UNITED STATES
SECURITIES
AND EXCHANGE COMMISSION
Washington,
D.C. 20549
FORM 10-Q
x
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the
quarterly period ended June 30, 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
x
No
o
Indicate by check mark if
the registrant is a large accelerated filer, an accelerated filer, a
non-accelerated filer, or a smaller reporting company. See the definitions of large accelerated
filer, accelerated filer and smaller reporting company in Rule 12b-2
of the Exchange Act.
Large
accelerated filer
x
|
|
Accelerated
filer
o
|
|
|
|
Non-accelerated
filer
o
|
|
Smaller
reporting company
o
|
(Do
not check if a smaller reporting company)
|
|
|
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
|
|
67,874,089
shares outstanding at August 2, 2010
|
PART I - FINANCIAL INFORMATION
Item 1.
Financial
Statements
INTERNATIONAL BANCSHARES CORPORATION AND SUBSIDIARIES
Consolidated Statements of Condition (Unaudited)
(Dollars in Thousands)
|
|
June 30,
|
|
December 31,
|
|
|
|
2010
|
|
2009
|
|
Assets
|
|
|
|
|
|
|
|
|
|
|
|
Cash
and due from banks
|
|
$
|
244,301
|
|
$
|
224,638
|
|
|
|
|
|
|
|
Total
cash and cash equivalents
|
|
244,301
|
|
224,638
|
|
|
|
|
|
|
|
Investment
securities:
|
|
|
|
|
|
Held-to-maturity
(Market value of $2,450 on June 30, 2010 and $2,450 on December 31,
2009)
|
|
2,450
|
|
2,450
|
|
Available-for-sale
(Amortized cost of $4,201,904 on June 30, 2010 and $4,541,851 on December 31,
2009)
|
|
4,308,600
|
|
4,644,083
|
|
|
|
|
|
|
|
Total
investment securities
|
|
4,311,050
|
|
4,646,533
|
|
|
|
|
|
|
|
Loans,
net of unearned discounts
|
|
5,538,623
|
|
5,667,262
|
|
Less
allowance for probable loan losses
|
|
(90,368
|
)
|
(95,393
|
)
|
|
|
|
|
|
|
Net
loans
|
|
5,448,255
|
|
5,571,869
|
|
|
|
|
|
|
|
Bank
premises and equipment, net
|
|
479,461
|
|
490,375
|
|
Accrued
interest receivable
|
|
39,132
|
|
41,731
|
|
Other
investments
|
|
322,996
|
|
359,404
|
|
Identified
intangible assets, net
|
|
19,834
|
|
22,358
|
|
Goodwill,
net
|
|
282,532
|
|
282,532
|
|
Other
assets
|
|
158,129
|
|
123,103
|
|
|
|
|
|
|
|
Total
assets
|
|
$
|
11,305,690
|
|
$
|
11,762,543
|
|
1
INTERNATIONAL BANCSHARES CORPORATION AND SUBSIDIARIES
Consolidated Statements of Condition, continued
(Unaudited)
(Dollars in Thousands)
|
|
June 30,
|
|
December 31,
|
|
|
|
2010
|
|
2009
|
|
Liabilities and Shareholders
Equity
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
Deposits:
|
|
|
|
|
|
Demand
non-interest bearing
|
|
$
|
1,561,360
|
|
$
|
1,516,799
|
|
Savings
and interest bearing demand
|
|
2,384,319
|
|
2,262,552
|
|
Time
|
|
3,534,193
|
|
3,398,656
|
|
|
|
|
|
|
|
Total
deposits
|
|
7,479,872
|
|
7,178,007
|
|
|
|
|
|
|
|
Securities
sold under repurchase agreements
|
|
1,490,517
|
|
1,441,817
|
|
Other
borrowed funds
|
|
543,500
|
|
1,347,625
|
|
Junior
subordinated deferrable interest debentures
|
|
201,100
|
|
201,082
|
|
Other
liabilities
|
|
133,614
|
|
186,542
|
|
|
|
|
|
|
|
Total
liabilities
|
|
9,848,603
|
|
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
June 30, 2010, net of discount of $9,113 and issued 216,000 shares on
December 31, 2009, net of discount of $10,258
|
|
206,887
|
|
205,742
|
|
Common
shares of $1.00 par value. Authorized 275,000,000 shares; issued 95,711,260
shares on June 30, 2010 and 95,711,111 shares on December 31, 2009
|
|
95,711
|
|
95,711
|
|
Surplus
|
|
161,556
|
|
161,258
|
|
Retained
earnings
|
|
1,170,222
|
|
1,122,290
|
|
Accumulated
other comprehensive income
|
|
68,783
|
|
65,878
|
|
|
|
1,703,159
|
|
1,650,879
|
|
|
|
|
|
|
|
Less
cost of shares in treasury, 27,752,171 shares on June 30, 2010 and
27,607,171 shares on December 31, 2009
|
|
(246,072
|
)
|
(243,409
|
)
|
|
|
|
|
|
|
Total
shareholders equity
|
|
1,457,087
|
|
1,407,470
|
|
|
|
|
|
|
|
Total
liabilities and shareholders equity
|
|
$
|
11,305,690
|
|
$
|
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
June 30,
|
|
Six Months Ended
June 30,
|
|
|
|
2010
|
|
2009
|
|
2010
|
|
2009
|
|
|
|
|
|
|
|
|
|
|
|
Interest
income:
|
|
|
|
|
|
|
|
|
|
Loans,
including fees
|
|
$
|
78,766
|
|
$
|
84,216
|
|
$
|
159,380
|
|
$
|
167,842
|
|
Investment
securities:
|
|
|
|
|
|
|
|
|
|
Taxable
|
|
32,348
|
|
48,705
|
|
69,681
|
|
104,137
|
|
Tax-exempt
|
|
1,783
|
|
1,109
|
|
3,416
|
|
2,079
|
|
Other
interest income
|
|
183
|
|
148
|
|
425
|
|
336
|
|
|
|
|
|
|
|
|
|
|
|
Total
interest income
|
|
113,080
|
|
134,178
|
|
232,902
|
|
274,394
|
|
|
|
|
|
|
|
|
|
|
|
Interest
expense:
|
|
|
|
|
|
|
|
|
|
Savings
deposits
|
|
2,410
|
|
2,670
|
|
4,891
|
|
5,619
|
|
Time
deposits
|
|
12,822
|
|
16,042
|
|
25,875
|
|
33,893
|
|
Securities
sold under repurchase agreements
|
|
11,235
|
|
11,151
|
|
22,287
|
|
22,512
|
|
Other
borrowings
|
|
129
|
|
1,624
|
|
440
|
|
8,309
|
|
Junior
subordinated interest deferrable debentures
|
|
3,047
|
|
3,164
|
|
6,077
|
|
6,388
|
|
|
|
|
|
|
|
|
|
|
|
Total
interest expense
|
|
29,643
|
|
34,651
|
|
59,570
|
|
76,721
|
|
|
|
|
|
|
|
|
|
|
|
Net
interest income
|
|
83,437
|
|
99,527
|
|
173,332
|
|
197,673
|
|
|
|
|
|
|
|
|
|
|
|
Provision
for probable loan losses
|
|
1,429
|
|
22,858
|
|
8,658
|
|
35,083
|
|
|
|
|
|
|
|
|
|
|
|
Net
interest income after provision for probable loan losses
|
|
82,008
|
|
76,669
|
|
164,674
|
|
162,590
|
|
|
|
|
|
|
|
|
|
|
|
Non-interest
income:
|
|
|
|
|
|
|
|
|
|
Service
charges on deposit accounts
|
|
24,954
|
|
24,246
|
|
49,234
|
|
48,328
|
|
Other
service charges, commissions and fees
|
|
|
|
|
|
|
|
|
|
Banking
|
|
12,167
|
|
10,871
|
|
23,787
|
|
21,268
|
|
Non-banking
|
|
1,855
|
|
2,291
|
|
3,523
|
|
3,718
|
|
Gain
on investment securities transactions, net
|
|
2,573
|
|
11,145
|
|
30,837
|
|
11,706
|
|
Other
investments, net
|
|
4,116
|
|
3,803
|
|
7,473
|
|
7,235
|
|
Other
income
|
|
3,735
|
|
3,836
|
|
6,144
|
|
5,949
|
|
|
|
|
|
|
|
|
|
|
|
Total
non-interest income
|
|
49,400
|
|
56,192
|
|
120,998
|
|
98,204
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
3
INTERNATIONAL BANCSHARES CORPORATION AND SUBSIDIARIES
Consolidated Statements of Income, continued (Unaudited)
(Dollars in Thousands, except per share data)
|
|
Three Months Ended
June 30,
|
|
Six Months Ended
June 30,
|
|
|
|
2010
|
|
2009
|
|
2010
|
|
2009
|
|
|
|
|
|
|
|
|
|
|
|
Non-interest
expense:
|
|
|
|
|
|
|
|
|
|
Employee
compensation and benefits
|
|
$
|
32,498
|
|
$
|
32,324
|
|
$
|
64,162
|
|
$
|
64,480
|
|
Occupancy
|
|
8,724
|
|
8,459
|
|
17,242
|
|
17,176
|
|
Depreciation
of bank premises and equipment
|
|
8,969
|
|
8,978
|
|
17,981
|
|
18,014
|
|
Professional
fees
|
|
3,781
|
|
3,268
|
|
7,763
|
|
5,874
|
|
Deposit
insurance assessments
|
|
2,668
|
|
5,536
|
|
5,212
|
|
5,903
|
|
Stationery
and supplies
|
|
896
|
|
979
|
|
1,889
|
|
1,816
|
|
Amortization
of identified intangible assets
|
|
1,324
|
|
1,321
|
|
2,625
|
|
2,630
|
|
Advertising
|
|
2,453
|
|
2,627
|
|
5,067
|
|
5,240
|
|
Litigation
expense
|
|
|
|
|
|
21,803
|
|
|
|
Impairment
charges (Total other-than-temporary impairment charges, $17 less gain of
($241) and $4,045 less gain of ($3,416), included in other comprehensive
income)
|
|
258
|
|
|
|
7,461
|
|
|
|
Other
|
|
17,893
|
|
21,689
|
|
33,838
|
|
34,274
|
|
|
|
|
|
|
|
|
|
|
|
Total
non-interest expense
|
|
79,464
|
|
85,181
|
|
185,043
|
|
155,407
|
|
|
|
|
|
|
|
|
|
|
|
Income
before income taxes
|
|
51,944
|
|
47,680
|
|
100,629
|
|
105,387
|
|
|
|
|
|
|
|
|
|
|
|
Provision
for income taxes
|
|
17,936
|
|
16,547
|
|
34,575
|
|
36,726
|
|
|
|
|
|
|
|
|
|
|
|
Net
income
|
|
$
|
34,008
|
|
$
|
31,133
|
|
$
|
66,054
|
|
$
|
68,661
|
|
|
|
|
|
|
|
|
|
|
|
Preferred
Stock Dividends
|
|
3,277
|
|
3,242
|
|
6,545
|
|
6,475
|
|
|
|
|
|
|
|
|
|
|
|
Net
income available to common shareholders
|
|
$
|
30,731
|
|
$
|
27,891
|
|
$
|
59,509
|
|
$
|
62,186
|
|
|
|
|
|
|
|
|
|
|
|
Basic
earnings per common share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted
average number of shares outstanding:
|
|
68,063,899
|
|
68,520,449
|
|
68,083,089
|
|
68,561,237
|
|
Net
income
|
|
$
|
.45
|
|
$
|
.41
|
|
$
|
.87
|
|
$
|
.91
|
|
|
|
|
|
|
|
|
|
|
|
Fully
diluted earnings per common share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted
average number of shares outstanding:
|
|
68,163,864
|
|
68,520,451
|
|
68,184,767
|
|
68,568,785
|
|
Net
income
|
|
$
|
.45
|
|
$
|
.41
|
|
$
|
.87
|
|
$
|
.91
|
|
See
accompanying notes to consolidated financial statements.
4
INTERNATIONAL BANCSHARES CORPORATION AND SUBSIDIARIES
Consolidated Statements of Comprehensive Income
(Unaudited)
(Dollars in Thousands)
|
|
Three Months Ended
June 30,
|
|
Six Months Ended
June 30,
|
|
|
|
2010
|
|
2009
|
|
2010
|
|
2009
|
|
|
|
|
|
|
|
|
|
|
|
Net
income
|
|
$
|
34,008
|
|
$
|
31,133
|
|
$
|
66,054
|
|
$
|
68,661
|
|
|
|
|
|
|
|
|
|
|
|
Other
comprehensive income, net of tax
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
unrealized holding gains on securities available for sale arising during
period (tax effects of $9,567, $10,646, $9,746 and $25,724)
|
|
17,766
|
|
19,771
|
|
18,099
|
|
47,773
|
|
Reclassification
adjustment for gains on securities available for sale included in net income
(tax effects of $(901), $(3,901), $(10,793) and $(4,097))
|
|
(1,672
|
)
|
(7,244
|
)
|
(20,044
|
)
|
(7,609
|
)
|
Reclassification
adjustment for impairment charges on available for sale securities included
in net income (tax effects of $90, and $2,611)
|
|
168
|
|
|
|
4,850
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive
income
|
|
$
|
50,270
|
|
$
|
43,660
|
|
$
|
68,959
|
|
$
|
108,825
|
|
See
accompanying notes to consolidated financial statements.
5
INTERNATIONAL BANCSHARES CORPORATION AND SUBSIDIARIES
Consolidated Statements of Cash Flows (Unaudited)
(Dollars in Thousands)
|
|
Six Months Ended
June 30,
|
|
|
|
2010
|
|
2009
|
|
Operating
activities:
|
|
|
|
|
|
|
|
|
|
|
|
Net
income
|
|
$
|
66,054
|
|
$
|
68,661
|
|
|
|
|
|
|
|
Adjustments
to reconcile net income to net cash (used in) provided by operating
activities:
|
|
|
|
|
|
Provision
for probable loan losses
|
|
8,658
|
|
35,083
|
|
Accretion
of time deposit discounts
|
|
(7
|
)
|
(6
|
)
|
Depreciation
of bank premises and equipment
|
|
17,981
|
|
18,014
|
|
(Gain)
loss on sale of bank premises and equipment
|
|
(192
|
)
|
63
|
|
Depreciation
and amortization of leased assets
|
|
|
|
240
|
|
Accretion
of investment securities discounts
|
|
(793
|
)
|
(974
|
)
|
Amortization
of investment securities premiums
|
|
4,940
|
|
3,114
|
|
Investment
securities transactions, net
|
|
(30,837
|
)
|
(11,706
|
)
|
Impairment
charges on available-for-sale investment securities
|
|
7,461
|
|
|
|
Amortization
of junior subordinated debenture discounts
|
|
18
|
|
17
|
|
Amortization
of identified intangible assets
|
|
2,625
|
|
2,630
|
|
Stock
based compensation expense
|
|
297
|
|
316
|
|
Earnings
from affiliates and other investments
|
|
(6,490
|
)
|
(6,807
|
)
|
Deferred
tax expense
|
|
(10,374
|
)
|
(1,397
|
)
|
Decrease
in accrued interest receivable
|
|
2,599
|
|
7,998
|
|
Net
increase in other assets
|
|
(19,857
|
)
|
(33,162
|
)
|
Net
decrease in other liabilities
|
|
(73,731
|
)
|
(80,681
|
)
|
|
|
|
|
|
|
Net
cash (used in) provided by operating activities
|
|
(31,648
|
)
|
1,403
|
|
|
|
|
|
|
|
Investing
activities:
|
|
|
|
|
|
|
|
|
|
|
|
Proceeds
from maturities of securities
|
|
600
|
|
1,287
|
|
Proceeds
from sales and calls of available for sale securities
|
|
1,051,172
|
|
536,680
|
|
Purchases
of available for sale securities
|
|
(1,137,861
|
)
|
(120,407
|
)
|
Principal
collected on mortgage-backed securities
|
|
458,264
|
|
630,899
|
|
Maturities
of time deposits with banks
|
|
|
|
297
|
|
Net
decrease in loans
|
|
114,956
|
|
107,588
|
|
Purchases
of other investments
|
|
(1,014
|
)
|
(3,814
|
)
|
Distributions
of other investments
|
|
43,912
|
|
12,726
|
|
Purchases
of bank premises and equipment
|
|
(8,553
|
)
|
(38,573
|
)
|
Proceeds
from sale of bank premises and equipment
|
|
1,678
|
|
324
|
|
|
|
|
|
|
|
Net
cash provided by investing activities
|
|
523,154
|
|
1,127,007
|
|
|
|
|
|
|
|
|
|
6
INTERNATIONAL BANCSHARES CORPORATION AND SUBSIDIARIES
Consolidated Statements of Cash Flows, continued (Unaudited)
(Dollars in Thousands)
|
|
Six Months Ended
June 30,
|
|
|
|
2010
|
|
2009
|
|
|
|
|
|
|
|
Financing
activities:
|
|
|
|
|
|
|
|
|
|
|
|
Net
increase (decrease) in non-interest bearing demand deposits
|
|
$
|
44,561
|
|
$
|
(7,452
|
)
|
Net
increase in savings and interest bearing demand deposits
|
|
121,767
|
|
52,531
|
|
Net
increase (decrease) in time deposits
|
|
135,544
|
|
(6,089
|
)
|
Net
increase in securities sold under repurchase agreements
|
|
48,700
|
|
19,242
|
|
Net
decrease in other borrowed funds
|
|
(804,125
|
)
|
(1,199,036
|
)
|
Purchase
of treasury stock
|
|
(2,663
|
)
|
(4,482
|
)
|
Proceeds
from stock transactions
|
|
1
|
|
85
|
|
Payment
of dividends on common stock
|
|
(11,578
|
)
|
(11,662
|
)
|
Payments
of dividends on preferred stock
|
|
(4,050
|
)
|
(4,260
|
)
|
|
|
|
|
|
|
Net
cash used in financing activities
|
|
(471,843
|
)
|
(1,161,123
|
)
|
|
|
|
|
|
|
Increase
(decrease) in cash and cash equivalents
|
|
19,663
|
|
(32,713
|
)
|
|
|
|
|
|
|
Cash
and cash equivalents at beginning of period
|
|
224,638
|
|
298,720
|
|
|
|
|
|
|
|
Cash
and cash equivalents at end of period
|
|
$
|
244,301
|
|
$
|
266,007
|
|
|
|
|
|
|
|
Supplemental
cash flow information:
|
|
|
|
|
|
Interest
paid
|
|
$
|
60,729
|
|
$
|
81,906
|
|
Income
taxes paid
|
|
45,552
|
|
43,491
|
|
Accrued
dividends, preferred shares
|
|
1,350
|
|
1,350
|
|
Sales
of available-for-sale securities not yet settled
|
|
15,271
|
|
|
|
Purchases
of available-for-sale securities not yet settled
|
|
28,269
|
|
124,009
|
|
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 ASC 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 June 30, 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
|
|
|
|
June 30, 2010
|
|
(Level 1)
|
|
(Level 2)
|
|
(Level 3)
|
|
|
|
|
|
|
|
|
|
|
|
Measured
on a recurring basis:
|
|
|
|
|
|
|
|
|
|
Assets:
|
|
|
|
|
|
|
|
|
|
U.S.
Treasury securities
|
|
$
|
1,327
|
|
$
|
|
|
$
|
1,327
|
|
$
|
|
|
Available-for-sale
|
|
|
|
|
|
|
|
|
|
Residential
mortgage-backed securities
|
|
4,141,023
|
|
|
|
4,090,963
|
|
50,060
|
|
Available-for-sale
|
|
|
|
|
|
|
|
|
|
States
and political subdivisions
|
|
151,409
|
|
|
|
151,409
|
|
|
|
Available-for-sale
|
|
|
|
|
|
|
|
|
|
Other
|
|
14,841
|
|
14,841
|
|
|
|
|
|
Available-for-sale
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Measured
on a non-recurring basis:
|
|
|
|
|
|
|
|
|
|
Assets:
|
|
|
|
|
|
|
|
|
|
Impaired
Loans
|
|
64,285
|
|
|
|
|
|
64,285
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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
|
|
$
|
1,327
|
|
$
|
|
|
$
|
1,327
|
|
$
|
|
|
Available-for-sale
|
|
|
|
|
|
|
|
|
|
Residential
mortgage-backed securities
|
|
4,491,764
|
|
|
|
4,432,195
|
|
59,569
|
|
Available-for-sale
|
|
|
|
|
|
|
|
|
|
States
and political subdivisions
|
|
136,866
|
|
|
|
136,866
|
|
|
|
Available-for-sale
|
|
|
|
|
|
|
|
|
|
Other
|
|
14,126
|
|
14,126
|
|
|
|
|
|
Available-for-sale
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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
|
|
(5,464
|
)
|
Total
unrealized gains (losses) included in:
|
|
|
|
Other
comprehensive income
|
|
3,416
|
|
Net
income
|
|
(7,461
|
)
|
|
|
|
|
Balance
at June 30, 2010
|
|
$
|
50,060
|
|
As of June 30, 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 June 30, 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.
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 June 30, 2010, and December 31,
2009, the carrying amount of fixed rate performing loans was $1,364,001,000 and
$1,303,049,000 respectively, and the estimated fair value was $1,244,651,000
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 June 30, 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 June 30,
2010 and December 31, 2009, the carrying amount of time deposits was
$3,534,193,000 and $3,398,656,000, respectively, and the estimated fair value
was $3,553,782,000 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 June 30,
2010 and December 31, 2009. The
fair value of the long-term instruments is based on established market
spreads. At June 30, 2010 and December 31,
2009, the carrying amount of long-term repurchase agreements was $1,000,000,000
and the estimated fair value was $1,141,174,000 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 June 30, 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 June 30, 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 June 30,
2010 and December 31, 2009, the carrying amount of fixed junior
subordinated deferrable interest debentures was $139,242,000 and $139,224,000,
respectively, and the estimated fair value was $69,955,000 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 June 30, 2010 and December 31,
2009 is as follows:
|
|
June 30,
|
|
December 31,
|
|
|
|
2010
|
|
2009
|
|
|
|
(Dollars
in Thousands)
|
|
|
|
|
|
|
|
Commercial,
financial and agricultural
|
|
$
|
2,663,337
|
|
$
|
2,703,379
|
|
Real
estate mortgage
|
|
948,194
|
|
954,010
|
|
Real
estate construction
|
|
1,526,809
|
|
1,583,057
|
|
Consumer
|
|
139,387
|
|
146,331
|
|
Foreign
|
|
260,896
|
|
280,485
|
|
|
|
|
|
|
|
Total
loans
|
|
$
|
5,538,623
|
|
$
|
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:
|
|
June 30,
|
|
June 30,
|
|
|
|
2010
|
|
2009
|
|
|
|
(Dollars
in Thousands)
|
|
|
|
|
|
|
|
Balance
at December 31,
|
|
$
|
95,393
|
|
$
|
73,461
|
|
|
|
|
|
|
|
Losses
charged to allowance
|
|
(14,298
|
)
|
(24,237
|
)
|
Recoveries
credited to allowance
|
|
615
|
|
654
|
|
Net
losses charged to allowance
|
|
(13,683
|
)
|
(23,583
|
)
|
|
|
|
|
|
|
Provision
charged to operations
|
|
8,658
|
|
35,083
|
|
|
|
|
|
|
|
Balance
at June 30,
|
|
$
|
90,368
|
|
$
|
84,961
|
|
The
losses charged to the allowance decreased by $9,900,000 for the six months
ended June 30, 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 affected the Companys provisions as well as charge-offs.
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:
|
|
June 30,
|
|
December 31,
|
|
|
|
2010
|
|
2009
|
|
|
|
(Dollars in Thousands)
|
|
|
|
|
|
|
|
Balance of impaired loans where there is a related
allowance for loan loss
|
|
$
|
87,764
|
|
$
|
106,780
|
|
Balance of impaired loans where there is no related allowance
for loan loss
|
|
34,192
|
|
11,494
|
|
|
|
|
|
|
|
Total impaired loans
|
|
$
|
121,956
|
|
$
|
118,274
|
|
|
|
|
|
|
|
Allowance allocated to impaired loans
|
|
$
|
23,479
|
|
$
|
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 $123,893,000 and $149,528,000 for the six months and year
ended June 30, 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 June 30, 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 June 30,
2010, 154,572 shares were available for future grants under the 2005 Plan.
14
A summary of option activity
under the stock option plans for the six months ended June 30, 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
|
|
149
|
|
10.40
|
|
|
|
|
|
Options
expired
|
|
|
|
|
|
|
|
|
|
Options
forfeited
|
|
11,650
|
|
18.03
|
|
|
|
|
|
Options
outstanding at June 30, 2010
|
|
811,793
|
|
$
|
20.58
|
|
4.31
|
|
$
|
1,476
|
|
|
|
|
|
|
|
|
|
|
|
Options
fully vested and exercisable at June 30, 2010
|
|
327,317
|
|
$
|
23.64
|
|
2.74
|
|
$
|
74
|
|
Stock-based compensation
expense included in the consolidated statements of income for the three and six
months ended June 30, 2010 was approximately $145,000 and $297,000,
respectively. As of June 30, 2010,
there was approximately $902,000 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. 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 June 30,
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
|
|
Residential mortgage-backed securities
|
|
4,039,361
|
|
113,320
|
|
(11,658
|
)
|
4,141,023
|
|
4,141,023
|
|
Obligations of states and political subdivisions
|
|
147,391
|
|
4,210
|
|
(192
|
)
|
151,409
|
|
151,409
|
|
Equity securities
|
|
13,825
|
|
1,035
|
|
(19
|
)
|
14,841
|
|
14,841
|
|
Total investment securities
|
|
$
|
4,201,904
|
|
$
|
118,565
|
|
$
|
(11,869
|
)
|
$
|
4,308,600
|
|
$
|
4,308,600
|
|
(1)
Included in the carrying
value of residential mortgage-backed securities are $1,236,201 of
mortgage-backed securities issued by Ginnie Mae, $2,854,762 of mortgage-backed
securities issued by Fannie Mae and Freddie Mac and $50,060 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
|
|
Residential 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 residential 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 June 30,
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
|
|
$
|
1,225
|
|
$
|
1,225
|
|
$
|
1,327
|
|
$
|
1,327
|
|
Due after one year through five years
|
|
1,225
|
|
1,225
|
|
546
|
|
552
|
|
Due after five years through ten years
|
|
|
|
|
|
7,460
|
|
7,549
|
|
Due after ten years
|
|
|
|
|
|
139,385
|
|
143,308
|
|
Residential mortgage-backed securities
|
|
|
|
|
|
4,039,361
|
|
4,141,023
|
|
Equity securities
|
|
|
|
|
|
13,825
|
|
14,841
|
|
Total investment securities
|
|
$
|
2,450
|
|
$
|
2,450
|
|
$
|
4,201,904
|
|
$
|
4,308,600
|
|
Residential mortgage-backed
securities are securities issued by the Freddie Mac, Fannie Mae, Ginnie Mae or
non-government entities. Investments in
residential mortgage-backed securities issued by Ginnie Mae are fully
guaranteed by the U.S. Government. Investments
in residential mortgage-backed securities issued by Freddie Mac and Fannie Mae
are not fully guaranteed by the U.S. Government, 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 $2,507,569,000 and
$2,588,179,000 at June 30, 2010.
Proceeds
from the sale of securities available-for-sale were $105,502,000 and
$1,051,172,000 for the three and six months ended June 30, 2010, which
included $99,058,000 and $1,042,678,000 of mortgage-backed securities. Gross
gains of $2,576,000 and $30,843,000 and gross losses of $(3,000) and $(6,000)
were realized on the sales for the three and six months ended June 30,
2010, respectively. During the three and
six months ended June 30, 2010, the Company recorded impairment charges of
$258,000 and $7,461,000, 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 June 30,
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:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Residential mortgage-backed securities
|
|
$
|
41,862
|
|
$
|
(8
|
)
|
$
|
50,060
|
|
$
|
(11,650
|
)
|
$
|
91,922
|
|
$
|
(11,658
|
)
|
Obligations of states and political subdivisions
|
|
16,805
|
|
(134
|
)
|
647
|
|
(58
|
)
|
17,452
|
|
(192
|
)
|
Other equity securities
|
|
|
|
|
|
56
|
|
(19
|
)
|
56
|
|
(19
|
)
|
|
|
$
|
58,667
|
|
$
|
(142
|
)
|
$
|
50,763
|
|
$
|
(11,727
|
)
|
$
|
109,430
|
|
$
|
(11,869
|
)
|
Gross
unrealized losses on investment securities and the fair value of the related securities,
aggregated by investment category and length of time that individual securities
have been in a continuous unrealized loss position at December 31, 2009,
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
|
|
$
|
16,581
|
|
$
|
(37
|
)
|
$
|
59,879
|
|
$
|
(15,068
|
)
|
$
|
76,460
|
|
$
|
(15,105
|
)
|
Obligations of states and political subdivisions
|
|
14,910
|
|
(201
|
)
|
275
|
|
(3
|
)
|
15,185
|
|
(204
|
)
|
Equity securities
|
|
|
|
|
|
33
|
|
(42
|
)
|
33
|
|
(42
|
)
|
|
|
$
|
31,491
|
|
$
|
(238
|
)
|
$
|
60,187
|
|
$
|
(15,113
|
)
|
$
|
91,678
|
|
$
|
(15,351
|
)
|
The
unrealized losses on investments in residential mortgage-backed securities are
primarily caused by changes in market interest rates. Residential
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 residential
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 residential 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
residential 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 residential
mortgage-backed securities before recovery of amortized cost. It is the conclusion of the Company that the
investments in non-agency residential mortgage-backed securities are
other-than-temporarily impaired due to both credit and other than credit
issues. Impairment charges of $258,000,
$168,000 after tax, and $7,461,000, $4,850,000, after tax was recorded in the
three and six months of 2010 on the non-agency residential mortgage backed
securities. The impairment charges
represent the credit related impairment on the securities.
17
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 for the three months ended June 30, 2010
(Dollars in Thousands):
Balance
at March 31, 2010
|
|
$
|
7,203
|
|
Impairment
charges recognized during period
|
|
258
|
|
Balance
at June 30, 2010
|
|
$
|
7,461
|
|
The following table presents
a reconciliation of credit-related impairment charges on available-for-sale
investment recognized in earnings for the six months ended June 30, 2010
(Dollars in Thousands):
Balance
at December 31, 2009
|
|
$
|
|
|
Impairment
charges recognized during period
|
|
7,461
|
|
Balance
at June 30, 2010
|
|
$
|
7,461
|
|
18
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 June 30, 2010, other
borrowed funds totaled $543,500,000, a decrease of 59.7% 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 June 30,
2010, the principal amount of debentures outstanding totaled $201,100,000. 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 June 30, 2010, the
total $201,100,000, 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. The Dodd-Frank Regulatory Reform
Act was signed into law on July 21, 2010.
Pursuant to that Act, trust preferred securities of bank holding
companies with consolidated assets under $15 billion that were issued before May 19,
2010 are grandfathered. Pursuant to this grandfather provision, these
entities will be able to continue to treat these securities as Tier 1 capital
subject to existing Federal Reserve limitations through the life of the
securities.
19
The following table
illustrates key information about each of the Capital and Common Securities and
their interest rate at June 30, 2010:
|
|
Junior
Subordinated
Deferrable
Interest
Debentures
|
|
Repricing
Frequency
|
|
Interest Rate
|
|
Interest Rate
Index
|
|
Maturity Date
|
|
Optional
Redemption Date
|
|
|
|
(In Thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Trust
I
|
|
$
|
10,374
|
|
Fixed
|
|
10.18
|
%
|
Fixed
|
|
June 2031
|
|
June 2011
|
|
Trust
VI
|
|
$
|
25,774
|
|
Quarterly
|
|
3.89
|
%
|
LIBOR + 3.45
|
|
November 2032
|
|
November 2010
|
|
Trust
VII
|
|
$
|
10,310
|
|
Quarterly
|
|
3.59
|
%
|
LIBOR + 3.25
|
|
April 2033
|
|
October 2010
|
|
Trust
VIII
|
|
$
|
25,774
|
|
Quarterly
|
|
3.35
|
%
|
LIBOR + 3.05
|
|
October 2033
|
|
October 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
|
|
|
|
$
|
201,100
|
|
|
|
|
|
|
|
|
|
|
|
(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 June 30, 2010, none of the Warrants had been exercised. The Company paid dividends on the Senior
Preferred Stock on February 16 and May 15, 2010, in the amount of
$2,700,000 each and will pay a dividend on the Senior Preferred Stock on August 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 $577,000 and $1,145,000 for the three
and six months ended June 30, 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.
20
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 August 2,
2010, a total of 7,143,284 shares had been repurchased under all programs at a
cost of $247,462,000.
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. During the first quarter of 2010, the Company recorded
an additional reserve of $21.8 million related to this matter. As of June 30, 2010, the Company has
determined that the established reserve for this matter is still
appropriate. Management will continue to
review the developments in this dispute and make appropriate adjustments to the
amount reserved, as needed.
21
Note 11
Capital Ratios
The Company had a Tier 1
capital to average total asset (leverage) ratio of 12.14% and 10.95%,
risk-weighted Tier 1 capital ratio of 18.80% and 17.74% and risk-weighted total
capital ratio of 20.06% and 18.99% at June 30, 2010 and December 31,
2009, respectively. The identified
intangibles and goodwill of $302,366,000 as of June 30, 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 June 30,
2010, the total of $201,100,000 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. The Dodd-Frank Regulatory Reform
Act was signed into law on July 21, 2010.
Pursuant to that Act, trust preferred securities of bank holding
companies with consolidated assets under $15 billion that were issued before May 19,
2010 are grandfathered. Pursuant to this grandfather provision, these entities
will be able to continue to treat these securities as Tier 1 capital subject to
existing Federal Reserve limitations through the life of the securities.
22
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 six months ended June 30,
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.
23
·
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 prohibits 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 reduction of income and possible increase
in required capital levels related to the adoption of new legislation,
including without limitation the Dodd-Frank Regulatory Reform Act and the
implementing rules and regulations that will be adopted in the future,
that may negatively affect interchange revenue from debit card transactions as
well as revenue from consumer services and may required increased levels of
capital.
·
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.
Summary of Recent Legislation
On
July 21 2010, sweeping financial regulatory reform legislation entitled
the Dodd-Frank Wall Street Reform and Consumer Protection Act (the Dodd-Frank
Regulatory Reform Act) was signed into law. The Dodd-Frank Regulatory Reform
Act implements far-reaching changes across the financial regulatory landscape,
including provisions that, among other things, will:
·
Centralize
responsibility for consumer financial protection by creating a new agency, the
Consumer Financial Protection Bureau, responsible for implementing, examining
and enforcing compliance with federal consumer financial laws.
·
Restrict the
preemption of state law by federal law and disallow subsidiaries and affiliates
of banks from availing themselves of such preemption.
·
Apply the same
leverage and risk-based capital requirements that apply to insured depository
institutions to most bank holding companies.
·
Require each
federal bank regulatory agency to seek to make its capital requirements for
banks countercyclical so that capital requirements increase in times of
economic expansion and decrease in times of economic contraction.
·
Require
financial holding companies, such as the Company, to be well-capitalized and
well-managed. Bank holding companies and banks must also be both
well-capitalized and well-managed in order to acquire banks located outside
their home state.
·
Change the
assessment base for federal deposit insurance from the amount of insured
deposits to consolidated assets less tangible capital, eliminate the ceiling on
the size of the Deposit Insurance Fund (DIF) and increase the floor of the
size of the DIF.
·
Impose
comprehensive regulation of the over-the-counter derivatives market, which
would include certain provisions that would effectively prohibit insured
depository institutions from conducting certain derivatives businesses in the
institution itself.
·
Implement
corporate governance revisions, including executive compensation and proxy
access by shareholders, provisions that apply to all public companies, not just
financial institutions.
·
Make permanent
the $250,000 limit for federal deposit insurance and increase the cash limit of
Securities Investor Protection Corporation protection from $100,000 to $250,000
and provide unlimited federal deposit insurance until January 1, 2013 for
non-interest bearing demand transaction accounts at all insured depository
institutions.
·
Repeal the
federal prohibitions on the payment of interest on demand deposits, thereby
permitting depository institutions to pay interest on business transaction and other
accounts.
·
Amend the
Electronic Fund Transfer Act (EFTA) to, among other things, give the Federal
Reserve the authority to establish rules regarding interchange fees
charged for electronic debit transactions by payment card issuers having assets
over $10 billion and to enforce a new statutory requirement that such fees be
reasonable and proportional to the actual cost of a transaction to the issuer.
24
·
Increase the
authority of the Federal Reserve to examine the Company and its non-bank
subsidiaries.
Many
aspects of the Dodd-Frank Regulatory Reform Act are subject to rulemaking and
will take effect over several years, making it difficult to anticipate the
overall financial impact on the Company, its customers or the financial
industry more generally. Provisions in the legislation that affect deposit
insurance assessments, payment of interest on demand deposits and interchange
fees could increase the costs associated with deposits as well as place limitations
on certain revenues those deposits may generate. Provisions in the legislation
that may require revisions to the capital requirements of the Company could
require the Company to seek other sources of capital in the future.
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 435 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 18 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.
25
Results of
Operations
Summary
Consolidated
Statements of Condition Information
|
|
June 30, 2010
|
|
December 31, 2009
|
|
Percent Increase
(Decrease)
|
|
|
|
(Dollars in Thousands)
|
|
|
|
|
|
|
|
|
|
|
|
Assets
|
|
$
|
11,305,690
|
|
$
|
11,762,543
|
|
(3.9
|
)%
|
Net loans
|
|
5,448,255
|
|
5,571,869
|
|
(2.2
|
)
|
Deposits
|
|
7,479,872
|
|
7,178,007
|
|
4.2
|
|
Other borrowed funds
|
|
543,500
|
|
1,347,625
|
|
(59.7
|
)
|
Junior subordinated deferrable interest
debentures
|
|
201,100
|
|
201,082
|
|
|
|
Shareholders equity
|
|
1,457,087
|
|
1,407,470
|
|
3.5
|
|
|
|
|
|
|
|
|
|
|
|
Consolidated Statements of Income Information
|
|
Three Months Ended
June 30,
|
|
Percent
|
|
Six Months Ended
June 30,
|
|
Percent
|
|
|
|
(Dollars in Thousands)
|
|
Increase
|
|
(Dollars in Thousands)
|
|
Increase
|
|
|
|
2010
|
|
2009
|
|
(Decrease)
|
|
2010
|
|
2009
|
|
(Decrease)
|
|
Interest income
|
|
$
|
113,080
|
|
$
|
134,178
|
|
(15.7
|
)%
|
$
|
232,902
|
|
$
|
274,394
|
|
(15.1
|
)%
|
Interest expense
|
|
29,643
|
|
34,651
|
|
(14.5
|
)
|
59,570
|
|
76,721
|
|
(22.4
|
)
|
Net interest income
|
|
83,437
|
|
99,527
|
|
(16.2
|
)
|
173,332
|
|
197,673
|
|
(12.3
|
)
|
Provision for probable loan
losses
|
|
1,429
|
|
22,858
|
|
(93.7
|
)
|
8,658
|
|
35,083
|
|
(75.3
|
)
|
Non-interest income
|
|
49,400
|
|
56,192
|
|
(12.1
|
)
|
120,998
|
|
98,204
|
|
23.2
|
|
Non-interest expense
|
|
79,464
|
|
85,181
|
|
(6.7
|
)
|
185,043
|
|
155,407
|
|
19.1
|
|
Net income available to common
shareholders
|
|
30,731
|
|
27,891
|
|
10.2
|
|
59,509
|
|
62,186
|
|
(4.3
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Per common share (adjusted for stock dividends):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
$
|
.45
|
|
$
|
.41
|
|
9.8
|
%
|
$
|
.87
|
|
$
|
.91
|
|
(4.4
|
)%
|
Diluted
|
|
.45
|
|
.41
|
|
9.8
|
|
.87
|
|
.91
|
|
(4.4
|
)
|
26
Net Income
Net income available to common shareholders for the
second quarter of 2010 increased by 10.2% and net income available to common
shareholders for the six months ended June 30, 2010 decreased by 4.3% as
compared to the same periods in 2009.
Net income for the six months ended June 30, 2010 was positively
affected by investment securities sales totaling $20 million, net of tax. The sales of the securities were to
facilitate a re-positioning of the Companys investment portfolio. 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. During the first quarter of 2010, the Company recorded an additional
reserve of $14.2 million, after tax, related to this matter. As of June 30, 2010, the Company has
determined that the reserve currently established for this matter is still
appropriate. Management will continue to
review the developments in this dispute and make appropriate adjustments to the
amount reserved, as needed.
Net
Interest Income
|
|
Three Months Ended
June 30,
|
|
Percent
|
|
Six Months Ended
June 30,
|
|
Percent
|
|
|
|
(in Thousands)
|
|
Increase
|
|
(in Thousands)
|
|
Increase
|
|
|
|
2010
|
|
2009
|
|
(Decrease)
|
|
2010
|
|
2009
|
|
(Decrease)
|
|
Interest
income:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loans,
including fees
|
|
$
|
78,766
|
|
$
|
84,216
|
|
(6.5
|
)%
|
$
|
159,380
|
|
$
|
167,842
|
|
(5.0
|
)%
|
Investment
securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Taxable
|
|
32,348
|
|
48,705
|
|
(33.6
|
)
|
69,681
|
|
104,137
|
|
(33.1
|
)
|
Tax-exempt
|
|
1,783
|
|
1,109
|
|
60.8
|
|
3,416
|
|
2,079
|
|
64.3
|
|
Other
interest income
|
|
183
|
|
148
|
|
23.6
|
|
425
|
|
336
|
|
26.5
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
interest income
|
|
113,080
|
|
134,178
|
|
(15.7
|
)
|
232,902
|
|
274,394
|
|
(15.1
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest
expense:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Savings
deposits
|
|
2,410
|
|
2,670
|
|
(9.7
|
)
|
4,891
|
|
5,619
|
|
(13.0
|
)
|
Time
deposits
|
|
12,822
|
|
16,042
|
|
(20.1
|
)
|
25,875
|
|
33,893
|
|
(23.7
|
)
|
Securities
sold under repurchase agreements
|
|
11,235
|
|
11,151
|
|
.8
|
|
22,287
|
|
22,512
|
|
(1.0
|
)
|
Other
borrowings
|
|
129
|
|
1,624
|
|
(92.1
|
)
|
440
|
|
8,309
|
|
(94.7
|
)
|
Junior
subordinated interest deferrable debentures
|
|
3,047
|
|
3,164
|
|
(3.7
|
)
|
6,077
|
|
6,388
|
|
(4.9
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
interest expense
|
|
29,643
|
|
34,651
|
|
(14.5
|
)
|
59,570
|
|
76,721
|
|
(22.4
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
interest income
|
|
$
|
83,437
|
|
$
|
99,527
|
|
(16.2
|
)%
|
$
|
173,332
|
|
$
|
197,673
|
|
(12.3
|
)%
|
27
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 benefitted significantly from the reduction in the
Federal Reserve prime interest rate in 2009.
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 June 30, 2010.
The Companys goal is to manage the net interest income in periods of
rising and falling rates. Net interest
income decreased 12.3% in the first six months 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.
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
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 32
for the June 30, 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
|
|
Three Months Ended
June 30,
|
|
Percent
|
|
Six Months Ended
June 30,
|
|
Percent
|
|
|
|
(in Thousands)
|
|
Increase
|
|
(in Thousands)
|
|
Increase
|
|
|
|
2010
|
|
2009
|
|
(Decrease)
|
|
2010
|
|
2009
|
|
(Decrease)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Service
charges on deposit accounts
|
|
$
|
24,954
|
|
$
|
24,246
|
|
2.9
|
%
|
$
|
49,234
|
|
$
|
48,328
|
|
1.9
|
%
|
Other
service charges, commissions and fees
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Banking
|
|
12,167
|
|
10,871
|
|
11.9
|
|
23,787
|
|
21,268
|
|
11.8
|
|
Non-banking
|
|
1,855
|
|
2,291
|
|
(19.0
|
)
|
3,523
|
|
3,718
|
|
(5.2
|
)
|
Investment
securities transactions, net
|
|
2,573
|
|
11,145
|
|
(76.9
|
)
|
30,837
|
|
11,706
|
|
163.4
|
|
Other
investments, net
|
|
4,116
|
|
3,803
|
|
8.2
|
|
7,473
|
|
7,235
|
|
3.3
|
|
Other
income
|
|
3,735
|
|
3,836
|
|
(2.6
|
)
|
6,144
|
|
5,949
|
|
3.3
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
non-interest income
|
|
$
|
49,400
|
|
$
|
56,192
|
|
(12.1
|
)%
|
$
|
120,998
|
|
$
|
98,204
|
|
23.2
|
%
|
The increase in investment
securities transactions for the six months ended June 30, 2010 can be
attributed to the sale of investment securities to facilitate the
re-positioning of the Companys investment portfolio. Sales of investment securities also occurred
in the three months ended June 30, 2010, but were significantly less than
securities sales for the same period of 2009.
The largest portion of securities sales for 2010 occurred in the first
quarter.
28
Non-Interest
Expense
|
|
Three Months Ended
June 30,
|
|
Percent
|
|
Six Months Ended
June 30,
|
|
Percent
|
|
|
|
(in Thousands)
|
|
Increase
|
|
(in Thousands)
|
|
Increase
|
|
|
|
2010
|
|
2009
|
|
(Decrease)
|
|
2010
|
|
2009
|
|
(Decrease)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Employee
compensation and benefits
|
|
$
|
32,498
|
|
$
|
32,324
|
|
.5
|
%
|
$
|
64,162
|
|
$
|
64,480
|
|
(.5
|
)%
|
Occupancy
|
|
8,724
|
|
8,459
|
|
3.1
|
|
17,242
|
|
17,176
|
|
.4
|
|
Depreciation
of bank premises and equipment
|
|
8,969
|
|
8,978
|
|
(0.1
|
)
|
17,981
|
|
18,014
|
|
(.2
|
)
|
Professional
fees
|
|
3,781
|
|
3,268
|
|
15.7
|
|
7,763
|
|
5,874
|
|
32.2
|
|
Deposit
insurance assessments
|
|
2,668
|
|
5,536
|
|
(51.8
|
)
|
5,212
|
|
5,903
|
|
(11.7
|
)
|
Stationery
and supplies
|
|
896
|
|
979
|
|
(8.5
|
)
|
1,889
|
|
1,816
|
|
4.0
|
|
Amortization
of identified intangible assets
|
|
1,324
|
|
1,321
|
|
.2
|
|
2,625
|
|
2,630
|
|
(.2
|
)
|
Advertising
|
|
2,453
|
|
2,627
|
|
(6.6
|
)
|
5,067
|
|
5,240
|
|
(3.3
|
)
|
Litigation
expense
|
|
|
|
|
|
|
|
21,803
|
|
|
|
100.0
|
|
Impairment
charges (Total other-than- temporary impairment charges, $17 less gain of
($241) and $4,045 less gain of ($3,416) included in other comprehensive
income)
|
|
258
|
|
|
|
100.0
|
|
7,461
|
|
|
|
100.0
|
|
Other
|
|
17,893
|
|
21,689
|
|
(17.5
|
)
|
33,838
|
|
34,274
|
|
(1.3
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
non-interest expense
|
|
$
|
79,464
|
|
$
|
85,181
|
|
(6.7
|
)%
|
$
|
185,043
|
|
$
|
155,407
|
|
19.1
|
%
|
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 $7.5 million on non-agency
mortgage-backed securities, representing the credit related impairment on the
securities. Included in deposit insurance assessments for the three months ended
June 30, 2009 is a special one-time FDIC assessment of $5.1 million, as
part of the FDICs efforts to re-build the Deposit Insurance Fund.
Financial Condition
Allowance for Probable Loan
Losses
The allowance for probable
loan losses decreased 5.3% to $90,368,000 at June 30, 2010 from
$95,393,000 at December 31, 2009.
The provision for probable loan losses charged to expense decreased
75.3% to $8,658,000 for the six months ended June 30, 2010 from
$35,083,000 for the same period in 2009.
The allowance for probable loan losses was 1.6% of total loans at June 30,
2010 and 1.7% at December 31, 2009.
Investment Securities
Residential
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 residential
mortgage-backed securities issued by Ginnie Mae are fully guaranteed by the
U.S. Government. Investments in
residential mortgage-backed securities issued by Freddie Mac and Fannie Mae are
not fully guaranteed by the U.S. Government, 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.
29
Loans
Net loans decreased 2.2% to
$5,448,255,000 at June 30, 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 4.2%
to $7,479,872,000 at June 30, 2010, from $7,178,007,000 at December 31,
2009. The increase in deposits is the
result of the Companys strong internal sales programs, coupled with an
increase in demand for conventional banking deposit products. 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 June 30, 2010, the
Company had $11,305,690,000 of consolidated assets, of which approximately
$260,896,000, or 2.3%, 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 $260,896,000, 82.5% is
directly or indirectly secured by U.S. assets, certificates of deposits and
real estate; 17.0% is secured by foreign real estate; and 0.5% is unsecured.
Critical
Accounting Policies
The
Company has established various accounting policies which govern the
application of accounting principles in the preparation of the Companys
consolidated financial statements. The
significant accounting policies are described in the notes to the consolidated
financial statements. Certain accounting
policies involve significant subjective judgments and assumptions by management
which have a material impact on the carrying value of certain assets and
liabilities; management considers such accounting policies to be critical
accounting policies.
The
Company considers its Allowance for 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.
30
The Company maintains an
adequate level of capital as a margin of safety for its depositors and
shareholders. At June 30, 2010,
shareholders equity was $1,457,087,000 compared to $1,407,470,000 at December 31,
2009, an increase of $49,617,000, or 3.5%.
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 12.14% and 10.95%, risk-weighted Tier 1 capital ratio of 18.80% and 17.74% and
risk-weighted total capital ratio of 20.06% and 18.99% at June 30, 2010
and December 31, 2009, respectively.
The identified intangibles and goodwill of $302,366,000 as of June 30,
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 June 30,
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.
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.
31
Interest Rate Sensitivity
(Dollars
in Thousands)
|
|
Rate/Maturity
|
|
June 30, 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
|
|
$
|
401,061
|
|
$
|
1,232,139
|
|
$
|
2,664,265
|
|
$
|
13,585
|
|
$
|
4,311,050
|
|
Loans,
net of non-accruals
|
|
4,097,189
|
|
198,850
|
|
452,448
|
|
718,643
|
|
5,467,130
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
earning assets
|
|
$
|
4,498,250
|
|
$
|
1,430,989
|
|
$
|
3,116,713
|
|
$
|
732,228
|
|
$
|
9,778,180
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cumulative
earning assets
|
|
$
|
4,498,250
|
|
$
|
5,929,239
|
|
$
|
9,045,952
|
|
$
|
9,778,180
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Rate
sensitive liabilities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Time
deposits
|
|
$
|
1,507,412
|
|
$
|
1,683,203
|
|
$
|
342,342
|
|
$
|
1,236
|
|
$
|
3,534,193
|
|
Other
interest bearing deposits
|
|
2,384,319
|
|
|
|
|
|
|
|
2,384,319
|
|
Securities
sold under repurchase agreements
|
|
419,605
|
|
70,257
|
|
655
|
|
1,000,000
|
|
1,490,517
|
|
Other
borrowed funds
|
|
543,500
|
|
|
|
|
|
|
|
543,500
|
|
Junior
subordinated deferrable interest debentures
|
|
61,858
|
|
|
|
128,868
|
|
10,374
|
|
201,100
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
interest bearing liabilities
|
|
$
|
4,916,694
|
|
$
|
1,753,460
|
|
$
|
471,865
|
|
$
|
1,011,610
|
|
$
|
8,153,629
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cumulative
sensitive liabilities
|
|
$
|
4,916,694
|
|
$
|
6,670,154
|
|
$
|
7,142,019
|
|
$
|
8,153,629
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Repricing
gap
|
|
$
|
(418,444
|
)
|
$
|
(322,471
|
)
|
$
|
2,644,848
|
|
$
|
(279,382
|
)
|
$
|
1,624,551
|
|
Cumulative
repricing gap
|
|
(418,444
|
)
|
(740,915
|
)
|
1,903,933
|
|
1,624,551
|
|
|
|
Ratio
of interest-sensitive assets to liabilities
|
|
.92
|
|
.82
|
|
6.61
|
|
.72
|
|
1.20
|
|
Ratio
of cumulative, interest- sensitive assets to liabilities
|
|
.92
|
|
.89
|
|
1.27
|
|
1.20
|
|
|
|
Item
3.
Quantitative and Qualitative
Disclosures about Market Risk
During the first six 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.
32
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. During the first quarter of 2010, the Company recorded an additional
reserve of $21.8 million related to this matter. As of June 30, 2010, the Company has
determined that the established reserve for this matter is still
appropriate. 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, except for the following additional risk factor:
33
The Dodd-Frank Regulatory Reform
Act could negatively impact the revenue streams of the Company related to
interchange fees and consumer services.
The Dodd-Frank Reform Act
authorizes the Federal Reserve to regulate interchange fees paid to banks on
debit card transactions to ensure that they are reasonable and proportional to
the cost of processing individual transactions, and prohibits debit card
networks and issuers from requiring transactions to be processed on a single
payment network. The impact of these
provisions on the Companys revenue from interchange fees is uncertain at this
time and will depend upon Federal Reserve implementing regulations. The Reform Act also creates a Consumer
Finance Protection Bureau. While banks
with less than $10 billion in assets, such as the subsidiary banks of the
Company, are exempt from the primary examination, and enforcement powers of the
CFPA, it is expected that the new agencys rulemaking will affect all
banks. The impact of the CFPA is
uncertain at this time, but the initiatives of the CFPA could negatively impact
revenue streams of the Company related to consumer services.
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 second 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 August 2, 2010, a total of 7,143,284
shares had been repurchased under all programs at a cost of $247,462,000. 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 June 30,
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)
|
|
April
1 April 30, 2010
|
|
|
|
|
|
|
|
$
|
40,000,000
|
|
May
1 May 31, 2010
|
|
45,000
|
|
19.08
|
|
45,000
|
|
39,141,000
|
|
June
1 June 30, 2010
|
|
100,000
|
|
18.05
|
|
100,000
|
|
37,336,000
|
|
|
|
145,000
|
|
18.37
|
|
145,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(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.
34
Item
6.
Exhibits
The following exhibits are
filed as a part of this Report:
31(a)
Certification of Chief Executive Officer pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002
31(b)
Certification of Chief Financial Officer pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002
32(a)
Certification of Chief Executive Officer pursuant to 18 U.S.C. Section 1350,
as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
32(b)
Certification of Chief Financial Officer pursuant to 18 U.S.C. Section 1350,
as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
101.INS
|
XBRL
Instance Document.*
|
|
|
101.SCH
|
XBRL
Taxonomy Extension Schema Document.*
|
|
|
101.CAL
|
XBRL
Taxonomy Extension Calculation Linkbase Document.*
|
|
|
101.LAB
|
XBRL
Taxonomy Extension Label Linkbase Document.*
|
|
|
101.PRE
|
XBRL
Taxonomy Extension Presentation Linkbase Document.*
|
|
|
101.DEF
|
XBRL
Taxonomy Extension Definition Linkbase Document.*
|
*
Attached as
Exhibit 101 to this report are the following documents formatted in XBRL
(Extensible Business Reporting Language):
(i) the Condensed Consolidated Statement of Earnings for the three and six
months ended June 30, 2010 and 2009, (ii) the Condensed Consolidated
Balance Sheet as of June 30, 2010 and December 31, 2009, and
(iii) the Condensed Consolidated Statement of Cash Flows for the six
months ended June 30, 2010 and 2009. Users of this data are
advised pursuant to Rule 406T of Regulation S-T that this interactive data
file is deemed not filed or part of a registration statement or prospectus for
purposes of sections 11 or 12 of the Securities Act of 1933, is deemed not
filed for purposes of section 18 of the Securities and Exchange Act of 1934,
and otherwise is not subject to liability under these sections.
35
SIGNATURES
Pursuant to the requirements
of the Securities Exchange Act of 1934, the registrant has duly caused this
report to be signed on its behalf by the undersigned thereunto duly authorized.
|
|
INTERNATIONAL BANCSHARES
CORPORATION
|
|
|
|
|
|
|
Date:
|
August 5, 2010
|
|
/s/ Dennis E. Nixon
|
|
|
Dennis E. Nixon
|
|
|
President
|
|
|
|
|
|
|
Date:
|
August 5, 2010
|
|
/s/ Imelda Navarro
|
|
|
Imelda Navarro
|
|
|
Treasurer
|
36
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