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 March 31,
2010
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 000-09439
INTERNATIONAL BANCSHARES
CORPORATION
(Exact name of registrant
as specified in its charter)
Texas
|
|
74-2157138
|
(State or other
jurisdiction of
|
|
(I.R.S. Employer
Identification No.)
|
incorporation or
organization)
|
|
|
1200 San Bernardo Avenue, Laredo, Texas 78042-1359
(Address of principal
executive offices)
(Zip Code)
(956) 722-7611
(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 whether the registrant has
submitted electronically and posted on its corporate Website, if any, every
Interactive Data File required to be submitted and posted pursuant to Rule 405
of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or
for such shorter period that the registrant was required to submit and post
such files). Yes
o
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 smaller 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
|
|
68,103,977 shares
outstanding at May 3, 2010
|
PART I
- FINANCIAL INFORMATION
Item 1.
Financial Statements
INTERNATIONAL
BANCSHARES CORPORATION AND SUBSIDIARIES
Consolidated
Statements of Condition (Unaudited)
(Dollars
in Thousands)
|
|
March 31,
|
|
December 31,
|
|
|
|
2010
|
|
2009
|
|
Assets
|
|
|
|
|
|
|
|
|
|
|
|
Cash and due
from banks
|
|
$
|
376,820
|
|
$
|
224,638
|
|
|
|
|
|
|
|
Total cash and
cash equivalents
|
|
376,820
|
|
224,638
|
|
|
|
|
|
|
|
Investment
securities:
|
|
|
|
|
|
Held-to-maturity
(Market value of $2,450 on March 31, 2010
and $2,450 on December 31, 2009)
|
|
2,450
|
|
2,450
|
|
Available-for-sale
(Amortized cost of $3,584,389 on
March 31, 2010 and $4,541,851 on
December 31, 2009)
|
|
3,665,904
|
|
4,644,083
|
|
|
|
|
|
|
|
Total investment
securities
|
|
3,668,354
|
|
4,646,533
|
|
|
|
|
|
|
|
Loans, net of
unearned discounts
|
|
5,567,985
|
|
5,667,262
|
|
Less allowance
for probable loan losses
|
|
(95,838
|
)
|
(95,393
|
)
|
|
|
|
|
|
|
Net loans
|
|
5,472,147
|
|
5,571,869
|
|
|
|
|
|
|
|
Bank premises
and equipment, net
|
|
484,917
|
|
490,375
|
|
Accrued interest
receivable
|
|
35,945
|
|
41,731
|
|
Other
investments
|
|
316,917
|
|
359,404
|
|
Identified
intangible assets, net
|
|
21,101
|
|
22,358
|
|
Goodwill, net
|
|
282,532
|
|
282,532
|
|
Other assets
|
|
124,933
|
|
123,103
|
|
|
|
|
|
|
|
Total assets
|
|
$
|
10,783,666
|
|
$
|
11,762,543
|
|
1
INTERNATIONAL
BANCSHARES CORPORATION AND SUBSIDIARIES
Consolidated
Statements of Condition, continued (Unaudited)
(Dollars
in Thousands)
|
|
March 31,
|
|
December 31,
|
|
|
|
2010
|
|
2009
|
|
Liabilities and Shareholders
Equity
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
Deposits:
|
|
|
|
|
|
Demand
non-interest bearing
|
|
$
|
1,588,972
|
|
$
|
1,516,799
|
|
Savings and
interest bearing demand
|
|
2,334,051
|
|
2,262,552
|
|
Time
|
|
3,527,933
|
|
3,398,656
|
|
|
|
|
|
|
|
Total deposits
|
|
7,450,956
|
|
7,178,007
|
|
|
|
|
|
|
|
Securities sold
under repurchase agreements
|
|
1,478,768
|
|
1,441,817
|
|
Other borrowed
funds
|
|
99,575
|
|
1,347,625
|
|
Junior
subordinated deferrable interest debentures
|
|
201,091
|
|
201,082
|
|
Other
liabilities
|
|
141,242
|
|
186,542
|
|
|
|
|
|
|
|
Total
liabilities
|
|
9,371,632
|
|
10,355,073
|
|
|
|
|
|
|
|
Commitments, Contingent Liabilities and Other Tax Matters (Note 10)
|
|
|
|
|
|
|
|
|
|
|
|
Shareholders
equity:
|
|
|
|
|
|
|
|
|
|
|
|
Series A
Cumulative perpetual preferred shares, $.01 par value,
$1,000 per share liquidation value.
Authorized 25,000,000
shares; issued 216,000 shares on March 31,
2010, net of
discount of $9,690 and issued 216,000 shares on
December 31, 2009, net of discount
of $10,258
|
|
206,310
|
|
205,742
|
|
Common shares of
$1.00 par value. Authorized 275,000,000
shares; issued 95,711,111 shares on
March 31, 2010 and
95,711,111 shares on December 31, 2009
|
|
95,711
|
|
95,711
|
|
Surplus
|
|
161,410
|
|
161,258
|
|
Retained
earnings
|
|
1,139,491
|
|
1,122,290
|
|
Accumulated
other comprehensive income
|
|
52,521
|
|
65,878
|
|
|
|
1,655,443
|
|
1,650,879
|
|
|
|
|
|
|
|
Less cost of shares in treasury, 27,607,171 shares on March 31,
2010 and
27,607,171 shares on December 31, 2009
|
|
(243,409
|
)
|
(243,409
|
)
|
|
|
|
|
|
|
Total
shareholders equity
|
|
1,412,034
|
|
1,407,470
|
|
|
|
|
|
|
|
Total
liabilities and shareholders equity
|
|
$
|
10,783,666
|
|
$
|
11,762,543
|
|
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
March 31,
|
|
|
|
2010
|
|
2009
|
|
|
|
|
|
|
|
Interest income:
|
|
|
|
|
|
Loans, including
fees
|
|
$
|
80,614
|
|
$
|
83,626
|
|
Investment
securities:
|
|
|
|
|
|
Taxable
|
|
37,333
|
|
55,432
|
|
Tax-exempt
|
|
1,634
|
|
970
|
|
Other interest
income
|
|
241
|
|
188
|
|
|
|
|
|
|
|
Total interest
income
|
|
119,822
|
|
140,216
|
|
|
|
|
|
|
|
Interest
expense:
|
|
|
|
|
|
Savings deposits
|
|
2,481
|
|
2,949
|
|
Time deposits
|
|
13,053
|
|
17,851
|
|
Securities sold
under repurchase agreements
|
|
11,052
|
|
11,361
|
|
Other borrowings
|
|
311
|
|
6,685
|
|
Junior
subordinated interest deferrable debentures
|
|
3,030
|
|
3,224
|
|
|
|
|
|
|
|
Total interest
expense
|
|
29,927
|
|
42,070
|
|
|
|
|
|
|
|
Net interest
income
|
|
89,895
|
|
98,146
|
|
|
|
|
|
|
|
Provision for
probable loan losses
|
|
7,229
|
|
12,225
|
|
|
|
|
|
|
|
Net interest
income after provision for probable loan losses
|
|
82,666
|
|
85,921
|
|
|
|
|
|
|
|
Non-interest
income:
|
|
|
|
|
|
Service charges
on deposit accounts
|
|
24,280
|
|
24,082
|
|
Other service
charges, commissions and fees
|
|
|
|
|
|
Banking
|
|
11,620
|
|
10,397
|
|
Non-banking
|
|
1,668
|
|
1,427
|
|
Investment
securities transactions, net
|
|
28,264
|
|
561
|
|
Other
investments, net
|
|
3,357
|
|
3,432
|
|
Other income
|
|
2,408
|
|
2,113
|
|
|
|
|
|
|
|
Total
non-interest income
|
|
71,597
|
|
42,012
|
|
|
|
|
|
|
|
|
|
3
INTERNATIONAL BANCSHARES CORPORATION AND SUBSIDIARIES
Consolidated
Statements of Income, continued (Unaudited)
(Dollars
in Thousands, except per share data)
|
|
Three Months Ended
March 31,
|
|
|
|
2010
|
|
2009
|
|
Non-interest
expense:
|
|
|
|
|
|
Employee
compensation and benefits
|
|
$
|
31,664
|
|
$
|
32,156
|
|
Occupancy
|
|
8,518
|
|
8,717
|
|
Depreciation of
bank premises and equipment
|
|
9,012
|
|
9,036
|
|
Professional
fees
|
|
3,982
|
|
2,606
|
|
Deposit
insurance assessments
|
|
2,544
|
|
367
|
|
Stationery and
supplies
|
|
993
|
|
837
|
|
Amortization of
identified intangible assets
|
|
1,301
|
|
1,309
|
|
Advertising
|
|
2,614
|
|
2,613
|
|
Litigation
expense
|
|
21,803
|
|
|
|
Impairment
charges (Total other-than-temporary impairment charges,
$19,095, net of $11,892 included in
other comprehensive income)
|
|
7,203
|
|
|
|
Other
|
|
15,943
|
|
12,585
|
|
|
|
|
|
|
|
Total
non-interest expense
|
|
105,577
|
|
70,226
|
|
|
|
|
|
|
|
Income before
income taxes
|
|
48,686
|
|
57,707
|
|
|
|
|
|
|
|
Provision for
income taxes
|
|
16,640
|
|
20,179
|
|
|
|
|
|
|
|
Net income
|
|
$
|
32,046
|
|
$
|
37,528
|
|
|
|
|
|
|
|
Preferred Stock
Dividends
|
|
3,268
|
|
3,233
|
|
|
|
|
|
|
|
Net income
available to common shareholders
|
|
$
|
28,778
|
|
$
|
34,295
|
|
|
|
|
|
|
|
Basic earnings
per common share:
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average
number of shares outstanding:
|
|
68,103,940
|
|
68,602,478
|
|
Net income
|
|
$
|
.42
|
|
$
|
.50
|
|
|
|
|
|
|
|
Fully diluted
earnings per common share:
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average
number of shares outstanding:
|
|
68,205,891
|
|
68,617,573
|
|
Net income
|
|
$
|
.42
|
|
$
|
.50
|
|
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
March 31,
|
|
|
|
2010
|
|
2009
|
|
|
|
|
|
|
|
Net income
|
|
$
|
32,046
|
|
$
|
37,528
|
|
|
|
|
|
|
|
Other
comprehensive income, net of tax:
|
|
|
|
|
|
|
|
|
|
|
|
Net unrealized
holding gains on securities available for sale arising during
period (tax effects of $179 and
$15,078)
|
|
333
|
|
28,002
|
|
Reclassification
adjustment for gains on securities available for sale
included in net income (tax effects of
$(9,892) and $(196))
|
|
(18,372
|
)
|
(365
|
)
|
Reclassification
adjustment for impairment charges on available for sale
securities included in net income (tax
effects of $2,521 and $0)
|
|
4,682
|
|
|
|
|
|
|
|
|
|
Comprehensive
income
|
|
$
|
18,689
|
|
$
|
65,165
|
|
See accompanying notes to
consolidated financial statements.
5
INTERNATIONAL
BANCSHARES CORPORATION AND SUBSIDIARIES
Consolidated Statements of Cash Flows
(Unaudited)
(Dollars
in Thousands)
|
|
Three Months Ended
March 31,
|
|
|
|
2010
|
|
2009
|
|
Operating
activities:
|
|
|
|
|
|
|
|
|
|
|
|
Net
income
|
|
$
|
32,046
|
|
$
|
37,528
|
|
|
|
|
|
|
|
Adjustments
to reconcile net income to net cash used in
operating activities:
|
|
|
|
|
|
Provision
for probable loan losses
|
|
7,229
|
|
12,225
|
|
Accretion
of time deposit discounts
|
|
(4
|
)
|
(4
|
)
|
Depreciation
of bank premises and equipment
|
|
9,012
|
|
9,036
|
|
(Gain)
loss on sale of bank premises and equipment
|
|
(337
|
)
|
68
|
|
Depreciation
and amortization of leased assets
|
|
|
|
120
|
|
Accretion
of investment securities discounts
|
|
(428
|
)
|
(505
|
)
|
Amortization
of investment securities premiums
|
|
2,441
|
|
1,562
|
|
Investment
securities transactions, net
|
|
(28,264
|
)
|
(561
|
)
|
Impairment
charges on available-for-sale investment securities
|
|
7,203
|
|
|
|
Amortization
of junior subordinated debenture discounts
|
|
9
|
|
8
|
|
Amortization
of identified intangible assets
|
|
1,301
|
|
1,309
|
|
Stock
based compensation expense
|
|
152
|
|
142
|
|
Earnings
from affiliates and other investments
|
|
(2,723
|
)
|
(3,148
|
)
|
Deferred
tax (expense) benefit
|
|
(11,510
|
)
|
4,403
|
|
Decrease
in accrued interest receivable
|
|
5,786
|
|
4,025
|
|
Net
increase in other assets
|
|
(1,874
|
)
|
(16,288
|
)
|
Net
decrease in other liabilities
|
|
(56,417
|
)
|
(78,298
|
)
|
|
|
|
|
|
|
Net
cash used in operating activities
|
|
(36,378
|
)
|
(28,378
|
)
|
|
|
|
|
|
|
Investing
activities:
|
|
|
|
|
|
|
|
|
|
|
|
Proceeds
from maturities of securities
|
|
200
|
|
8,236
|
|
Proceeds
from sales of available for sale securities
|
|
945,670
|
|
18,675
|
|
Purchases
of available for sale securities
|
|
(200,133
|
)
|
(21,448
|
)
|
Principal
collected on mortgage-backed securities
|
|
247,833
|
|
281,768
|
|
Net
decrease in loans
|
|
92,493
|
|
87,021
|
|
Purchases
of other investments
|
|
(14
|
)
|
(3,674
|
)
|
Distributions
of other investments
|
|
45,224
|
|
4,467
|
|
Purchases
of bank premises and equipment
|
|
(4,656
|
)
|
(17,090
|
)
|
Proceeds
from sale of bank premises and equipment
|
|
1,439
|
|
68
|
|
|
|
|
|
|
|
Net
cash provided by investing activities
|
|
1,128,056
|
|
358,023
|
|
|
|
|
|
|
|
|
|
6
INTERNATIONAL BANCSHARES CORPORATION AND SUBSIDIARIES
Consolidated
Statements of Cash Flows, continued (Unaudited)
(Dollars
in Thousands)
|
|
Three Months Ended
March 31,
|
|
|
|
2010
|
|
2009
|
|
|
|
|
|
|
|
Financing
activities:
|
|
|
|
|
|
|
|
|
|
|
|
Net
increase in non-interest bearing demand deposits
|
|
$
|
72,173
|
|
$
|
15,992
|
|
Net
increase in savings and interest bearing demand deposits
|
|
71,499
|
|
4,284
|
|
Net
increase (decrease) in time deposits
|
|
129,281
|
|
(21,070
|
)
|
Net
increase in securities sold under repurchase agreements
|
|
36,951
|
|
31,805
|
|
Net
decrease in other borrowed funds
|
|
(1,248,050
|
)
|
(407,886
|
)
|
Purchase
of treasury stock
|
|
|
|
(68
|
)
|
Proceeds
from stock transactions
|
|
|
|
68
|
|
Payments
of dividends on preferred stock
|
|
(1,350
|
)
|
(1,560
|
)
|
|
|
|
|
|
|
Net
cash used in financing activities
|
|
(939,496
|
)
|
(378,435
|
)
|
|
|
|
|
|
|
Increase
(decrease) in cash and cash equivalents
|
|
152,182
|
|
(48,790
|
)
|
|
|
|
|
|
|
Cash
and cash equivalents at beginning of period
|
|
224,638
|
|
298,720
|
|
|
|
|
|
|
|
Cash
and cash equivalents at end of period
|
|
$
|
376,820
|
|
$
|
249,930
|
|
|
|
|
|
|
|
Supplemental
cash flow information:
|
|
|
|
|
|
Interest
paid
|
|
$
|
29,716
|
|
$
|
45,309
|
|
Income
taxes paid
|
|
4,120
|
|
6,100
|
|
Accrued
dividends, preferred shares
|
|
1,350
|
|
1,140
|
|
Dividends
declared, not yet paid
|
|
11,578
|
|
|
|
Purchases
of available-for-sale securities not yet settled
|
|
17,061
|
|
60,417
|
|
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, IBC
Capital Corporation and Premier Tierra Holdings, Inc. 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, 2009 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
Financial Accounting Standards Board (FASB) Accounting Statement Codification
(ASC), FASB ASC 280, Segment Reporting, in determining its reportable
segments and related disclosures.
On July 1,
2009, the Financial Accounting Standards Board officially launched the FASB
Accounting Standards Codification, (Codification), which is now the single
official source of authoritative, non-governmental U.S. GAAP, in addition to
guidance issued by the Securities and Exchange Commission (SEC). The Codification supersedes all prior
accounting literature. With the launch
of the Codification, U.S. GAAP now consists of two levels authoritative
(Codification) and non-authoritative (anything not in the Codification). The Codification is effective for interim and
annual periods ending after September 15, 2009, and is organized into
approximately 90 accounting topics. The
FASB will no longer be issuing accounting standards in the form of Statements,
Staff Positions or Emerging Issues Task Force Abstracts. The FASB will instead amend the Codification
by issuing Accounting Standards Updates.
The adoption of the Codification did not have a significant impact on
the Companys consolidated financial statements.
Effective June 30,
2009, the Company adopted Statement of Financial Accounting Standards No. 165
(SFAS No. 165), Subsequent Events. SFAS No. 165 is currently
included in the Codification under ASC Topic 855, Subsequent Events (ASC 855). ASC 855 establishes general standards of accounting
for and disclosure of events that occur after the balance sheet date but before
financial statements are issued or available to be issued. ASC 855 defines (i) the period after the
balance sheet date during which a reporting entitys management should evaluate
events or transactions that may occur for potential recognition or disclosure
in the financial statements (ii) the circumstances under which an entity
should recognize events or transactions occurring after the balance sheet date
in its financial statements and (iii) the disclosures an entity should
make about events or transactions that occurred after the balance sheet
date. The adoption of the accounting
standard did not have an impact on the Companys consolidated financial
statements. The Company has evaluated all events or transactions
that occurred through the date the Company issued these financial statements.
During this period, the Company did not have any material recognizable or
non-recognizable subsequent events.
8
Note 2
Fair Value Measurements
Effective January 1,
2008, the Company adopted Statement of Financial Accounting Standards No. 157
(SFAS No. 157), Fair Value Measurements for financial assets and
liabilities. Additionally, 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
delayed 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 and FSP No. 157-2 are
now included in the Accounting Standards Codification (ASC) in Topic 820, Fair
Value Measurements and Disclosures (ASC 820). ASC 820 defines fair value, establishes a
framework for measuring fair value in generally accepted accounting principles,
and expands disclosures about fair value measurements. ASC 820 applies to all financial instruments
that are being measured and reported on a fair value basis. ASC 820 defines fair value as the price that
would be received to sell an asset or paid to transfer a liability in an
orderly transaction between market participants at the measurement date; it
also establishes a fair value hierarchy that prioritizes the inputs used in
valuation methodologies into the following three levels:
·
Level 1 Inputs Unadjusted quoted prices
in active markets for identical assets or liabilities.
·
Level 2 Inputs Observable inputs other
than Level 1 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.
The following table
represents assets and liabilities reported on the consolidated balance sheets
at their fair value as of March 31, 2010 by level within the fair value
measurement hierarchy:
|
|
|
|
Fair Value Measurements at Reporting Date Using
|
|
|
|
|
|
(in thousands)
|
|
|
|
Assets/Liabilities
Measured at Fair
Value
|
|
Quoted Prices
in Active
Markets for
Identical
Assets
|
|
Significant Other
Observable
Inputs
|
|
Significant
Unobservable
Inputs
|
|
|
|
March 31, 2010
|
|
(Level 1)
|
|
(Level 2)
|
|
(Level 3)
|
|
|
|
|
|
|
|
|
|
|
|
Measured on a recurring basis:
|
|
|
|
|
|
|
|
|
|
Assets:
|
|
|
|
|
|
|
|
|
|
U.S.
Treasury securities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Available-for-sale
|
|
$
|
1,327
|
|
$
|
|
|
$
|
1,327
|
|
$
|
|
|
Mortgage-backed
securities
|
|
|
|
|
|
|
|
|
|
Available-for-sale
|
|
3,495,566
|
|
|
|
3,443,136
|
|
52,430
|
|
States
and political subdivisions
|
|
|
|
|
|
|
|
|
|
Available-for-sale
|
|
154,424
|
|
|
|
154,424
|
|
|
|
Other
|
|
|
|
|
|
|
|
|
|
Available-for-sale
|
|
14,587
|
|
14,587
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Measured on a non-recurring basis:
|
|
|
|
|
|
|
|
|
|
Assets:
|
|
|
|
|
|
|
|
|
|
Impaired
Loans
|
|
73,060
|
|
|
|
|
|
73,060
|
|
9
The following table
represents assets and liabilities reported on the consolidated balance sheets
at their fair value as of December 31, 2009 by level within the fair value
measurement hierarchy:
|
|
|
|
Fair Value Measurements at Reporting Date Using
|
|
|
|
|
|
(in thousands)
|
|
|
|
Assets/Liabilities
Measured at Fair
Value
|
|
Quoted Prices
in Active
Markets for
Identical
Assets
|
|
Significant Other
Observable
Inputs
|
|
Significant
Unobservable
Inputs
|
|
|
|
December 31, 2009
|
|
(Level 1)
|
|
(Level 2)
|
|
(Level 3)
|
|
|
|
|
|
|
|
|
|
|
|
Measured on a recurring basis:
|
|
|
|
|
|
|
|
|
|
Assets:
|
|
|
|
|
|
|
|
|
|
U.S.
Treasury securities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Available-for-sale
|
|
$
|
1,327
|
|
$
|
|
|
$
|
1,327
|
|
$
|
|
|
Residential
mortgage-backed
securities
|
|
|
|
|
|
|
|
|
|
Available-for-sale
|
|
4,491,764
|
|
|
|
4,432,195
|
|
59,569
|
|
States
and political subdivisions
|
|
|
|
|
|
|
|
|
|
Available-for-sale
|
|
136,866
|
|
|
|
136,866
|
|
|
|
Other
|
|
|
|
|
|
|
|
|
|
Available-for-sale
|
|
14,126
|
|
626
|
|
13,500
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Measured on a non-recurring basis:
|
|
|
|
|
|
|
|
|
|
Assets:
|
|
|
|
|
|
|
|
|
|
Impaired
Loans
|
|
76,225
|
|
|
|
|
|
76,225
|
|
Investment securities
available-for-sale are classified within level 2 and level 3 of the valuation
hierarchy, with the exception of certain equity investments that are classified
within level 1. For investments
classified as level 2 in the fair value hierarchy, 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.
Investment securities classified as level 3 are non-agency
mortgage-backed securities. The
non-agency mortgage-backed securities held by the Company are traded in
in-active markets and markets that have experienced significant decreases in
volume and level of activity, as exhibited by few recent transactions, a
significant decline or absence of new issuances, price quotations that are not
based on comparable securities transactions and wide bid-ask spreads among
other factors. As a result of the
inability to use quoted market prices to determine fair value for these
securities, the Company determined that fair value, as determined by level 3
inputs in the fair value hierarchy, is more appropriate for financial reporting
and more consistent with the expected performance of the investments. For the investments classified within level 3
of the fair value hierarchy, the Company used a discounted cash flow model to
determine fair value. Inputs in the
model included both historical performance and expected future performance
based on information currently available.
Assumptions used in the discounted cash flow model included estimates on
future principal prepayment rates, default and loss severity rates. The Company estimates that future principal
prepayment rates will range from 4-5% and used a 13% discount rate.
10
The following table
presents a reconciliation of activity for such mortgage-backed securities on a
net basis (Dollars in thousands):
Balance
at December 31, 2009
|
|
$
|
59,569
|
|
Principal
paydowns, net of discount amortization
|
|
(3,111
|
)
|
Total
unrealized gains (losses) included in:
|
|
|
|
Other
comprehensive income
|
|
3,175
|
|
Net
income
|
|
(7,203
|
)
|
|
|
|
|
Balance
at March 31, 2010
|
|
$
|
52,430
|
|
As of March 31,
2010, the Companys financial instruments measured at fair value on a
non-recurring basis are limited to impaired loans. Impaired loans are classified within level 3
of the valuation hierarchy. The fair
value of impaired loans is derived in accordance with FASB ASC 310, Receivables. The fair value of impaired loans is based on
the fair value of the collateral, as determined through an external appraisal
process, discounted based on internal criteria.
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).
The fair value estimates, methods, and
assumptions for the Companys financial instruments at March 31, 2010 and December 31,
2009 are outlined below.
Cash and Due From Banks and Federal Funds Sold
For these short-term instruments, the carrying
amount is a reasonable estimate of fair value.
Time
Deposits with Banks
The
carrying amounts of time deposits with banks approximate fair value.
Investment
securities held-to-maturity
The
carrying amounts of investments held-to-maturity approximate fair value.
Investment Securities
For investment securities, which include U. S.
Treasury securities, obligations of other U. S. government agencies,
obligations of states and political subdivisions and mortgage pass through and
related securities, fair values are based on quoted market prices or dealer
quotes. Fair values are based on the value of one unit without regard to any
premium or discount that may result from concentrations of ownership of a
financial instrument, probable tax ramifications, or estimated transaction
costs. See disclosures of fair value of investment securities in Note 6.
Loans
Fair values are estimated for portfolios of
loans with similar financial characteristics.
Loans are segregated by type such as commercial, real estate and
consumer loans as outlined by regulatory reporting guidelines. Each category is segmented into fixed and
variable interest rate terms and by performing and non-performing categories.
11
For variable rate performing loans, the carrying
amount approximates the fair value. For
fixed rate performing loans, except residential mortgage loans, the fair value
is calculated by discounting scheduled cash flows through the estimated
maturity using estimated market discount rates that reflect the credit and
interest rate risk inherent in the loan.
For performing residential mortgage loans, fair value is estimated by
discounting contractual cash flows adjusted for prepayment estimates using
discount rates based on secondary market sources or the primary origination
market. At March 31, 2010, and December 31,
2009, the carrying amount of fixed rate performing loans was $1,293,400,000 and
$1,303,049,000 respectively, and the estimated fair value was $1,161,447,000
and $1,200,343,000, respectively.
Accrued
Interest
The
carrying amounts of accrued interest approximate fair value.
Deposits
The fair value of deposits with no stated
maturity, such as non-interest bearing demand deposit accounts, savings
accounts and interest bearing demand deposit accounts, was equal to the amount
payable on demand as of March 31, 2010 and December 31, 2009. The fair value of time deposits is based on
the discounted value of contractual cash flows.
The discount rate is based on currently offered rates. At March 31, 2010 and December 31,
2009, the carrying amount of time deposits was $3,527,933,000 and
$3,398,656,000, respectively, and the estimated fair value was $3,537,891,000
and $3,412,538,000, respectively.
Securities
Sold Under Repurchase Agreements and Other Borrowed Funds
Securities
sold under repurchase agreements include both short and long-term
maturities. Due to the contractual terms
of the short-term instruments, the carrying amounts approximated fair value at March 31,
2010 and December 31, 2009. The
fair value of the long-term instruments is based on established market
spreads. At March 31, 2010 and December 31,
2009, the carrying amount of long-term repurchase agreements was $1,000,000,000
and the estimated fair value was $1,101,860,000 and $1,099,064,000,
respectively. Other borrowed funds are
short-term Federal Home Loan Bank borrowings.
Due to the contractual terms of these financial instruments, the
carrying amounts approximated fair value at March 31, 2010 and December 31,
2009.
Junior Subordinated Deferrable Interest Debentures
The Company currently has
fixed and floating junior subordinated deferrable interest debentures
outstanding. Due to the contractual
terms of the floating rate junior subordinated deferrable interest debentures,
the carrying amounts approximated fair value at March 31, 2010 and December 31,
2009. The fair value of the fixed junior
subordinated deferrable interest debentures is based on established market
spreads to the debentures. At March 31,
2010 and December 31, 2009, the carrying amount of fixed junior
subordinated deferrable interest debentures was $139,233,000 and $139,224,000,
respectively, and the estimated fair value was $69,947,000 and $65,762,000,
respectively.
Commitments
to Extend Credit and Letters of Credit
Commitments to extend credit and fund letters of
credit are principally at current interest rates, and, therefore, the carrying
amount approximates fair value.
Limitations
Fair value estimates are made at a point in
time, based on relevant market information and information about the financial
instrument. These estimates do not
reflect any premium or discount that could result from offering for sale at one
time the Companys entire holdings of a particular financial instrument. Because no market exists for a significant
portion of the Companys financial instruments, fair value estimates are based
on judgments regarding future expected loss experience, current economic
conditions, risk characteristics of various financial instruments and other
factors. These estimates are subjective
in nature and involve uncertainties and matters of significant judgment and
therefore cannot be determined with precision.
Changes in assumptions could significantly affect the estimates.
12
Fair
value estimates are based on existing on-and off-statement of condition
financial instruments without attempting to estimate the value of anticipated
future business and the value of assets and liabilities that are not considered
financial instruments. Other significant
assets and liabilities that are not considered financial assets or liabilities
include the bank premises and equipment and core deposit value. In addition, the tax ramifications related to
the effect of fair value estimates have not been considered in the above estimates.
Note 3
Loans
A
summary of net loans, by loan type at March 31, 2010 and December 31,
2009 is as follows:
|
|
March 31,
|
|
December 31,
|
|
|
|
2010
|
|
2009
|
|
|
|
(Dollars in Thousands)
|
|
|
|
|
|
|
|
Commercial,
financial and agricultural
|
|
$
|
2,665,638
|
|
$
|
2,703,379
|
|
Real
estate mortgage
|
|
950,638
|
|
954,010
|
|
Real
estate construction
|
|
1,568,916
|
|
1,583,057
|
|
Consumer
|
|
140,524
|
|
146,331
|
|
Foreign
|
|
242,269
|
|
280,485
|
|
|
|
|
|
|
|
Total
loans
|
|
$
|
5,567,985
|
|
$
|
5,667,262
|
|
Note 4 -
Allowance for Probable Loan Losses
A
summary of the transactions in the allowance for probable loan losses is as
follows:
|
|
March 31,
|
|
March 31,
|
|
|
|
2010
|
|
2009
|
|
|
|
(Dollars in Thousands)
|
|
Balance
at December 31,
|
|
$
|
95,393
|
|
$
|
73,461
|
|
|
|
|
|
|
|
Losses
charged to allowance
|
|
(7,235
|
)
|
(10,502
|
)
|
Recoveries
credited to allowance
|
|
451
|
|
210
|
|
Net
losses charged to allowance
|
|
(6,784
|
)
|
(10,292
|
)
|
|
|
|
|
|
|
Provision
charged to operations
|
|
7,229
|
|
12,225
|
|
|
|
|
|
|
|
Balance
at March 31,
|
|
$
|
95,838
|
|
$
|
75,394
|
|
The losses charged
to the allowance decreased by $3,267,000 for the three months ended March 31,
2010 versus the same period of 2009.
The nationwide
recession and its consequences are being felt in the Companys markets, but not
to the extent being seen in the nation as a whole. These factors, as well
as other economic issues, have elevated the Companys provisions as well as
charge-offs. The increase in the allowance for probable loan losses
from March 31, 2009 to March 31, 2010 can be attributed to the
nationwide recession and the effects it has on the Companys loan portfolio.
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.
13
The
following table details key information regarding the Companys impaired loans:
|
|
March 31,
|
|
December 31,
|
|
|
|
2010
|
|
2009
|
|
|
|
(Dollars in Thousands)
|
|
|
|
|
|
|
|
Balance of impaired loans where there is a related
allowance for loan loss
|
|
$
|
101,099
|
|
$
|
106,780
|
|
Balance of impaired loans where there is no related
allowance for loan loss
|
|
23,522
|
|
11,494
|
|
|
|
|
|
|
|
Total impaired loans
|
|
$
|
124,621
|
|
$
|
118,274
|
|
|
|
|
|
|
|
Allowance allocated to impaired loans
|
|
$
|
28,039
|
|
$
|
30,555
|
|
The
impaired loans included in the table above are primarily comprised of
collateral dependent commercial loans, which have not been fully charged
off. The average recorded investment in
impaired loans was $131,673,000 and $149,528,000 for the three months ended March 31,
2010 and December 31, 2009, respectively.
The interest recognized on impaired loans was not significant.
A
portion of the impaired loans have adequate collateral and credit enhancements
not requiring a related allowance for loan loss. The level of impaired
loans is reflective of the economic weakness that has been created by the
financial crisis and the subsequent economic downturn. Management is confident the Companys loss
exposure regarding these credits will be significantly reduced due to the
Companys long-standing practices that emphasize secured lending with strong
collateral positions and guarantor support.
Management is likewise confident the reserve for probable loan losses is
adequate. The Company has no direct
exposure to sub-prime loans in its loan portfolio, but the sub-prime crisis has
affected the credit markets on a national level, and as a result, the Company
has experienced an increasing amount of impaired loans; however, managements
decision to place loans in this category does not necessarily mean that the
Company will experience significant losses from these loans or significant
increases in impaired loans from these levels.
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.
In the current environment, troubled loan management can be protracted because
of the legal and process problems that delay the collection of an otherwise
collectible loan. Additionally,
management believes that the collateral related to these impaired loans and/or
the secondary support from guarantors mitigates the potential for losses from
impaired loans. It is also important
to note that even though the economic conditions in Texas and Oklahoma are
weakened, we believe these markets are stronger and better positioned to
recover than many other areas of the country.
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 probable loan losses can be made only on a
subjective basis. It is the judgment of
the Companys management that the allowance for probable loan losses at March 31,
2010 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 March 31, 2010, 148,422 shares
were available for future grants under the 2005 Plan.
14
A summary of option
activity under the stock option plans for the three months ended March 31,
2010 is as follows:
|
|
Number of
options
|
|
Weighted
average
exercise price
|
|
Weighted
average
remaining
contractual term
(years)
|
|
Aggregate
intrinsic
value ($)
|
|
|
|
|
|
|
|
|
|
(Dollars in Thousands)
|
|
|
|
|
|
|
|
|
|
|
|
Options
outstanding at December 31, 2009
|
|
823,592
|
|
$
|
20.54
|
|
|
|
|
|
Plus:
Options granted
|
|
|
|
|
|
|
|
|
|
Less:
|
|
|
|
|
|
|
|
|
|
Options
exercised
|
|
|
|
|
|
|
|
|
|
Options
expired
|
|
|
|
|
|
|
|
|
|
Options
forfeited
|
|
5,500
|
|
16.40
|
|
|
|
|
|
Options
outstanding at March 31, 2010
|
|
818,092
|
|
$
|
20.57
|
|
4.57
|
|
$
|
3,051
|
|
|
|
|
|
|
|
|
|
|
|
Options
fully vested and exercisable at
March 31, 2010
|
|
309,561
|
|
$
|
24.08
|
|
2.80
|
|
$
|
54
|
|
Stock-based compensation
expense included in the consolidated statements of income for the three months
ended March 31, 2010 and March 31, 2009 was approximately $152,000
and $142,000, respectively. As of March 31,
2010, there was approximately $1,047,000 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 1.5 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.
The amortized cost and estimated fair value by
type of investment security at March 31, 2010 are as follows:
|
|
Held to Maturity
|
|
|
|
Amortized
cost
|
|
Gross
unrealized
gains
|
|
Gross
unrealized
losses
|
|
Estimated fair
value
|
|
Carrying
value
|
|
|
|
(Dollars in Thousands)
|
|
Other securities
|
|
$
|
2,450
|
|
$
|
|
|
$
|
|
|
$
|
2,450
|
|
$
|
2,450
|
|
Total investment securities
|
|
$
|
2,450
|
|
$
|
|
|
$
|
|
|
$
|
2,450
|
|
$
|
2,450
|
|
|
|
Available for Sale
|
|
|
|
Amortized
cost
|
|
Gross
unrealized
gains
|
|
Gross
unrealized
losses
|
|
Estimated fair
value
|
|
Carrying
value (1)
|
|
|
|
(Dollars in Thousands)
|
|
U.S. Treasury securities
|
|
$
|
1,327
|
|
$
|
|
|
$
|
|
|
$
|
1,327
|
|
$
|
1,327
|
|
Mortgage-backed securities
|
|
3,418,593
|
|
88,867
|
|
(11,894
|
)
|
3,495,566
|
|
3,495,566
|
|
Obligations of states and political subdivisions
|
|
150,644
|
|
3,979
|
|
(199
|
)
|
154,424
|
|
154,424
|
|
Equity securities
|
|
13,825
|
|
801
|
|
(39
|
)
|
14,587
|
|
14,587
|
|
Total investment securities
|
|
$
|
3,584,389
|
|
$
|
93,647
|
|
$
|
(12,132
|
)
|
$
|
3,665,904
|
|
$
|
3,665,904
|
|
(1)
Included in the carrying value of
mortgage-backed securities are $1,294,294 of mortgage-backed securities issued
by Ginnie Mae, $2,148,842 of mortgage-backed securities issued by Fannie Mae
and Freddie Mac and $52,430 issued by non-government entities
15
The amortized cost and estimated fair value by
type of investment security at December 31, 2009 are as follows:
|
|
Held to Maturity
|
|
|
|
Amortized
cost
|
|
Gross
unrealized
gains
|
|
Gross
unrealized
losses
|
|
Estimated fair
value
|
|
Carrying
value
|
|
|
|
(Dollars in Thousands)
|
|
Other securities
|
|
$
|
2,450
|
|
$
|
|
|
$
|
|
|
$
|
2,450
|
|
$
|
2,450
|
|
Total investment securities
|
|
$
|
2,450
|
|
$
|
|
|
$
|
|
|
$
|
2,450
|
|
$
|
2,450
|
|
|
|
Available for Sale
|
|
|
|
Amortized
cost
|
|
Gross
unrealized
gains
|
|
Gross
unrealized
losses
|
|
Estimated fair
value
|
|
Carrying
value (1)
|
|
|
|
(Dollars in Thousands)
|
|
U.S. Treasury securities
|
|
$
|
1,327
|
|
$
|
|
|
$
|
|
|
$
|
1,327
|
|
$
|
1,327
|
|
Mortgage-backed securities
|
|
4,393,731
|
|
113,138
|
|
(15,105
|
)
|
4,491,764
|
|
4,491,764
|
|
Obligations of states and political subdivisions
|
|
132,968
|
|
4,102
|
|
(204
|
)
|
136,866
|
|
136,866
|
|
Equity securities
|
|
13,825
|
|
343
|
|
(42
|
)
|
14,126
|
|
14,126
|
|
Total investment securities
|
|
$
|
4,541,851
|
|
$
|
117,583
|
|
$
|
(15,351
|
)
|
$
|
4,644,083
|
|
$
|
4,644,083
|
|
(1)
Included in the carrying value of
mortgage-backed securities are $1,898,905 of mortgage-backed securities issued
by Ginnie Mae, $2,533,290 of mortgage-backed securities issued by Fannie Mae
and Freddie Mac and $59,569 issued by non-government entities
The amortized cost and estimated fair value of
investment securities at March 31, 2010, by contractual maturity, are
shown below. Expected maturities will
differ from contractual maturities because borrowers may have the right to
prepay obligations with or without prepayment penalties.
|
|
Held to Maturity
|
|
Available for Sale
|
|
|
|
Amortized
Cost
|
|
Estimated
fair value
|
|
Amortized
Cost
|
|
Estimated
fair value
|
|
|
|
(Dollars in Thousands)
|
|
Due in one year or less
|
|
$
|
1,625
|
|
$
|
1,625
|
|
$
|
1,327
|
|
$
|
1,327
|
|
Due after one year through five years
|
|
825
|
|
825
|
|
547
|
|
551
|
|
Due after five years through ten years
|
|
|
|
|
|
9,671
|
|
9,797
|
|
Due after ten years
|
|
|
|
|
|
140,426
|
|
144,076
|
|
Mortgage-backed securities
|
|
|
|
|
|
3,418,593
|
|
3,495,566
|
|
Equity securities
|
|
|
|
|
|
13,825
|
|
14,587
|
|
Total investment securities
|
|
$
|
2,450
|
|
$
|
2,450
|
|
$
|
3,584,389
|
|
$
|
3,665,904
|
|
Mortgage-backed
securities are securities issued by the Freddie Mac, Fannie Mae, Ginnie Mae or
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.
The amortized cost and
fair value of available for sale investment securities pledged to qualify for
fiduciary powers, to secure public monies as required by law, repurchase
agreements and short-term fixed borrowings was $2,571,228,000 and
$2,648,407,000 at March 31, 2010.
Proceeds
from the sale of securities available-for-sale were $945,670,000 for the three
months ended March 31, 2010, which included $943,304,000 of
mortgage-backed securities. Gross gains of $28,268,000 and gross losses of
$(3,000) were realized on the sales for the three months ended March 31,
2010, respectively. During the first
quarter, the Company recorded an impairment charge of $7,203,000, before tax,
representing the credit loss on non-agency mortgage-backed securities.
16
Gross
unrealized losses on investment securities and the fair value of the related
securities, aggregated by investment category and length of time that
individual securities have been in a continuous unrealized loss position at March 31,
2010, were as follows:
|
|
Less than 12 months
|
|
12 months or more
|
|
Total
|
|
|
|
Fair Value
|
|
Unrealized
Losses
|
|
Fair Value
|
|
Unrealized
Losses
|
|
Fair Value
|
|
Unrealized
Losses
|
|
|
|
(Dollars in Thousands)
|
|
Available for sale:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Mortgage-backed securities
|
|
$
|
92,665
|
|
$
|
(2
|
)
|
$
|
52,429
|
|
$
|
(11,892
|
)
|
$
|
145,094
|
|
$
|
(11,894
|
)
|
Obligations of states and
political
subdivisions
|
|
14,284
|
|
(150
|
)
|
638
|
|
(49
|
)
|
14,922
|
|
(199
|
)
|
Other equity securities
|
|
4,979
|
|
(21
|
)
|
57
|
|
(18
|
)
|
5,036
|
|
(39
|
)
|
|
|
$
|
111,928
|
|
$
|
(173
|
)
|
$
|
53,124
|
|
$
|
(11,959
|
)
|
$
|
165,052
|
|
$
|
(12,132
|
)
|
The
unrealized losses on investments in mortgage-backed securities are primarily
caused by changes in market interest rates. Mortgage-backed securities
are primarily securities issued by the Freddie Mac, Fannie Mae and Ginnie
Mae. The contractual cash obligations of the securities issued by Ginnie
Mae are fully guaranteed by the U.S. Government. The contractual cash
obligations of the securities issued by Freddie Mac and Fannie Mae are not
fully guaranteed by the U.S. Government; however, the securities 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. The decrease in fair value on
mortgage-backed securities issued by Freddie Mac, Fannie Mae and Ginnie Mae is
due to market interest rates. The Company has no intent to sell and will
more than likely not be required to sell before a market price recovery or
maturity of the securities; therefore, it is the conclusion of the Company that
the investments in mortgage-backed securities issued by Freddie Mac, Fannie Mae
and Ginnie Mae are not considered other-than-temporarily impaired. In
addition, the Company has a small investment in non-agency mortgage-backed
securities that have strong credit backgrounds and include additional credit
enhancements to protect the Company from losses arising from high foreclosure
rates. These securities have additional market volatility beyond
economically induced interest rate events. The Company has received
principal and interest payments in line with expected cash flows at the time of
purchase. The Company has no intent to sell and will more than likely not
be required to sell the non-agency mortgage-backed securities before recovery
of amortized cost. It is the conclusion
of the Company that the investments in non-agency mortgage-backed securities
are other-than-temporarily impaired due to both credit and other than credit
issues. An impairment charge of
$7,203,000, $4,682,000 after tax, was recorded in the first quarter 2010 on the
non-agency mortgage backed securities, representing the credit related
impairment on the securities.
The
unrealized losses on investments in other securities are caused by fluctuations
in market interest rates. The underlying
cash obligations of the securities are guaranteed by the entity underwriting
the debt instrument. It is the belief of
the Company that the entity issuing the debt will honor its interest payment
schedule, as well as the full debt at maturity.
The securities are purchased by the Company for their economic
value. The decrease in fair value is
primarily due to market interest rates and not other factors, and because the
Company has no intent to sell and will more than likely not be required to sell
before a market price recovery or maturity of the securities, it is the
conclusion of the Company that the investments are not considered
other-than-temporarily impaired.
The following table
presents a reconciliation of credit-related impairment charges on
available-for-sale investment recognized in earnings (Dollars in Thousands):
Balance
at December 31, 2009
|
|
$
|
|
|
Impairment
charges recognized during period
|
|
7,203
|
|
Balance
at March 31, 2010
|
|
$
|
7,203
|
|
17
Note 7 Other Borrowed Funds
Other borrowed funds
include Federal Home Loan Bank borrowings, which are short-term 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 March 31,
2010, other borrowed funds totaled $99,575,000, a decrease of 92.6% from
$1,347,625,000 at December 31, 2009.
The decrease in other borrowed funds can be attributed to the use of
funds generated from the sale of mortgage-backed securities to facilitate a
re-positioning of the Companys investment portfolio.
Note 8 Junior Subordinated
Interest Deferrable Debentures
The Company has formed
eight statutory business trusts under the laws of the State of Delaware, for
the purpose of issuing trust preferred securities. The eight statutory business trusts formed by
the Company (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. As of March 31, 2010, the principal
amount of debentures outstanding totaled $201,091,000. As a result of the participation in the TARP
Capital Purchase Program, the Company may not, without the consent of the
Treasury Department, redeem any of the Debentures until the earlier to occur of
December 23, 2011, or the date on which the Company has redeemed all of
the Series A Preferred Stock issued under the Capital Purchase Program or
the date on which the Treasury has transferred all of the Series A
Preferred Stock to third parties not affiliated with the Treasury.
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 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 March 31, 2010, the
total $201,091,000, 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.
On March 16, 2009, the Federal Reserve Board extended for two years
the transition period. The Company
believes that substantially all of the current trust preferred securities will
be included in Tier 1 capital after the transition period ending on March 31,
2011.
18
The following table
illustrates key information about each of the Capital and Common Securities and
their interest rate at March 31, 2010:
|
|
Junior
Subordinated
Deferrable
Interest
Debentures
|
|
Repricing
Frequency
|
|
Interest Rate
|
|
Interest Rate
Index
|
|
Maturity Date
|
|
Optional
Redemption Date
|
|
|
|
(In Thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Trust
I
|
|
$
|
10,365
|
|
Fixed
|
|
10.18
|
%
|
Fixed
|
|
June 2031
|
|
June 2011
|
|
Trust
VI
|
|
$
|
25,774
|
|
Quarterly
|
|
3.70
|
%
|
LIBOR+ 3.45
|
|
November 2032
|
|
August 2010
|
|
Trust
VII
|
|
$
|
10,310
|
|
Quarterly
|
|
3.50
|
%
|
LIBOR+ 3.25
|
|
April 2033
|
|
July 2010
|
|
Trust
VIII
|
|
$
|
25,774
|
|
Quarterly
|
|
3.30
|
%
|
LIBOR+ 3.05
|
|
October 2033
|
|
July 2010
|
|
Trust
IX
|
|
$
|
41,238
|
|
Fixed
|
|
7.10
|
%(1)
|
Fixed
|
|
October 2036
|
|
October 2011
|
|
Trust
X
|
|
$
|
34,021
|
|
Fixed
|
|
6.66
|
%(1)
|
Fixed
|
|
February 2037
|
|
February 2012
|
|
Trust
XI
|
|
$
|
32,990
|
|
Fixed
|
|
6.82
|
%(1)
|
Fixed
|
|
July 2037
|
|
July 2012
|
|
Trust
XII
|
|
$
|
20,619
|
|
Fixed
|
|
6.85
|
%(1)
|
Fixed
|
|
September 2037
|
|
September 2012
|
|
|
|
$
|
201,091
|
|
|
|
|
|
|
|
|
|
|
|
(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.
Note 9
Preferred Stock, Common Stock and Dividends
The Company has
outstanding 216,000 shares of Series A cumulative perpetual preferred
stock, issued to the US Treasury under the Companys participation in the
Troubled Asset Relief Program Capital Purchase Program (the TARP Capital
Purchase Program). The Series A
shares have a par value of $.01 per share (the Senior Preferred Stock), and a
liquidation preference of $1,000 per share, for a total price of
$216,000,000. The Senior Preferred Stock
will pay dividends at a rate of 5% per year for the first five years and 9% per
year thereafter. The Senior Preferred
Stock has no maturity date and ranks senior to the Companys common stock with
respect to the payment of dividends and distributions and amounts payable upon
liquidation, dissolution and winding up of the Company. In conjunction with the purchase of the
Senior Preferred Stock, the US Treasury received a warrant (the Warrant) to
purchase 1,326,238 shares of the Companys common stock (the Warrant Shares)
at $24.43 per share, which would represent an aggregate common stock investment
in the Company on exercise of the warrant in full equal to 15% of the Senior
Preferred Stock investment. The term of
the Warrant is ten years and was immediately exercisable. Both the Senior Preferred Stock and Warrant
are included as components of Tier 1 capital.
As of March 31, 2010, none of the Warrants had been exercised. The Company paid dividends on the Senior
Preferred Stock on February 16, 2010, in the amount of $2,700,000 and will
pay a dividend on the Senior Preferred Stock on May 15, 2010, in the
amount of $2,700,000.
Upon issuance, the fair
value of the Series A shares and the associated warrants were computed as
if the instruments were issued on a stand-alone basis. The fair value of the Series A shares
were estimated based on discounted cash flows, resulting in a stand-alone fair
value of approximately $130.9 million.
The Company used the Black-Sholes-Merton option pricing model to
estimate the fair value of the warrants, resulting in a stand-alone fair value
of approximately $8.0 million. The fair
values of both were then used to record the Series A shares and Warrants
on a relative fair value basis, with the warrants being recorded in Surplus as
permanent equity and the Series A shares being recorded at a discount of
approximately $12.4 million. Accretion
of the discount associated with the preferred stock is recognized as an
increase to preferred stock dividends in determining net income available to
common shareholders. The discount is
being amortized over a five year period from the respective issuance date using
the effective-yield method and totaled $568,000 for the three months ended March 31,
2010.
The Company paid cash
dividends to the common shareholders of $.17 per share on April 19, 2010
to all holders of record on April 1, 2010.
Cash dividends to common shareholders were paid on May 11, and November 2,
2009 to all holders of record on April 27, 2009 and October 19, 2009,
respectively.
19
The Company
terminated its stock repurchase program on December 19, 2008, in
connection with participating in the TARP Capital Purchase Program, which
program prohibited stock repurchases, except for repurchases made in connection
with the administration of an employee benefit plan in the ordinary course of
business and consistent with past practices.
On April 7, 2009, the Company obtained consent from the Treasury to
repurchase shares of the Companys common stock; provided, however, that in no
event will the aggregate amount of cash dividends and common stock repurchases
for a given semi-annual period exceed the aggregate amount that would be used
to pay the originally permitted semi-annual cash dividend of $.33 per share. The Company also received consent from the
Treasury to pay quarterly dividends. The
Company will determine on an ongoing basis the best use of the funds and
whether a more frequent dividend program and expanded repurchase program are
warranted and beneficial to its shareholders.
Following receipt of the Treasury Departments consent, the Board of
Directors established a formal stock repurchase program that authorized the
repurchase of up to $40 million of common stock within the following twelve months
and on March 9, 2010, the Board of Directors extended the repurchase
program and again authorized the repurchase of up to $40 million of common
stock during the twelve month period expiring on April 9, 2011, which
repurchase cap the Board is inclined to increase over time, subject to the
limitations imposed by the Treasury Departments consent. 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 May 3,
2010, a total of 6,913,284 shares had been repurchased under all programs at a
cost of $243,409,000.
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 substantial actual
and punitive damages. The Company has
determined, based on discussions with its counsel that any material loss in
such actions, individually or in the aggregate, is remote or the damages
sought, even if fully recovered, would not be considered material to 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 Internal Revenue Service issued a Notice of
Final Partnership Administrative Adjustments (FPAA) on two of the
partnerships. In both partnerships, the
lead bank subsidiary was the owner of a ninety-nine percent (99%) limited
partnership interest. In connection with the two partnerships through the first
quarter of 2006, the Company expensed approximately $25.7 million, which amount
represents 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.
The Company is
involved in a dispute related to certain tax matters that were inherited by the
Company in its 2004 acquisition of LFIN.
The dispute involves claims by the former controlling shareholders of
LFIN related to approximately $14 million of tax refunds received by the
Company based on deductions taken in 2003 by LFIN in connection with losses on
loans acquired from a failed thrift and a dispute LFIN had with the FDIC
regarding the tax benefits related to the failed thrift acquisition which
originated in 1988. On March 5,
2010, judgment was entered on a jury verdict rendered against the Company in
the U.S. District Court for the Western District of Oklahoma (the Court). Other than the tax refunds that are in
dispute, the Company does not have any other disputes regarding tax refunds
received by the Company in connection with the LFIN acquisition. While judgment has been entered in the case,
certain additional issues related to fees and other matters are to be
determined by the Court in the future prior to the judgment becoming final and
appealable. Company management is
currently reviewing the judgment, its implications and the Companys intention
to appeal, as well as take other paths of action to mitigate the impact of the
judgment. The Company is disappointed
with the judgment but believes it has a number of valid grounds for appeal
which it intends to pursue. As of March 31, 2010, the Company recorded an
additional reserve of $21.8 million related to this matter. Management will continue to review the
developments in this dispute and make appropriate adjustments to the amount
reserved, as needed.
20
Note 11
Capital Ratios
The Company had a Tier 1
capital to average total asset (leverage) ratio of 11.44% and 10.95%,
risk-weighted Tier 1 capital ratio of 18.66% and 17.74% and risk-weighted total
capital ratio of 19.91% and 18.99% at March 31, 2010 and December 31,
2009, respectively. The identified
intangibles and goodwill of $303,633,000 as of March 31, 2010, 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. 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
qualifies as Tier 2 capital. As of March 31,
2010, the total of $201,091,000 of the Capital Securities outstanding qualified
as Tier 1 capital. 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 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.
On March 16, 2009, the Federal Reserve Board extended for two years
the transition period. The Company
believes that substantially all of the current trust preferred securities will
be included in Tier 1 capital after the transition period ending on March 31,
2011.
21
Item 2 -
Managements Discussion and Analysis of Financial Condition and Results of
Operations
The
following discussion should be read in conjunction with the Companys
consolidated financial statements, and notes thereto, for the year-ended December 31,
2009, included in the Companys 2009 Form 10-K. Operating results for the three months ended March 31,
2010 are not necessarily indicative of the results for the year ending December 31,
2010, or any future period.
Special Cautionary Notice Regarding Forward Looking Information
Certain matters discussed in this report, excluding historical
information, include forward-looking statements, within the meaning of Section 27A
of the Securities Act of 1933, as amended, and Section 21E of the
Securities Exchange Act of 1934, as amended, and are subject to the safe harbor
created by these sections. Although 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, the Companys customers, and such customers 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 Preferred Stock or 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 or Mexico.
·
Technological changes.
·
Acts of war or terrorism.
·
Natural disasters.
22
·
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.
·
The costs and effects of regulatory
developments, including the resolution of regulatory or other governmental
inquiries and the results of regulatory examinations or reviews.
·
The effect of final rules amending
Regulation E that prohibit financial institutions from charging consumer fees
for paying overdrafts on ATM and one-time debit card transactions, unless the
consumer consents or opts-in to the overdraft service for those types of
transactions.
·
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 probable
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.
Recent Developments
On July 1,
2009, the Financial Accounting Standards Board officially launched the FASB
Accounting Standards Codification, (Codification), which is now the single
official source of authoritative, non-governmental U.S. GAAP, in addition to
guidance issued by the Securities and Exchange Commission (SEC). The Codification supersedes all prior accounting
literature. With the launch of the
Codification, U.S. GAAP now consists of two levels authoritative
(Codification) and non-authoritative (anything not in the Codification). The Codification is effective for interim and
annual periods ending after September 15, 2009, and is organized into
approximately 90 accounting topics. The
FASB will no longer be issuing accounting standards in the form of Statements,
Staff Positions or Emerging Issues Task Force Abstracts. The FASB will instead amend the Codification
by issuing Accounting Standards Updates.
The adoption of the Codification did not have a significant impact to
the Companys consolidated financial statements.
Overview
The
Company, which is headquartered in Laredo, Texas, with 279 facilities and more
than 430 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 liquidating subsidiary, 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, the Company monitors the
efficiency ratio, which is a measure of non-interest expense to net interest
income plus non-interest income closely.
The Companys efficiency ratio has been negatively impacted over the
last few years because of the Companys branch expansion which has added a
total of 19 branches during 2009 and 2010.
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.
23
Results of
Operations
Summary
Consolidated
Statements of Condition Information
|
|
March 31, 2010
|
|
December 31, 2009
|
|
Percent Increase
(Decrease)
|
|
|
|
(Dollars in Thousands)
|
|
|
|
|
|
|
|
|
|
|
|
Assets
|
|
$
|
10,783,666
|
|
$
|
11,762,543
|
|
(8.3
|
)%
|
Net loans
|
|
5,472,147
|
|
5,571,869
|
|
(1.8
|
)
|
Deposits
|
|
7,450,956
|
|
7,178,007
|
|
3.8
|
|
Other borrowed funds
|
|
99,575
|
|
1,347,625
|
|
(92.6
|
)
|
Junior subordinated deferrable interest
debentures
|
|
201,091
|
|
201,082
|
|
|
|
Shareholders equity
|
|
1,412,034
|
|
1,407,470
|
|
.3
|
|
|
|
|
|
|
|
|
|
|
|
Consolidated Statements of Income Information
|
|
Quarter Ended
March 31, 2010
|
|
Quarter Ended
March 31, 2009
|
|
Percent Increase
(Decrease)
|
|
|
|
(
Dollars
in Thousands)
|
|
|
|
|
|
|
|
|
|
|
|
Interest income
|
|
$
|
119,822
|
|
$
|
140,216
|
|
(14.5
|
)%
|
Interest expense
|
|
29,927
|
|
42,070
|
|
(28.9
|
)
|
Net interest income
|
|
89,895
|
|
98,146
|
|
(8.4
|
)
|
Provision for probable loan
losses
|
|
7,229
|
|
12,225
|
|
(40.9
|
)
|
Non-interest income
|
|
71,597
|
|
42,012
|
|
70.4
|
|
Non-interest expense
|
|
105,577
|
|
70,226
|
|
50.3
|
|
Net income available to
common
shareholders
|
|
28,778
|
|
34,295
|
|
(16.1
|
)
|
|
|
|
|
|
|
|
|
Per common share:
|
|
|
|
|
|
|
|
Basic
|
|
$
|
.42
|
|
$
|
.50
|
|
(16.0
|
)%
|
Diluted
|
|
.42
|
|
.50
|
|
(16.0
|
)
|
24
Net Income
Net income available to common shareholders for the first quarter of 2010
decreased by 16.1% as compared to the same period in 2009. Net income was negatively affected by
a dispute related to certain tax matters
that were inherited by the Company in its 2004 acquisition of LFIN. The dispute involves claims by the former
controlling shareholders of LFIN related to approximately $14 million of tax refunds
received by the Company based on deductions taken in 2003 by LFIN in connection
with losses on loans acquired from a failed thrift and a dispute LFIN had with
the FDIC regarding the tax benefits related to the failed thrift acquisition
which originated in 1988. On March 5,
2010, judgment was entered on a jury verdict rendered against the Company in
the U.S. District Court for the Western District of Oklahoma. Other than the tax refunds that are in
dispute, the Company does not have any other disputes regarding tax refunds
received by the Company in connection with the LFIN acquisition. While judgment has been entered in the case,
certain additional issues related to fees and other matters are to be
determined by the Court in the future prior to the judgment becoming final and
appealable. Company management is
currently reviewing the judgment, its implications and the Companys intention
to appeal, as well as, take other paths of action to mitigate the impact of the
judgment. The Company is disappointed
with the judgment but believes it has a number of valid grounds for appeal
which it intends to pursue. As of March 31, 2010, the Company recorded an
additional reserve of $14.2 million, after tax, related to this matter. Management will continue to review the
developments in this dispute and make appropriate adjustments to the amount
reserved, as needed.
Net Interest Income
|
|
Quarter Ended
March 31, 2010
|
|
Quarter Ended
March 31, 2009
|
|
Percent Increase
(Decrease)
|
|
|
|
(in Thousands)
|
|
|
|
|
|
|
|
|
|
|
|
Interest income:
|
|
|
|
|
|
|
|
Loans, including fees
|
|
$
|
80,614
|
|
$
|
83,626
|
|
(3.6
|
)%
|
Investment securities:
|
|
|
|
|
|
|
|
Taxable
|
|
37,333
|
|
55,432
|
|
(32.7
|
)
|
Tax-exempt
|
|
1,634
|
|
970
|
|
68.5
|
|
Other interest income
|
|
241
|
|
188
|
|
28.2
|
|
|
|
|
|
|
|
|
|
Total interest income
|
|
119,822
|
|
140,216
|
|
(14.5
|
)
|
|
|
|
|
|
|
|
|
Interest expense:
|
|
|
|
|
|
|
|
Savings deposits
|
|
2,481
|
|
2,949
|
|
(15.9
|
)
|
Time deposits
|
|
13,053
|
|
17,851
|
|
(26.9
|
)
|
Securities sold under repurchase agreements
|
|
11,052
|
|
11,361
|
|
(2.7
|
)
|
Other borrowings
|
|
311
|
|
6,685
|
|
(95.3
|
)
|
Junior subordinated interest deferrable debentures
|
|
3,030
|
|
3,224
|
|
(6.0
|
)
|
|
|
|
|
|
|
|
|
Total interest expense
|
|
29,927
|
|
42,070
|
|
(28.9
|
)
|
|
|
|
|
|
|
|
|
Net interest income
|
|
$
|
89,895
|
|
$
|
98,146
|
|
(8.4
|
)%
|
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 and increased substantially because of the reduction in the
Federal Reserve prime interest rate. 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 2007 at 7.25%. During 2008, the prime interest rate
decreased 400 basis points to end the year at 3.25% where it has remained as of
March 31, 2010. The Companys goal
is to manage the net interest income in periods of rising and falling
rates. Net interest income decreased
8.4% in the first quarter of 2010 compared to the same period in 2009 because
of the sale of
mortgage-backed
securities to facilitate a re-positioning of the Companys investment
portfolio.
25
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 29 for the March 31, 2010 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
|
|
Quarter Ended March 31,
2010
|
|
Quarter Ended March 31,
2009
|
|
Percent Increase (Decrease)
|
|
|
|
(in Thousands)
|
|
|
|
|
|
|
|
|
|
|
|
Service charges on deposit accounts
|
|
$
|
24,280
|
|
$
|
24,082
|
|
.8
|
%
|
Other service charges, commissions and fees
|
|
|
|
|
|
|
|
Banking
|
|
11,620
|
|
10,397
|
|
11.8
|
|
Non-banking
|
|
1,668
|
|
1,427
|
|
16.9
|
|
Investment securities transactions, net
|
|
28,264
|
|
561
|
|
4,938.1
|
|
Other investments, net
|
|
3,357
|
|
3,432
|
|
(2.2
|
)
|
Other income
|
|
2,408
|
|
2,113
|
|
14.0
|
|
|
|
|
|
|
|
|
|
Total non-interest income
|
|
$
|
71,597
|
|
$
|
42,012
|
|
70.4
|
|
The
increase in investment securities transactions for the three months ended March 31,
2010 can be attributed to the sale of investment securities to facilitate the
re-positioning of the Companys investment portfolio.
Non-Interest Expense
|
|
Quarter Ended
March 31, 2010
|
|
Quarter Ended
March 31, 2009
|
|
Percent Increase
(Decrease)
|
|
|
|
(in Thousands)
|
|
|
|
|
|
|
|
|
|
|
|
Employee compensation and benefits
|
|
$
|
31,664
|
|
$
|
32,156
|
|
(1.5
|
)%
|
Occupancy
|
|
8,518
|
|
8,717
|
|
(2.3
|
)
|
Depreciation of bank premises and equipment
|
|
9,012
|
|
9,036
|
|
(0.3
|
)
|
Professional fees
|
|
3,982
|
|
2,606
|
|
52.8
|
|
Deposit insurance assessments
|
|
2,544
|
|
367
|
|
593.2
|
|
Stationery and supplies
|
|
993
|
|
837
|
|
18.6
|
|
Amortization of identified intangible assets
|
|
1,301
|
|
1,309
|
|
(0.6
|
)
|
Advertising
|
|
2,614
|
|
2,613
|
|
|
|
Litigation expense
|
|
21,803
|
|
|
|
100.0
|
|
Impairment charges (Total other-than-temporary
impairment
charges, $19,095, net of $11,892
included in
other comprehensive income)
|
|
7,203
|
|
|
|
100.0
|
|
Other
|
|
15,943
|
|
12,585
|
|
26.7
|
|
|
|
|
|
|
|
|
|
Total non-interest expense
|
|
$
|
105,577
|
|
$
|
70,226
|
|
50.3
|
|
26
Non-interest
expense was affected by the de novo branching activity that has added 3 new
branches in 2010 and 16 branches in 2009.
Included in litigation expense is a reserve for a dispute related to
certain tax deductions that were inherited by the Companys 2004 acquisition of
LFIN. The dispute involves claims by the
former controlling shareholders of LFIN related to approximately $14 million of
tax refunds received by the Company based on deductions taken in 2003 by LFIN
in connection with losses on loans acquired from a failed thrift and a dispute
LFIN had with the FDIC regarding tax benefits related to the failed thrift
acquisition, which originated in 1988.
The Company recorded an other-than-temporary impairment charge of $7.2
million on non-agency mortgage-backed securities, representing the credit
related impairment on the securities.
Financial Condition
Allowance for Probable Loan
Losses
The
allowance for probable loan losses increased .5% to $95,838,000 at March 31,
2010 from $95,393,000 at December 31, 2009. The provision for probable loan losses
charged to expense decreased 40.9% to $7,229,000 for the three months ended March 31,
2010 from $12,225,000 for the same period in 2009. The allowance for probable loan losses was
1.7% of total loans at March 31, 2010 and December 31, 2009. The increase in the allowance was prompted by
the analysis of management regarding the general weakness in the economy and
the impact of that weakness on the Companys loan portfolio and the related
allowance for probable loan losses. The
increase is not necessarily an indicator that more credits will worsen to the
point that the Company will have to continue to record substantial provisions
for probable loan losses at similar levels in future periods.
Investment Securities
Mortgage-backed securities are securities primarily
issued by the Federal Home Loan Mortgage Corporation (Freddie Mac), Federal
National Mortgage Association (Fannie Mae), and the Government National
Mortgage Association (Ginnie Mae).
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.
Loans
Net loans decreased 1.8%
to $5,472,147,000 at March 31, 2010, from $5,571,869,000 at December 31,
2009. The decrease in loans can be
attributed to the lack of demand for loans that the Company is experiencing as
the result of the negative economic conditions.
Deposits
Deposits increased by
3.8% to $7,450,956,000 at March 31, 2010, from $7,178,007,000 at December 31,
2009. The increase in deposits is the
result of the increased demand for deposits and the aggregate pricing that is
occurring in the market for deposits.
Even though the Company increased its deposits, the Company is still
experiencing a substantial amount of competition for deposits at higher than
market rates. As a result, the Company
has attempted to maintain certain deposit relationships but has allowed certain
deposits to leave as the result of aggressive pricing.
Foreign Operations
On
March 31, 2010, the Company had $10,783,666,000 of consolidated assets, of
which approximately $242,269,000, or 2.2%, was related to loans outstanding to
borrowers domiciled in foreign countries, compared to $280,485,000, or 2.4%, at
December 31, 2009. Of the
$242,269,000, 82.4% is directly or indirectly secured by U.S. assets, certificates
of deposits and real estate; 17.0% is secured by foreign real estate; and 0.6%
is unsecured.
27
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 Probable Loan Losses as a policy critical
to the sound operations of the bank subsidiaries. The allowance for probable 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 probable loan losses. Loan losses or recoveries are charged or
credited directly to the allowances. The
allowance for probable 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 probable loan losses and provision for
probable loan losses included in the results of operations and Provision and
Allowance for Probable 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
probable 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 2010 and 2009 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 March 31, 2010,
shareholders equity was $1,412,034,000 compared to $1,407,470,000 at December 31,
2009, an increase of $4,564,000, or .3%.
The increase is primarily due to the retention of earnings, offset by
dividends paid to the preferred and common shareholders.
The Company had a
leverage ratio of 11.44% and 10.95%, risk-weighted Tier 1 capital ratio of 18.66% and 17.74% and
risk-weighted total capital ratio of 19.91% and 18.99% at March 31, 2010
and December 31, 2009, respectively.
The identified intangibles and goodwill of $303,633,000 as of March 31,
2010, 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 March 31, 2010 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.
28
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.
Interest
Rate Sensitivity
(Dollars in Thousands)
|
|
Rate/Maturity
|
|
March 31,
2010
|
|
3 Months
or Less
|
|
Over 3 Months
to 1 Year
|
|
Over 1
Year to 5
Years
|
|
Over 5
Years
|
|
Total
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Rate
sensitive assets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Investment
securities
|
|
$
|
583,062
|
|
$
|
1,028,157
|
|
$
|
2,004,706
|
|
$
|
52,429
|
|
$
|
3,668,354
|
|
Loans,
net of non-accruals
|
|
4,184,911
|
|
221,979
|
|
367,099
|
|
724,182
|
|
5,498,171
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
earning assets
|
|
$
|
4,767,973
|
|
$
|
1,250,136
|
|
$
|
2,371,805
|
|
$
|
776,611
|
|
$
|
9,166,525
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cumulative
earning assets
|
|
$
|
4,767,973
|
|
$
|
6,018,109
|
|
$
|
8,389,914
|
|
$
|
9,166,525
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Rate
sensitive liabilities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Time
deposits
|
|
$
|
1,442,323
|
|
$
|
1,773,718
|
|
$
|
310,728
|
|
$
|
1,164
|
|
$
|
3,527,933
|
|
Other
interest bearing deposits
|
|
2,334,051
|
|
|
|
|
|
|
|
2,334,051
|
|
Securities
sold under repurchase
agreements
|
|
421,180
|
|
56,933
|
|
655
|
|
1,000,000
|
|
1,478,768
|
|
Other
borrowed funds
|
|
99,575
|
|
|
|
|
|
|
|
99,575
|
|
Junior
subordinated deferrable
interest debentures
|
|
61,858
|
|
|
|
128,868
|
|
10,365
|
|
201,091
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
interest bearing liabilities
|
|
$
|
4,358,987
|
|
$
|
1,830,651
|
|
$
|
440,251
|
|
$
|
1,011,529
|
|
$
|
7,641,418
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cumulative
sensitive liabilities
|
|
$
|
4,358,987
|
|
$
|
6,189,638
|
|
$
|
6,629,889
|
|
$
|
7,641,418
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Repricing
gap
|
|
$
|
408,986
|
|
$
|
(580,515
|
)
|
$
|
1,931,554
|
|
$
|
(234,918
|
)
|
$
|
1,525,107
|
|
Cumulative
repricing gap
|
|
408,986
|
|
(171,529
|
)
|
1,760,025
|
|
1,525,107
|
|
|
|
Ratio
of interest-sensitive assets
to liabilities
|
|
1.09
|
|
.68
|
|
5.39
|
|
.77
|
|
1.20
|
|
Ratio
of cumulative, interest-sensitive assets to liabilities
|
|
1.09
|
|
.97
|
|
1.27
|
|
1.20
|
|
|
|
Item
3.
Quantitative and Qualitative
Disclosures about Market Risk
During the first three
months of 2010, 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 24 of the Companys 2009 Annual Report as filed as an exhibit to the
Companys Form 10-K for the year ended December 31, 2009.
29
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 substantial actual
and punitive damages. The Company has
determined, based on discussions with its counsel that any material loss in
such actions, individually or in the aggregate, is remote or the damages
sought, even if fully recovered, would not be considered material to 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 Internal Revenue Service issued a Notice of
Final Partnership Administrative Adjustments (FPAA) on two of the
partnerships. In both partnerships, the
lead bank subsidiary was the owner of a ninety-nine percent (99%) limited
partnership interest. In connection with the two partnerships through the first
quarter of 2006, the Company expensed approximately $25.7 million, which amount
represents 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.
The Company is involved
in a dispute related to certain tax matters that were inherited by the Company
in its 2004 acquisition of LFIN. The
dispute involves claims by the former controlling shareholders of LFIN related
to approximately $14 million of tax refunds received by the Company based on
deductions taken in 2003 by LFIN in connection with losses on loans acquired
from a failed thrift and a dispute LFIN had with the FDIC regarding the tax
benefits related to the failed thrift acquisition which originated in
1988. On March 5, 2010, judgment
was entered on a jury verdict rendered against the Company in the U.S. District
Court for the Western District of Oklahoma (the Court). Other than the tax refunds that are in
dispute, the Company does not have any other disputes regarding tax refunds
received by the Company in connection with the LFIN acquisition. While judgment has been entered in the case,
certain additional issues related to fees and other matters are to be
determined by the Court in the future prior to the judgment becoming final and
appealable. Company management is
currently reviewing the judgment, its implications and the Companys intention
to appeal, as well as take other paths of action to mitigate the impact of the
judgment. The Company is disappointed
with the judgment but believes it has a number of valid grounds for appeal
which it intends to pursue. As of March 31, 2010, the Company recorded an
additional reserve of $21.8 million related to this matter. Management will continue to review the
developments in this dispute and make appropriate adjustments to the amount
reserved, as needed.
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,
2009.
30
Item 2.
Unregistered Sales of Equity Securities
and Use of Proceeds
From time to time,
the Companys Board of Directors has authorized stock repurchase plans. The Company terminated its stock repurchase
program on December 19, 2008, in connection with participating in the TARP
Capital Purchase Program, which program prohibited stock repurchases, except
for repurchases made in connection with the administration of an employee
benefit plan in the ordinary course of business and consistent with past
practices. On April 7, 2009, the
Company obtained consent from the Treasury to repurchase shares of the Companys
common stock; provided, however, that in no event will the aggregate amount of
cash dividends and common stock repurchases for a given semi-annual period
exceed the aggregate amount that would be used to pay the originally permitted
semi-annual cash dividend of $.33 per share. The Company also received consent from the
Treasury to pay quarterly dividends. The
Company will determine on an ongoing basis the best use of the funds and
whether a more frequent dividend program and expanded repurchase program are
warranted and beneficial to its shareholders.
Following receipt of the Treasury Departments consent, the Board of
Directors established a formal stock repurchase program that authorized the
repurchase of up to $40 million of common stock within the following twelve
months and on March 9, 2010, the Board of Directors extended the
repurchase program and again authorized the repurchase of up to $40 million of
common stock during the twelve month period expiring on April 9, 2011,
which repurchase cap the Board is inclined to increase over time, subject to
the limitations imposed by the Treasury Departments consent. Stock repurchases may be made from time to
time, on the open market or through private transactions. During the first quarter, the Companys Board
of Directors adopted a Rule 10b5-1 plan and intends to adopt additional Rule 10b5-1
trading plans that will allow the Company to purchase its shares of common
stock during certain trading blackout periods when the Company ordinarily would
not be in the market due to trading restrictions in its internal trading
policy. Shares repurchased in this
program will be held in treasury for reissue for various corporate purposes,
including employee stock option plans.
As of May 3, 2010, a total of 6,913,284 shares had been repurchased
under all programs at a cost of $243,409,000.
The Company is not obligated to repurchase shares under its stock
purchase program or to enter into additional Rule 10b5-1 plans. The timing, actual number and value of shares
purchased will depend on many factors, including the Companys cash flow and
the liquidity and price performance of its shares of common stock.
Except for repurchases in
connection with the administration of an employee benefit plan in the ordinary
course of business and consistent with past practices, common stock repurchases
are only conducted under publicly announced repurchase programs approved by the
Board of Directors. The following table
includes information about common stock share repurchases for the quarter ended
March 31, 2010.
|
|
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)
|
|
January 1
January 31, 2010
|
|
|
|
|
|
|
|
$
|
30,722,000
|
|
February 1
February 28, 2010
|
|
|
|
|
|
|
|
30,722,000
|
|
March 1
March 31, 2010
|
|
|
|
|
|
|
|
30,722,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) The
repurchase program was extended on March 9, 2010 and allows for the
repurchase of up to an additional $40,000,000 of treasury stock through April 9,
2011.
31
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
32
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:
|
May 6, 2010
|
|
/s/ Dennis E. Nixon
|
|
|
Dennis E. Nixon
|
|
|
President
|
|
|
|
|
|
|
Date:
|
May 6,
2010
|
|
/s/ Imelda Navarro
|
|
|
Imelda Navarro
|
|
|
Treasurer
|
33
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