UNITED STATES
SECURITIES
AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
x
QUARTERLY
REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 2008
OR
o
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 0-9439
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
|
(Registrants
telephone number, including area code)
|
|
None
|
(Former
name, former address and former fiscal year, if changed since last report)
|
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
x
No
o
Indicate by check mark if the registrant is a large accelerated filer,
an accelerated filer, a non-accelerated filer, or a smaller reporting
company. See the definitions of large
accelerated filer, accelerated filer and small reporting company in Rule 12b-2
of the Exchange Act.
|
Large
Accelerated filer
x
|
|
|
|
Accelerated
filer
o
|
|
Non-accelerated
filer
|
|
(Do not check if a smaller reporting company)
|
|
Smaller
reporting company
o
|
Indicate by check mark whether the registrant is a shell company (as
defined in Rule 12b-2 of the Exchange Act). Yes
o
No
x
Indicate the number of
shares outstanding of each of the issuers classes of common stock, as of the
latest practicable date.
Class
|
|
Shares Issued and Outstanding
|
|
|
|
Common
Stock, $1.00 par value
|
|
68,562,906
shares outstanding at
|
|
|
August 1,
2008
|
PART I
- FINANCIAL INFORMATION
Item 1.
Financial Statements
INTERNATIONAL
BANCSHARES CORPORATION AND SUBSIDIARIES
Consolidated
Statements of Condition (Unaudited)
(Dollars in
Thousands)
|
|
June 30,
2008
|
|
December 31,
2007
|
|
Assets
|
|
|
|
|
|
|
|
|
|
|
|
Cash and due from banks
|
|
$
|
256,754
|
|
$
|
329,052
|
|
Federal funds sold
|
|
6,000
|
|
17,000
|
|
|
|
|
|
|
|
Total cash and cash equivalents
|
|
262,754
|
|
346,052
|
|
|
|
|
|
|
|
Time deposits with banks
|
|
396
|
|
4,852
|
|
|
|
|
|
|
|
Investment securities:
|
|
|
|
|
|
Held-to-maturity (Market value of $2,300 on
June 30, 2008 and $2,300 on December 31, 2007)
|
|
2,300
|
|
2,300
|
|
Available-for-sale (Amortized cost of
$3,944,716 on June 30, 2008 and $4,167,624 on December 31, 2007)
|
|
3,960,388
|
|
4,167,888
|
|
|
|
|
|
|
|
Total investment securities
|
|
3,962,688
|
|
4,170,188
|
|
|
|
|
|
|
|
Loans, net of unearned discounts
|
|
5,690,075
|
|
5,536,628
|
|
Less allowance for possible loan losses
|
|
(65,407
|
)
|
(61,726
|
)
|
|
|
|
|
|
|
Net loans
|
|
5,624,668
|
|
5,474,902
|
|
|
|
|
|
|
|
Bank premises and equipment, net
|
|
445,327
|
|
435,654
|
|
Accrued interest receivable
|
|
48,501
|
|
54,301
|
|
Other investments
|
|
315,150
|
|
323,565
|
|
Identified intangible assets, net
|
|
28,909
|
|
31,507
|
|
Goodwill, net
|
|
282,357
|
|
283,198
|
|
Other assets
|
|
39,799
|
|
42,942
|
|
|
|
|
|
|
|
Total assets
|
|
$
|
11,010,549
|
|
$
|
11,167,161
|
|
1
|
|
June 30,
2008
|
|
December 31,
2007
|
|
Liabilities
and Shareholders Equity
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
Deposits:
|
|
|
|
|
|
Demand non-interest bearing
|
|
$
|
1,532,668
|
|
$
|
1,512,627
|
|
Savings and interest bearing demand
|
|
2,315,771
|
|
2,292,589
|
|
Time
|
|
3,352,924
|
|
3,352,390
|
|
|
|
|
|
|
|
Total deposits
|
|
7,201,363
|
|
7,157,606
|
|
|
|
|
|
|
|
Securities sold under repurchase agreements
|
|
1,475,147
|
|
1,328,983
|
|
Other borrowed funds
|
|
1,048,089
|
|
1,456,936
|
|
Junior subordinated deferrable interest
debentures
|
|
201,009
|
|
200,929
|
|
Other liabilities
|
|
95,497
|
|
86,802
|
|
|
|
|
|
|
|
Total liabilities
|
|
10,021,105
|
|
10,231,256
|
|
|
|
|
|
|
|
Commitments, Contingent Liabilities and
Other Tax Matters (Note 10)
|
|
|
|
|
|
|
|
|
|
|
|
Shareholders equity:
|
|
|
|
|
|
|
|
|
|
|
|
Common shares of $1.00 par value.
Authorized 275,000,000 shares; issued 95,458,437 shares on June 30, 2008
and 95,440,983 shares on December 31, 2007
|
|
95,458
|
|
95,441
|
|
Surplus
|
|
144,734
|
|
144,140
|
|
Retained earnings
|
|
973,050
|
|
929,145
|
|
Accumulated other comprehensive income
|
|
10,098
|
|
165
|
|
|
|
1,223,340
|
|
1,168,891
|
|
|
|
|
|
|
|
Less cost of shares in treasury, 26,891,101
shares on June 30, 2008 and 26,848,880 shares on December 31, 2007
|
|
(233,896
|
)
|
(232,986
|
)
|
|
|
|
|
|
|
Total shareholders equity
|
|
989,444
|
|
935,905
|
|
|
|
|
|
|
|
Total liabilities and shareholders equity
|
|
$
|
11,010,549
|
|
$
|
11,167,161
|
|
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
June 30,
|
|
Six Months Ended
June 30,
|
|
|
|
2008
|
|
2007
|
|
2008
|
|
2007
|
|
|
|
|
|
|
|
|
|
|
|
Interest income:
|
|
|
|
|
|
|
|
|
|
Loans, including fees
|
|
$
|
91,028
|
|
$
|
112,723
|
|
$
|
190,549
|
|
$
|
221,979
|
|
Federal funds sold
|
|
312
|
|
821
|
|
681
|
|
1,517
|
|
Investment securities:
|
|
|
|
|
|
|
|
|
|
Taxable
|
|
44,610
|
|
45,782
|
|
92,250
|
|
97,438
|
|
Tax-exempt
|
|
881
|
|
1,078
|
|
1,835
|
|
2,209
|
|
Other interest income
|
|
100
|
|
2,004
|
|
277
|
|
2,120
|
|
|
|
|
|
|
|
|
|
|
|
Total interest income
|
|
136,931
|
|
162,408
|
|
285,592
|
|
325,263
|
|
|
|
|
|
|
|
|
|
|
|
Interest expense:
|
|
|
|
|
|
|
|
|
|
Savings deposits
|
|
6,892
|
|
13,695
|
|
15,802
|
|
26,791
|
|
Time deposits
|
|
28,086
|
|
36,236
|
|
61,267
|
|
71,273
|
|
Securities sold under repurchase agreements
|
|
12,484
|
|
10,213
|
|
26,125
|
|
18,535
|
|
Other borrowings
|
|
5,813
|
|
18,177
|
|
17,413
|
|
45,382
|
|
Junior subordinated interest deferrable
debentures
|
|
3,473
|
|
4,526
|
|
7,125
|
|
8,945
|
|
Other interest expense
|
|
42
|
|
|
|
88
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total interest expense
|
|
56,790
|
|
82,847
|
|
127,820
|
|
170,926
|
|
|
|
|
|
|
|
|
|
|
|
Net interest income
|
|
80,141
|
|
79,561
|
|
157,772
|
|
154,337
|
|
|
|
|
|
|
|
|
|
|
|
Provision for possible loan losses
|
|
4,101
|
|
1,198
|
|
5,653
|
|
2,559
|
|
|
|
|
|
|
|
|
|
|
|
Net interest income after provision for
possible loan losses
|
|
76,040
|
|
78,363
|
|
152,119
|
|
151,778
|
|
|
|
|
|
|
|
|
|
|
|
Non-interest income:
|
|
|
|
|
|
|
|
|
|
Service charges on deposit accounts
|
|
25,488
|
|
21,058
|
|
49,242
|
|
41,283
|
|
Other service charges, commissions and fees
|
|
|
|
|
|
|
|
|
|
Banking
|
|
10,150
|
|
8,843
|
|
20,162
|
|
16,961
|
|
Non-banking
|
|
1,647
|
|
3,887
|
|
3,145
|
|
8,831
|
|
Gain (loss) on investment securities
transactions, net
|
|
6,264
|
|
2,257
|
|
6,410
|
|
(14,910
|
)
|
Other investments, net
|
|
3,685
|
|
4,785
|
|
8,110
|
|
10,568
|
|
Other income
|
|
3,783
|
|
6,436
|
|
10,242
|
|
10,774
|
|
|
|
|
|
|
|
|
|
|
|
Total non-interest income
|
|
51,017
|
|
47,266
|
|
97,311
|
|
73,507
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
3
|
|
Three Months Ended
June 30,
|
|
Six Months Ended
June 30,
|
|
|
|
2008
|
|
2007
|
|
2008
|
|
2007
|
|
|
|
|
|
|
|
|
|
|
|
Non-interest expense:
|
|
|
|
|
|
|
|
|
|
Employee compensation and benefits
|
|
$
|
31,420
|
|
$
|
31,962
|
|
$
|
62,460
|
|
$
|
63,155
|
|
Occupancy
|
|
9,022
|
|
8,303
|
|
17,098
|
|
15,343
|
|
Depreciation of bank premises and equipment
|
|
9,092
|
|
7,813
|
|
17,638
|
|
15,369
|
|
Professional fees
|
|
3,170
|
|
2,791
|
|
5,885
|
|
5,469
|
|
Stationery and supplies
|
|
1,266
|
|
1,490
|
|
2,594
|
|
2,971
|
|
Amortization of identified intangible
assets
|
|
1,299
|
|
1,320
|
|
2,598
|
|
2,529
|
|
Advertising
|
|
3,479
|
|
3,169
|
|
6,662
|
|
6,420
|
|
Other
|
|
17,636
|
|
16,581
|
|
32,446
|
|
34,242
|
|
|
|
|
|
|
|
|
|
|
|
Total non-interest expense
|
|
76,384
|
|
73,429
|
|
147,381
|
|
145,498
|
|
|
|
|
|
|
|
|
|
|
|
Income before income taxes
|
|
50,673
|
|
52,200
|
|
102,049
|
|
79,787
|
|
|
|
|
|
|
|
|
|
|
|
Minority interest in consolidated
subsidiaries
|
|
|
|
(78
|
)
|
|
|
|
|
Provision for income taxes
|
|
17,624
|
|
17,688
|
|
35,520
|
|
26,553
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
33,049
|
|
$
|
34,590
|
|
$
|
66,529
|
|
$
|
53,234
|
|
|
|
|
|
|
|
|
|
|
|
Basic earnings per common share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average number of shares
outstanding:
|
|
68,565,037
|
|
69,313,121
|
|
68,574,155
|
|
69,314,282
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
.48
|
|
$
|
.50
|
|
$
|
.97
|
|
$
|
.77
|
|
|
|
|
|
|
|
|
|
|
|
Fully diluted earnings per common share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average number of shares
outstanding:
|
|
68,716,210
|
|
69,686,149
|
|
68,708,657
|
|
69,820,072
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
.48
|
|
$
|
.50
|
|
$
|
.97
|
|
$
|
.76
|
|
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
June 30,
|
|
Six Months Ended
June 30,
|
|
|
|
2008
|
|
2007
|
|
2008
|
|
2007
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
33,049
|
|
$
|
34,590
|
|
$
|
66,529
|
|
$
|
53,234
|
|
|
|
|
|
|
|
|
|
|
|
Other comprehensive income, net of tax
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net unrealized holding (losses) gains on
securities available for sale arising during period
|
|
(17,472
|
)
|
(9,072
|
)
|
3,523
|
|
28,520
|
|
Reclassification adjustment for gains
(losses) on securities available for sale included in net income
|
|
6,264
|
|
2,257
|
|
6,410
|
|
(14,910
|
)
|
|
|
|
|
|
|
|
|
|
|
Comprehensive income
|
|
$
|
21,841
|
|
$
|
27,775
|
|
$
|
76,462
|
|
$
|
66,844
|
|
See accompanying notes to consolidated financial statements.
5
INTERNATIONAL BANCSHARES CORPORATION AND SUBSIDIARIES
Consolidated
Statements of Cash Flows (Unaudited)
(Dollars in Thousands)
|
|
Six Months Ended
June 30,
|
|
|
|
2008
|
|
2007
|
|
Operating activities:
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
66,529
|
|
$
|
53,234
|
|
|
|
|
|
|
|
Adjustments to reconcile net income to net
cash provided by operating activities:
|
|
|
|
|
|
Provision for possible loan losses
|
|
5,653
|
|
2,559
|
|
Amortization of loan premiums
|
|
122
|
|
233
|
|
Accretion of time deposits with banks
|
|
1
|
|
(32
|
)
|
Accretion of time deposit discounts
|
|
(19
|
)
|
|
|
Depreciation of bank premises and equipment
|
|
17,638
|
|
15,369
|
|
Gain on sale of bank premises and equipment
|
|
(85
|
)
|
(2,431
|
)
|
Depreciation and amortization of leased
assets
|
|
640
|
|
1,083
|
|
Accretion of investment securities
discounts
|
|
(338
|
)
|
(321
|
)
|
Amortization of investment securities
premiums
|
|
3,288
|
|
2,076
|
|
Investment securities transactions, net
|
|
(6,410
|
)
|
14,910
|
|
Amortization of junior subordinated
debenture discounts
|
|
80
|
|
215
|
|
Amortization of identified intangible
assets
|
|
2,598
|
|
2,529
|
|
Stock based compensation expense
|
|
376
|
|
369
|
|
Earnings from affiliates and other investments
|
|
(5,936
|
)
|
(5,038
|
)
|
Deferred tax benefit
|
|
(3,535
|
)
|
(349
|
)
|
Decrease in accrued interest receivable
|
|
5,800
|
|
3,288
|
|
Net decrease in other assets
|
|
3,443
|
|
2,347
|
|
Net increase in other liabilities
|
|
6,653
|
|
3,360
|
|
|
|
|
|
|
|
Net cash provided by operating activities
|
|
96,498
|
|
93,401
|
|
|
|
|
|
|
|
Investing activities:
|
|
|
|
|
|
|
|
|
|
|
|
Proceeds from maturities of securities
|
|
13,938
|
|
16,015
|
|
Proceeds from sales of available for sale
securities
|
|
8,359
|
|
739,069
|
|
Purchases of available for sale securities
|
|
(518,958
|
)
|
(484,958
|
)
|
Principal collected on mortgage-backed
securities
|
|
723,029
|
|
470,673
|
|
Maturities of time deposits with banks
|
|
4,457
|
|
25,084
|
|
Net increase in loans
|
|
(155,541
|
)
|
(60,561
|
)
|
Purchases of other investments
|
|
(4,006
|
)
|
(5,412
|
)
|
Distributions of other investments
|
|
18,357
|
|
49,187
|
|
Purchases of bank premises and equipment
|
|
(27,856
|
)
|
(38,596
|
)
|
Proceeds from sale of bank premises and
equipment
|
|
630
|
|
5,966
|
|
Adjustment to goodwill related to prior
acquisition
|
|
|
|
5,885
|
|
Cash paid in purchase transaction
|
|
|
|
(23,470
|
)
|
Cash acquired in purchase transaction
|
|
|
|
30,772
|
|
|
|
|
|
|
|
Net cash provided by investing activities
|
|
62,409
|
|
729,654
|
|
|
|
|
|
|
|
|
|
6
|
|
Six Months Ended
June 30,
|
|
|
|
2008
|
|
2007
|
|
Financing activities:
|
|
|
|
|
|
|
|
|
|
|
|
Net increase (decrease) in non-interest
bearing demand deposits
|
|
$
|
20,041
|
|
$
|
(23,191
|
)
|
Net increase in savings and interest
bearing demand deposits
|
|
23,182
|
|
92,255
|
|
Net increase (decrease) in time deposits
|
|
553
|
|
(37,654
|
)
|
Net increase in securities sold under
repurchase agreements
|
|
146,164
|
|
262,061
|
|
Net decrease in other borrowed funds
|
|
(408,847
|
)
|
(1,029,409
|
)
|
Proceeds of issuance of long-term debt
|
|
|
|
53,609
|
|
Principal payments of long term-debt
|
|
|
|
(22,681
|
)
|
Purchase of treasury stock
|
|
(910
|
)
|
(16,912
|
)
|
Proceeds from stock transactions
|
|
235
|
|
3,992
|
|
Payment of cash dividends
|
|
(22,623
|
)
|
(22,086
|
)
|
Payment of cash dividends in lieu of
fractional shares
|
|
|
|
(27
|
)
|
|
|
|
|
|
|
Net cash used in financing activities
|
|
(242,205
|
)
|
(740,043
|
)
|
|
|
|
|
|
|
(Decrease) increase in cash and cash
equivalents
|
|
(83,298
|
)
|
83,012
|
|
|
|
|
|
|
|
Cash and cash equivalents at beginning of
period
|
|
346,052
|
|
297,207
|
|
|
|
|
|
|
|
Cash and cash equivalents at end of period
|
|
$
|
262,754
|
|
$
|
380,219
|
|
|
|
|
|
|
|
Supplemental cash flow information:
|
|
|
|
|
|
Interest paid
|
|
$
|
135,514
|
|
$
|
176,295
|
|
Income taxes paid
|
|
34,208
|
|
29,981
|
|
Adjustment to goodwill arising from prior
acquisition
|
|
|
|
2,076
|
|
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. 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, 2007 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.
Effective
January 1, 2008, the Company adopted Statement of Financial Accounting
Standards No. 157 (SFAS No. 157), Fair Value Measurements for
financial assets and financial liabilities.
In accordance with Financial Accounting Standards Board Staff Position No. 157-2,
(FSP No. 157-2), Effective date of FASB Statement No. 157, the
Company will delay application of SFAS No. 157 for non-financial assets
and non-financial liabilities until January 1, 2009, except for those that are recognized or disclosed at
fair value on a recurring basis. SFAS No. 157
defines fair value, establishes a framework for measuring fair value in
generally accepted accounting principles, and expands disclosures about fair value
measurements. SFAS No. 157 applies
to all financial instruments that are being measured and reported on a fair
value basis. SFAS No. 157 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. SFAS No. 157
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 prices, 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.
8
The
following table represents assets and liabilities reported on the consolidated
balance sheets at their fair value as of June 30, 2008 by level within the
SFAS No. 157 fair value measurement hierarchy:
|
|
|
|
Fair Value Measurements at Reporting Date Using
(Dollars in Thousands)
|
|
|
|
Assets/Liabilities
Measured at
Fair Value
June 30, 2008
|
|
Quoted Prices
in Active
Markets for
Identical
Assets
(Level 1)
|
|
Significant Other
Observable
Inputs
(Level 2)
|
|
Significant
Unobservable
Inputs
(Level 3)
|
|
|
|
|
|
|
|
|
|
|
|
Measured on a recurring basis:
|
|
|
|
|
|
|
|
|
|
Assets:
|
|
|
|
|
|
|
|
|
|
Investment securities available-for-sale
|
|
$
|
3,960,388
|
|
$
|
627
|
|
$
|
3,959,761
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
|
Measured on a non-recurring basis:
|
|
|
|
|
|
|
|
|
|
Assets:
|
|
|
|
|
|
|
|
|
|
Impaired Loans
|
|
64,031
|
|
|
|
64,031
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Investment
securities available-for-sale are classified within Level 2 of the valuation
hierarchy, with the exception of certain equity investments that are classified
within Level 1. The Company obtains fair
value measurements for investment securities from an independent pricing
service. The fair value measurements
consider observable data that may include dealer quotes, market spreads, cash
flows, the U.S. Treasury yield curve, live trading levels, trade execution
data, market consensus prepayment speeds, credit information and the bonds
terms and conditions, among other things.
Impaired
loans are classified within Level 2 of the valuation hierarchy. The fair value of impaired loans is derived
in accordance with Statement of Financial Accounting Standards No. 114 (SFAS
No. 114), Accounting by Creditors for Impairment of a Loan. The fair value of impaired loans is based on
the fair value of the collateral, as determined through an external appraisal
process. Impaired loans are primarily
comprised of collateral-dependent commercial loans.
Certain
financial assets and financial liabilities are measured at fair value on a
nonrecurring 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).
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.
9
Note 3 Loans
A summary of net loans, by loan type at June 30,
2008 and December 31, 2007 is as follows:
|
|
June 30,
2008
|
|
December 31,
2007
|
|
|
|
(Dollars in thousands)
|
|
|
|
|
|
|
|
Commercial, financial and agricultural
|
|
$
|
2,468,094
|
|
$
|
2,426,064
|
|
Real estate mortgage
|
|
837,187
|
|
798,708
|
|
Real estate construction
|
|
1,928,399
|
|
1,835,950
|
|
Consumer
|
|
176,654
|
|
190,899
|
|
Foreign
|
|
279,741
|
|
285,008
|
|
|
|
|
|
|
|
Total loans
|
|
5,690,075
|
|
5,536,629
|
|
|
|
|
|
|
|
Unearned discount
|
|
|
|
(1
|
)
|
|
|
|
|
|
|
Loans, net of unearned discount
|
|
$
|
5,690,075
|
|
$
|
5,536,628
|
|
Note 4 - Allowance for Possible Loan Losses
A
summary of the transactions in the allowance for possible loan losses is as
follows:
|
|
June 30,
2008
|
|
June 30,
2007
|
|
|
|
(Dollars in Thousands)
|
|
|
|
|
|
|
|
Balance at December 31,
|
|
$
|
61,726
|
|
$
|
64,537
|
|
|
|
|
|
|
|
Losses charged to allowance
|
|
(2,320
|
)
|
(1,947
|
)
|
Recoveries credited to allowance
|
|
348
|
|
735
|
|
Net losses charged to allowance
|
|
(1,972
|
)
|
(1,212
|
)
|
|
|
|
|
|
|
Provision charged to operations
|
|
5,653
|
|
2,559
|
|
Allowance acquired in acquisition (Note 2)
|
|
|
|
1,054
|
|
|
|
|
|
|
|
Balance at June 30,
|
|
$
|
65,407
|
|
$
|
66,938
|
|
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.
10
The following table details key information regarding
the Companys impaired loans:
|
|
June 30,
2008
|
|
December 31,
2007
|
|
|
|
(Dollars in Thousands)
|
|
|
|
|
|
|
|
Balance of impaired loans where
there is a related allowance for loan loss
|
|
$
|
55,231
|
|
$
|
39,618
|
|
Balance of impaired loans where
there is no related allowance for loan loss
|
|
17,863
|
|
|
|
|
|
|
|
|
|
Total impaired loans
|
|
$
|
73,094
|
|
$
|
39,618
|
|
|
|
|
|
|
|
Allowance allocated to impaired
loans
|
|
$
|
9,063
|
|
$
|
4,903
|
|
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 $53,870,000 and $22,590,000 for the
six months and year ended June 30, 2008 and December 31, 2007,
respectively. The interest recognized on
impaired loans was not significant. The
balance of impaired loans increased because of a certain energy related loan
that filed for bankruptcy protection.
As a result of some
recent collateral improvements and collateral enhancements of two impaired
loans, the Company determined that the allowance allocated to the two credits
was no longer justified; however the Company still deems the credits impaired
as of June 30, 2008.
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 June 30,
2008 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). Effective May 19, 2008, the 2005 Plan
was amended to increase the number of shares available for stock option grants
under the 2005 Plan by 300,000 shares.
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 June 30,
2008, 357,047 shares were available for future grants under the 2005 Plan.
11
A summary of option activity
under the stock option plans for the six months ended June 30, 2008 is as
follows:
|
|
Number of
options
|
|
Weighted
average
exercise price
|
|
Weighted
average
remaining
contractual term
(years)
|
|
Aggregate
intrinsic
value ($)
|
|
|
|
|
|
|
|
|
|
|
|
Options outstanding at December 31,
2007
|
|
924,483
|
|
$
|
21.00
|
|
|
|
|
|
Plus:
Options granted
|
|
1,500
|
|
24.61
|
|
|
|
|
|
Less:
|
|
|
|
|
|
|
|
|
|
Options exercised
|
|
17,454
|
|
13.52
|
|
|
|
|
|
Options expired
|
|
|
|
|
|
|
|
|
|
Options forfeited
|
|
17,806
|
|
25.45
|
|
|
|
|
|
Options outstanding at June 30, 2008
|
|
890,723
|
|
$
|
21.06
|
|
4.04
|
|
$
|
2,568,000
|
|
|
|
|
|
|
|
|
|
|
|
Options fully vested and exercisable at
June 30, 2008
|
|
442,902
|
|
$
|
16.28
|
|
2.18
|
|
$
|
2,567,000
|
|
Stock-based compensation expense
included in the consolidated statements of income for the three and six months
ended June 30, 2008 was approximately $186,000 and $376,000,
respectively. As of June 30, 2008
there was approximately $1,400,000, 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 1.6 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.
12
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:
|
|
June 30,
2008
|
|
December 31,
2007
|
|
|
|
(Dollars in Thousands)
|
|
|
|
|
|
|
|
U.S. Treasury securities
|
|
|
|
|
|
Available-for-sale
|
|
$
|
1,319
|
|
$
|
1,308
|
|
Mortgage-backed securities
|
|
|
|
|
|
Available-for-sale
|
|
3,874,275
|
|
4,066,828
|
|
States and political subdivisions
|
|
|
|
|
|
Available-for-sale
|
|
70,667
|
|
84,633
|
|
Other
|
|
|
|
|
|
Held-to-maturity
|
|
2,300
|
|
2,300
|
|
Available-for-sale
|
|
14,127
|
|
15,119
|
|
|
|
|
|
|
|
Total investment securities
|
|
$
|
3,962,688
|
|
$
|
4,170,188
|
|
Included
in mortgage-backed securities in the table above are $2,240,428 of mortgage-backed
securities issued by either the Federal Home Loan Mortgage Corporation (Freddie
Mac) or the Federal National Mortgage Corporation (Fannie Mae), $1,535,508
of mortgage-backed securities issued by the Government National Mortgage
Corporation (Ginnie Mae) and $98,339 issued by non-government entities. Investments in mortgage-backed securities
issued by Ginnie Mae are fully guaranteed by the U.S. Government. Investments in mortgage-backed securities
issued by Freddie Mac and Fannie Mae are not fully guaranteed by the U.S.
Government, but are rated AAA.
Investments in mortgage-backed securities issued by non-governmental
entities are rated AAA.
Note 7
Other Borrowed Funds
Other borrowed funds include Federal Home
Loan Bank borrowings, which are short-term, variable-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 June 30, 2008, other borrowed funds
totaled $1,048,089,000, a decrease of 28.1% from $1,456,936,000 at December 31,
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. As of June 30, 2008,
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 June 30,
2008, the principal amount of debentures outstanding totaled $201,009,000.
The Debentures are subordinated
and junior in right of payment to all present and future senior indebtedness
(as defined in the respective indentures) of the Company, 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 Trust I and for up to twenty
consecutive quarterly periods on Trusts VI, VII, VIII, IX, X, XI and XII. If interest
13
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 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 June 30, 2008, the
total $201,009,000, 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 June 30, 2008:
|
|
Junior
Subordinated
Deferrable
Interest
Debentures
|
|
Repricing
Frequency
|
|
Interest Rate
|
|
Interest Rate
Index
|
|
Maturity Date
|
|
Optional
Redemption Date
|
|
|
|
(in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Trust I
|
|
$
|
10,304
|
|
Fixed
|
|
10.18
|
%
|
Fixed
|
|
June 2031
|
|
June 2011
|
|
Trust VI
|
|
$
|
25,774
|
|
Quarterly
|
|
6.13
|
%
|
LIBOR + 3.45
|
|
November 2032
|
|
August 2008
|
|
Trust VII
|
|
$
|
10,310
|
|
Quarterly
|
|
6.12
|
%
|
LIBOR + 3.25
|
|
April 2033
|
|
October 2008
|
|
Trust VIII
|
|
$
|
25,753
|
|
Quarterly
|
|
5.76
|
%
|
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
|
|
|
|
$
|
201,009
|
|
|
|
|
|
|
|
|
|
|
|
(1) 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
$.33 were paid on April 18, 2008 to all holders of record on March 31,
2008.
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 August 1, 2008, a total of
6,197,214 shares had been repurchased under this program at a cost of
$212,923,000. 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 August 1,
2008, the Company has approximately $233,896,000 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 issued a 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. The
judgment became non-appealable on November 21, 2007. The other partnership case was stayed by the
same Trial Court pending the appeal.
Following the resolution of the first case, the trial court reopened the
second case and set it for trial on September 2, 2008. Subsequently, the Company engaged in
settlement negotiations with the Department of Justice, and agreed to settle
the second case. Under the terms of the
settlement, the Company has conceded the entire amount in dispute based upon
the similarity of the facts of that case to the first case and the likelihood
of an unfavorable outcome if litigated based upon the Court rulings in the
first case.
15
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 and the similarity between the two FPAAs, the Company
additionally expensed an approximate $13.7 million in the first quarter of
2006. 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 will continue to evaluate the correspondence with the IRS on
the FPAAs and make any appropriate revisions to the amounts as deemed
necessary.
Note 11 Capital Ratios
The
Company had a leverage ratio of 8.29% and 7.76%, risk-weighted Tier 1 capital ratio of
12.11% and 11.98% and risk-weighted total capital ratio of 13.13% and 12.99% at
June 30, 2008 and December 31, 2007, respectively. The identified intangibles and goodwill of
$311,266,000 as of June 30, 2008, 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, 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.
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 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 260 facilities
and more than 415 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 fifty percent
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 first six months 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. Additionally, the Companys efficiency ratio
has been negatively impacted over the last few years because of the Companys
aggressive branch expansion which has added 50 branches in 2007 and the first
six months of 2008. 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. The Company monitors this ratio over time to
assess the Companys efficiency relative to its peers taking into account the
Companys branch expansion. The Company
uses this measure as one factor in determining if the Company is accomplishing
its long-term goals of providing superior returns to the Companys
shareholders.
Results of Operations
Summary
Consolidated Statements
of Condition Information
|
|
June 30, 2008
|
|
December 31, 2007
|
|
Percent Increase
(Decrease)
|
|
|
|
(Dollars in Thousands)
|
|
|
|
|
|
|
|
|
|
|
Assets
|
|
$
|
11,010,549
|
|
$
|
11,167,161
|
|
(1.4
|
)%
|
Net loans
|
|
5,624,668
|
|
5,474,902
|
|
2.7
|
|
Deposits
|
|
7,201,363
|
|
7,157,606
|
|
.6
|
|
Other borrowed funds
|
|
1,048,089
|
|
1,456,936
|
|
(28.1
|
)
|
Junior subordinated deferrable
interest debentures
|
|
201,009
|
|
200,929
|
|
|
|
Shareholders equity
|
|
989,444
|
|
935,905
|
|
5.7
|
|
|
|
|
|
|
|
|
|
|
|
18
Consolidated Statements
of Income Information
|
|
Three Months Ended
June 30,
|
|
Percent
|
|
Six Months Ended
June 30,
|
|
Percent
|
|
|
|
(
Dollars in Thousands)
|
|
Increase
|
|
(
Dollars in Thousands)
|
|
Increase
|
|
|
|
2008
|
|
2007
|
|
(Decrease)
|
|
2008
|
|
2007
|
|
(Decrease)
|
|
Interest income
|
|
$
|
136,931
|
|
$
|
162,408
|
|
(15.7
|
)%
|
$
|
285,592
|
|
$
|
325,263
|
|
(12.2
|
)%
|
Interest expense
|
|
56,790
|
|
82,847
|
|
(31.5
|
)
|
127,820
|
|
170,926
|
|
(25.2
|
)
|
Net interest income
|
|
80,141
|
|
79,561
|
|
.7
|
|
157,772
|
|
154,337
|
|
2.2
|
|
Provision for possible loan
losses
|
|
4,101
|
|
1,198
|
|
242.3
|
|
5,653
|
|
2,559
|
|
120.9
|
|
Non-interest income
|
|
51,017
|
|
47,266
|
|
7.9
|
|
97,311
|
|
73,507
|
|
32.4
|
|
Non-interest expense
|
|
76,384
|
|
73,429
|
|
4.0
|
|
147,381
|
|
145,498
|
|
1.3
|
|
Net income
|
|
33,049
|
|
34,590
|
|
(4.5
|
)
|
66,529
|
|
53,234
|
|
25.0
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Per common share (adjusted for
stock dividends):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
$
|
.48
|
|
$
|
.50
|
|
(4.0
|
)%
|
$
|
.97
|
|
$
|
.77
|
|
26.0
|
%
|
Diluted
|
|
.48
|
|
.50
|
|
(4.0
|
)
|
.97
|
|
.76
|
|
27.6
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Income
Net
income for the first and second quarter of 2008 increased by 25.0% as compared
to the same period in 2007.
Net income for the second quarter of 2008 was
negatively impacted by a pre-tax increase in the provision for possible loan
losses of $3.0 million in connection with an energy-related commercial
borrower. The energy-related borrower
filed for bankruptcy protection on July 22, 2008. The total allowance allocated to the credit
was derived from a range of values using information currently available. The provision for possible loan losses
considers both the value of the borrower as a going concern and its liquidation
value. The Company will continue to
monitor the credit and adjust the allowance allocated to the credit as
needed. Net income for the first six
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 is a result of the
Companys strategic identification in 2007 of certain investment securities
that were sold with the proceeds from the sales to be used to reduce Federal
Home Loan Bank (FHLB) borrowings.
19
Net Interest Income
|
|
Three Months Ended
June 30,
|
|
Percent
|
|
Six Months Ended
June 30,
|
|
Percent
|
|
|
|
(in Thousands)
|
|
Increase
|
|
(in Thousands)
|
|
Increase
|
|
|
|
2008
|
|
2007
|
|
(Decrease)
|
|
2008
|
|
2007
|
|
(Decrease)
|
|
Interest income:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loans, including fees
|
|
$
|
91,028
|
|
$
|
112,723
|
|
(19.2
|
)%
|
$
|
190,549
|
|
$
|
221,979
|
|
(14.2
|
)%
|
Federal funds sold
|
|
312
|
|
821
|
|
(62.0
|
)
|
681
|
|
1,517
|
|
(55.1
|
)
|
Investment securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Taxable
|
|
44,610
|
|
45,782
|
|
(2.6
|
)
|
92,250
|
|
97,438
|
|
(5.3
|
)
|
Tax-exempt
|
|
881
|
|
1,078
|
|
(18.3
|
)
|
1,835
|
|
2,209
|
|
(16.9
|
)
|
Other interest income
|
|
100
|
|
2,004
|
|
(95.0
|
)
|
277
|
|
2,120
|
|
(86.9
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total interest income
|
|
136,931
|
|
162,408
|
|
(15.7
|
)
|
285,592
|
|
325,263
|
|
(12.2
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest expense:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Savings deposits
|
|
6,892
|
|
13,695
|
|
(49.7
|
)
|
15,802
|
|
26,791
|
|
(41.0
|
)
|
Time deposits
|
|
28,086
|
|
36,236
|
|
(22.5
|
)
|
61,267
|
|
71,273
|
|
(14.0
|
)
|
Securities sold under repurchase agreements
|
|
12,484
|
|
10,213
|
|
22.2
|
|
26,125
|
|
18,535
|
|
40.9
|
|
Other borrowings
|
|
5,813
|
|
18,177
|
|
(68.0
|
)
|
17,413
|
|
45,382
|
|
(61.6
|
)
|
Junior subordinated interest deferrable
debentures
|
|
3,473
|
|
4,526
|
|
(23.3
|
)
|
7,125
|
|
8,945
|
|
(20.3
|
)
|
Other interest expense
|
|
42
|
|
|
|
(100.0
|
)
|
88
|
|
|
|
(100.0
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total interest expense
|
|
56,790
|
|
82,847
|
|
(31.5
|
)
|
127,820
|
|
170,926
|
|
(25.2
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net interest income
|
|
$
|
80,141
|
|
$
|
79,561
|
|
.7
|
%
|
$
|
157,772
|
|
$
|
154,337
|
|
2.2
|
%
|
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. The Federal Reserve
Board influences the general market rates of interest, including the deposit
and loan rates offered by many financial institutions. The Companys loan portfolio is significantly
affected by changes in the prime interest rate.
The prime interest rate, which is the rate that loan rates are indexed
from, ended 2006 at 8.25%. During 2007,
the prime interest rate decreased 50 basis points in the third quarter and 50
basis points in the fourth quarter to end the year at 7.25%. During the first and second quarters of 2008,
the prime interest rate decreased by 250 basis points to end the quarter at
5.00%. The Companys goal is to manage
the net interest income in periods of rising and falling rates. Net interest income increased 2.2% for the
first six months of 2008 as compared to the same period in 2007 despite the
decreases in the prime interest rate.
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 24 for the June 30, 2008 gap analysis). Management currently believes that the
Company is properly positioned for interest rate changes; however if management
determines at any
20
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.
Non-Interest Income
|
|
Three Months Ended
June 30,
|
|
Percent
|
|
Six Months Ended
June 30,
|
|
Percent
|
|
|
|
(in Thousands)
|
|
Increase
|
|
(in Thousands)
|
|
Increase
|
|
|
|
2008
|
|
2007
|
|
(Decrease)
|
|
2008
|
|
2007
|
|
(Decrease)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Service charges on deposit accounts
|
|
$
|
25,488
|
|
$
|
21,058
|
|
21.0
|
%
|
$
|
49,242
|
|
$
|
41,283
|
|
19.3
|
%
|
Other service charges, commissions and fees
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Banking
|
|
10,150
|
|
8,843
|
|
14.8
|
|
20,162
|
|
16,961
|
|
18.9
|
|
Non-banking
|
|
1,647
|
|
3,887
|
|
(57.6
|
)
|
3,145
|
|
8,831
|
|
(64.4
|
)
|
Investment securities transactions, net
|
|
6,264
|
|
2,257
|
|
177.5
|
|
6,410
|
|
(14,910
|
)
|
(143.0
|
)
|
Other investments, net
|
|
3,685
|
|
4,785
|
|
(23.0
|
)
|
8,110
|
|
10,568
|
|
(23.3
|
)
|
Other income
|
|
3,783
|
|
6,436
|
|
(41.2
|
)
|
10,242
|
|
10,774
|
|
(4.9
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total non-interest income
|
|
$
|
51,017
|
|
$
|
47,266
|
|
7.9
|
%
|
$
|
97,311
|
|
$
|
73,507
|
|
32.4
|
%
|
The increase
in investment securities transactions for the three and six months ended June 30,
2008 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 and the sale of certain equity investments. The impairment charge in 2007 was the
result of the Companys strategic identification of certain investment
securities that were identified for sale with the proceeds from the sales used
to reduce Federal Home Loan Bank (FHLB) borrowings. The investments identified 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 was done to improve the Companys operating
ratios. As a result of this decision,
the Company marked the securities to market.
The sale of certain equity
securities resulted in a gain of $6.2 million, before taxes for the three and
six months ended June 30, 2008. The
increase in banking service charges, commissions and fees for the first six
months of 2008 can be attributed to surcharge and interchange income from
customers using the IBC debit card and automated teller machines (ATM).
Non-Interest Expense
|
|
Three Months Ended
June 30,
|
|
Percent
|
|
Six Months Ended
June 30,
|
|
Percent
|
|
|
|
(in Thousands)
|
|
Increase
|
|
(in Thousands)
|
|
Increase
|
|
|
|
2008
|
|
2007
|
|
(Decrease)
|
|
2008
|
|
2007
|
|
(Decrease)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Employee compensation and benefits
|
|
$
|
31,420
|
|
$
|
31,962
|
|
(1.7
|
)%
|
$
|
62,460
|
|
$
|
63,155
|
|
(1.1
|
)%
|
Occupancy
|
|
9,022
|
|
8,303
|
|
8.7
|
|
17,098
|
|
15,343
|
|
11.4
|
|
Depreciation of bank premises and equipment
|
|
9,092
|
|
7,813
|
|
16.4
|
|
17,638
|
|
15,369
|
|
14.8
|
|
Professional fees
|
|
3,170
|
|
2,791
|
|
13.6
|
|
5,885
|
|
5,469
|
|
7.6
|
|
Stationery and supplies
|
|
1,266
|
|
1,490
|
|
(15.0
|
)
|
2,594
|
|
2,971
|
|
(12.7
|
)
|
Amortization of identified intangible
assets
|
|
1,299
|
|
1,320
|
|
(1.6
|
)
|
2,598
|
|
2,529
|
|
2.7
|
|
Advertising
|
|
3,479
|
|
3,169
|
|
9.8
|
|
6,662
|
|
6,420
|
|
3.8
|
|
Other
|
|
17,636
|
|
16,581
|
|
6.4
|
|
32,446
|
|
34,242
|
|
(5.2
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total non-interest expense
|
|
$
|
76,384
|
|
$
|
73,429
|
|
4.0
|
%
|
$
|
147,381
|
|
$
|
145,498
|
|
1.3
|
%
|
Non-interest
expense was affected by the aggressive de novo branching activity that has
added 12 new branches in 2008 and 38 branches in 2007, including three acquired
in the Southwest First Community acquisition.
21
Financial Condition
Allowance for Possible Loan Losses
The allowance
for possible loan losses increased 6.0% to $65,407,000 at June 30, 2008
from $61,726,000 at December 31, 2007.
The provision for possible loan losses charged to expense increased
120.9% to $5,653,000 for the six months ended June 30, 2008 from
$2,559,000 for the same period in 2007.
The increase in the provision for possible loan losses charged to
expense can be attributed to an energy-related commercial borrower. The energy-related borrower filed for
bankruptcy protection on July 22, 2008.
The increase in the provision for possible loan losses charged to
expense considers both the value of the borrower as a going concern and its
liquidation value. The Company will
continue to monitor the credit in future periods.
The allowance for possible loan losses
was 1.1% of total loans, net of unearned income at June 30, 2008 and at December 31,
2007, 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 5.0% to $3,962,688,000 at June 30, 2008, from $4,170,188,000 at December 31,
2007. The decrease in investment
securities can be attributed to principal pay downs on mortgage-backed
securities in the investment portfolio.
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 or non-governmental entities and are rated AAA.
Loans
Loans, net of unearned
discounts increased 2.8% to $5,690,075,000 at June 30, 2008, from
$5,536,628,000 at December 31, 2007.
The increase in loans can be attributed to the Companys internal
efforts to grow its loan balances.
Deposits
Deposits increased 0.6% to
$7,201,363,000 at June 30, 2008, from $7,157,606,000 at December 31,
2007. The change in deposits is
primarily the result of the Companys internal sales program.
Foreign Operations
On June 30,
2008, the Company had $11,010,549,000 of consolidated assets, of which
approximately $279,741,000, or 2.5%, was related to loans outstanding to
borrowers domiciled in foreign countries, compared to $285,008,000, or 2.6%, at
December 31, 2007. Of the
$279,741,000, 78.8% is directly or indirectly secured by U.S. assets,
certificates of deposits and real estate; 20.5% is secured by foreign real
estate; and 0.7% is unsecured.
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.
22
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 2008
and 2007 were 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 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 June 30, 2008,
shareholders equity was $989,444,000 compared to $935,905,000 at December 31,
2007, an increase of $53,539,000, or 5.7%.
The increase is primarily due to the retention of earnings offset by
dividends to be paid to shareholders.
The Company had a leverage
ratio of 8.29% and 7.76%, risk-weighted Tier 1 capital ratio of 12.11% and 11.98% and
risk-weighted total capital ratio of 13.13% and 12.99% at June 30, 2008
and December 31, 2007, respectively.
The identified intangibles and goodwill of $311,266,000 as of June 30,
2008, 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 June 30,
2008 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.
23
Interest Rate Sensitivity
(Dollars
in Thousands)
|
|
Rate/Maturity
|
|
June 30, 2008
|
|
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
|
|
$
|
6,000
|
|
$
|
|
|
$
|
|
|
$
|
|
|
$
|
6,000
|
|
Time deposits with banks
|
|
396
|
|
|
|
|
|
|
|
396
|
|
Investment securities
|
|
350,041
|
|
1,926,644
|
|
1,674,173
|
|
11,830
|
|
3,962,688
|
|
Loans, net of non-accruals
|
|
4,215,994
|
|
269,930
|
|
464,805
|
|
671,316
|
|
5,622,045
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total earning assets
|
|
$
|
4,572,431
|
|
$
|
2,196,574
|
|
$
|
2,138,978
|
|
$
|
683,146
|
|
$
|
9,591,129
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cumulative earning assets
|
|
$
|
4,572,431
|
|
$
|
6,769,005
|
|
$
|
8,907,983
|
|
$
|
9,591,129
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Rate sensitive liabilities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Time deposits
|
|
$
|
1,428,507
|
|
$
|
1,579,061
|
|
$
|
344,758
|
|
$
|
598
|
|
$
|
3,352,924
|
|
Other interest bearing deposits
|
|
2,315,771
|
|
|
|
|
|
|
|
2,315,771
|
|
Securities sold under repurchase agreements
|
|
333,315
|
|
136,286
|
|
205,546
|
|
800,000
|
|
1,475,147
|
|
Other borrowed funds
|
|
1,048,089
|
|
|
|
|
|
|
|
1,048,089
|
|
Junior subordinated deferrable interest
debentures
|
|
61,837
|
|
|
|
128,868
|
|
10,304
|
|
201,009
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total interest bearing liabilities
|
|
$
|
5,187,519
|
|
$
|
1,715,347
|
|
$
|
679,172
|
|
$
|
810,902
|
|
$
|
8,392,940
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cumulative sensitive liabilities
|
|
$
|
5,187,519
|
|
$
|
6,902,866
|
|
$
|
7,582,038
|
|
$
|
8,392,940
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Repricing gap
|
|
$
|
(615,088
|
)
|
$
|
481,227
|
|
$
|
1,459,806
|
|
$
|
(127,756
|
)
|
$
|
1,198,189
|
|
Cumulative repricing gap
|
|
(615,088
|
)
|
(133,861
|
)
|
1,325,945
|
|
1,198,189
|
|
|
|
Ratio of interest-sensitive assets to
liabilities
|
|
.88
|
|
1.28
|
|
3.15
|
|
.84
|
|
1.14
|
|
Ratio of cumulative, interest-sensitive
assets to liabilities
|
|
.88
|
|
.98
|
|
1.17
|
|
1.14
|
|
|
|
Item 3.
Quantitative
and Qualitative Disclosures about Market Risk
During
the first six months of 2008, 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 22 of the Companys 2007 Annual Report as
filed as an exhibit to the Companys Form 10-K for the year ended December 31,
2007.
24
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 issued a 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. The
judgment became non-appealable on November 21, 2007. The other partnership case was stayed by the
same Trial Court pending the appeal. Following
the resolution of the first case, the trial court reopened the second case and
set it for trial on September 2, 2008.
Subsequently, the Company engaged in settlement negotiations with the
Department of Justice, and agreed to settle the second case. Under the terms of the settlement, the
Company has conceded the entire amount in dispute based upon the similarity of
the facts of that case to the first case and the likelihood of an unfavorable
outcome if litigated based upon the Court rulings in the first case.
25
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 and the similarity between the two FPAAs, the Company
additionally expensed an approximate $13.7 million in the first quarter of
2006. 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 will continue to evaluate the correspondence with the IRS on
the FPAAs and make any appropriate revisions to the amounts as deemed
necessary.
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, 2007.
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 August 1, 2008, a total of
6,197,214 shares had been repurchased under this program at a cost of
$212,923,000. 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 August 1,
2008, the Company has approximately $233,896,000 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 June 30, 2008.
|
|
Total Number of
Shares Purchased
|
|
Average Price
Paid Per
Share
|
|
Shares Purchased as
Part of a Publicly-
Announced
Program
|
|
Approximate Dollar
Value of Shares
Available for
Repurchase
(1)
|
|
April 1 April 30, 2008
|
|
2,198
|
|
23.20
|
|
|
|
$
|
12,127,800
|
|
May 1 May 31, 2008
|
|
2,081
|
|
24.51
|
|
|
|
12,076,800
|
|
June 1 June 30, 2008
|
|
|
|
|
|
|
|
12,076,800
|
|
|
|
4,279
|
|
$
|
23.88
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) 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
$12,076,800 remains.
26
Item 4.
Submission
of Matters to a Vote of Security Holders
The Annual Meeting of Shareholders of the
Company was held May 19, 2008 for the consideration of the following
items, each of which was approved by the number of votes set forth below:
|
|
|
|
|
Votes
|
|
Votes
|
|
|
|
|
|
|
For
|
|
Withheld
|
|
|
|
|
|
|
|
|
|
|
1.
|
To elect ten
(10) directors of the Company until the next Annual Meeting of
Shareholders and until their successors are elected and qualified; The
following directors, constituting the entire board of directors, were
elected:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Irving Greenblum
|
|
|
|
59,901,225
|
|
358,051
|
|
|
R. David Guerra
|
|
|
|
56,922,274
|
|
3,337,002
|
|
|
Daniel B. Hastings, Jr.
|
|
|
|
59,946,937
|
|
312,339
|
|
|
Richard E. Haynes
|
|
|
|
54,125,016
|
|
6,134,260
|
|
|
Imelda Navarro
|
|
|
|
56,707,364
|
|
3,551,912
|
|
|
Sioma Neiman
|
|
|
|
52,564,252
|
|
7,695,024
|
|
|
Peggy J. Newman
|
|
|
|
59,931,945
|
|
327,331
|
|
|
Dennis E. Nixon
|
|
|
|
56,959,466
|
|
3,299,810
|
|
|
Leonardo Salinas
|
|
|
|
59,852,801
|
|
406,475
|
|
|
A.R. Sanchez, Jr.
|
|
|
|
57,029,654
|
|
3,229,662
|
|
|
|
|
|
|
|
|
|
|
|
|
Broker Non-Votes:
|
|
954,973
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Votes
|
|
Votes
|
|
|
|
|
|
|
For
|
|
Against
|
|
|
|
|
|
|
|
|
|
|
2.
|
To ratify
the appointment of McGladrey & Pullen LLP as independent auditors
for the 2008 fiscal year
|
|
|
|
60,104,711
|
|
138,619
|
|
|
|
|
|
|
|
|
|
|
|
Abstentions :
|
15,944
|
Broker Non-Votes:
|
|
954,975
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Votes
|
|
Votes
|
|
|
|
|
|
|
|
For
|
|
Against
|
|
|
|
|
|
|
|
|
|
|
|
3.
|
To amend the
2005 International Bancshares Stock Option Plan
|
|
|
|
42,621,912
|
|
2,208,689
|
|
|
|
|
|
|
|
|
|
|
|
|
Abstentions :
|
135,384
|
Broker Non-Votes:
|
|
16,248,264
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
27
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
99.1 Amendment One 2005 International
Bancshares Corporation Stock Option Plan incorporated herein as an exhibit by
reference to the Form S-8. Exhibit 99.1
therein under the Securities Exchange Act of 1934, filed by Registrant on Form S-8
with the Securities Exchange Commission on June 30, 2008, SEC File No. 09439.
28
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:
|
August 8,
2008
|
|
/s/ Dennis E. Nixon
|
|
|
|
Dennis
E. Nixon
|
|
|
|
President
|
|
|
|
|
|
|
|
|
Date:
|
August
8, 2008
|
|
/s/ Imelda Navarro
|
|
|
Imelda
Navarro
|
|
|
Treasurer
|
29
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