The write down was a result of the Companys strategic
identification of certain investment securities that were sold in the second
quarter of 2007 with the proceeds used to reduce Federal Home Loan Bank (FHLB)
borrowings. The investments sold were
certain hybrid mortgage backed securities with a coupon re-set date that
exceeded 30 months and a weighted average yield to coupon re-set that was
approximately 100 basis points less than the FHLB certificate of indebtedness
short term-rate. The sale of the securities
facilitated a repositioning of the balance sheet to a more neutral position in
terms of interest rate risk and improved the Companys operating ratios.
In the third quarter 2007, the Company sold approximately $96.0 million of investment securities, which resulted in a loss of approximately $1 million. The sale of the securities was a result of the Companys strategic identification of certain investment securities, with the proceeds used to reduce FHLB borrowings. The investments sold were certain hybrid mortgage backed securities with a coupon re-set date that was 15 30 months and a weighted average yield coupon re-set that was approximately 60 basis points below the FHLB short-term advance rate. The sale of the securities will continue the Companys move to re-position the balance sheet to a more neutral position in terms of interest rate risk and will also improve operating ratios in the short term.
11
A summary of the
investment securities held for investment and securities available for sale as
reflected on the books of the Company is as follows:
|
|
September 30,
|
|
December 31,
|
|
|
|
2007
|
|
2006
|
|
|
|
(Dollars
in Thousands)
|
|
U.S. Treasury securities
|
|
|
|
|
|
Available-for-sale
|
|
$
|
5,323
|
|
$
|
1,268
|
|
Mortgage-backed securities
|
|
|
|
|
|
Available-for-sale
|
|
3,923,295
|
|
4,376,284
|
|
States and political subdivisions
|
|
|
|
|
|
Available-for-sale
|
|
84,497
|
|
95,897
|
|
Other
|
|
|
|
|
|
Held-to-maturity
|
|
2,300
|
|
2,375
|
|
Available-for-sale
|
|
15,321
|
|
14,629
|
|
|
|
|
|
|
|
Total investment securities
|
|
$
|
4,030,736
|
|
$
|
4,490,453
|
|
Note 7 Other Borrowed Funds
Other
borrowed funds include Federal Home Loan Bank borrowings, which are short or
long term, variable or fixed rate borrowings issued by the Federal Home Loan
Bank of Dallas at the market price offered at the time of funding. These borrowings are secured by
mortgage-backed investment securities and a portion of the Companys loan
portfolio. At September 30, 2007, other
borrowed funds totaled $1,141,333,000, a decrease of 45.5% from $2,095,576,000
at December 31, 2006. The decrease is
attributable to the pay-down of borrowings due to the Companys sale of certain
identified investment securities in the second and third quarters of 2007.
Note 8 Junior Subordinated Interest Deferrable
Debentures
The Company has formed twelve statutory business
trusts under the laws of the State of Delaware, for the purpose of issuing
trust preferred securities. As part of
the Local Financial Corporation (LFIN) acquisition, the Company acquired
three additional statutory business trusts previously formed by LFIN for the
purpose of issuing trust preferred securities.
The twelve statutory business trusts formed by the Company and the three
business trusts acquired in the LFIN transaction (the Trusts) have each
issued Capital and Common Securities and invested the proceeds thereof in an
equivalent amount of junior subordinated debentures (the Debentures) issued
by the Company or LFIN, as appropriate.
The Company has succeeded to the obligations of LFIN under the LFIN
Debentures, which have an outstanding principal balance of $10,310,000. The Debentures will mature on various dates;
however the Debentures may be redeemed at specified prepayment prices, in whole
or in part after the optional redemption dates specified in the respective
indentures or in whole upon the occurrence of any one of certain legal,
regulatory or tax events specified in respective indentures. As of November 7, 2007, the Debentures issued
by four of the trusts formed by the Company and the Debentures issued by all
three of the trusts formed by LFIN have been redeemed by the Company. As of September 30, 2007, the principal
amount of debentures outstanding totaled $211,199,000.
On April 22, 2007, pursuant to the Indenture dated as
of April 10, 2002, between the Company and Wilmington Trust Company, as
Trustee, the Company redeemed all of its Floating Rate Junior Subordinated Debt
Securities (the Debt Securities), issued to International Bancshares Capital
Trust IV (Trust IV) at a redemption price equal to approximately $22,681,000,
which includes accrued interest to, but not including, the redemption date.
In accordance with the Amended and Restated
Declaration of Trust dated as of April 10, 2002 between the Company and
Wilmington Trust Company, as Institutional Trustee, the proceeds from the
redemption of the Debt Securities were used to simultaneously redeem an equal
amount of Trust IV Floating Rate Capital Securities and Floating Rate Common
Securities issued by Trust IV.
12
On April 13, 2007, the Company formed International
Bancshares Corporation Trust XI (Trust XI), its eleventh statutory business
trust formed under the laws of the State of Delaware, for the purpose of
issuing trust preferred securities. On
April 19, 2007, Trust XI issued $32,000,000 of Capital Securities. The Capital Securities accrue interest for
the first five years at a fixed rate of 6.82% and subsequently at a floating
rate of 1.62% over the three month LIBOR, and interest is payable quarterly
beginning July 1, 2007. The Trust XI
Capital Securities will mature on July 1, 2037, however, the Capital Securities
may be redeemed at specified prepayment prices (a) in whole or in part on any
interest payment date on or after July 1, 2012, or (b) in whole or in part
within 90 days upon the occurrence of certain legal, regulatory, or tax
events. The Capital Securities are
subordinated and junior in right of payment to all present and future senior
indebtedness of the Company. The Company
has fully and unconditionally guaranteed the obligation of Trust XI with
respect to the Capital Securities. The
Company has the right, unless an Event of Default has occurred and is
continuing, to defer payment of interest on the Capital Securities for up to
twenty consecutive quarterly periods.
The redemption prior to maturity of any of the Capital Securities may
require the prior approval of the Federal Reserve and/or other regulatory agencies.
On June 11, 2007, the Company formed International
Bancshares Corporation Trust XII (Trust XII), its twelfth statutory business
trust formed under the laws of the State of Delaware, for the purpose of
issuing trust preferred securities. On
June 26, 2007, Trust XII issued $20,000,000 of Capital Securities. The Capital Securities accrue interest for
the first five years at a fixed rate of 6.851% and subsequently at a floating
rate of 1.45% over the three month LIBOR, and interest is payable quarterly
beginning September 1, 2007. The Trust
XII Capital Securities will mature on September 1, 2037; however, the Capital Securities may be
redeemed at specified prepayment prices (a) in whole or in part on any interest
payment date on or after September 1, 2012, or (b) in whole or in part within
90 days upon the occurrence of certain legal, regulatory, or tax events. The Capital Securities are subordinated and
junior in right of payment to all present and future senior indebtedness of the
Company. The Company has fully and
unconditionally guaranteed the obligation of Trust XII with respect to the
Capital Securities. The Company has the
right, unless an Event of Default has occurred and is continuing, to defer
payment of interest on the Capital Securities for up to twenty consecutive
quarterly periods. The redemption prior
to maturity of any of the Capital Securities may require the prior approval of
the Federal Reserve and/or other regulatory agencies.
On July 7, 2007, pursuant to the Indenture dated as of
July 11, 2002, between the Company and Wilmington Trust Company, as Trustee,
the Company redeemed all of its Floating Rate Junior Subordinated Debt
Securities (the Debt Securities), issued to International Bancshares Capital
Trust V (Trust V) at a redemption price equal to approximately $20,619,000,
which includes accrued interest to, but not including, the redemption date.
In accordance with the Amended and Restated
Declaration of Trust dated as of July 11, 2002 between the Company and
Wilmington Trust Company, as Institutional Trustee, the proceeds from the
redemption of the Debt Securities were used to simultaneously redeem an equal
amount of Trust V Floating Rate Capital Securities and Floating Rate Common
Securities issued by Trust V.
On July 30, 2007, pursuant to the Indenture dated as
of July 30, 2002, between Local Financial Corporation and The Bank of New York,
as Trustee, the Company, as successor issuer, redeemed all of its Floating Rate
Junior Subordinated Debt Securities (the Debt Securities), issued to Local
Financial Capital Trust II (LFIN Trust II) at a redemption price equal to
approximately $10,310,000, which includes accrued interest to, but not
including, the redemption date.
In accordance with the Amended and Restated
Declaration of Trust dated as of July 30, 2002 between the Local Financial
Corporation and The Bank of New York, as Institutional Trustee, the proceeds
from the redemption of the Debt Securities were used to simultaneously redeem
an equal amount of LFIN Trust II Floating Rate Capital Securities and Floating
Rate Common Securities issued by LFIN Trust II.
The Debentures are
subordinated and junior in right of payment to all present and future senior
indebtedness (as defined in the respective indentures) of the Company, and are
pari passu
with one another.
The interest rate payable on, and the payment terms of the Debentures
are the same as the distribution rate and payment terms of the respective
issues of Capital and Common Securities issued by the Trusts. The Company has fully and unconditionally
guaranteed the obligations of each of the Trusts with respect to the Capital
and Common Securities. The Company has
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 ten consecutive semi-annual periods on Trusts I and IV and for up to
twenty consecutive quarterly periods on Trusts VI, VII, VIII, IX, X, XI and XII
and LFIN Trust III. 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.
13
For financial
reporting purposes, the Trusts are treated as investments of the Company and
not consolidated in the consolidated financial statements. Although the Capital Securities issued by
each of the Trusts are not included as a component of shareholders equity on
the consolidated statement of condition, the Capital Securities are treated as
capital for regulatory purposes.
Specifically, under applicable regulatory guidelines, the Capital
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. For September 30, 2007, the
total $211,199,000, of the Capital Securities outstanding qualified as Tier 1
capital.
In March 2005, the Federal Reserve Board issued a
final rule that would continue to allow the inclusion of trust preferred
securities in Tier 1 capital, but with stricter quantitative limits. Under the final rule, after a transition
period ending March 31, 2009, the aggregate amount of trust preferred
securities and certain other capital elements would be limited to 25% of Tier 1
capital elements, net of goodwill, less any associated deferred tax liability. The amount of trust preferred securities and
certain other elements in excess of the limit could be included in Tier 2
capital, subject to restrictions. Bank
holding companies with significant international operations will be expected to
limit trust preferred securities to 15% of Tier 1 capital elements, net of
goodwill; however, they may include qualifying mandatory convertible preferred
securities up to the 25% limit. The
Company believes that substantially all of the current trust preferred
securities will be included in Tier 1 capital after the five-year transition
period ending March 31, 2009.
The following table illustrates key information about
each of the Capital and Common Securities and their interest rate at September
30, 2007:
|
|
Junior Subordinated Deferrable Interest Debentures
|
|
Repricing
Frequency
|
|
Interest Rate
|
|
Interest Rate
Index
|
|
Maturity Date
|
|
Optional Redemption Date
|
|
|
|
(in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
Trust I
|
|
$
|
10,278
|
|
Fixed
|
|
10.18
|
%
|
Fixed
|
|
June 2031
|
|
June 2011
|
|
Trust VI
|
|
$
|
25,774
|
|
Quarterly
|
|
9.01
|
%
|
LIBOR + 3.45
|
|
November 2032
|
|
November 2007
|
|
Trust VII
|
|
$
|
10,310
|
|
Quarterly
|
|
8.61
|
%
|
LIBOR + 3.25
|
|
April 2033
|
|
April 2008
|
|
Trust VIII
|
|
$
|
25,659
|
|
Quarterly
|
|
8.41
|
%
|
LIBOR + 3.05
|
|
October 2033
|
|
October 2008
|
|
Trust IX
|
|
$
|
41,238
|
|
Fixed
|
|
7.10
|
%
|
Fixed
|
|
October 2036
|
|
October 2011
|
|
Trust X
|
|
$
|
34,021
|
|
Fixed
|
|
6.66
|
%
|
Fixed
|
|
February 2037
|
|
February 2012
|
|
Trust XI
|
|
$
|
32,990
|
|
Fixed
|
|
6.82
|
%
|
Fixed
|
|
July 2037
|
|
July 2012
|
|
Trust XII
|
|
$
|
20,619
|
|
Fixed
|
|
6.85
|
%
|
Fixed
|
|
September 2037
|
|
September 2012
|
|
LFIN Trust III
|
|
$
|
10,310
|
|
Quarterly
|
|
9.01
|
%
|
LIBOR + 3.45
|
|
November 2032
|
|
November 2007
|
|
|
|
$
|
211,199
|
|
|
|
|
|
|
|
|
|
|
|
(1) LFIN Trust III was redeemed in November
2007, pursuant to the Indenture
(2) Trust IX, X, XI and XII accrue interest at
a fixed rate for the first five years, then floating at LIBOR + 1.62%, 1.65%,
1.62% and 1.45% thereafter, respectively.
14
Note 9 Common Stock and Dividends
All per share data presented has been restated to
reflect the stock split effected through a stock dividend, which became
effective May 21, 2007 and was paid on June 8, 2007. Cash dividends of $.32 and $.33 per share
were paid on May 1, 2007 and on November 1, 2007 to all holders of record on
April 16, 2007 and October 15, 2007, respectively.
The Company expanded its
formal stock repurchase program on May 3, 2007.
Under the expanded stock repurchase program, the Company is authorized
to repurchase up to $225,000,000 of its common stock through December
2008. Stock repurchases may be made from
time to time, on the open market or through private transactions. Shares repurchased in this program will be
held in treasury for reissue for various corporate purposes, including employee
stock option plans. As of November 1,
2007, a total of 6,091,735 shares had been repurchased under this program at a
cost of $210,696,000. Stock repurchases
are reviewed quarterly at the Companys Board of Directors meetings and the
Board of Directors has stated that the aggregate investment in treasury stock
should not exceed $245,973,000. In the
past, the Board of Directors has increased previous caps on treasury stock once
they were met, but there are no assurances that an increase of the $245,973,000
cap will occur in the future. As of
November 1, 2007, the Company has approximately $231,669,000 invested in
treasury shares, which amount has been accumulated since the inception of the
Company.
Note 10 - Commitments and Contingent
Liabilities and Other Tax Matters
The Company is involved in
various legal proceedings that are in various stages of litigation. Some of these actions allege lender
liability claims on a variety of theories and claim actual and punitive
damages. The Company has determined,
based on discussions with its counsel that any loss in such actions,
individually or in the aggregate, is remote or the damages sought, even if fully
recovered, would not be considered material to the consolidated financial
position or results of operations of the Company. However, many of these matters are in various
stages of proceedings and further developments could cause management to revise
its assessment of these matters.
The Companys lead bank subsidiary has invested in
partnerships, which have entered into several lease-financing
transactions. The lease-financing
transactions in two of the partnerships have been examined by the Internal
Revenue Service (IRS). In both
partnerships, the lead bank subsidiary was the owner of a ninety-nine percent
(99%) limited partnership interest. The
IRS has issued separate Notice of Final Partnership Administrative Adjustments
(FPAA) to the partnerships and on September 25, 2001, and January 10, 2003,
the Company filed lawsuits contesting the adjustments asserted in the FPAAs.
Prior to filing the lawsuits the Company was required
to deposit the estimated tax due of approximately $4,083,000 with respect to
the first FPAA and $7,710,606 with respect to the second FPAA with the IRS
pursuant to the Internal Revenue Code.
If it is determined that the amount of tax due, if any, related to the
lease-financing transactions is less than the amount of the deposits, the
remaining amount of the deposits would be returned to the Company.
In order to curtail the accrual of additional interest
related to the disputed tax benefits and because interest rates were
unfavorable, on March 7, 2003, the Company submitted to the IRS a total of
approximately $13.7 million, which constitutes the interest that would have
accrued based on the adjustments proposed in the FPAAs related to both of the
lease-financing transactions. If it is
determined that the amount of interest due, if any, related to the
lease-financing transactions is less than the approximate $13.7 million, the
remaining amount of the prepaid interest would be refunded to the Company, plus
interest thereon.
Beginning August 29, 2005, IBC proceeded to litigate
one of the partnership tax cases in the Federal District Court in San Antonio,
Texas. The case was tried over nine days
beginning August 29, 2005. On March 31,
2006, the trial court rendered a judgment against the Company on the first
FPAA. IBC timely filed its notice of
appeal to the Fifth Circuit Court of Appeals.
The appeal was argued on August 8, 2007 and the Trial Court decision was
affirmed on August 23, 2007. Unless
further appealed, the judgment will be come non-appealable on November 21,
2007. The other partnership tax case was
and continues to be stayed by the same Trial Court.
The Company, through December 31, 2005, had previously
expensed approximately $12.0 million in connection with the lawsuits. Because of the above-referenced trial court
judgment against the Company on the first FPAA, the uncertainty of the outcome
at the appellate level, and the similarity between the two FPAAs, the Company,
through December 31, 2006, has expensed an additional $13.7 million,
approximately. The resultant
approximately $25.7 million expensed is the total of the tax adjustments due
and the interest due on such adjustments for both FPAAs. Management is determining whether to further
appeal the judgment in the first case and will continue to evaluate the merits
of each lawsuit and make any appropriate revisions to the amounts, as deemed
necessary.
15
As part of the LFIN acquisition, two tax matters were
transferred to the Company. The first relates to deductions taken on amended
returns filed by LFIN during 2003 for the tax years ended June 30, 1999 through
December 31, 2001. The refunds requested on the amended returns amounted
to approximately $7.0 million. At December 31, 2003, LFIN had received
approximately $2.0 million of the total refund requested. Because all the
refunds are under review by the IRS, LFIN had established a reserve equal to
the $2.0 million received and did not recognize any benefit for the remaining
$5.0 million. The second tax contingency reserve of $7.0 million was resolved
with the IRS in September 2006 and as a result, the second tax contingency
reserve is no longer required. The
reserve was applied to the goodwill acquired as part of the LFIN acquisition. During the first quarter of 2007, the Company
favorably resolved the issues with the IRS on the first tax contingency for
approximately $7.0 million plus interest accrued thereon. The Company has applied the refund, including
interest accrued prior to the LFIN acquisition, to the goodwill that resulted
from the LFIN acquisition. The Company
has booked the remaining portion of the interest accrued on the tax matter
subsequent to the LFIN acquisition to earnings.
In June 2006, the Financial Accounting Standards Board
issued Financial Interpretation No. 48, (FIN 48), Accounting for Uncertainty
in Income Taxes an interpretation of FASB Statement No. 109, Accounting for
Income Taxes. FIN 48 addresses the
determination of whether tax benefits claimed or expected to be claimed on a
tax return should be recorded in the financial statements. Under FIN 48, the Company may recognize the
tax benefit from an uncertain tax position only if it is more likely than not
that the tax position will be sustained on examination by the taxing
authorities, based on the technical merits of the position. The tax benefits recognized in the financial
statements from such a position should be measured based on the largest benefit
that has a greater than fifty percent likelihood of being realized upon
ultimate settlement. FIN 48 also provides
guidance on derecognition, classification, interest and penalties on income
taxes, accounting in interim periods and requires increased disclosures.
The Company adopted the provisions of FIN 48 on
January 1, 2007. As a result of the
implementation of FIN 48, the Company recognized no change in the liability for
unrecognized tax benefits, thus, there was no change to the January 1, 2007
retained earnings balance.
Note 11 Capital Ratios
The Company had a leverage ratio of 8.09% and 7.36%, risk-weighted
Tier 1 capital ratio of 12.48% and 12.49% and risk-weighted total capital ratio
of 13.54% and 13.61% at September 30, 2007 and December 31, 2006,
respectively. The identified intangibles
and goodwill of $316,031,000 as of September 30, 2007, recorded in connection
with the acquisitions made by the Company, are deducted from the sum of core
capital elements when determining the capital ratios of the Company. The Company actively monitors the regulatory
capital ratios to ensure that the Companys bank subsidiaries are well
capitalized under the regulatory framework.
In March 2005, the Federal Reserve Board issued a
final rule that would continue to allow the inclusion of trust preferred
securities in Tier 1 capital, but with stricter quantitative limits. Under the final rule, after a five-year
transition period ending March 31, 2009, the aggregate amount of trust
preferred securities and certain other capital elements would be limited to 25%
of Tier 1 capital elements, net of goodwill, less any associated deferred tax
liability. The amount of trust preferred
securities and certain other elements in excess of the limit could be included
in Tier 2 capital, subject to restrictions.
Bank holding companies with significant international operations will be
expected to limit trust preferred securities to 15% of Tier 1 capital elements,
net of goodwill; however, they may include qualifying mandatory convertible
preferred securities up to the 25% limit.
16
Item 2 -
Managements Discussion
and Analysis of Financial Condition and Results of Operations
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 Exchange Act of 1933, as amended, and Section
21E of the Securities Exchange Act of 1934, as amended, and are subject to the
safe harbor created by these sections.
Although the Company believes 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.
Factors that could
cause actual results to differ materially from any results that are projected,
forecasted, estimated or budgeted by the Company in forward-looking statements
include, among others, the following possibilities:
|
Changes in interest rates and market prices, which
could reduce the Companys net interest margins, asset valuations and expense
expectations.
|
|
Changes in the capital markets utilized by the
Company and its subsidiaries, including changes in the interest rate
environment that may reduce margins.
|
|
Changes in state and/or federal laws and regulations
to which the Company and its subsidiaries, as well as their customers,
competitors and potential competitors, are subject, including, without
limitation, changes in the accounting, tax and regulatory treatment of trust
preferred securities, as well as changes in banking, tax, securities,
insurance and employment laws and regulations.
|
|
Changes in U.S. Mexico trade, including, without
limitation, reductions in border crossings and commerce resulting from the
Homeland Security Programs called US-VISIT, which is derived from Section
110 of the Illegal Immigration Reform and Immigrant Responsibility Act of
1996.
|
|
The loss of senior management or operating
personnel.
|
|
Increased competition from both within and outside
the banking industry.
|
|
Changes in local, national and international
economic business conditions that adversely affect the Companys customers
and their ability to transact profitable business with the Company, including
the ability of its borrowers to repay their loans according to their terms or
a change in the value of the related collateral.
|
|
The timing, impact and other uncertainties of the
Companys potential future acquisitions including the Companys ability to
identify suitable potential future acquisition candidates, the success or
failure in the integration of their operations and the Companys ability to
maintain its current branch network and to enter new markets successfully and
capitalize on growth opportunities.
|
|
Changes in the Companys ability to pay dividends on
its Common Stock.
|
|
The effects of the litigation and proceedings
pending with the Internal Revenue Service regarding the Companys lease
financing transactions.
|
|
Additions to the Companys loan loss allowance as a
result of changes in local, national or international conditions which
adversely affect the Companys customers.
|
|
Political instability in the United States and
Mexico.
|
|
Technological changes.
|
|
Acts of war or terrorism.
|
|
Natural disasters.
|
|
The effect of changes in accounting policies and
practices as may be adopted by the regulatory agencies, as well as the Public
Company Accounting Oversight Board, the Financial Accounting Standards Board
and other accounting standards setters.
|
|
|
It is not possible
to foresee or identify all such factors.
The Company makes no commitment to update any forward-looking statement,
or to disclose any facts, events or circumstances after the date hereof that
may affect the accuracy of any forward-looking statement, unless required by
law.
17
Overview
The Company, which is
headquartered in Laredo, Texas, with more than 250 facilities and more than 390
ATMs, provides banking services for commercial, consumer and international
customers of South, Central and Southeast Texas and the State of Oklahoma. The Company is one of the largest independent
commercial bank holding companies headquartered in Texas. The Company, through its bank subsidiaries,
is in the business of gathering funds from various sources and investing those
funds in order to earn a return. The
Company either directly or through a bank subsidiary owns two insurance
agencies, a broker/dealer and a majority interest in an investment banking unit
that owns a broker/dealer. The Companys
primary earnings come from the spread between the interest earned on
interest-bearing assets and the interest paid on interest-bearing
liabilities. In addition, the Company
generates income from fees on products offered to commercial, consumer and international
customers.
The Company is very active in
facilitating trade along the United States border with Mexico. The Company does a large amount of business
with customers domiciled in Mexico. Deposits
from persons and entities domiciled in Mexico comprise a large and stable
portion of the deposit base of the Companys bank subsidiaries. The Company also serves the growing Hispanic
population through the Companys facilities located throughout South, Central
and Southeast Texas and the State of Oklahoma.
Expense
control is an essential element in the Companys long-term profitability. As a result, one of the key ratios the
Company monitors is the efficiency ratio, which is a measure of non-interest
expense to net interest income plus non-interest income. The Company monitors this ratio over time to
assess the Companys efficiency relative to its peers and whether the Company
is being productive with its long term goals of providing superior returns to
the Companys shareholders. The first
quarter of 2007 was negatively affected by an impairment charge of $13.1
million, after tax, arising from a charge on certain investment
securities. This impairment charge
negatively affected the efficiency ratio but does not necessarily reflect a
long-term negative trend. The first
quarter of 2006 was negatively affected by a $8.9 million, net of tax expense
recognized as part
of the tax litigation.
Additionally, the Companys efficiency ratio has been negatively impacted
over the last few years because of the Companys aggressive branch expansion
which has added 66 branches in 2006 and the first nine months of 2007. During rapid expansion periods, the Companys
efficiency ratio will suffer but the long-term benefits of the expansion should
be realized in future periods and the benefits should positively impact the
efficiency ratio in future periods.
Results of Operations
Summary
Consolidated Statements of
Condition Information
|
|
September 30, 2007
|
|
December 31, 2006
|
|
Percent Increase (Decrease)
|
|
|
|
(Dollars in Thousands )
|
|
|
|
|
|
|
|
|
|
|
|
Assets
|
|
$
|
10,616,870
|
|
$
|
10,911,454
|
|
(2.7)
|
%
|
Net loans
|
|
5,172,228
|
|
4,970,273
|
|
4.1
|
|
Deposits
|
|
7,021,596
|
|
6,989,918
|
|
0.5
|
|
Other borrowed funds
|
|
1,141,333
|
|
2,095,576
|
|
(45.5)
|
|
Junior subordinated deferrable interest
debentures
|
|
211,199
|
|
210,908
|
|
0.1
|
|
Shareholders equity
|
|
909,720
|
|
842,056
|
|
8.0
|
|
|
|
|
|
|
|
|
|
|
|
18
Consolidated
Statements of Income Information
|
|
Three Months Ended
September 30,
|
|
Percent Increase (Decrease)
|
|
Nine Months Ended
September 30,
|
|
Percent Increase (Decrease)
|
|
|
|
2007
|
|
2006
|
|
|
|
2007
|
|
2006
|
|
|
|
|
|
(Dollars in Thousands)
|
|
|
|
(Dollars in Thousands)
|
|
|
|
Interest income
|
|
$
|
159,158
|
|
$
|
156,552
|
|
1.7
|
%
|
$
|
484,421
|
|
$
|
448,244
|
|
8.1
|
%
|
Interest expense
|
|
81,350
|
|
86,600
|
|
(6.1
|
)
|
252,276
|
|
231,930
|
|
8.8
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net interest income
|
|
77,808
|
|
69,952
|
|
11.2
|
|
232,145
|
|
216,314
|
|
7.3
|
|
Provision for (credit) possible loan losses
|
|
(3,916
|
)
|
1,954
|
|
(300.4
|
)
|
(1,357
|
)
|
2,633
|
|
(151.5
|
)
|
Non-interest income
|
|
45,617
|
|
40,058
|
|
13.9
|
|
119,125
|
|
127,697
|
|
(6.7
|
)
|
Non-interest expense
|
|
78,352
|
|
69,028
|
|
13.5
|
|
223,851
|
|
215,605
|
|
3.8
|
|
Net income
|
|
32,662
|
|
26,593
|
|
22.8
|
|
85,896
|
|
85,226
|
|
0.8
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Per
common share (adjusted for
stock dividends):
|
|
|
|
|
|
|
|
|
|
Basic
|
|
$
|
.47
|
|
$
|
.38
|
|
23.7
|
%
|
$
|
1.24
|
|
$
|
1.23
|
|
0.8
|
%
|
Diluted
|
|
.47
|
|
.38
|
|
23.7
|
|
1.23
|
|
1.21
|
|
1.7
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Income
Net income for the third quarter
of 2007 increased by 22.8% as compared to the same period in 2006. A portion of the increase is due to the
credit for possible loan losses recorded in 2007. Net income for the nine months ended
September 30, 2007 increased by 0.8% as compared to the same period in
2006.
Net income for the first nine months of 2007 was
negatively impacted by an impairment charge of $13.1 million, after tax, on
certain investments. A significant
portion of the impairment charge was the result of the Companys strategic
identification of certain investment securities that were sold in the second
quarter of 2007 with the proceeds from the sales used to reduce Federal Home
Loan Bank (FHLB) borrowings. Net
income for the same period was positively affected by the sale of the
securities, which generated gains of $1.5 million, after tax. The investments sold were certain hybrid
mortgage backed securities with a coupon re-set date that exceeded 30 months
and a weighted average yield to coupon re-set that was approximately 100 basis
points less than the FHLB certificate of indebtedness short-term rate. The sale of the securities facilitated a
re-positioning of the balance sheet to a more neutral position in terms of
interest rate risk and also improved operating ratios.
Net income for the first nine months of 2006 was
negatively impacted by a $8.9 million, net of tax, charge to operations as a
result of the loss of a IRS tax lawsuit that was litigated during the third
quarter of 2005 in the Federal District Court in San Antonio, Texas and relates
to certain leasing transactions previously discussed in Note 17 of the Notes to
Consolidated Financial Statements set forth in the Companys 2006 Annual
Report. Because of the trial court
judgment, uncertainty of the outcome at the appellate level and the similarity
between the litigated lawsuit and one that is pending, the Company took the
$8.9 million charge, net of tax.
19
Net Interest Income
|
|
Three Months Ended
September 30,
|
|
Percent (Decrease)
Increase
|
|
Nine Months Ended
September 30,
|
|
Percent Increase (Decrease)
|
|
|
|
2007
|
|
2006
|
|
|
|
2007
|
|
2006
|
|
|
|
|
|
(in
Thousands)
|
|
|
|
(in
Thousands)
|
|
|
|
Interest income:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loans, including fees
|
|
$
|
112,214
|
|
$
|
104,837
|
|
7.0
|
%
|
$
|
334,193
|
|
$
|
292,441
|
|
14.3
|
%
|
Federal funds sold
|
|
700
|
|
748
|
|
(6.4
|
)
|
2,217
|
|
2,942
|
|
(24.6
|
)
|
Investment securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Taxable
|
|
44,862
|
|
49,728
|
|
(9.8
|
)
|
142,300
|
|
149,094
|
|
(4.6
|
)
|
Tax-exempt
|
|
1,046
|
|
1,136
|
|
(7.9
|
)
|
3,255
|
|
3,452
|
|
(5.7
|
)
|
Other interest income
|
|
336
|
|
103
|
|
226.2
|
|
2,456
|
|
315
|
|
679.7
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total interest income
|
|
159,158
|
|
156,552
|
|
1.7
|
|
484,421
|
|
448,244
|
|
8.1
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest expense:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Savings deposits
|
|
14,233
|
|
9,743
|
|
46.1
|
|
41,024
|
|
28,786
|
|
42.5
|
|
Time deposits
|
|
36,297
|
|
32,759
|
|
10.8
|
|
107,570
|
|
88,379
|
|
21.7
|
|
Securities sold under repurchase agreements
|
|
11,718
|
|
7,319
|
|
60.1
|
|
30,253
|
|
22,867
|
|
32.3
|
|
Other borrowings
|
|
14,821
|
|
29,423
|
|
(49.6
|
)
|
60,203
|
|
74,157
|
|
(18.8
|
)
|
Junior subordinated interest deferrable debentures
|
|
4,281
|
|
7,356
|
|
(41.8
|
)
|
13,226
|
|
17,741
|
|
(25.4
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total interest expense
|
|
81,350
|
|
86,600
|
|
(6.1
|
)
|
252,276
|
|
231,930
|
|
8.8
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net interest income
|
|
$
|
77,808
|
|
$
|
69,952
|
|
11.2
|
%
|
$
|
232,145
|
|
$
|
216,314
|
|
7.3
|
%
|
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. Net interest income is the Companys largest
source of revenue. Net interest income
is affected by both changes in the level of interest rates and changes in the
amount and composition of interest earning assets and interest bearing
liabilities.
As part of its strategy to
manage interest rate risk, the Company strives 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. Management can quickly change the
Companys interest rate position at any given point in time as market
conditions dictate. Additionally,
interest rate changes do not affect all categories of assets and liabilities
equally or at the same time. Analytical
techniques employed by the Company to supplement gap analysis include
simulation analysis to quantify interest rate risk exposure. The gap analysis prepared by management is
reviewed by the Investment Committee of the Company twice a year (see table on
page 25 for the September 30, 2007 gap analysis). Management currently believes that the
Company is properly positioned for interest rate changes; however if management
determines at any time that the Company is not properly positioned, it will
strive to adjust the interest rate sensitive assets and liabilities in order to
manage the effect of interest rate changes.
20
Non-Interest
Income
|
|
Three Months Ended
September 30,
|
|
Percent Increase (Decrease)
|
|
Nine Months Ended
September 30,
|
|
Percent Increase (Decrease)
|
|
|
|
2007
|
|
2006
|
|
|
|
2007
|
|
2006
|
|
|
|
|
|
(in Thousands)
|
|
|
|
(in Thousands)
|
|
|
|
Service charges on deposit accounts
|
|
$
|
23,318
|
|
$
|
21,324
|
|
9.4
|
%
|
$
|
64,602
|
|
$
|
63,839
|
|
1.2
|
%
|
Other service charges, commissions and fees
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Banking
|
|
8,800
|
|
7,451
|
|
18.1
|
|
25,761
|
|
21,680
|
|
18.8
|
|
Non-banking
|
|
5,061
|
|
6,000
|
|
(15.7
|
)
|
13,892
|
|
14,011
|
|
(0.8
|
)
|
Investment securities transactions, net
|
|
(1,031
|
)
|
(1,353
|
)
|
(23.8
|
)
|
(15,941
|
)
|
(943
|
)
|
1,590.5
|
|
Other investments, net
|
|
4,226
|
|
3,389
|
|
24.7
|
|
14,794
|
|
15,346
|
|
(3.6
|
)
|
Other income
|
|
5,243
|
|
3,247
|
|
61.5
|
|
16,017
|
|
13,764
|
|
16.4
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total non-interest income
|
|
$
|
45,617
|
|
$
|
40,058
|
|
13.9
|
%
|
$
|
119,125
|
|
$
|
127,697
|
|
(6.7)
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The decrease in investment
securities transactions for the nine months ended September 30, 2007 can be
attributed to a $17.0 million impairment charge recorded in connection with
certain investment securities identified for sale in the first quarter 2007,
offset by gains of $2.3 million in the second quarter 2007, when the securities
were sold. Additionally, a loss of $1.0
million was recorded on sales of securities in the third quarter of 2007.
The impairment charge in the first quarter is a result
of the Companys strategic identification of certain investment securities sold
in the second quarter 2007 with the proceeds from the sales used to reduce
Federal Home Loan Bank (FHLB) borrowings.
The investments sold were certain hybrid mortgage backed securities with
a coupon re-set date that exceeded 30 months and a weighted average yield to
coupon re-set that was approximately 100 basis points less than the FHLB
certificate of indebtedness short-term rate.
The sale of the securities facilitated a re-positioning of the balance
sheet to a more neutral position in terms of interest rate risk and improved
the Companys operating ratios. As a
result of this decision, the Company marked the securities to market.
The increase in banking service charges,
commissions and fees can be attributed to surcharge and interchange income for
use of automated teller machines (ATM) and increased debit card usage by
customers.
Non-Interest Expense
|
|
Three Months Ended
September 30,
|
|
Percent Increase (Decrease)
|
|
Nine Months Ended
September 30,
|
|
Percent Increase (Decrease)
|
|
|
|
2007
|
|
2006
|
|
|
|
2007
|
|
2006
|
|
|
|
|
|
(in Thousands)
|
|
|
|
(in Thousands)
|
|
|
|
Employee compensation and benefits
|
|
$
|
34,645
|
|
$
|
31,418
|
|
10.3
|
%
|
$
|
97,800
|
|
$
|
91,042
|
|
7.4
|
%
|
Occupancy
|
|
8,172
|
|
6,919
|
|
18.1
|
|
23,515
|
|
19,667
|
|
19.6
|
|
Depreciation of bank premises and equipment
|
|
8,178
|
|
7,201
|
|
13.6
|
|
23,547
|
|
21,006
|
|
12.1
|
|
Professional fees
|
|
3,014
|
|
2,819
|
|
6.9
|
|
8,483
|
|
8,289
|
|
2.3
|
|
Stationery and supplies
|
|
1,466
|
|
1,568
|
|
(6.5
|
)
|
4,437
|
|
4,469
|
|
(0.7
|
)
|
Amortization of identified intangible assets
|
|
1,332
|
|
1,217
|
|
9.4
|
|
3,861
|
|
3,650
|
|
5.8
|
|
Advertising
|
|
3,391
|
|
2,891
|
|
17.3
|
|
9,811
|
|
8,935
|
|
9.8
|
|
Other
|
|
18,154
|
|
14,995
|
|
21.1
|
|
52,397
|
|
58,547
|
|
(10.5
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total non-interest expense
|
|
$
|
78,352
|
|
$
|
69,028
|
|
13.5
|
%
|
$
|
223,851
|
|
$
|
215,605
|
|
3.8
|
%
|
21
The increase in employee
compensation and benefits for the three and nine months ended September 30,
2007 can be attributed to increased commissions paid on increased fee income by
its investment banking group and an increase in total employees as the result
of the bank acquisitions and de novo branching activity at the bank
subsidiaries. Other expense for the nine
months ended September 30, 2006 reflects $13,640,000 paid to the IRS in
connection with the tax lawsuits (See Note 10 to the consolidated financial
statements). Non-interest expense was
also affected by the aggressive de novo branching activity that has added 32
new branches in 2006 and 34 branches in 2007, including three acquired in the
Southwest First Community acquisition.
Financial Condition
Allowance for Possible Loan Losses
The allowance for
possible loan losses decreased 2.3% to $63,075,000 at September 30, 2007 from
$64,537,000 at December 31, 2006. The
provision for possible loan losses charged to expense decreased 151.5% to
$(1,357,000) for the nine months ended September 30, 2007 from $2,633,000 for
the same period in 2006. The decrease
can be attributed to the recovery of a loan that was charged off in prior years
and was acquired in the LFIN acquisition.
The allowance for possible loan losses was 1.2% of total loans, net of
unearned income at September 30, 2007 and at December 31, 2006,
respectively. The Company is not
involved in sub-prime mortgage lending and the allowance for possible loan
losses does not reflect any reserve for such lending.
Investment Securities
Investment
securities decreased 10.2% to $4,030,736,000 at September 30, 2007, from
$4,490,453,000 at December 31, 2006. The
Company recorded an impairment charge of $17.0 million in the first quarter
2007 related to certain identified investment securities. The impairment charge is a result of the
Companys strategic identification of certain investment securities that were
sold in the second quarter 2007 with the proceeds from the sales used to reduce
FHLB borrowings. The investments sold
were certain hybrid mortgage backed securities with a coupon re-set date that
exceeded 30 months and a weighted average yield to coupon re-set that was
approximately 100 basis points less than the FHLB certificate of indebtedness
short-term rate. The sale of the
securities facilitated a re-positioning of the balance sheet to a more neutral
position in terms of interest rate risk and also improved operating
ratios. As a result of this decision,
the Company marked the securities to market in the first quarter 2007. The Company recorded additional losses on
sales of securities of approximately $1 million in the third quarter 2007. The sale of securities was a result of the
Companys continued re-positioning of the balance sheet to a more neutral
position in terms of interest rate risk and will also improve operating ratios
in the short term. The securities sold
were hybrid mortgage backed securities with a coupon re-set date that was 15
30 months and a weighted average yield to coupon re-set that was approximately
60 basis points below the FHLB short-term advance rate. All of the mortgage-backed securities held by
the Company are either fully guaranteed by the U.S. Government or issued by an
agency of the Federal Government and are rated AAA.
Loans
Loans, net of
unearned discounts increased 4.0% to $5,235,303,000 at September 30, 2007, from
$5,034,810,000 at December 31, 2006. The
increase in loans can be attributed to the Companys expanded efforts to grow
its loan balances.
Deposits
Deposits increased
0.5% to $7,021,596,000 at September 30, 2007, from $6,989,918,000 at December
31, 2006. The change in deposits is
primarily the result of the Companys internal sales program and the
acquisition of Southwest First Community, Inc.
Foreign Operations
On September 30, 2007, the
Company had $10,616,870,000 of consolidated assets, of which approximately
$277,648,000, or 2.6%, was related to loans outstanding to borrowers domiciled
in foreign countries, compared to $309,144,000, or 2.8%, at December 31,
2006. Of the $277,648,000, 78.7% is
directly or indirectly secured by U.S. assets, certificates of deposits and real
estate; 20.4% is secured by foreign real estate; .2% is secured by foreign real
estate related to maquiladora plants and guaranteed under lease obligations
primarily by U.S. companies, many of which are on the Fortune 500 list of
companies; and 0.7% is unsecured.
22
Critical Accounting Policies
The Company has established
various accounting policies which govern the application of accounting
principles in the preparation of the Companys 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 which
have a material impact on the carrying value of certain assets and liabilities;
management considers such accounting policies to be critical accounting
policies.
The Company considers its
Allowance for Possible Loan Losses as a policy critical to the sound operations
of the bank subsidiaries. The allowance
for possible loan losses consists of the aggregate loan loss allowances of the
bank subsidiaries. The allowances are
established through charges to operations in the form of provisions for
possible loan losses. Loan losses or
recoveries are charged or credited directly to the allowances. The allowance for possible loan losses of
each bank subsidiary is maintained at a level considered appropriate by
management, based on estimated probable losses in the loan portfolio. The allowance is derived from the following
elements: (i) allowances established on
specific loans and (ii) allowances based on historical loss experience on the
Companys remaining loan portfolio, which includes general economic conditions
and other qualitative risk factors both internal and external to the
Company. See also discussion regarding
the allowance for possible loan losses and provision for possible loan losses
included in the results of operations and Provision and Allowance for Possible
Loan Losses included in Notes 1 and 5 of the notes to Consolidated Financial
Statements in the Companys latest Annual Report on Form 10-K for further
information regarding the Companys provision and allowance for possible loan
losses policy.
Liquidity and Capital Resources
The maintenance of
adequate liquidity provides the Companys bank subsidiaries with the ability to
meet potential depositor withdrawals, provide for customer credit needs,
maintain adequate statutory reserve levels and take full advantage of
high-yield investment opportunities as they arise. Liquidity is afforded by access to financial
markets and by holding appropriate amounts of liquid assets. The Companys bank subsidiaries derive their
liquidity largely from deposits of individuals and business entities. Deposits from persons and entities domiciled
in Mexico comprise a stable portion of the deposit base of the Companys bank
subsidiaries. Other important funding sources for the Companys bank
subsidiaries during 2007 and 2006 have been borrowings from FHLB, securities
sold under repurchase agreements and large certificates of deposit, requiring
management to closely monitor its asset/liability mix in terms of both rate
sensitivity and maturity distribution.
Primary liquidity of the Company and its subsidiaries has been
maintained by means of increased investment in shorter-term securities,
certificates of deposit and
23
repurchase agreements. As in the
past, the Company will continue to monitor the volatility and cost of funds in
an attempt to match maturities of rate-sensitive assets and liabilities and
respond accordingly to anticipated fluctuations in interest rates over
reasonable periods of time.
The Company maintains an adequate level of capital as
a margin of safety for its depositors and shareholders. At September 30, 2007, shareholders equity
was $909,720,000 compared to $842,056,000 at December 31, 2006, an increase of
$67,664,000, or 8.0%.
The Company had a leverage ratio of 8.09% and 7.36%,
risk-weighted Tier 1 capital ratio of 12.48% and 12.49% and risk-weighted total
capital ratio of 13.54% and 13.61% at September 30, 2007 and December 31, 2006,
respectively. The identified intangibles
and goodwill of $316,031,000 as of September 30, 2007, recorded in connection
with the Companys acquisitions, are deducted from the sum of core capital
elements when determining the capital ratios of the Company.
As in the past, the Company
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, 2007 is illustrated in the table on the following page. This information reflects the balances of
assets and liabilities for which rates are subject to change. A mix of assets and liabilities that are
roughly equal in volume and re-pricing characteristics represents a matched
interest rate sensitivity position. Any
excess of assets or liabilities results in an interest rate sensitivity gap.
The Company undertakes 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 asset and liabilities equally or at the same time. As indicated in the table, the Company is
liability sensitive during the early time periods and asset sensitive in the
longer periods. The Companys Asset and
Liability Committee semi-annually reviews the consolidated position along with
simulation and duration models, and makes adjustments as needed to control the
Companys interest rate risk position.
The Company uses modeling of future events as a primary tool for
monitoring interest rate risk.
24
Interest Rate Sensitivity
(Dollars
in Thousands)
|
|
Rate/Maturity
|
|
September
30, 2007
|
|
3 Months
or Less
|
|
Over
3 Months to 1 Year
|
|
Over 1
Year to 5
Years
|
|
Over 5
Years
|
|
Total
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Rate sensitive assets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Federal funds sold
|
|
$
|
18,000
|
|
$
|
|
|
$
|
|
|
$
|
|
|
$
|
18,000
|
|
Time deposits with banks
|
|
6,920
|
|
4,455
|
|
|
|
|
|
11,375
|
|
Investment securities
|
|
244,975
|
|
1,384.240
|
|
2,242,261
|
|
159,260
|
|
4,030,736
|
|
Loans, net of non-accruals
|
|
3,941,426
|
|
332,552
|
|
379,111
|
|
575,243
|
|
5,228,332
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total earning assets
|
|
$
|
4,211,321
|
|
$
|
1,721,247
|
|
$
|
2,621,372
|
|
$
|
734,503
|
|
$
|
9,288,443
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cumulative earning assets
|
|
$
|
4,211,321
|
|
$
|
5,932,568
|
|
$
|
8,553,940
|
|
$
|
9,288,443
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Rate sensitive liabilities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Time deposits
|
|
$
|
1,459,852
|
|
$
|
1,487,406
|
|
$
|
336,829
|
|
$
|
869
|
|
$
|
3,284,956
|
|
Other interest bearing deposits
|
|
2,316,113
|
|
|
|
|
|
|
|
2,316,113
|
|
Securities sold under repurchase agreements
|
|
367,136
|
|
70,174
|
|
203,950
|
|
600,000
|
|
1,241,260
|
|
Other borrowed funds
|
|
1,141,265
|
|
|
|
|
|
68
|
|
1,141,333
|
|
Junior subordinated deferrable interest debentures
|
|
200,921
|
|
|
|
|
|
10,278
|
|
211,199
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total interest bearing liabilities
|
|
$
|
5,485,287
|
|
$
|
1,557,580
|
|
$
|
540,779
|
|
$
|
611,215
|
|
$
|
8,194,861
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cumulative sensitive liabilities
|
|
$
|
5,485,287
|
|
$
|
7,042,867
|
|
$
|
7,583,646
|
|
$
|
8,194,861
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Repricing gap
|
|
$
|
(1,273,966
|
)
|
$
|
163,667
|
|
$
|
2,080,593
|
|
$
|
123,288
|
|
$
|
1,093,582
|
|
Cumulative repricing gap
|
|
(1,273,966
|
)
|
(1,110,299
|
)
|
970,294
|
|
1,093,582
|
|
|
|
Ratio of interest-sensitive assets to liabilities
|
|
.77
|
|
1.11
|
|
4.85
|
|
1.20
|
|
1.13
|
|
Ratio of cumulative, interest-sensitive assets to liabilities
|
|
.77
|
|
.84
|
|
1.13
|
|
1.13
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Item 3.
Quantitative and Qualitative Disclosures
about Market Risk
During the first nine months of 2007, there were no
material changes in market risk exposures that affected the quantitative and
qualitative disclosures regarding market risk presented under the caption Liquidity
and Capital Resources located on pages 18 through 23 of the Companys 2006
Annual Report as filed as an exhibit to the Companys Form 10-K for the year
ended December 31, 2006.
25
Item 4.
Controls and Procedures
Disclosure
Controls and Procedures
The Company maintains
disclosure controls and procedures designed to ensure that information required
to be disclosed in reports filed under the Securities Exchange Act of 1934, as
amended, is recorded, processed, summarized and reported within specified time
periods. As of the end of the period
covered by this Quarterly Report on Form 10-Q, the Companys principal
executive officer and principal financial officer evaluated, with the
participation of the Companys management, the effectiveness of the Companys
disclosure controls and procedures (as defined in Exchange Act rules 13a-15(e)
and 15d-15(e)). Based on the evaluation,
which disclosed no material weaknesses, the Companys principal executive
officer and principal financial officer concluded that the Companys disclosure
controls and procedures were effective as of the end of the period covered by
this report.
Internal
Control Over Financial Reporting
There were no changes in
the Companys internal control over financial reporting that occurred during
the Companys most recent fiscal quarter that have materially affected or are
reasonably likely to materially affect the Companys internal control over
financial reporting.
PART II
- OTHER INFORMATION
Item 1.
Legal
Proceedings
The Company is involved in
various legal proceedings that are in various stages of litigation. Some of these actions allege lender
liability claims on a variety of theories and claim actual and punitive
damages. The Company has determined,
based on discussions with its counsel that any loss in such actions,
individually or in the aggregate, is remote or the damages sought, even if
fully recovered, would not be considered material to the consolidated financial
position or results of operations of the Company. However, many of these matters are in various
stages of proceedings and further developments could cause management to revise
its assessment of these matters.
The Companys lead bank subsidiary has invested in
partnerships, which have entered into several lease-financing
transactions. The lease-financing
transactions in two of the partnerships have been examined by the Internal
Revenue Service (IRS). In both
partnerships, the lead bank subsidiary was the owner of a ninety-nine percent
(99%) limited partnership interest. The
IRS has issued separate Notice of Final Partnership Administrative Adjustments
(FPAA) to the partnerships and on September 25, 2001, and January 10, 2003,
the Company filed lawsuits contesting the adjustments asserted in the FPAAs.
Prior to filing the lawsuits the Company was required
to deposit the estimated tax due of approximately $4,083,000 with respect to
the first FPAA and $7,710,606 with respect to the second FPAA with the IRS
pursuant to the Internal Revenue Code.
If it is determined that the amount of tax due, if any, related to the
lease-financing transactions is less than the amount of the deposits, the
remaining amount of the deposits would be returned to the Company.
In order to curtail the accrual of additional interest
related to the disputed tax benefits and because interest rates were
unfavorable, on March 7, 2003, the Company submitted to the IRS a total of
approximately $13.7 million, which constitutes the interest that would have
accrued based on the adjustments proposed in the FPAAs related to both of the
lease-financing transactions. If it is
determined that the amount of interest due, if any, related to the
lease-financing transactions is less than the approximate $13.7 million, the
remaining amount of the prepaid interest would be refunded to the Company, plus
interest thereon.
Beginning August 29, 2005, IBC proceeded to litigate
one of the partnership tax cases in the Federal District Court in San Antonio,
Texas. The case was tried over nine days
beginning August 29, 2005. On March 31,
2006, the trial court rendered a judgment against the Company on the first
FPAA. IBC timely filed its notice of
appeal to the Fifth Circuit Court of Appeals.
The appeal was argued on August 8, 2007 and the Trial Court decision was
affirmed on August 23, 2007. Unless
further appealed, the judgment will be come non-appealable on November 21,
2007. The other partnership tax case was
and continues to be stayed by the same Trial Court.
The Company, through December 31, 2005, had previously
expensed approximately $12.0 million in connection with the lawsuits. Because of the above-referenced trial court
judgment against the Company on the first FPAA, the uncertainty of the outcome
at the appellate level, and the similarity between the two FPAAs, the Company,
through December 31, 2006, has expensed an additional $13.7 million,
approximately. The resultant
approximately $25.7 million expensed is the total of the tax adjustments due
and the interest due on such adjustments for both FPAAs. Management is determining whether to further
appeal the judgment in the first case and will continue to evaluate the merits
of each lawsuit and make any appropriate revisions to the amounts, as deemed
necessary.
26
As part of the LFIN acquisition, two tax matters were
transferred to the Company. The first relates to deductions taken on amended
returns filed by LFIN during 2003 for the tax years ended June 30, 1999 through
December 31, 2001. The refunds requested on the amended returns amounted
to approximately $7.0 million. At December 31, 2003, LFIN had received
approximately $2.0 million of the total refund requested. Because all the
refunds are under review by the IRS, LFIN had established a reserve equal to
the $2.0 million received and did not recognize any benefit for the remaining
$5.0 million. The second tax contingency reserve of $7.0 million was resolved
with the IRS in September 2006 and as a result, the second tax contingency
reserve is no longer required. The
reserve was applied to the goodwill acquired as part of the LFIN
acquisition. During the first quarter of
2007, the Company favorably resolved the issues with the IRS on the first tax
contingency for approximately $7.0 million plus interest accrued thereon. The Company has applied the refund, including
interest accrued prior to the LFIN acquisition, to the goodwill that resulted
from the LFIN acquisition. The Company
has booked the remaining portion of the interest accrued on the tax matter
subsequent to the LFIN acquisition to earnings.
In June 2006, the Financial Accounting Standards Board
issued Financial Interpretation No. 48, (FIN 48), Accounting for Uncertainty
in Income Taxes an interpretation of FASB Statement No. 109, Accounting for
Income Taxes. FIN 48 addresses the
determination of whether tax benefits claimed or expected to be claimed on a
tax return should be recorded in the financial statements. Under FIN 48, the Company may recognize the
tax benefit from an uncertain tax position only if it is more likely than not
that the tax position will be sustained on examination by the taxing
authorities, based on the technical merits of the position. The tax benefits recognized in the financial
statements from such a position should be measured based on the largest benefit
that has a greater than fifty percent likelihood of being realized upon
ultimate settlement. FIN 48 also
provides guidance on derecognition, classification, interest and penalties on
income taxes, accounting in interim periods and requires increased disclosures.
The Company adopted the provisions of FIN 48 on
January 1, 2007. As a result of the
implementation of FIN 48, the Company recognized no change in the liability for
unrecognized tax benefits, thus, there was no change to the January 1, 2007
retained earnings balance.
1A.
Risk Factors
There were no material changes in the risk factors as
previously disclosed in Item 1A to Part I of the Companys Annual Report on
Form 10-K for the fiscal year ended December 31, 2006.
27
Item 2.
Unregistered
Sales of Equity Securities and Use of Proceeds
The Company expanded its
formal stock repurchase program on May 3, 2007.
Under the expanded stock repurchase program, the Company is authorized
to repurchase up to $225,000,000 of its common stock through December
2008. Stock repurchases may be made from
time to time, on the open market or through private transactions. Shares repurchased in this program will be
held in treasury for reissue for various corporate purposes, including employee
stock option plans. As of November 1,
2007, a total of 6,091,735 shares had been repurchased under this program at a
cost of $210,696,000. Stock repurchases
are reviewed quarterly at the Companys Board of Directors meetings and the
Board of Directors has stated that the aggregate investment in treasury stock
should not exceed $245,973,000. In the
past, the Board of Directors has increased previous caps on treasury stock once
they were met, but there are no assurances that an increase of the $245,973,000
cap will occur in the future. As of
November 1, 2007, the Company has approximately $231,669,000 invested in
treasury shares, which amount has been accumulated since the inception of the
Company.
Share repurchases
are only conducted under publicly announced repurchase programs approved by the
Board of Directors. The following table
includes information about share repurchases for the quarter ended September 30,
2007.
|
|
Total Number of Shares
Purchased(1)
|
|
Average Price Paid Per Share
|
|
Shares Purchased as Part of a Publicly-Announced Program
|
|
Approximate Dollar Value of Shares Available for
Repurchase
(2)
|
|
July 1 July 31, 2007
|
|
84,105
|
|
24.77
|
|
|
|
$
|
23,702,000
|
|
August 1 August 31, 2007
|
|
289,526
|
|
22.86
|
|
289,526
|
|
17,082,000
|
|
September 1 September 30, 2007
|
|
121,972
|
|
22.78
|
|
121,972
|
|
14,304,000
|
|
|
|
495,603
|
|
$
|
23.17
|
|
411,498
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) During the third quarter of 2007, the
Company repurchased 83,893 shares for a total purchase price of $2,077,000 from
employees of the GulfStar Group, who exercised non-qualified stock options.
(2) The formal stock repurchase program was
initiated in 1999 and has been expanded periodically with the most recent
expansion occurring in May 2007. The
current program allows for the repurchase of up to $225,000,000 of treasury
stock through December 2008 of which $14,304,000 remains.
28
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
|
29
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
|
INTERNATIONAL BANCSHARES CORPORATION
|
|
|
|
|
|
Date:
November 8, 2007
|
/s/ Dennis E. Nixon
|
|
|
Dennis E. Nixon
|
|
|
President
|
|
|
|
|
Date:
November 8, 2007
|
/s/ Imelda Navarro
|
|
|
Imelda Navarro
|
|
|
Treasurer
|
|
|
|
|
30
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