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 September 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
o
(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
|
|
68,579,446
shares outstanding at
November 3, 2008
|
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,
|
|
|
|
2008
|
|
2007
|
|
Assets
|
|
|
|
|
|
|
|
|
|
|
|
Cash and due
from banks
|
|
$
|
287,087
|
|
$
|
329,052
|
|
Federal funds
sold
|
|
60,000
|
|
17,000
|
|
|
|
|
|
|
|
Total cash and
cash equivalents
|
|
347,087
|
|
346,052
|
|
|
|
|
|
|
|
Time deposits
with banks
|
|
396
|
|
4,852
|
|
|
|
|
|
|
|
Investment
securities:
|
|
|
|
|
|
Held-to-maturity
(Market value of $2,300 on September 30, 2008 and $2,300 on
December 31, 2007)
|
|
2,300
|
|
2,300
|
|
Available-for-sale
(Amortized cost of $4,315,996 on September 30, 2008 and $4,167,624 on
December 31, 2007)
|
|
4,322,219
|
|
4,167,888
|
|
|
|
|
|
|
|
Total investment
securities
|
|
4,324,519
|
|
4,170,188
|
|
|
|
|
|
|
|
Loans, net of
unearned discounts
|
|
5,740,914
|
|
5,536,628
|
|
Less allowance
for possible loan losses
|
|
(68,963
|
)
|
(61,726
|
)
|
|
|
|
|
|
|
Net loans
|
|
5,671,951
|
|
5,474,902
|
|
|
|
|
|
|
|
Bank premises
and equipment, net
|
|
455,194
|
|
435,654
|
|
Accrued interest
receivable
|
|
46,444
|
|
54,301
|
|
Other
investments
|
|
341,620
|
|
323,565
|
|
Identified
intangible assets, net
|
|
27,610
|
|
31,507
|
|
Goodwill, net
|
|
282,532
|
|
283,198
|
|
Other assets
|
|
47,243
|
|
42,942
|
|
|
|
|
|
|
|
Total assets
|
|
$
|
11,544,596
|
|
$
|
11,167,161
|
|
1
INTERNATIONAL
BANCSHARES CORPORATION AND SUBSIDIARIES
Consolidated Statements of Condition, continued
(Unaudited)
(Dollars in Thousands)
|
|
September 30,
|
|
December 31,
|
|
|
|
2008
|
|
2007
|
|
Liabilities and Shareholders Equity
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
Deposits:
|
|
|
|
|
|
Demand
non-interest bearing
|
|
$
|
1,460,564
|
|
$
|
1,512,627
|
|
Savings and
interest bearing demand
|
|
2,227,956
|
|
2,292,589
|
|
Time
|
|
3,312,836
|
|
3,352,390
|
|
|
|
|
|
|
|
Total deposits
|
|
7,001,356
|
|
7,157,606
|
|
|
|
|
|
|
|
Securities sold
under repurchase agreements
|
|
1,468,006
|
|
1,328,983
|
|
Other borrowed
funds
|
|
1,624,750
|
|
1,456,936
|
|
Junior
subordinated deferrable interest debentures
|
|
201,039
|
|
200,929
|
|
Other
liabilities
|
|
254,372
|
|
86,802
|
|
|
|
|
|
|
|
Total
liabilities
|
|
10,549,523
|
|
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 95,472,886 shares on
September 30, 2008 and 95,440,983 shares on December 31, 2007
|
|
95,473
|
|
95,441
|
|
Surplus
|
|
145,218
|
|
144,140
|
|
Retained
earnings
|
|
984,301
|
|
929,145
|
|
Accumulated
other comprehensive income
|
|
4,025
|
|
165
|
|
|
|
1,229,017
|
|
1,168,891
|
|
|
|
|
|
|
|
Less cost of
shares in treasury, 26,892,726 shares on September 30, 2008 and
26,848,880 shares on December 31, 2007
|
|
(233,944
|
)
|
(232,986
|
)
|
|
|
|
|
|
|
Total
shareholders equity
|
|
995,073
|
|
935,905
|
|
|
|
|
|
|
|
Total
liabilities and shareholders equity
|
|
$
|
11,544,596
|
|
$
|
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
September 30,
|
|
Nine Months Ended
September 30,
|
|
|
|
2008
|
|
2007
|
|
2008
|
|
2007
|
|
|
|
|
|
|
|
|
|
|
|
Interest income:
|
|
|
|
|
|
|
|
|
|
Loans, including
fees
|
|
$
|
91,020
|
|
$
|
112,214
|
|
$
|
281,569
|
|
$
|
334,193
|
|
Federal funds
sold
|
|
226
|
|
700
|
|
907
|
|
2,217
|
|
Investment
securities:
|
|
|
|
|
|
|
|
|
|
Taxable
|
|
45,996
|
|
44,862
|
|
138,246
|
|
142,300
|
|
Tax-exempt
|
|
846
|
|
1,046
|
|
2,680
|
|
3,255
|
|
Other interest
income
|
|
106
|
|
336
|
|
383
|
|
2,456
|
|
|
|
|
|
|
|
|
|
|
|
Total interest
income
|
|
138,194
|
|
159,158
|
|
423,785
|
|
484,421
|
|
|
|
|
|
|
|
|
|
|
|
Interest
expense:
|
|
|
|
|
|
|
|
|
|
Savings deposits
|
|
6,807
|
|
14,233
|
|
22,609
|
|
41,024
|
|
Time deposits
|
|
24,093
|
|
36,297
|
|
85,360
|
|
107,570
|
|
Securities sold
under repurchase agreements
|
|
12,486
|
|
11,718
|
|
38,612
|
|
30,253
|
|
Other borrowings
|
|
7,133
|
|
14,821
|
|
24,546
|
|
60,203
|
|
Junior
subordinated interest deferrable debentures
|
|
3,461
|
|
4,281
|
|
10,586
|
|
13,226
|
|
Other interest
expense
|
|
96
|
|
|
|
184
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total interest
expense
|
|
54,076
|
|
81,350
|
|
181,897
|
|
252,276
|
|
|
|
|
|
|
|
|
|
|
|
Net interest
income
|
|
84,118
|
|
77,808
|
|
241,888
|
|
232,145
|
|
|
|
|
|
|
|
|
|
|
|
Provision for
possible loan losses
|
|
7,037
|
|
(3,916
|
)
|
12,690
|
|
(1,357
|
)
|
|
|
|
|
|
|
|
|
|
|
Net interest
income after provision for possible loan losses
|
|
77,081
|
|
81,724
|
|
229,198
|
|
233,502
|
|
|
|
|
|
|
|
|
|
|
|
Non-interest
income:
|
|
|
|
|
|
|
|
|
|
Service charges
on deposit accounts
|
|
25,354
|
|
23,318
|
|
74,596
|
|
64,602
|
|
Other service
charges, commissions and fees
|
|
|
|
|
|
|
|
|
|
Banking
|
|
10,437
|
|
8,800
|
|
30,599
|
|
25,761
|
|
Non-banking
|
|
2,267
|
|
5,061
|
|
5,412
|
|
13,892
|
|
Gain (loss) on
investment securities transactions, net
|
|
|
|
(1,031
|
)
|
6,410
|
|
(15,941
|
)
|
Other
investments, net
|
|
5,785
|
|
4,226
|
|
13,895
|
|
14,794
|
|
Other income
|
|
6,980
|
|
5,243
|
|
17,222
|
|
16,017
|
|
|
|
|
|
|
|
|
|
|
|
Total
non-interest income
|
|
50,823
|
|
45,617
|
|
148,134
|
|
119,125
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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,
|
|
|
|
2008
|
|
2007
|
|
2008
|
|
2007
|
|
|
|
|
|
|
|
|
|
|
|
Non-interest
expense:
|
|
|
|
|
|
|
|
|
|
Employee
compensation and benefits
|
|
$
|
32,854
|
|
$
|
34,645
|
|
$
|
95,314
|
|
$
|
97,800
|
|
Occupancy
|
|
9,955
|
|
8,172
|
|
27,053
|
|
23,515
|
|
Depreciation of
bank premises and equipment
|
|
9,481
|
|
8,178
|
|
27,119
|
|
23,547
|
|
Professional
fees
|
|
2,557
|
|
3,014
|
|
8,442
|
|
8,483
|
|
Stationery and
supplies
|
|
1,540
|
|
1,466
|
|
4,134
|
|
4,437
|
|
Amortization of
identified intangible assets
|
|
1,299
|
|
1,332
|
|
3,897
|
|
3,861
|
|
Advertising
|
|
3,667
|
|
3,391
|
|
10,329
|
|
9,811
|
|
Other
|
|
15,238
|
|
18,154
|
|
47,682
|
|
52,397
|
|
|
|
|
|
|
|
|
|
|
|
Total non-interest
expense
|
|
76,591
|
|
78,352
|
|
223,970
|
|
223,851
|
|
|
|
|
|
|
|
|
|
|
|
Income before
income taxes
|
|
51,313
|
|
48,989
|
|
153,362
|
|
128,776
|
|
|
|
|
|
|
|
|
|
|
|
Provision for
income taxes
|
|
17,433
|
|
16,327
|
|
52,953
|
|
42,880
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
33,880
|
|
$
|
32,662
|
|
$
|
100,409
|
|
$
|
85,896
|
|
|
|
|
|
|
|
|
|
|
|
Basic earnings
per common share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average
number of shares outstanding:
|
|
68,571,661
|
|
68,898,059
|
|
68,573,318
|
|
69,174,016
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
.49
|
|
$
|
.47
|
|
$
|
1.46
|
|
$
|
1.24
|
|
|
|
|
|
|
|
|
|
|
|
Fully diluted
earnings per common share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average
number of shares outstanding:
|
|
68,727,949
|
|
69,090,549
|
|
68,715,082
|
|
69,575,373
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
.49
|
|
$
|
.47
|
|
$
|
1.46
|
|
$
|
1.23
|
|
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,
|
|
|
|
2008
|
|
2007
|
|
2008
|
|
2007
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
33,880
|
|
$
|
32,662
|
|
$
|
100,409
|
|
$
|
85,896
|
|
|
|
|
|
|
|
|
|
|
|
Other
comprehensive income, net of tax
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net unrealized
holding (losses) gains on securities available for sale arising during period
|
|
(6,074
|
)
|
13,471
|
|
(2,550
|
)
|
41,992
|
|
Reclassification
adjustment for (losses) gains on securities available for sale included in
net income
|
|
|
|
(1,031
|
)
|
6,410
|
|
(15,941
|
)
|
|
|
|
|
|
|
|
|
|
|
Comprehensive
income
|
|
$
|
27,806
|
|
$
|
45,102
|
|
$
|
104,269
|
|
$
|
111,947
|
|
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,
|
|
|
|
2008
|
|
2007
|
|
Operating
activities:
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
100, 409
|
|
$
|
85,896
|
|
|
|
|
|
|
|
Adjustments to
reconcile net income to net cash provided by operating activities:
|
|
|
|
|
|
Provision
(credit) for possible loan losses
|
|
12,690
|
|
(1,357
|
)
|
Amortization of
loan premiums
|
|
134
|
|
239
|
|
Accretion of
time deposits with banks
|
|
1
|
|
(49
|
)
|
Accretion of
time deposit discounts
|
|
(28
|
)
|
(9
|
)
|
Depreciation of
bank premises and equipment
|
|
27,119
|
|
23,547
|
|
Gain on sale of
bank premises and equipment
|
|
(44
|
)
|
(3,409
|
)
|
Depreciation and
amortization of leased assets
|
|
760
|
|
1,625
|
|
Accretion of
investment securities discounts
|
|
(858
|
)
|
(439
|
)
|
Amortization of
investment securities premiums
|
|
4,787
|
|
3,173
|
|
Investment
securities transactions, net
|
|
(6,410
|
)
|
15,941
|
|
Amortization of
junior subordinated debenture discounts
|
|
110
|
|
292
|
|
Amortization of
identified intangible assets
|
|
3,897
|
|
3,861
|
|
Stock based
compensation expense
|
|
550
|
|
581
|
|
Earnings from
affiliates and other investments
|
|
(9,773
|
)
|
(7,852
|
)
|
Deferred tax
benefit
|
|
(7,727
|
)
|
(2,261
|
)
|
Decrease in
accrued interest receivable
|
|
7,857
|
|
2,770
|
|
Net decrease in
other assets
|
|
(4,226
|
)
|
(5,015
|
)
|
Net increase in
other liabilities
|
|
150,397
|
|
14,087
|
|
|
|
|
|
|
|
Net cash
provided by operating activities
|
|
279,645
|
|
131,621
|
|
|
|
|
|
|
|
Investing
activities:
|
|
|
|
|
|
|
|
|
|
|
|
Proceeds from
maturities of securities
|
|
16,261
|
|
21,903
|
|
Proceeds from
sales of available for sale securities
|
|
8,359
|
|
841,081
|
|
Purchases of
available for sale securities
|
|
(1,152,190
|
)
|
(1,103,277
|
)
|
Principal
collected on mortgage-backed securities
|
|
981,679
|
|
738,989
|
|
Maturities of
time deposits with banks
|
|
4,457
|
|
35,643
|
|
Net increase in
loans
|
|
(209,873
|
)
|
(168,233
|
)
|
Purchases of
other investments
|
|
(8,315
|
)
|
(54,922
|
)
|
Distributions of
other investments
|
|
33
|
|
97,262
|
|
Purchases of
bank premises and equipment
|
|
(47,415
|
)
|
(56,513
|
)
|
Proceeds from
sale of bank premises and equipment
|
|
800
|
|
7,917
|
|
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 (used
in) provided by investing activities
|
|
(406,204
|
)
|
373,037
|
|
|
|
|
|
|
|
|
|
6
INTERNATIONAL
BANCSHARES CORPORATION AND SUBSIDIARIES
Consolidated
Statements of Cash Flows, continued (Unaudited)
(Dollars
in Thousands)
|
|
Nine Months Ended
September 30,
|
|
|
|
2008
|
|
2007
|
|
|
|
|
|
|
|
Financing
activities:
|
|
|
|
|
|
|
|
|
|
|
|
Net decrease in
non-interest bearing demand deposits
|
|
$
|
(52,063
|
)
|
$
|
(62,287
|
)
|
Net (decrease)
increase in savings and interest bearing demand deposits
|
|
(64,633
|
)
|
55,041
|
|
Net decrease in
time deposits
|
|
(39,526
|
)
|
(79,068
|
)
|
Net increase in
securities sold under repurchase agreements
|
|
139,023
|
|
534,925
|
|
Net increase
(decrease) in other borrowed funds
|
|
167,814
|
|
(954,490
|
)
|
Proceeds of
issuance of long-term debt
|
|
|
|
53,609
|
|
Principal payments
of long term-debt
|
|
|
|
(53,610
|
)
|
Purchase of
treasury stock
|
|
(958
|
)
|
(28,393
|
)
|
Proceeds from
stock transactions
|
|
560
|
|
5,640
|
|
Payment of cash
dividends
|
|
(22,623
|
)
|
(22,086
|
)
|
Payment of cash
dividends in lieu of fractional shares
|
|
|
|
(27
|
)
|
|
|
|
|
|
|
Net cash
provided by (used in) financing activities
|
|
127,594
|
|
(550,746
|
)
|
|
|
|
|
|
|
Increase
(decrease) in cash and cash equivalents
|
|
1,035
|
|
(46,088
|
)
|
|
|
|
|
|
|
Cash and cash
equivalents at beginning of period
|
|
346,052
|
|
297,207
|
|
|
|
|
|
|
|
Cash and cash equivalents
at end of period
|
|
$
|
347,087
|
|
$
|
251,119
|
|
|
|
|
|
|
|
Supplemental
cash flow information:
|
|
|
|
|
|
Interest paid
|
|
$
|
191,610
|
|
$
|
250,212
|
|
Income taxes
paid
|
|
51,711
|
|
51,508
|
|
Dividends
declared, not yet paid
|
|
22,630
|
|
|
|
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
Statement of Financial Accounting Standards No. 131 (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 September 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
|
|
Quoted Prices
in Active
Markets for
Identical
Assets
|
|
Significant Other
Observable
Inputs
|
|
Significant
Unobservable
Inputs
|
|
|
|
September 30, 2008
|
|
(Level 1)
|
|
(Level 2)
|
|
(Level 3)
|
|
|
|
|
|
|
|
|
|
|
|
Measured
on a recurring basis:
|
|
|
|
|
|
|
|
|
|
Assets:
|
|
|
|
|
|
|
|
|
|
Investment
securities available-for-sale
|
|
$
|
4,322,219
|
|
$
|
727
|
|
$
|
4,321,492
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
|
Measured
on a non-recurring basis:
|
|
|
|
|
|
|
|
|
|
Assets:
|
|
|
|
|
|
|
|
|
|
Impaired Loans
|
|
78,543
|
|
|
|
78,543
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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 September 30, 2008 and December 31, 2007 is as
follows:
|
|
September 30,
|
|
December 31,
|
|
|
|
2008
|
|
2007
|
|
|
|
(Dollars in Thousands)
|
|
|
|
|
|
|
|
Commercial,
financial and agricultural
|
|
$
|
2,521,270
|
|
$
|
2,426,064
|
|
Real estate
mortgage
|
|
867,097
|
|
798,708
|
|
Real estate
construction
|
|
1,896,091
|
|
1,835,950
|
|
Consumer
|
|
172,055
|
|
190,899
|
|
Foreign
|
|
284,401
|
|
285,008
|
|
|
|
|
|
|
|
Total loans
|
|
5,740,914
|
|
5,536,629
|
|
|
|
|
|
|
|
Unearned
discount
|
|
|
|
(1
|
)
|
|
|
|
|
|
|
Loans, net of
unearned discount
|
|
$
|
5,740,914
|
|
$
|
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:
|
|
September 30,
|
|
September 30,
|
|
|
|
2008
|
|
2007
|
|
|
|
(Dollars in Thousands)
|
|
|
|
|
|
|
|
Balance at
December 31,
|
|
$
|
61,726
|
|
$
|
64,537
|
|
|
|
|
|
|
|
Losses charged
to allowance
|
|
(6,345
|
)
|
(5,297
|
)
|
Recoveries
credited to allowance
|
|
892
|
|
4,138
|
|
Net losses
charged to allowance
|
|
(5,453
|
)
|
(1,159
|
)
|
|
|
|
|
|
|
Provision charged
to operations
|
|
12,690
|
|
(1,357
|
)
|
Allowance
acquired in acquisition (Note 2)
|
|
|
|
1,054
|
|
|
|
|
|
|
|
Balance at
September 30,
|
|
$
|
68,963
|
|
$
|
63,075
|
|
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:
|
|
September 30,
|
|
December 31,
|
|
|
|
2008
|
|
2007
|
|
|
|
(Dollars in Thousands)
|
|
|
|
|
|
|
|
Balance of
impaired loans where there is a related allowance for loan loss
|
|
$
|
40,243
|
|
$
|
39,618
|
|
Balance of
impaired loans where there is no related allowance for loan loss
|
|
47,443
|
|
|
|
|
|
|
|
|
|
Total impaired
loans
|
|
$
|
87,686
|
|
$
|
39,618
|
|
|
|
|
|
|
|
Allowance
allocated to impaired loans
|
|
$
|
9,143
|
|
$
|
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 $62,324,000 and $22,590,000 for the nine months and year ended September 30,
2008 and December 31, 2007, respectively.
The interest recognized on impaired loans was not significant. The increase in the balance of impaired loans
can be partially attributed to a certain energy related loan that filed for
bankruptcy protection and certain other loans that deteriorated during the last
nine months; however, a substantial amount of the impaired loans have adequate
collateral and credit enhancements to justify not allocating a related
allowance for loan loss.
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,
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
September 30, 2008, 370,572 shares were available for future grants under
the 2005 Plan.
11
A summary of
option activity under the stock option plans for the nine months ended September 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
|
|
31,903
|
|
13.76
|
|
|
|
|
|
Options expired
|
|
|
|
|
|
|
|
|
|
Options
forfeited
|
|
36,405
|
|
23.68
|
|
|
|
|
|
Options
outstanding at September 30, 2008
|
|
857,675
|
|
$
|
21.17
|
|
3.80
|
|
$
|
5,063,900
|
|
|
|
|
|
|
|
|
|
|
|
Options fully
vested and exercisable at September 30, 2008
|
|
431,180
|
|
$
|
16.48
|
|
2.01
|
|
$
|
4,589,200
|
|
Stock-based
compensation expense included in the consolidated statements of income for the
three and nine months ended September 30, 2008, was approximately $174,000
and $550,000, respectively. As of September 30,
2008, there was approximately $1,225,900, 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 1.5 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:
|
|
September 30,
|
|
December 31,
|
|
|
|
2008
|
|
2007
|
|
|
|
(Dollars in Thousands)
|
|
|
|
|
|
|
|
U.S. Treasury
securities
|
|
|
|
|
|
Available-for-sale
|
|
$
|
1,326
|
|
$
|
1,308
|
|
Mortgage-backed
securities
|
|
|
|
|
|
Available-for-sale
|
|
4,236,989
|
|
4,066,828
|
|
States and
political subdivisions
|
|
|
|
|
|
Available-for-sale
|
|
69,677
|
|
84,633
|
|
Other
|
|
|
|
|
|
Held-to-maturity
|
|
2,300
|
|
2,300
|
|
Available-for-sale
|
|
14,227
|
|
15,119
|
|
|
|
|
|
|
|
Total investment
securities
|
|
$
|
4,324,519
|
|
$
|
4,170,188
|
|
Included in mortgage-backed securities in the
table above are $2,379,222 of mortgage-backed securities issued by either the
Federal Home Loan Mortgage Corporation (Freddie Mac) or the Federal National
Mortgage Corporation (Fannie Mae), $1,775,103 of mortgage-backed securities
issued by the Government National Mortgage Corporation (Ginnie Mae) and
$82,664 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 carry an
implied AAA rating with limited credit risk, particularly given the placement
of Fannie Mae and Freddie Mac into conservatorship by the federal government in
early September 2008. Investments
in mortgage-backed securities issued by non-governmental entities are
investment grade.
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 September 30, 2008,
other borrowed funds totaled $1,624,750,000, an increase of 11.5% 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 September 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 September 30,
2008, the principal amount of debentures outstanding totaled $201,039,000.
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. As of September 30, 2008,
the total $201,039,000, of the Capital Securities outstanding qualified as Tier
1 capital.
In March 2005, the
Federal Reserve Board issued a final rule that allowed the inclusion of
trust preferred securities in Tier 1 capital, but placed 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, 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.
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, 2008:
|
|
Junior
Subordinated
Deferrable
Interest
Debentures
|
|
Repricing
Frequency
|
|
Interest Rate
|
|
Interest Rate
Index
|
|
Maturity Date
|
|
Optional
Redemption Date
|
|
|
|
(in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Trust I
|
|
$
|
10,313
|
|
Fixed
|
|
10.18
|
%
|
Fixed
|
|
June 2031
|
|
June 2011
|
|
Trust VI
|
|
$
|
25,774
|
|
Quarterly
|
|
6.25
|
%
|
LIBOR + 3.45
|
|
November 2032
|
|
November 2008
|
|
Trust VII
|
|
$
|
10,310
|
|
Quarterly
|
|
6.05
|
%
|
LIBOR + 3.25
|
|
April 2033
|
|
October 2008
|
|
Trust VIII
|
|
$
|
25,774
|
|
Quarterly
|
|
5.84
|
%
|
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
|
|
|
|
$
|
201,039
|
|
|
|
|
|
|
|
|
|
|
|
(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 and October 15, 2008, to all holders of record on March 31,
2008 and September 30, 2008, 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 3,
2008, a total of 6,200,226 shares had been repurchased under this program at a
cost of $213,005,000. 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 3,
2008, the Company has approximately $233,978,000 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 the second case to the first case and the
likelihood of an unfavorable outcome if litigated based upon the Court rulings
in the first case. On August 13,
2008, the Company filed a lawsuit in the Texas State District Court in Laredo,
Texas against KPMG, LLP and a number of other third parties asserting claims
against the defendants related to the underlying transactions of the two
partnership tax cases.
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 8.22% and 7.76%, risk-weighted Tier 1 capital ratio of 12.20%
and 11.98% and risk-weighted total capital ratio of 13.20% and 12.99% at September 30,
2008 and December 31, 2007, respectively.
The identified intangibles and goodwill of $310,142,000 as of September 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. 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.
Risk 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:
·
Local, regional, national and
international economic business conditions and the impact they may have on the
Company and 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.
·
Volatility and disruption in national
and international financial markets.
·
Government intervention in the U.S.
financial system.
·
Changes in consumer spending,
borrowings and savings habits.
·
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.
·
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.
·
Greater than expected costs or
difficulties related to the development and integration of new products and
lines of business.
·
Changes in the soundness of other
financial institutions with which the Company interacts.
·
Political instability in the United
States and Mexico.
·
Technological changes.
·
Acts of war or terrorism.
·
Natural disasters.
·
Reduced earnings resulting from the
write down of the carrying value of securities held in our securities
available-for-sale portfolio following a determination that the securities are
other-than-temporarily impaired.
·
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.
17
·
The Companys success at managing the
risks involved in the foregoing items.
Forward-looking statements speak only as of the date on which such
statements are made. It is not possible
to foresee or identify all such factors.
The Company makes no commitment to update any forward-looking statement,
or to disclose any facts, events or circumstances after the date hereof that
may affect the accuracy of any forward-looking statement, unless required by
law.
Overview
The Company, which is
headquartered in Laredo, Texas, with 263 facilities and 420 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 with the Companys extensive branch and ATM network 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 nine 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 55
branches in 2007 and the first nine 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.
18
Results of Operations
Summary
Consolidated Statements
of Condition Information
|
|
September 30, 2008
|
|
December 31, 2007
|
|
Percent Increase
(Decrease)
|
|
|
|
(Dollars in Thousands)
|
|
|
|
Assets
|
|
$
|
11,544,596
|
|
$
|
11,167,161
|
|
3.4
|
%
|
Net loans
|
|
5,671,951
|
|
5,474,902
|
|
3.6
|
|
Deposits
|
|
7,001,356
|
|
7,157,606
|
|
(2.2
|
)
|
Other borrowed
funds
|
|
1,624,750
|
|
1,456,936
|
|
11.5
|
|
Junior
subordinated deferrable interest debentures
|
|
201,039
|
|
200,929
|
|
.1
|
|
Shareholders
equity
|
|
995,073
|
|
935,905
|
|
6.3
|
|
|
|
|
|
|
|
|
|
|
|
Consolidated
Statements of Income Information
|
|
Three Months Ended
September 30,
|
|
Percent
|
|
Nine Months Ended
September 30,
|
|
Percent
|
|
|
|
(Dollars in Thousands)
|
|
Increase
|
|
(Dollars in Thousands)
|
|
Increase
|
|
|
|
2008
|
|
2007
|
|
(Decrease)
|
|
2008
|
|
2007
|
|
(Decrease)
|
|
Interest income
|
|
$
|
138,194
|
|
$
|
159,158
|
|
(13.2
|
)%
|
$
|
423,785
|
|
$
|
484,421
|
|
(12.5
|
)%
|
Interest expense
|
|
54,076
|
|
81,350
|
|
(33.5
|
)
|
181,897
|
|
252,276
|
|
(27.9
|
)
|
Net interest
income
|
|
84,118
|
|
77,808
|
|
8.1
|
|
241,888
|
|
232,145
|
|
4.2
|
|
Provision for
possible loan losses
|
|
7,037
|
|
(3,916
|
)
|
279.7
|
|
12,690
|
|
(1,357
|
)
|
1,035.2
|
|
Non-interest
income
|
|
50,823
|
|
45,617
|
|
11.4
|
|
148,134
|
|
119,125
|
|
24.4
|
|
Non-interest
expense
|
|
76,591
|
|
78,352
|
|
(2.2
|
)
|
223,970
|
|
223,851
|
|
(.1
|
)
|
Net income
|
|
33,880
|
|
32,662
|
|
3.7
|
|
100,409
|
|
85,896
|
|
16.9
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Per common share
(adjusted for stock dividends):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
$
|
.49
|
|
$
|
.47
|
|
4.3
|
%
|
$
|
1.46
|
|
$
|
1.24
|
|
17.7
|
%
|
Diluted
|
|
.49
|
|
.47
|
|
4.3
|
|
1.46
|
|
1.23
|
|
18.7
|
|
Net Income
Net income for the nine
months ended September 30, 2008 increased by 16.9% as compared to the same
period in 2007. Net income for the first
nine months of 2008 was negatively impacted by increases in the provision for
possible loan losses charged to expense because of the economic turmoil
currently being experienced in the United States. 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 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
September 30,
|
|
Percent
|
|
Nine Months Ended
September 30,
|
|
Percent
|
|
|
|
(in Thousands)
|
|
Increase
|
|
(in Thousands)
|
|
Increase
|
|
|
|
2008
|
|
2007
|
|
(Decrease)
|
|
2008
|
|
2007
|
|
(Decrease)
|
|
Interest income:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loans, including
fees
|
|
$
|
91,020
|
|
$
|
112,214
|
|
(18.9
|
)%
|
$
|
281,569
|
|
$
|
334,193
|
|
(15.7
|
)%
|
Federal funds
sold
|
|
226
|
|
700
|
|
(67.7
|
)
|
907
|
|
2,217
|
|
(59.1
|
)
|
Investment
securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Taxable
|
|
45,996
|
|
44,862
|
|
2.5
|
|
138,246
|
|
142,300
|
|
(2.8
|
)
|
Tax-exempt
|
|
846
|
|
1,046
|
|
(19.1
|
)
|
2,680
|
|
3,255
|
|
(17.7
|
)
|
Other interest
income
|
|
106
|
|
336
|
|
(68.5
|
)
|
383
|
|
2,456
|
|
(84.4
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total interest
income
|
|
138,194
|
|
159,158
|
|
(13.2
|
)
|
423,785
|
|
484,421
|
|
(12.5
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest
expense:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Savings deposits
|
|
6,807
|
|
14,233
|
|
(52.2
|
)
|
22,609
|
|
41,024
|
|
(44.9
|
)
|
Time deposits
|
|
24,093
|
|
36,297
|
|
(33.6
|
)
|
85,360
|
|
107,570
|
|
(20.6
|
)
|
Securities sold
under repurchase agreements
|
|
12,486
|
|
11,718
|
|
6.6
|
|
38,612
|
|
30,253
|
|
27.6
|
|
Other borrowings
|
|
7,133
|
|
14,821
|
|
(51.9
|
)
|
24,546
|
|
60,203
|
|
(59.2
|
)
|
Junior
subordinated interest deferrable debentures
|
|
3,461
|
|
4,281
|
|
(19.2
|
)
|
10,586
|
|
13,226
|
|
(20.0
|
)
|
Other interest
expense
|
|
96
|
|
|
|
(100.0
|
)
|
184
|
|
|
|
(100.0
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total interest
expense
|
|
54,076
|
|
81,350
|
|
(33.5
|
)
|
181,897
|
|
252,276
|
|
(27.9
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net interest
income
|
|
$
|
84,118
|
|
$
|
77,808
|
|
8.1
|
%
|
$
|
241,888
|
|
$
|
232,145
|
|
4.2
|
%
|
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 nine months of 2008, the prime interest rate decreased
by 225 basis points to end the quarter at 5.00%. On October 8 and October 30, 2008,
the prime interest rate decreased an additional 50 basis points on each day to
end at 4.0% on October 31, 2008.
The Companys goal is to manage the net interest income in periods of
rising and falling rates. Net interest
income increased 4.2% for the first nine months of 2008 as compared to the same
period in 2007 despite the decreases in the prime interest rate.
20
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, 2008 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.
Non-Interest
Income
|
|
Three Months Ended
September 30,
|
|
Percent
|
|
Nine Months Ended
September 30,
|
|
Percent
|
|
|
|
(in Thousands)
|
|
Increase
|
|
(in Thousands)
|
|
Increase
|
|
|
|
2008
|
|
2007
|
|
(Decrease)
|
|
2008
|
|
2007
|
|
(Decrease)
|
|
Service charges on deposit accounts
|
|
$
|
25,354
|
|
$
|
23,318
|
|
8.7
|
%
|
$
|
74,596
|
|
$
|
64,602
|
|
15.5
|
%
|
Other service charges, commissions
and fees
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Banking
|
|
10,437
|
|
8,800
|
|
18.6
|
|
30,599
|
|
25,761
|
|
18.8
|
|
Non-banking
|
|
2,267
|
|
5,061
|
|
(55.2
|
)
|
5,412
|
|
13,892
|
|
(61.0
|
)
|
Investment securities transactions, net
|
|
|
|
(1,031
|
)
|
(100.0
|
)
|
6,410
|
|
(15,941
|
)
|
(140.2
|
)
|
Other investments, net
|
|
5,785
|
|
4,226
|
|
36.9
|
|
13,895
|
|
14,794
|
|
(6.1
|
)
|
Other income
|
|
6,980
|
|
5,243
|
|
33.1
|
|
17,222
|
|
16,017
|
|
7.5
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total non-interest income
|
|
$
|
50,823
|
|
$
|
45,617
|
|
11.4
|
%
|
$
|
148,134
|
|
$
|
119,125
|
|
24.4
|
%
|
The increase in investment
securities transactions for the nine months ended September 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 nine months ended September 30,
2008. The increase in banking service
charges, commissions and fees for the first nine months of 2008 can be
attributed to increased surcharge and interchange income from customers using
the IBC debit card and automated teller machines (ATM).
21
Non-Interest Expense
|
|
Three Months Ended
September 30,
|
|
Percent
|
|
Nine Months Ended
September 30,
|
|
Percent
|
|
|
|
(in Thousands)
|
|
Increase
|
|
(in Thousands)
|
|
Increase
|
|
|
|
2008
|
|
2007
|
|
(Decrease)
|
|
2008
|
|
2007
|
|
(Decrease)
|
|
Employee
compensation and benefits
|
|
$
|
32,854
|
|
$
|
34,645
|
|
(5.2
|
)%
|
$
|
95,314
|
|
$
|
97,800
|
|
(2.5
|
)%
|
Occupancy
|
|
9,955
|
|
8,172
|
|
21.8
|
|
27,053
|
|
23,515
|
|
15.0
|
|
Depreciation of
bank premises and equipment
|
|
9,481
|
|
8,178
|
|
15.9
|
|
27,119
|
|
23,547
|
|
15.2
|
|
Professional
fees
|
|
2,557
|
|
3,014
|
|
(15.2
|
)
|
8,442
|
|
8,483
|
|
(.5
|
)
|
Stationery and
supplies
|
|
1,540
|
|
1,466
|
|
5.0
|
|
4,134
|
|
4,437
|
|
(6.8
|
)
|
Amortization of
identified intangible assets
|
|
1,299
|
|
1,332
|
|
(2.5
|
)
|
3,897
|
|
3,861
|
|
.9
|
|
Advertising
|
|
3,667
|
|
3,391
|
|
8.1
|
|
10,329
|
|
9,811
|
|
5.3
|
|
Other
|
|
15,238
|
|
18,154
|
|
(16.1
|
)
|
47,682
|
|
52,397
|
|
(9.0
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
non-interest expense
|
|
76,591
|
|
$
|
78,352
|
|
(2.2
|
)%
|
223,970
|
|
$
|
223,851
|
|
(.1
|
)%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-interest expense was
affected by the aggressive de novo branching activity that has added 17 new
branches in 2008 and 38 branches in 2007, including two acquired in the
Southwest First Community acquisition.
Financial Condition
Allowance for Possible Loan
Losses
The allowance for
possible loan losses increased 11.7% to $68,963,000 at September 30, 2008
from $61,726,000 at December 31, 2007.
The provision for possible loan losses charged to expense increased
1,035.2% to $12,690,000 for the nine months ended September 30, 2008 from
$(1,357,000) for the same period in 2007.
The Companys provision for possible loan losses increased for the nine
months ended September 30, 2008 because of the economic turmoil currently
being experienced in the United States.
As a result of this turmoil, the Company has continued to re-evaluate
certain areas of its allowance for possible loan losses to reflect the
appropriate amount needed as an allowance.
The allowance for possible loan losses was 1.2% of total loans, net of
unearned income at September 30, 2008 and 1.1% 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 increased 3.7% to
$4,324,519,000 at September 30, 2008, from $4,170,188,000 at December 31,
2007. 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. The securities issued by
Fannie Mae and Freddie Mac have an implied rating of AAA because on September 7,
2008, the two agencies were placed in conservatorship by the Federal Housing
Finance Agency (FHFA) and, under the conservatorship of the FHFA, the federal
government has provided Fannie Mae and Freddie Mac with substantial backing in
the form of secured lending facilities and preferred equity capital. The actual or perceived credit quality of
these agency securities may be negatively impacted by market uncertainty over
any regulatory or legislative initiatives that may affect the financial backing
of these securities or other matters related to these agency securities. The securities issued by non-governmental
entities are investment grade.
Loans
Loans, net of unearned discounts increased 3.7% to $5,740,914,000 at September 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.
22
Deposits
Deposits decreased 2.2%
to $7,001,356,000 at September 30, 2008, from $7,157,606,000 at December 31,
2007.
Foreign Operations
On September 30,
2008, the Company had $11,544,596,000 of consolidated assets, of which
approximately $284,401,000, 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
$284,401,000, 76.9% is directly or indirectly secured by U.S. assets,
certificates of deposits and real estate; 22.3% is secured by foreign real
estate; and 0.8% 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.
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 September 30,
2008, shareholders equity was $995,073,000 compared to $935,905,000 at December 31,
2007, an increase of $59,168,000, or 6.3%.
The increase is primarily due to the retention of earnings offset by
dividends paid to shareholders.
The Company had a
leverage ratio of 8.22% and 7.76%, risk-weighted Tier 1 capital ratio of 12.20%
and 11.98% and risk-weighted total capital ratio of 13.20% and 12.99% at September 30,
2008 and December 31, 2007, respectively.
The identified intangibles and goodwill of $310,142,000 as of September 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.
23
As of September 30,
2008, the Company had capital ratios in excess of those required to be
considered well-capitalized under current banking regulations; however, given
the substantial ongoing economic uncertainties and the lack of liquidity in the
market, the Company believes it may be beneficial and prudent to raise capital
under the U.S. Treasurys Capital Purchase Program. The Company believes that it would be
eligible to raise up to approximately $216 million of capital under the program
and that the cost and amount of capital being offered under the Treasurys
program may be significantly larger and more attractive than the capital
otherwise available to the Company in the current market. Raising capital under the Treasurys program
would provide the Company with an additional layer of capital to face the
challenging economic environment and to participate in the opportunities that
it may present. Participation in the
Capital Purchase Program would require the Company to issue shares of preferred
stock. The Company has called a special
shareholders meeting in December 2008, for the shareholders to consider
and vote on a proposal to authorize preferred stock 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,
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.
24
Interest Rate Sensitivity
(Dollars in
Thousands)
|
|
Rate/Maturity
|
|
September 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
|
|
$
|
60,000
|
|
$
|
|
|
$
|
|
|
$
|
|
|
$
|
60,000
|
|
Time deposits
with banks
|
|
396
|
|
|
|
|
|
|
|
396
|
|
Investment
securities
|
|
516,265
|
|
1,759,953
|
|
1,987,997
|
|
60,304
|
|
4,324,519
|
|
Loans, net of
non-accruals
|
|
4,205,877
|
|
309,669
|
|
453,480
|
|
685,197
|
|
5,654,223
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total earning
assets
|
|
$
|
4,782,538
|
|
$
|
2,069,622
|
|
$
|
2,441,477
|
|
$
|
745,501
|
|
$
|
10,039,138
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cumulative
earning assets
|
|
$
|
4,782,538
|
|
$
|
6,852,160
|
|
$
|
9,293,637
|
|
$
|
10,039,138
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Rate sensitive
liabilities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Time deposits
|
|
$
|
1,436,252
|
|
$
|
1,555,069
|
|
$
|
320,920
|
|
$
|
595
|
|
$
|
3,312,836
|
|
Other interest
bearing deposits
|
|
2,227,956
|
|
|
|
|
|
|
|
2,227,956
|
|
Securities sold
under repurchase agreements
|
|
376,822
|
|
85,054
|
|
6,130
|
|
1,000,000
|
|
1,468,006
|
|
Other borrowed
funds
|
|
1,624,750
|
|
|
|
|
|
|
|
1,624,750
|
|
Junior
subordinated deferrable interest debentures
|
|
61,858
|
|
|
|
128,868
|
|
10,313
|
|
201,039
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total interest
bearing liabilities
|
|
$
|
5,727,638
|
|
$
|
1,640,123
|
|
$
|
455,918
|
|
$
|
1,010,908
|
|
$
|
8,834,587
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cumulative
sensitive liabilities
|
|
$
|
5,727,638
|
|
$
|
7,367,761
|
|
$
|
7,823,679
|
|
$
|
8,834,587
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Repricing gap
|
|
$
|
(945,100
|
)
|
$
|
429,499
|
|
$
|
1,985,559
|
|
$
|
(265,407
|
)
|
$
|
1,204,551
|
|
Cumulative
repricing gap
|
|
(945,100
|
)
|
(515,601
|
)
|
1,469,958
|
|
1,204,551
|
|
|
|
Ratio of
interest-sensitive assets to liabilities
|
|
.83
|
|
1.26
|
|
5.36
|
|
.74
|
|
1.14
|
|
Ratio of
cumulative, interest- sensitive assets to liabilities
|
|
.83
|
|
.93
|
|
1.19
|
|
1.14
|
|
|
|
Item 3.
Quantitative and Qualitative Disclosures
about Market Risk
During the first nine
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.
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 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. On August 13, 2008, the
Company filed a lawsuit in the Texas State District Court in Laredo, Texas
against KPMG, LLP and a number of other
26
third parties asserting
claims against the defendants related to the underlying transactions of the two
partnership tax cases.
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
Except for the addition
of the risk factor detailed below, 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. Please also see the risk factors set forth
under Special Cautionary Notice Regarding Forward Looking Information in Part
I, Item 2, hereof entitled Managements Discussion and Analysis of Financial
Condition and Results of Operations.
The Company May Be Adversely
Affected by the Soundness of Other Financial Institutions
Financial services
institutions are interrelated as a result of trading, clearing, counterparty,
or other relationships. The Company has
exposure to many different industries and counterparties, and routinely engages
in transactions with counterparties in the financial services industry,
including commercial banks, brokers and dealers, investment banks, and other
institutional clients. Many of these
transactions expose the Company to credit risk in the event of a default by a
counterparty or client, including credit risk related to the underlying
collateral of such transactions. Any
such losses could have a material adverse affect on the Companys financial
conditions and results of operations.
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 3,
2008, a total of 6,200,226 shares had been repurchased under this program at a
cost of $213,005,000. 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 3,
2008, the Company has approximately $233,978,000 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,
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)
|
|
July 1
July 31, 2008
|
|
|
|
|
|
|
|
$
|
12,076,800
|
|
August 1
August 31, 2008
|
|
|
|
|
|
|
|
12,076,800
|
|
September 1
September 30, 2008
|
|
1,625
|
|
29.29
|
|
|
|
12,029,200
|
|
|
|
1,625
|
|
$
|
29.29
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(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
$12,029,200 remains.
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
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:
|
November 7, 2008
|
|
/s/ Dennis E. Nixon
|
|
Dennis E. Nixon
|
|
President
|
|
|
|
|
Date:
|
November 7, 2008
|
|
/s/ Imelda Navarro
|
|
Imelda Navarro
|
|
Treasurer
|
29
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