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, 2013

 

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

(Registrant’s 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 (Do not check if a smaller reporting company)

 

Smaller reporting company o

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes o  No x

 

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date

 

Class

 

Shares Issued and Outstanding

Common Stock, $1.00 par value

 

67,197,575 shares outstanding at July 31, 2013

 

 

 



 

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,

 

 

 

2013

 

2012

 

Assets

 

 

 

 

 

 

 

 

 

 

 

Cash and due from banks

 

$

238,924

 

$

283,100

 

 

 

 

 

 

 

Investment securities:

 

 

 

 

 

Held-to-maturity (Market value of $2,400 on June 30, 2013 and $2,400 on December 31, 2012)

 

2,400

 

2,400

 

Available-for-sale (Amortized cost of $5,213,646 on June 30, 2013 and $5,423,189 on December 31, 2012)

 

5,189,977

 

5,525,015

 

 

 

 

 

 

 

Total investment securities

 

5,192,377

 

5,527,415

 

 

 

 

 

 

 

Loans

 

4,911,949

 

4,775,004

 

Less allowance for probable loan losses

 

(65,051

)

(58,193

)

 

 

 

 

 

 

Net loans

 

4,846,898

 

4,716,811

 

 

 

 

 

 

 

Bank premises and equipment, net

 

484,345

 

481,287

 

Accrued interest receivable

 

30,711

 

31,034

 

Other investments

 

366,476

 

372,739

 

Identified intangible assets, net

 

5,524

 

7,819

 

Goodwill

 

282,532

 

282,532

 

Other assets

 

149,126

 

179,936

 

 

 

 

 

 

 

Total assets

 

$

11,596,913

 

$

11,882,673

 

 

1



 

INTERNATIONAL BANCSHARES CORPORATION AND SUBSIDIARIES

 

Consolidated Statements of Condition, continued (Unaudited)

 

(Dollars in Thousands)

 

 

 

June 30,

 

December 31,

 

 

 

2013

 

2012

 

Liabilities and Shareholders’ Equity

 

 

 

 

 

 

 

 

 

 

 

Liabilities:

 

 

 

 

 

 

 

 

 

 

 

Deposits:

 

 

 

 

 

Demand — non-interest bearing

 

$

2,613,721

 

$

2,465,750

 

Savings and interest bearing demand

 

2,833,768

 

2,867,151

 

Time

 

2,746,235

 

2,954,312

 

 

 

 

 

 

 

Total deposits

 

8,193,724

 

8,287,213

 

 

 

 

 

 

 

Securities sold under repurchase agreements

 

1,025,071

 

1,129,679

 

Other borrowed funds

 

752,458

 

749,027

 

Junior subordinated deferrable interest debentures

 

190,726

 

190,726

 

Other liabilities

 

37,640

 

90,320

 

 

 

 

 

 

 

Total liabilities

 

10,199,619

 

10,446,965

 

 

 

 

 

 

 

Commitments and Contingent Liabilities (Note 10)

 

 

 

 

 

 

 

 

 

 

 

Shareholders’ equity:

 

 

 

 

 

 

 

 

 

 

 

Common shares of $1.00 par value. Authorized 275,000,000 shares; issued 95,730,472 shares on June 30, 2013 and 95,724,517 shares on December 31, 2012

 

95,730

 

95,725

 

Surplus

 

163,567

 

163,287

 

Retained earnings

 

1,411,687

 

1,369,543

 

Accumulated other comprehensive (loss) income (including $(6,352) and $(6,811) of comprehensive loss related to other- than-temporary impairment for non-credit related issues)

 

(15,181

)

65,662

 

 

 

1,655,803

 

1,694,217

 

 

 

 

 

 

 

Less cost of shares in treasury, 28,537,180 shares on June 30, 2013 and 28,537,180 December 31, 2012

 

(258,509

)

(258,509

)

 

 

 

 

 

 

Total shareholders’ equity

 

1,397,294

 

1,435,708

 

 

 

 

 

 

 

Total liabilities and shareholders’ equity

 

$

11,596,913

 

$

11,882,673

 

 

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,

 

 

 

2013

 

2012

 

2013

 

2012

 

 

 

 

 

 

 

 

 

 

 

Interest income:

 

 

 

 

 

 

 

 

 

Loans, including fees

 

$

64,617

 

$

67,413

 

$

128,151

 

$

135,736

 

Investment securities:

 

 

 

 

 

 

 

 

 

Taxable

 

18,601

 

23,228

 

39,120

 

47,740

 

Tax-exempt

 

3,085

 

2,849

 

6,121

 

5,710

 

Other interest income

 

21

 

193

 

42

 

279

 

 

 

 

 

 

 

 

 

 

 

Total interest income

 

86,324

 

93,683

 

173,434

 

189,465

 

 

 

 

 

 

 

 

 

 

 

Interest expense:

 

 

 

 

 

 

 

 

 

Savings deposits

 

956

 

1,479

 

1,967

 

3,102

 

Time deposits

 

3,978

 

6,255

 

8,423

 

12,740

 

Securities sold under repurchase agreements

 

7,312

 

10,267

 

14,880

 

20,569

 

Other borrowings

 

289

 

138

 

579

 

346

 

Junior subordinated interest deferrable debentures

 

1,165

 

1,901

 

2,329

 

3,948

 

 

 

 

 

 

 

 

 

 

 

Total interest expense

 

13,700

 

20,040

 

28,178

 

40,705

 

 

 

 

 

 

 

 

 

 

 

Net interest income

 

72,624

 

73,643

 

145,256

 

148,760

 

 

 

 

 

 

 

 

 

 

 

Provision for probable loan losses

 

4,342

 

6,107

 

11,761

 

11,392

 

 

 

 

 

 

 

 

 

 

 

Net interest income after provision for probable loan losses

 

68,282

 

67,536

 

133,495

 

137,368

 

 

 

 

 

 

 

 

 

 

 

Non-interest income:

 

 

 

 

 

 

 

 

 

Service charges on deposit accounts

 

23,507

 

23,100

 

47,337

 

45,853

 

Other service charges, commissions and fees

 

 

 

 

 

 

 

 

 

Banking

 

10,052

 

9,424

 

20,035

 

19,488

 

Non-banking

 

1,515

 

1,682

 

2,576

 

2,933

 

Investment securities transactions, net

 

 

1,420

 

9,601

 

2,592

 

Other investments, net

 

8,635

 

2,647

 

15,632

 

7,781

 

Other income

 

2,996

 

2,546

 

4,776

 

5,349

 

 

 

 

 

 

 

 

 

 

 

Total non-interest income

 

46,705

 

40,819

 

99,957

 

83,996

 

 

3



 

INTERNATIONAL BANCSHARES CORPORATION AND SUBSIDIARIES

 

Consolidated Statements of Income, continued (Unaudited)

 

(Dollars in Thousands, except per share data)

 

 

 

Three Months Ended

 

Six Months Ended

 

 

 

June 30,

 

June 30,

 

 

 

2013

 

2012

 

2013

 

2012

 

 

 

 

 

 

 

 

 

 

 

Non-interest expense:

 

 

 

 

 

 

 

 

 

Employee compensation and benefits

 

$

30,764

 

$

30,210

 

$

60,975

 

$

59,611

 

Occupancy

 

7,180

 

8,107

 

14,992

 

16,841

 

Depreciation of bank premises and equipment

 

6,619

 

6,790

 

13,244

 

13,717

 

Professional fees

 

3,952

 

4,171

 

7,675

 

7,541

 

Deposit insurance assessments

 

1,762

 

1,490

 

3,378

 

3,057

 

Net expense, other real estate owned

 

1,575

 

1,385

 

3,364

 

2,566

 

Amortization of identified intangible assets

 

1,158

 

1,163

 

2,295

 

2,300

 

Advertising

 

2,023

 

1,970

 

3,869

 

3,797

 

Early termination fee — securities sold under repurchase agreements

 

2,418

 

 

12,303

 

 

Impairment charges (Total other-than-temporary impairment losses, $(953), net of $(1,370), $(301), net of $(523), $15, net of $(712), and $1,349, net of $941, included in other comprehensive income)

 

417

 

222

 

727

 

408

 

Other

 

15,846

 

16,583

 

31,753

 

30,396

 

 

 

 

 

 

 

 

 

 

 

Total non-interest expense

 

73,714

 

72,091

 

154,575

 

140,234

 

 

 

 

 

 

 

 

 

 

 

Income before income taxes

 

41,273

 

36,264

 

78,877

 

81,130

 

 

 

 

 

 

 

 

 

 

 

Provision for income taxes

 

13,760

 

11,714

 

23,295

 

24,893

 

 

 

 

 

 

 

 

 

 

 

Net income

 

27,513

 

24,550

 

55,582

 

56,237

 

 

 

 

 

 

 

 

 

 

 

Preferred stock dividends

 

 

3,355

 

 

6,698

 

 

 

 

 

 

 

 

 

 

 

Net income available to common shareholders

 

$

27,513

 

$

21,195

 

$

55,582

 

$

49,539

 

 

 

 

 

 

 

 

 

 

 

Basic earnings per common share:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Weighted average number of shares outstanding:

 

67,190,792

 

67,244,005

 

67,189,196

 

67,257,456

 

Net income

 

$

.41

 

$

.32

 

$

.83

 

$

.74

 

 

 

 

 

 

 

 

 

 

 

Fully diluted earnings per common share:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Weighted average number of shares outstanding:

 

67,292,053

 

67,323,912

 

67,286,026

 

67,339,550

 

Net income

 

$

.41

 

$

.31

 

$

.83

 

$

.74

 

 

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

 

Six Months Ended

 

 

 

June 30,

 

June 30,

 

 

 

2013

 

2012

 

2013

 

2012

 

 

 

 

 

 

 

 

 

 

 

Net income

 

$

27,513

 

$

24,550

 

$

55,582

 

$

56,237

 

 

 

 

 

 

 

 

 

 

 

Other comprehensive (loss) income, net of tax

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net unrealized holding (losses) gains on securities available for sale arising during period (tax effects of $(35,282), $4,354, $(40,425) and $395)

 

(65,523

)

8,086

 

(75,075

)

734

 

Reclassification adjustment for gains on securities available for sale included in net income (tax effects of $0, $(497), $(3,360)and $(907))

 

 

(923

)

(6,241

)

(1,685

)

Reclassification adjustment for impairment charges on available for sale securities included in net income (tax effects of $146, $78, $254 and $143)

 

271

 

144

 

473

 

265

 

 

 

(65,252

)

7,307

 

(80,843

)

(686

)

 

 

 

 

 

 

 

 

 

 

Comprehensive (loss) income

 

$

(37,739

)

$

31,857

 

$

(25,261

)

$

55,551

 

 

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,

 

 

 

2013

 

2012

 

Operating activities:

 

 

 

 

 

 

 

 

 

 

 

Net income

 

$

55,582

 

$

56,237

 

 

 

 

 

 

 

Adjustments to reconcile net income to net cash provided by operating activities:

 

 

 

 

 

Provision for probable loan losses

 

11,761

 

11,392

 

Specific reserve, other real estate owned

 

478

 

741

 

Depreciation of bank premises and equipment

 

13,244

 

13,717

 

Gain on sale of bank premises and equipment

 

(516

)

(319

)

Gain on sale of other real estate owned

 

(188

)

(395

)

Accretion of investment securities discounts

 

(1,812

)

(1,521

)

Amortization of investment securities premiums

 

24,256

 

13,339

 

Investment securities transactions, net

 

(9,601

)

(2,592

)

Impairment charges on available-for-sale investment securities

 

727

 

408

 

Amortization of identified intangible assets

 

2,295

 

2,300

 

Stock based compensation expense

 

221

 

253

 

Earnings from affiliates and other investments

 

(13,209

)

(7,348

)

Deferred tax (benefit) expense

 

(3,274

)

2,869

 

Decrease in accrued interest receivable

 

323

 

712

 

Net decrease (increase) in other assets

 

17,281

 

(123

)

Net (decrease) increase in other liabilities

 

(4,754

)

5,138

 

 

 

 

 

 

 

Net cash provided by operating activities

 

92,814

 

94,808

 

 

 

 

 

 

 

Investing activities:

 

 

 

 

 

 

 

 

 

 

 

Proceeds from maturities of held-to-maturity securities

 

 

1,100

 

Proceeds from sales and calls of available for sale securities

 

178,124

 

72,383

 

Purchases of available for sale securities

 

(731,384

)

(792,642

)

Principal collected on mortgage-backed securities

 

749,233

 

643,667

 

Net (increase) decrease in loans

 

(141,191

)

94,229

 

Purchases of other investments

 

(637

)

(1,860

)

Distributions received on other investments

 

20,109

 

23,006

 

Purchases of bank premises and equipment

 

(16,321

)

(17,282

)

Proceeds from sales of other real estate owned

 

12,582

 

15,066

 

Proceeds from sale of bank premises and equipment

 

535

 

2,501

 

 

 

 

 

 

 

Net cash provided by investing activities

 

71,050

 

40,168

 

 

6



 

INTERNATIONAL BANCSHARES CORPORATION AND SUBSIDIARIES

 

Consolidated Statements of Cash Flows, continued (Unaudited)

 

(Dollars in Thousands)

 

 

 

Six Months Ended

 

 

 

June 30,

 

 

 

2013

 

2012

 

 

 

 

 

 

 

Financing activities:

 

 

 

 

 

 

 

 

 

 

 

Net increase in non-interest bearing demand deposits

 

$

147,971

 

$

108,245

 

Net decrease in savings and interest bearing demand deposits

 

(33,383

)

(2,828

)

Net (decrease) increase in time deposits

 

(208,077

)

108,114

 

Net decrease in securities sold under repurchase agreements

 

(104,608

)

(18,631

)

Net increase (decrease) in other borrowed funds

 

3,431

 

(352,066

)

Purchase of treasury stock

 

 

(971

)

Proceeds from stock transactions

 

64

 

33

 

Payments of dividends on common stock

 

(13,438

)

(13,450

)

Payments of dividends on preferred stock

 

 

(5,400

)

 

 

 

 

 

 

Net cash used in financing activities

 

(208,040

)

(176,954

)

 

 

 

 

 

 

Decrease in cash and cash equivalents

 

(44,176

)

(41,978

)

 

 

 

 

 

 

Cash and cash equivalents at beginning of period

 

283,100

 

261,885

 

 

 

 

 

 

 

Cash and cash equivalents at end of period

 

$

238,924

 

$

219,907

 

 

 

 

 

 

 

Supplemental cash flow information:

 

 

 

 

 

Interest paid

 

$

29,910

 

$

42,268

 

Income taxes paid

 

35,171

 

14,719

 

Non-cash investing and financing activities:

 

 

 

 

 

Accrued dividends, preferred shares

 

 

1,350

 

Net transfer from loans to other real estate owned

 

(657

)

57,605

 

Purchases of available-for-sale securities not yet settled

 

 

2,427

 

 

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 Corporation’s 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 Company’s latest Annual Report on Form 10-K.  The consolidated statement of condition at December 31, 2012 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 Company’s 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 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.

 

Note 2 — Fair Value Measurements

 

ASC Topic 820,”Fair Value Measurements and Disclosures” (“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.

 

8



 

The following table represents assets and liabilities reported on the consolidated balance sheets at their fair value on a recurring basis as of June 30, 2013 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, 2013

 

(Level 1)

 

(Level 2)

 

(Level 3)

 

 

 

 

 

 

 

 

 

 

 

Measured on a recurring basis:

 

 

 

 

 

 

 

 

 

Assets:

 

 

 

 

 

 

 

 

 

Available for sale securities

 

 

 

 

 

 

 

 

 

Residential mortgage-backed securities

 

$

4,920,978

 

$

 

$

4,890,537

 

$

30,441

 

States and political subdivisions

 

248,626

 

 

248,626

 

 

Other

 

20,373

 

20,373

 

 

 

Total

 

$

5,189,977

 

$

20,373

 

$

5,139,163

 

$

30,441

 

 

The following table represents assets and liabilities reported on the consolidated balance sheets at their fair value on a recurring basis as of December 31, 2012 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, 2012

 

(Level 1)

 

(Level 2)

 

(Level 3)

 

 

 

 

 

 

 

 

 

 

 

Measured on a recurring basis:

 

 

 

 

 

 

 

 

 

Assets:

 

 

 

 

 

 

 

 

 

Available for sale securities

 

 

 

 

 

 

 

 

 

Residential mortgage-backed securities

 

$

5,265,204

 

$

 

$

5,232,344

 

$

32,860

 

States and political subdivisions

 

238,675

 

 

238,675

 

 

Other

 

21,136

 

21,136

 

 

 

Total

 

$

5,525,015

 

$

21,136

 

$

5,471,019

 

$

32,860

 

 

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 bond’s 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 inactive markets and markets that have experienced significant decreases in volume and level of activity, as evidenced 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.

 

9



 

Assumptions used in the discounted cash flow model as of June 30, 2013 and December 31, 2012, were applied separately to those portions of the bond where the underlying residential mortgage loans had been performing under original contract terms for at least the prior 24 months and those where the underlying residential mortgages had not been meeting the original contractual obligation for the same period.  Unobservable inputs included in the model are estimates on future principal prepayment rates, and default and loss severity rates.  For that portion of the bond where the underlying residential mortgage had been meeting the original contract terms for at least 24 months, the Company used the following estimates in the model: (i) a voluntary prepayment rate of 7%, (ii) a 1% default rate, (iii) a loss severity rate of 25%, and (iv) a discount rate of 13%.  The assumptions used in the model for the rest of the bond included the following estimates:  (i) a voluntary prepayment rate of 2 %, (ii) a default rate of 4.5%, (iii) a loss severity rate that started at 60% for the first year (2012)  then declines by 5% for the following five years (2013, 2014, 2015, 2016 and 2017) and remains at 25% thereafter (2018 and beyond), and (iv) a discount rate of 13%.  The estimates used in the model to determine fair value are based on observable historical data of the underlying collateral.  The model anticipates that the housing market will gradually improve and that the underlying collateral will eventually all perform in accordance with the original contract terms on the bond.  Should the number of loans in the underlying collateral that default and go into foreclosure or the severity of the losses in the underlying collateral significantly change, the results of the model would be impacted.  The Company will continue to evaluate the actual historical performance of the underlying collateral and will modify the assumptions used in the model as necessary.

 

The following table presents a reconciliation of activity for such mortgage-backed securities on a net basis (Dollars in Thousands):

 

Balance at December 31, 2012

 

$

32,860

 

Principal paydowns

 

(2,404

)

Total unrealized gains (losses) included in:

 

 

 

Other comprehensive loss

 

712

 

Impairment realized in earnings

 

(727

)

 

 

 

 

Balance at June 30, 2013

 

$

30,441

 

 

Certain assets and liabilities are measured at fair value on a nonrecurring basis.  They 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).

 

10



 

The following table represents assets measured at fair value on a non-recurring basis as of and for the period ended June 30, 2013 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

 

Net Provision
During

 

 

 

June 30, 2013

 

(Level 1)

 

(Level 2)

 

(Level 3)

 

Period

 

 

 

 

 

 

 

 

 

 

 

 

 

Measured on a non-recurring basis:

 

 

 

 

 

 

 

 

 

 

 

Assets:

 

 

 

 

 

 

 

 

 

 

 

Impaired loans

 

$

26,658

 

$

 

$

 

$

26,658

 

$

11,094

 

Other real estate owned

 

12,036

 

 

 

12,036

 

478

 

 

The following table represents assets measured at fair value on a non-recurring basis as of and for the year ended December 31, 2012 by level within the fair value measurement hierarchy:

 

 

 

 

 

Fair Value Measurements at Reporting Date
Using

 

 

 

 

 

 

 

(in thousands)

 

 

 

 

 

Assets/Liabilities
Measured at Fair
Value
December 31,

 

Quoted
Prices in
Active
Markets for
Identical
Assets

 

Significant
Other
Observable
Inputs

 

Significant
Unobservable
Inputs

 

Net
Provision
During

 

 

 

2012

 

(Level 1)

 

(Level 2)

 

(Level 3)

 

Period

 

 

 

 

 

 

 

 

 

 

 

 

 

Measured on a non-recurring basis:

 

 

 

 

 

 

 

 

 

 

 

Assets:

 

 

 

 

 

 

 

 

 

 

 

Impaired loans

 

$

11,981

 

$

 

$

 

$

11,981

 

$

295

 

Other real estate owned

 

18,749

 

 

 

18,749

 

 

 

The Company’s assets measured at fair value on a non-recurring basis are limited to impaired loans and other real estate owned.  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”.  Impaired loans are primarily comprised of collateral-dependent commercial loans.   The fair value of impaired loans is based on the fair value of the collateral, as determined through an appraisal process.  The basis for the Company’s appraisal and appraisal review process is based on regulatory guidelines and strives to comply with all regulatory appraisal laws, regulations and the Uniform Standards of Professional Appraisal Practice.  Understanding that as the primary sources of loan repayments decline, the secondary repayment source comes into play and correctly evaluating the fair value of that secondary source, the collateral, becomes even more important.  New or updated appraisals may be obtained as warranted after evaluation of any material deterioration in the performance of the project, the conditions for the geographic area where the property is located, the property type, differences between the current property conditions and the conditions assumed in prior appraisals or evaluations, or changes in project specifications.  All appraisals and evaluations are “as is” (the property’s highest and best use) valuations based on the current conditions of the property/project at that point in time.  The determination of the fair value of the collateral is based on the net realizable value, which is the appraised value less any closing costs, when applicable.  Impaired loans are remeasured and reported at fair value through a specific valuation allowance allocation of the allowance for probable loan losses based upon the fair value of the underlying collateral.  As of June 30, 2013, the Company had $77,596,000 of impaired commercial collateral

 

11



 

dependent loans, of which $49,127,000  had an appraisal or evaluation performed within the last twelve months.  As of December 31, 2012, the Company had $73,646,000 of impaired commercial collateral dependent loans, of which $48,856,000 had an appraisal or evaluation performed within the last twelve months.

 

Other real estate owned is comprised of real estate acquired by foreclosure and deeds in lieu of foreclosure. Other real estate owned is carried at the lower of the recorded investment in the property or its fair value less estimated costs to sell such property (as determined by independent appraisal) within level 3 of the fair value hierarchy.  Prior to foreclosure, the value of the underlying loan is written down to the fair value of the real estate to be acquired by a charge to the allowance for probable loan losses, if necessary.  The fair value is reviewed periodically and subsequent write downs are made accordingly through a charge to operations.  Other real estate owned is included in other assets on the consolidated financial statements.  For the six months ended June 30, 2013 and the twelve months ended December 31, 2012, respectively, the Company recorded $188,000 and $10,450,000 in charges to the allowance for probable loan losses in connection with loans transferred to other real estate owned.  For the six months ended June 30, 2013 and twelve months ended December 31, 2012, respectively, the Company recorded $478,000 and $0 in adjustments to fair value in connection with other real estate owned.

 

The fair value estimates, methods, and assumptions for the Company’s financial instruments at June 30, 2013 and December 31, 2012 are outlined below.

 

Cash and Due From Banks and Federal Funds Sold

 

For these short-term instruments, the carrying amount is a reasonable estimate of fair value.

 

Time Deposits with Banks

 

The carrying amounts of time deposits with banks approximate fair value.

 

Investment Securities Held-to-Maturity

 

The carrying amounts of investments held-to-maturity approximate fair value.

 

Investment Securities

 

For investment securities, which include U.S. Treasury securities, obligations of other U.S. government agencies, obligations of states and political subdivisions and mortgage pass through and related securities, fair values are 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 bond’s terms and conditions, among other things.  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.

 

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.  Fixed rate performing loans are within Level 3 of the fair value hierarchy.  At June 30, 2013, and December 31, 2012, the carrying amount of fixed rate performing loans was $1,195,825,000 and $1,189,585,000 respectively, and the estimated fair value was $1,142,132,000 and $1,126,228,000, respectively.

 

Accrued Interest

 

The carrying amounts of accrued interest approximate fair value.

 

12



 

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, 2013 and December 31, 2012.  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.  Time deposits are within Level 3 of the fair value hierarchy.    At June 30, 2013 and December 31, 2012, the carrying amount of time deposits was $2,746,235,000 and $2,954,312,000, respectively, and the estimated fair value was $2,754,137,000 and $2,962,190,000, respectively.

 

Securities Sold Under Repurchase Agreements

 

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, 2013 and December 31, 2012.  The fair value of the long-term instruments is based on established market spreads using option adjusted spread methodology.  Long-term repurchase agreements are within level 3 of the fair value hierarchy.  At June 30, 2013 and December 31, 2012, respectively, the carrying amount of long-term repurchase agreements was $710,000,000 and $800,000,000 and the estimated fair value was $800,888,000 and $932,007,000, respectively.

 

Junior Subordinated Deferrable Interest Debentures

 

The Company currently has floating rate 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, 2013 and December 31, 2012.

 

Other Borrowed Funds

 

The company currently has short and long-term borrowings issued from the Federal Home Loan Bank (“FHLB”).  Due to the contractual terms of the short-term borrowings, the carrying amounts approximated fair value at June 30, 2013 and December 31, 2012.  The fair value of the long-term borrowings is based on established market spreads for similar types of borrowings.  The long-term borrowings are included in Level 2 of the fair value hierarchy.  At June 30, 2013 and December 31, 2012, the carrying amount of the long-term FHLB borrowings was $6,458,000, and $6,527,000, respectively, and the estimated fair value was $6,551,000 and $7,073,000, 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 Company’s entire holdings of a particular financial instrument.  Because no market exists for a significant portion of the Company’s 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.

 

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.

 

13



 

Note 3— Loans

 

A summary of loans, by loan type at June 30, 2013 and December 31, 2012 is as follows:

 

 

 

June 30,

 

December 31,

 

 

 

2013

 

2012

 

 

 

(Dollars in Thousands)

 

 

 

 

 

 

 

Commercial, financial and agricultural

 

$

2,688,995

 

$

2,525,380

 

Real estate — mortgage

 

827,513

 

838,467

 

Real estate — construction

 

1,142,868

 

1,147,669

 

Consumer

 

68,077

 

74,514

 

Foreign

 

184,496

 

188,974

 

 

 

 

 

 

 

Total loans

 

$

4,911,949

 

$

4,775,004

 

 

Note 4 - Allowance for Probable Loan Losses

 

The allowance for probable loan losses primarily 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 for probable loan losses is derived from the following elements:  (i) allowances established on specific loans, which are based on a review of the individual characteristics of each loan, including the customer’s ability to repay the loan, the underlying collateral values, and the industry in which the customer operates, (ii) allowances based on actual historical loss experience for similar types of loans in the Company’s loan portfolio, and (iii) allowances based on general economic conditions, changes in the mix of loans, company resources, border risk and credit quality indicators, among other things.  All segments of the loan portfolio continue to be impacted by the prolonged economic downturn.  Loans secured by real estate could be impacted negatively by the continued economic environment and resulting decrease in collateral values.  Consumer loans may be impacted by continued and prolonged unemployment rates.

 

The Company’s management continually reviews the allowance for loan losses of the bank subsidiaries using the amounts determined from the allowances established on specific loans, the allowance established on quantitative historical loss percentages, and the allowance based on qualitative data to establish an appropriate amount to maintain in the Company’s allowance for loan losses.  Should any of the factors considered by management in evaluating the adequacy of the allowance for probable loan losses change, the Company’s estimate of probable loan losses could also change, which could affect the level of future provisions for probable loan losses.  While the calculation of the allowance for probable loan losses utilizes management’s best judgment and all information available, the adequacy of the allowance is dependent on a variety of factors beyond the Company’s control, including, among other things, the performance of the entire loan portfolio, the economy, changes in interest rates and the view of regulatory authorities towards loan classifications.

 

The specific loan loss provision is determined using the following methods.  On a weekly basis, loan past due reports are reviewed by the credit quality committee to determine if a loan has any potential problems and if a loan should be placed on the Company’s internal classified report.  Additionally, the Company’s credit department reviews the majority of the Company’s loans for proper internal classification purposes regardless of whether they are past due and segregates any loans with potential problems for further review.  The credit department will discuss the potential problem loans with the servicing loan officers to determine any relevant issues that were not discovered in the evaluation.  Also, an analysis of loans that is provided through examinations by regulatory authorities is considered in the review process.  After the above analysis is completed, the Company will determine if a loan should be placed on an internal classified report because of issues related to the analysis of the credit, credit documents, collateral and/or payment history.

 

14



 

A summary of the transactions in the allowance for probable loan losses by loan class is as follows:

 

 

 

Quarter ended June 30, 2013

 

 

 

 

 

Domestic

 

 

 

Foreign

 

 

 

 

 

Commercial

 

Commercial
real estate:
other
construction &
land
development

 

Commercial
real estate:
farmland &
commercial

 

Commercial
real estate:
multifamily

 

Residential:
first lien

 

Residential:
junior lien

 

Consumer

 

Foreign

 

Total

 

 

 

(Dollars in Thousands)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance at March 31,

 

$

20,926

 

$

11,053

 

$

20,651

 

$

609

 

$

3,868

 

$

4,011

 

$

820

 

$

1,030

 

$

62,968

 

Losses charge to allowance

 

(2,663

)

(120

)

(1

)

 

(27

)

(140

)

(105

)

 

(3,056

)

Recoveries credited to allowance

 

557

 

13

 

128

 

 

4

 

30

 

60

 

5

 

797

 

Net losses charged to allowance

 

(2,106

)

(107

)

127

 

 

(23

)

(110

)

(45

)

5

 

(2,259

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Provision (credit) charged to operations

 

1,856

 

678

 

1,605

 

14

 

10

 

146

 

22

 

11

 

4,342

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance at June 30,

 

$

20,676

 

$

11,624

 

$

22,383

 

$

623

 

$

3,855

 

$

4,047

 

$

797

 

$

1,046

 

$

65,051

 

 

 

 

Quarter ended June 30, 2012

 

 

 

 

 

Domestic

 

 

 

Foreign

 

 

 

 

 

Commercial

 

Commercial
real estate:
other
construction &
land
development

 

Commercial
real estate:
farmland &
commercial

 

Commercial
real estate:
multifamily

 

Residential:
first lien

 

Residential:
junior lien

 

Consumer

 

Foreign

 

Total

 

 

 

(Dollars in Thousands)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance at March 31,

 

$

24,577

 

$

19,766

 

$

21,810

 

$

849

 

$

4, 379

 

$

4,505

 

$

1,602

 

$

1,293

 

$

78,781

 

Losses charge to allowance

 

(3,064

)

(7,500

)

(4,482

)

 

(30

)

(399

)

(189

)

(5

)

(15,669

)

Recoveries credited to allowance

 

758

 

207

 

100

 

 

1

 

61

 

32

 

 

1,159

 

Net losses charged to allowance

 

(2,306

)

(7,293

)

(4,382

)

 

(29

)

(338

)

(157

)

(5

)

(14,510

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Provision (credit) charged to operations

 

2,417

 

769

 

3,123

 

(46

)

(363

)

243

 

31

 

(67

)

6,107

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance at June 30,

 

$

24,688

 

$

13,242

 

$

20,551

 

$

803

 

$

3,987

 

$

4,410

 

$

1,476

 

$

1,221

 

$

70,378

 

 

15



 

 

 

Six Months Ended June 30, 2013

 

 

 

 

 

Domestic

 

 

 

Foreign

 

 

 

 

 

Commercial

 

Commercial
real estate:
other
construction &
land
development

 

Commercial
real estate:
farmland &
commercial

 

Commercial
real estate:
multifamily

 

Residential:
first lien

 

Residential:
junior lien

 

Consumer

 

Foreign

 

Total

 

 

 

(Dollars in Thousands)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance at December 31,

 

$

11,632

 

$

12,720

 

$

21,880

 

$

694

 

$

4,390

 

$

4,448

 

$

1,289

 

$

1,140

 

$

58,193

 

Losses charge to allowance

 

(5,326

)

(248

)

(61

)

 

(199

)

(395

)

(316

)

(20

)

(6,565

)

Recoveries credited to allowance

 

1,251

 

26

 

141

 

 

9

 

124

 

106

 

5

 

1,662

 

Net losses charged to allowance

 

(4,075

)

(222

)

80

 

 

(190

)

(271

)

(210

)

(15

)

(4,903

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Provision (credit) charged to operations

 

13,119

 

(874

)

423

 

(71

)

(345

)

(130

)

(282

)

(79

)

11,761

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance at June 30,

 

$

20,676

 

$

11,624

 

$

22,383

 

$

623

 

$

3,855

 

$

4,047

 

$

797

 

$

1,046

 

$

65,051

 

 

 

 

Six Months Ended June 30, 2012

 

 

 

 

 

Domestic

 

 

 

Foreign

 

 

 

 

 

Commercial

 

Commercial
real estate:
other
construction &
land
development

 

Commercial
real estate:
farmland &
commercial

 

Commercial
real estate:
multifamily

 

Residential:
first lien

 

Residential:
junior lien

 

Consumer

 

Foreign

 

Total

 

 

 

(Dollars in Thousands)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance at December 31,

 

$

26,617

 

$

19,940

 

$

24,227

 

$

1,003

 

$

4,562

 

$

4,760

 

$

1,724

 

$

1,359

 

$

84,192

 

Losses charge to allowance

 

(6,488

)

(7,571

)

(12,476

)

 

(66

)

(711

)

(436

)

(5

)

(27,753

)

Recoveries credited to allowance

 

2,002

 

212

 

131

 

 

3

 

106

 

93

 

 

2,547

 

Net losses charged to allowance

 

(4,486

)

(7,359

)

(12,345

)

 

(63

)

(605

)

(343

)

(5

)

(25,206

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Provision (credit) charged to operations

 

2,557

 

661

 

8,669

 

(200

)

(512

)

255

 

95

 

(133

)

11,392

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance at June 30,

 

$

24,688

 

$

13,242

 

$

20,551

 

$

803

 

$

3,987

 

$

4,410

 

$

1,476

 

$

1,221

 

$

70,378

 

 

The allowance for probable loan losses is a reserve established through a provision for probable loan losses charged to expense, which represents management’s best estimate of probable loan losses when evaluating loans (i) individually or (ii) collectively.

 

16



 

The table below provides additional information on the balance of loans individually or collectively evaluated for impairment and their related allowance, by loan class as of June 30, 2013 and December 31, 2012:

 

 

 

June 30, 2013

 

 

 

Loans individually evaluated
for impairment

 

Loans collectively evaluated
for impairment

 

 

 

(Dollars in Thousands)

 

 

 

Recorded
Investment

 

Allowance

 

Recorded
Investment

 

Allowance

 

 

 

 

 

 

 

 

 

 

 

Domestic

 

 

 

 

 

 

 

 

 

Commercial

 

$

35,120

 

$

10,961

 

$

841,878

 

$

9,715

 

Commercial real estate: other construction & land development

 

26,490

 

766

 

1,116,378

 

10,858

 

Commercial real estate: farmland & commercial

 

16,598

 

3,446

 

1,713,462

 

18,937

 

Commercial real estate: multifamily

 

324

 

 

81,613

 

623

 

Residential: first lien

 

4,367

 

 

441,481

 

3,855

 

Residential: junior lien

 

1,711

 

 

379,954

 

4,047

 

Consumer

 

1,239

 

 

66,838

 

797

 

Foreign

 

449

 

 

184,047

 

1,046

 

 

 

 

 

 

 

 

 

 

 

Total

 

$

86,298

 

$

15,173

 

$

4,825,651

 

$

49,878

 

 

 

 

December 31, 2012

 

 

 

Loans individually evaluated
for impairment

 

Loans collectively evaluated
for impairment

 

 

 

(Dollars in Thousands)

 

 

 

Recorded
Investment

 

Allowance

 

Recorded
Investment

 

Allowance

 

 

 

 

 

 

 

 

 

 

 

Domestic

 

 

 

 

 

 

 

 

 

Commercial

 

$

32,768

 

$

1,477

 

$

736,342

 

$

10,155

 

Commercial real estate: other construction & land development

 

28,660

 

539

 

1,119,009

 

12,181

 

Commercial real estate: farmland & commercial

 

13,945

 

2,730

 

1,659,377

 

19,150

 

Commercial real estate: multifamily

 

353

 

 

82,595

 

694

 

Residential: first lien

 

3,656

 

 

453,075

 

4,390

 

Residential: junior lien

 

1,850

 

 

379,886

 

4,448

 

Consumer

 

1,326

 

 

73,188

 

1,289

 

Foreign

 

447

 

 

188,527

 

1,140

 

 

 

 

 

 

 

 

 

 

 

Total

 

$

83,005

 

$

4,746

 

$

4,691,999

 

$

53,447

 

 

17



 

The table below provides additional information on loans accounted for on a non-accrual basis by loan class at June 30, 2013 and December 31, 2012:

 

 

 

June 30, 2013

 

December 31, 2012

 

 

 

(Dollars in Thousands)

 

 

 

 

 

 

 

Domestic

 

 

 

 

 

Commercial

 

$

34,384

 

$

31,929

 

Commercial real estate: other construction & land development

 

24,240

 

26,410

 

Commercial real estate: farmland & commercial

 

14,335

 

11,681

 

Commercial real estate: multifamily

 

324

 

353

 

Residential: first lien

 

1,178

 

1,175

 

Residential: junior lien

 

64

 

175

 

Consumer

 

49

 

45

 

Foreign

 

13

 

 

 

 

 

 

 

 

Total non-accrual loans

 

$

74,587

 

$

71,768

 

 

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 loan’s effective interest rate; (2) the loan’s observable market price; or (3) the fair value of the collateral if the loan is collateral dependent.  Substantially all of the Company’s 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.

 

The following tables detail key information regarding the Company’s impaired loans by loan class at June 30, 2013 and December 31, 2011:

 

 

 

June 30, 2013

 

 

 

 

 

 

 

 

 

Quarter to Date

 

Year to Date

 

 

 

Recorded
Investment

 

Unpaid
Principal
Balance

 

Related
Allowance

 

Average
Recorded
Investment

 

Interest
Recognized

 

Average
Recorded
Investment

 

Interest
Recognized

 

 

 

(Dollars in Thousands)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Loans with Related Allowance

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Domestic

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Commercial

 

$

18,170

 

$

18,170

 

$

10,961

 

$

18,174

 

$

10

 

$

18,184

 

$

21

 

Commercial real estate: other construction & land development

 

3,968

 

3,971

 

766

 

3,969

 

 

4,820

 

 

Commercial real estate: farmland & commercial

 

7,812

 

11,144

 

3,446

 

6,879

 

23

 

6,666

 

46

 

Total impaired loans with related allowance

 

$

29,950

 

$

33,285

 

$

15,173

 

$

29,022

 

$

33

 

$

29,670

 

$

67

 

 

18



 

 

 

June 30, 2013

 

 

 

 

 

 

 

Quarter to Date

 

Year to Date

 

 

 

Recorded
Investment

 

Unpaid
Principal
Balance

 

Average
Recorded
Investment

 

Interest
Recognized

 

Average
Recorded
Investment

 

Interest
Recognized

 

 

 

(Dollars in Thousands)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Loans with No Related Allowance

 

 

 

 

 

 

 

 

 

 

 

 

 

Domestic

 

 

 

 

 

 

 

 

 

 

 

 

 

Commercial

 

$

16,950

 

$

17,580

 

$

17,309

 

$

 

$

16,475

 

$

 

Commercial real estate: other construction & land development

 

22,522

 

22,611

 

20,217

 

18

 

20,451

 

37

 

Commercial real estate: farmland & commercial

 

8,786

 

9,648

 

6,579

 

 

5,793

 

 

Commercial real estate: multifamily

 

324

 

324

 

329

 

 

337

 

 

Residential: first lien

 

4,367

 

4,490

 

4,605

 

39

 

4,222

 

72

 

Residential: junior lien

 

1,711

 

1,729

 

1,713

 

24

 

1,722

 

49

 

Consumer

 

1,239

 

1,244

 

1,236

 

 

1,241

 

 

Foreign

 

449

 

451

 

455

 

5

 

456

 

9

 

Total impaired loans with no related allowance

 

$

56,348

 

$

58,077

 

$

52,443

 

$

86

 

$

50,697

 

$

167

 

 

 

 

December 31, 2012

 

 

 

 

 

 

 

 

 

Year to Date

 

 

 

Recorded
Investment

 

Unpaid
Principal
Balance

 

Related
Allowance

 

Average Recorded
Investment

 

Interest
Recognized

 

 

 

(Dollars in Thousands)

 

 

 

 

 

 

 

 

 

 

 

 

 

Loans with Related Allowance

 

 

 

 

 

 

 

 

 

 

 

Domestic

 

 

 

 

 

 

 

 

 

 

 

Commercial

 

$

1,633

 

$

1,679

 

$

1,477

 

$

21,126

 

$

39

 

Commercial real estate: other construction & land development

 

3,671

 

3,671

 

539

 

6,608

 

 

Commercial real estate: farmland & commercial

 

6,678

 

9,923

 

2,730

 

7,342

 

92

 

Total impaired loans with related allowance

 

$

11,982

 

$

15,273

 

$

4,746

 

$

35,076

 

$

131

 

 

19



 

 

 

December 31, 2012

 

 

 

 

 

 

 

Year to Date

 

 

 

Recorded
Investment

 

Unpaid Principal
Balance

 

Average
Recorded
Investment

 

Interest
Recognized

 

 

 

(Dollars in Thousands)

 

 

 

 

 

 

 

 

 

 

 

Loans with No Related Allowance

 

 

 

 

 

 

 

 

 

Domestic

 

 

 

 

 

 

 

 

 

Commercial

 

$

31,135

 

$

31,170

 

$

2,996

 

$

4

 

Commercial real estate: other construction & land development

 

24,989

 

25,160

 

39,449

 

141

 

Commercial real estate: farmland & commercial

 

7,267

 

9,340

 

16,536

 

8

 

Commercial real estate: multifamily

 

353

 

353

 

381

 

 

Residential: first lien

 

3,656

 

3,984

 

2,876

 

60

 

Residential: junior lien

 

1,850

 

1,944

 

1,939

 

104

 

Consumer

 

1,326

 

1,330

 

1,193

 

 

Foreign

 

447

 

447

 

166

 

6

 

Total impaired loans with no related allowance

 

$

71,023

 

$

73,728

 

$

65,536

 

$

323

 

 

The following tables detail key information regarding the Company’s average recorded investment in impaired loans and interest recognized on impaired loans by loan class at June 30, 2012:

 

 

 

June 30, 2012

 

 

 

Quarter to Date

 

Year to Date

 

 

 

Average
Recorded
Investment

 

Interest
Recognized

 

Average
Recorded
Investment

 

Interest
Recognized

 

 

 

(Dollars in Thousands)

 

Loans with Related Allowance

 

 

 

 

 

 

 

 

 

Domestic

 

 

 

 

 

 

 

 

 

Commercial

 

$

24,271

 

$

 

$

24,417

 

$

10

 

Commercial real estate: other construction & land development

 

27,377

 

 

33,384

 

 

Commercial real estate: farmland & commercial

 

12,553

 

23

 

13,539

 

46

 

Residential: first lien

 

202

 

 

203

 

 

Total impaired loans with related allowance

 

$

64,403

 

$

23

 

$

71,543

 

$

56

 

 

20



 

 

 

June 30, 2012

 

 

 

Quarter to Date

 

Year to Date

 

 

 

Average
Recorded
Investment

 

Interest
Recognized

 

Average
Recorded
Investment

 

Interest
Recognized

 

 

 

(Dollars in Thousands)

 

 

 

 

 

 

 

 

 

 

 

Loans with No Related Allowance

 

 

 

 

 

 

 

 

 

Domestic

 

 

 

 

 

 

 

 

 

Commercial

 

$

3,798

 

$

1

 

$

3,808

 

$

1

 

Commercial real estate: other construction & land development

 

29,816

 

41

 

31,627

 

99

 

Commercial real estate: farmland & commercial

 

11,545

 

 

11,996

 

8

 

Commercial real estate: multifamily

 

387

 

 

394

 

 

Residential: first lien

 

2,681

 

11

 

2,596

 

16

 

Residential: junior lien

 

2,113

 

27

 

2,119

 

54

 

Consumer

 

1,178

 

 

1,323

 

 

Foreign

 

45

 

1

 

45

 

1

 

Total impaired loans with no related allowance

 

$

51,564

 

$

81

 

$

53,909

 

$

179

 

 

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 Company’s loss exposure regarding these credits will be significantly reduced due to the Company’s 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, management’s 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, management’s 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 collectable 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 improving and better positioned to recover than many other areas of the country.  Loans accounted for as “troubled debt restructuring,” which are included in impaired loans, were not significant and totaled $22,307,000 and $29,395,000 as of June 30, 2013 and December 31, 2012, respectively.

 

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 borrower’s financial condition and general economic conditions in the borrower’s industry. Generally, unsecured consumer loans are charged-off when 90 days past due.

 

21



 

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 Company’s management that the allowance for probable loan losses at June 30, 2013 was adequate to absorb probable losses from loans in the portfolio at that date.

 

The following table presents information regarding the aging of past due loans by loan class at June 30, 2013 and December 31, 2012:

 

 

 

June 30, 2013

 

 

 

30 – 59
Days

 

60 – 89
Days

 

90 Days or
Greater

 

90 Days
or
greater
& still
accruing

 

Total
Past
due

 

Current

 

Total
Portfolio

 

 

 

(Dollars in Thousands)

 

Domestic

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Commercial

 

$

10,760

 

$

2,573

 

$

32,261

 

$

890

 

$

45,594

 

$

831,404

 

$

876,998

 

Commercial real estate: other construction & land development

 

709

 

174

 

35,560

 

12,895

 

36,443

 

1,106,425

 

1,142,868

 

Commercial real estate: farmland & commercial

 

6,709

 

3,907

 

7,959

 

1,935

 

18,575

 

1,711,485

 

1,730,060

 

Commercial real estate: multifamily

 

72

 

341

 

324

 

 

737

 

81,200

 

81,937

 

Residential: first lien

 

6,323

 

2,151

 

9,236

 

8,913

 

17,710

 

428,138

 

445,848

 

Residential: junior lien

 

590

 

19

 

1,914

 

1,879

 

2,523

 

379,142

 

381,665

 

Consumer

 

1,605

 

369

 

694

 

655

 

2,668

 

65,409

 

68,077

 

Foreign

 

867

 

563

 

20

 

7

 

1,450

 

183,046

 

184,496

 

Total past due loans

 

$

27,635

 

$

10,097

 

$

87,968

 

$

27,174

 

$

125,700

 

$

4,786,249

 

$

4,911,949

 

 

22



 

 

 

December 31, 2012

 

 

 

30 – 59
Days

 

60 – 89
Days

 

90 Days or
Greater

 

90 Days
or
greater
& still
accruing

 

Total
Past
due

 

Current

 

Total
Portfolio

 

 

 

(Dollars in Thousands)

 

Domestic

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Commercial

 

$

4,393

 

$

471

 

$

3,386

 

$

2,689

 

$

8,250

 

$

760,860

 

$

769,110

 

Commercial real estate: other construction & land development

 

1,107

 

2,300

 

24,225

 

497

 

27,632

 

1,120,037

 

1,147,669

 

Commercial real estate: farmland & commercial

 

3,127

 

21,272

 

2,310

 

929

 

26,709

 

1,646,613

 

1,673,322

 

Commercial real estate: multifamily

 

685

 

 

353

 

 

1,038

 

81,910

 

82,948

 

Residential: first lien

 

4,305

 

2,510

 

10,645

 

9,657

 

17,460

 

439,271

 

456,731

 

Residential: junior lien

 

2,035

 

410

 

259

 

115

 

2,704

 

379,032

 

381,736

 

Consumer

 

1,598

 

404

 

915

 

882

 

2,917

 

71,597

 

74,514

 

Foreign

 

2,257

 

1,005

 

264

 

264

 

3,526

 

185,448

 

188,974

 

Total past due loans

 

$

19,507

 

$

28,372

 

$

42,357

 

$

15,033

 

$

90,236

 

$

4,684,768

 

$

4,775,004

 

 

The Company’s internal classified report is segregated into the following categories:  (i) “Special Review Credits,” (ii) “Watch List - Pass Credits,” or (iii) “Watch List - Substandard Credits.”  The loans placed in the “Special Review Credits” category reflect the Company’s opinion that the loans reflect potential weakness which require monitoring on a more frequent basis.  The “Special Review Credits” are reviewed and discussed on a regular basis with the credit department and the lending staff to determine if a change in category is warranted.  The loans placed in the “Watch List - Pass Credits” category reflect the Company’s opinion that the credit contains weaknesses which represent a greater degree of risk, which warrant “extra attention.”  The “Watch List — Pass Credits” are reviewed and discussed on a regular basis with the credit department and the lending staff to determine if a change in category is warranted.  The loans placed in the “Watch List — Substandard Credits” classification are considered to be potentially inadequately protected by the current sound worth and debt service capacity of the borrower or of any pledged collateral.  These credit obligations, even if apparently protected by collateral value, have shown defined weaknesses related to adverse financial, managerial, economic, market or political conditions which may jeopardize repayment of principal and interest.  Furthermore, there is the possibility that some future loss could be sustained by the Company if such weaknesses are not corrected.  For loans that are classified as impaired, management evaluates these credits ASC 310-10, “Receivables,” and, if deemed necessary, a specific reserve is allocated to the credit.  The specific reserve allocated under ASC 310-10, is based on (i) the present value of expected future cash flows discounted at the loan’s effective interest rate; (ii) the loan’s observable market price; or (iii) the fair value of the collateral if the loan is collateral dependent.  Substantially all of the Company’s loans evaluated as impaired under ASC 310-10 are measured using the fair value of collateral method.  In limited cases, the Company may use other methods to determine the specific reserve of a loan under ASC 310-10 if such loan is not collateral dependent.

 

The allowance based on historical loss experience on the Company’s remaining loan portfolio, which includes the “Special Review Credits,” “Watch List - Pass Credits,” and “Watch List - Substandard Credits” is determined by segregating the remaining loan portfolio into certain categories such as commercial loans, installment loans, international loans, loan concentrations and overdrafts.  Installment loans are then further segregated by number of days past due.  A historical loss percentage, adjusted for (i) management’s evaluation of changes in lending policies and procedures, (ii) current economic conditions in the market area served by the Company, (iii) other risk factors, (iv) the effectiveness of the internal loan review function, (v) changes in loan portfolios, and (vi) the composition and concentration of credit volume is applied to each category.  Each category is then added together to determine the allowance allocated under ASC 450-20.

 

23



 

A summary of the loan portfolio by credit quality indicator by loan class at June 30, 2013 and December 31, 2012 is as follows:

 

 

 

 

 

June 30, 2013

 

 

 

Pass

 

Special
Review

 

Watch List
- Pass

 

Watch List -
Substandard

 

Watch List -
Impaired

 

 

 

 

 

(Dollars in Thousands)

 

 

 

 

 

 

 

 

 

 

 

 

 

Domestic

 

 

 

 

 

 

 

 

 

 

 

Commercial

 

$

777,045

 

$

4,317

 

$

16,048

 

$

44,468

 

$

35,120

 

Commercial real estate: other construction & land development

 

1,052,052

 

37,332

 

1,920

 

25,074

 

26,490

 

Commercial real estate: farmland & commercial

 

1,557,457

 

110,783

 

20,165

 

25,057

 

16,598

 

Commercial real estate: multifamily

 

81,613

 

 

 

 

324

 

Residential: first lien

 

435,272

 

509

 

 

5,700

 

4,367

 

Residential: junior lien

 

378,075

 

76

 

 

1,803

 

1,711

 

Consumer

 

66,838

 

 

 

 

1,239

 

Foreign

 

181,864

 

2,183

 

 

 

449

 

Total

 

$

4,530,216

 

$

155,200

 

$

38,133

 

$

102,102

 

$

86,298

 

 

 

 

 

 

December 31, 2012

 

 

 

Pass

 

Special
Review

 

Watch List
- Pass

 

Watch List -
Substandard

 

Watch List -
Impaired

 

 

 

 

 

(Dollars in Thousands)

 

 

 

 

 

 

 

 

 

 

 

 

 

Domestic

 

 

 

 

 

 

 

 

 

 

 

Commercial

 

$

675,263

 

$

4,278

 

$

16,535

 

$

40,266

 

$

32,768

 

Commercial real estate: other construction & land development

 

1,038,749

 

55,079

 

2,614

 

22,567

 

28,660

 

Commercial real estate: farmland & commercial

 

1,486,572

 

109,144

 

46,316

 

17,345

 

13,945

 

Commercial real estate: multifamily

 

82,542

 

 

53

 

 

353

 

Residential: first lien

 

446,218

 

519

 

 

6,338

 

3,656

 

Residential: junior lien

 

378,000

 

77

 

309

 

1,500

 

1,850

 

Consumer

 

73,188

 

 

 

 

1,326

 

Foreign

 

188,499

 

 

28

 

 

447

 

Total

 

$

4,369,031

 

$

169,097

 

$

65,855

 

$

88,016

 

$

83,005

 

 

24



 

Note 5 — Stock Options

 

On April 5, 2012, the Board of Directors adopted the 2012 International Bancshares Corporation Stock Option Plan (the “2012 Plan”). There are 800,000 shares available for stock option grants under the 2012 Plan. Under the 2012 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, 2013, 757,500 shares were available for future grants under the 2012 Plan.

 

A summary of option activity under the stock option plans for the six months ended June 30, 2013 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, 2012

 

794,877

 

$

19.03

 

 

 

 

 

Plus: Options granted

 

 

 

 

 

 

 

Less:

 

 

 

 

 

 

 

 

 

Options exercised

 

5,955

 

10.77

 

 

 

 

 

Options expired

 

22,343

 

23.50

 

 

 

 

 

Options forfeited

 

20,600

 

17.88

 

 

 

 

 

Options outstanding at June 30, 2013

 

745,979

 

19.00

 

3.37

 

$

3,860

 

 

 

 

 

 

 

 

 

 

 

Options fully vested and exercisable at June 30, 2013

 

416,822

 

$

22.71

 

1.59

 

$

1,130

 

 

Stock-based compensation expense included in the consolidated statements of income for the three and six months ended June 30, 2013 was approximately $107,000 and $221,000, respectively.  Stock-based compensation expense included in the consolidated statements of income for the three and six months ended June 30, 2012 was approximately $122,000 and $253,000, respectively.  As of June 30, 2013, there was approximately $936,000 of total unrecognized stock-based compensation cost related to non-vested options granted under the Company plans that will be recognized over a weighted average period of 1.8 years.

 

Note 6 - Investment Securities

 

The Company classifies debt and equity securities into one of three categories:  held-to maturity, available-for-sale, or trading.  Such securities are reassessed for appropriate classification at each reporting date.  Securities classified as “held-to-maturity” are carried at amortized cost for financial statement reporting, while securities classified as “available-for-sale” and “trading” are carried at their fair value.  Unrealized holding gains and losses are included in net income for those securities classified as “trading”, while unrealized holding gains and losses related to those securities classified as “available-for-sale” are excluded from net income and reported net of tax as other comprehensive income (loss) and accumulated other comprehensive income (loss) until realized, or in the case of losses, when deemed other than temporary.

 

The amortized cost and estimated fair value by type of investment security at June 30, 2013 are as follows:

 

 

 

Held to Maturity

 

 

 

Amortized
cost

 

Gross
unrealized
gains

 

Gross
unrealized
losses

 

Estimated
fair value

 

Carrying
value

 

 

 

(Dollars in Thousands)

 

Other securities

 

$

2,400

 

$

 

$

 

$

2,400

 

$

2,400

 

Total investment securities

 

$

2,400

 

$

 

$

 

$

2,400

 

$

2,400

 

 

25



 

 

 

Available for Sale

 

 

 

Amortized
cost

 

Gross
unrealized
gains

 

Gross
unrealized
losses

 

Estimated
fair value

 

Carrying
value (1)

 

 

 

(Dollars in Thousands)

 

Residential mortgage-backed securities

 

$

4,951,842

 

$

67,140

 

$

(98,004

)

$

4,920,978

 

$

4,920,978

 

Obligations of states and political subdivisions

 

242,229

 

11,372

 

(4,975

)

248,626

 

248,626

 

Equity securities

 

19,575

 

1,028

 

(230

)

20,373

 

20,373

 

Total investment securities

 

$

5,213,646

 

$

79,540

 

$

(103,209

)

$

5,189,977

 

$

5,189,977

 

 


(1)         Included in the carrying value of residential mortgage-backed securities are $1,769,076 of mortgage-backed securities issued by Ginnie Mae, $3,121,461 of mortgage-backed securities issued by Fannie Mae and Freddie Mac and $30,441 issued by non-government entities

 

The amortized cost and estimated fair value by type of investment security at December 31, 2012 are as follows:

 

 

 

Held to Maturity

 

 

 

Amortized
cost

 

Gross
unrealized
gains

 

Gross
unrealized
losses

 

Estimated
fair value

 

Carrying
value

 

 

 

(Dollars in Thousands)

 

Other securities

 

$

2,400

 

$

 

$

 

$

2,400

 

$

2,400

 

Total investment securities

 

$

2,400

 

$

 

$

 

$

2,400

 

$

2,400

 

 

 

 

Available for Sale

 

 

 

Amortized
cost

 

Gross
unrealized
gains

 

Gross
unrealized
losses

 

Estimated fair
value

 

Carrying
value (1)

 

 

 

(Dollars in Thousands)

 

Residential mortgage-backed securities

 

$

5,186,652

 

$

94,585

 

$

(16,033

)

$

5,265,204

 

$

5,265,204

 

Obligations of states and political subdivisions

 

216,962

 

23,504

 

(1,791

)

238,675

 

238,675

 

Equity securities

 

19,575

 

1,581

 

(20

)

21,136

 

21,136

 

Total investment securities

 

$

5,423,189

 

$

119,670

 

$

(17,844

)

$

5,525,015

 

$

5,525,015

 

 


(1)         Included in the carrying value of residential mortgage-backed securities are $2,035,742 of mortgage-backed securities issued by Ginnie Mae, $3,196,602 of mortgage-backed securities issued by Fannie Mae and Freddie Mac and $32,860  issued by non-government entities

 

The amortized cost and estimated fair value of investment securities at June 30, 2013, 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

 

$

1,200

 

$

1,200

 

$

 

$

 

Due after one year through five years

 

1,200

 

1,200

 

 

 

Due after five years through ten years

 

 

 

689

 

741

 

Due after ten years

 

 

 

241,540

 

247,885

 

Residential mortgage-backed securities

 

 

 

4,951,842

 

4,920,978

 

Equity securities

 

 

 

19,575

 

20,373

 

Total investment securities

 

$

2,400

 

$

2,400

 

$

5,213,646

 

$

5,189,977

 

 

26



 

Residential mortgage-backed securities are securities issued by 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 mortgage-backed securities issued by Freddie Mac and Fannie Mae are not fully guaranteed by the U.S. Government, however, the Company believes that the quality of the bonds is similar to other AAA rated bonds with limited credit risk, particularly given the placement of Fannie Mae and Freddie Mac into conservatorship by the federal government in early September 2008 and because securities issued by others that are collateralized by residential mortgage-backed securities issued by Fannie Mae or Freddie Mac are rated consistently as AAA rated securities.

 

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 $2,104,649,000 and $2,141,462,000 at June 30, 2013.

 

Proceeds from the sale of securities available-for-sale were $0 and $178,124,000 for the three and six months ended June 30, 2013, which included $0 and $177,623,000 of mortgage-backed securities. Gross gains of $0 and $9,601,000 and gross losses of $0 and $0 were realized on the sales for the three and six months ended June 30, 2013, respectively.  Proceeds from the sale of securities available-for-sale were $55,052,000 and $72,383,000 for the three and six months ended June 30, 2012, which included $31,515,000 and $31,515,000 of mortgage-backed securities. Gross gains of $1,420,000 and $2,593,000 and gross losses of $0 and $(1,000) were realized on the sales for the three and six months ended June 30, 2012, respectively.

 

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, 2013, 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

 

$

2,836,648

 

$

(87,735

)

$

46,765

 

$

(10,269

)

$

2,883,413

 

$

(98,004

)

Obligations of states and political subdivisions

 

42,360

 

(1,993

)

12,364

 

(2,982

)

54,724

 

(4,975

)

Other equity securities

 

10,519

 

(230

)

75

 

 

10,594

 

(230

)

 

 

$

2,889,527

 

$

(89,958

)

$

59,204

 

$

(13,251

)

$

2,948,731

 

$

(103,209

)

 

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, 2012 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

 

$

738,492

 

$

(5,476

)

$

32,860

 

$

(10,557

)

$

771,352

 

$

(16,033

)

Obligations of states and political subdivisions

 

5,117

 

(114

)

10,437

 

(1,677

)

15,554

 

(1,791

)

Equity securities

 

 

 

56

 

(20

)

56

 

(20

)

 

 

$

743,609

 

$

(5,590

)

$

43,353

 

$

(12,254

)

$

786,962

 

$

(17,844

)

 

27



 

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 Freddie Mac, Fannie Mae and Ginnie Mae.  Investments in mortgage-backed securities issued by Ginnie Mae are fully guaranteed by the U.S. Government.  Investments in mortgage-backed securities issued by Freddie Mac and Fannie Mae are not fully guaranteed by the U.S. Government, however, the Company believes that the quality of the bonds is similar to other AAA rated bonds with limited credit risk, particularly given the placement of Fannie Mae and Freddie Mac into conservatorship by the federal government in early September 2008 and because securities issued by others that are collateralized by residential mortgage-backed securities issued by Fannie Mae or Freddie Mac are rated consistently as AAA rated securities.  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 such mortgage-backed securities, and will more than likely not be required to sell such securities 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.  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 $417,000 ($271,000, after tax) and $727,000 ($473,000, after tax) were recorded for the three and six months ended June 30, 2013. Impairment charges of $222,000 ($144,000, after tax) and $408,000 ($265,000, after tax) were recorded for the three and six months ended June 30, 2012. The impairment charge represents the credit related impairment on the securities.

 

The unrealized losses on investments in other securities are caused by fluctuations in market interest rates.  The underlying cash obligations of the securities are guaranteed by the entity underwriting the debt instrument.  It is the belief of the Company that the entity issuing the debt will honor its interest payment schedule, as well as the full debt at maturity.  The securities are purchased by the Company for their economic value.  The decrease in fair value is primarily due to market interest rates and not other factors, and because the Company has no intent to sell and will more than likely not be required to sell before a market price recovery or maturity of the securities, it is the conclusion of the Company that the investments are not considered other-than-temporarily impaired.

 

The following table presents a reconciliation of credit-related impairment charges on available-for-sale investments recognized in earnings for the three months ended June 30, 2013 (Dollars in Thousands):

 

Balance at March 31, 2013

 

$

10,742

 

Impairment charges recognized during period

 

417

 

Balance at June 30, 2013

 

$

11,159

 

 

The following table presents a reconciliation of credit-related impairment charges on available-for-sale investments recognized in earnings for the six months ended June 30, 2013 (Dollars in Thousands):

 

Balance at December 31, 2012

 

$

10,432

 

Impairment charges recognized during period

 

727

 

Balance at June 30, 2013

 

$

11,159

 

 

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, 2012 (Dollars in Thousands):

 

Balance at March 31, 2012

 

$

9,579

 

Impairment charges recognized during period

 

222

 

Balance at June 30, 2012

 

$

9,801

 

 

28



 

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, 2012 (Dollars in Thousands):

 

Balance at December 31, 2011

 

$

9,393

 

Impairment charges recognized during period

 

408

 

Balance at June 30, 2012

 

$

9,801

 

 

Note 7 — Other Borrowed Funds

 

Other borrowed funds include Federal Home Loan Bank borrowings, which are short-term and long-term borrowings issued by the FHLB of Dallas at the market price offered at the time of funding.  These borrowings are secured by residential mortgage-backed investment securities and a portion of the Company’s loan portfolio.  At June 30, 2013, other borrowed funds totaled $752,458,000, an increase of .5% from $749,027,000 at December 31, 2012.

 

Note 8 — Junior Subordinated Interest Deferrable Debentures

 

The Company has formed seven statutory business trusts under the laws of the State of Delaware, for the purpose of issuing trust preferred securities. The seven 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, 2013 and December 31, 2012, the principal amount of debentures outstanding totaled $190,726,000.

 

The Debentures are subordinated and junior in right of payment to all present and future senior indebtedness (as defined in the respective indentures) of the Company, and are pari passu with one another. The interest rate payable on, and the payment terms of the Debentures are the same as the distribution rate and payment terms of the respective issues of Capital and Common Securities issued by the Trusts. The Company has fully and unconditionally guaranteed the obligations of each of the Trusts with respect to the Capital and Common Securities. The Company has the right, unless an Event of Default (as defined in the Indentures) has occurred and is continuing, to defer payment of interest on the Debentures for up to 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.  At June 30, 2013 and December 31, 2012, the total $190,726,000 of the Capital Securities outstanding qualified as Tier 1 capital.

 

29



 

The following table illustrates key information about each of the Capital and Common Securities and their interest rate at June 30, 2013:

 

 

 

Junior
Subordinated
Deferrable
Interest
Debentures

 

Repricing
Frequency

 

Interest Rate

 

Interest Rate
Index

 

Maturity Date

 

Optional
Redemption
Date(1)

 

 

 

(In Thousands)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Trust VI

 

$

25,774

 

Quarterly

 

3.73

%

LIBOR + 3.45

 

November 2032

 

February 2008

 

Trust VII

 

10,310

 

Quarterly

 

3.52

%

LIBOR + 3.25

 

April 2033

 

April 2008

 

Trust VIII

 

25,774

 

Quarterly

 

3.33

%

LIBOR + 3.05

 

October 2033

 

October 2008

 

Trust IX

 

41,238

 

Quarterly

 

1.90

%

LIBOR + 1.62

 

October 2036

 

October 2011

 

Trust X

 

34,021

 

Quarterly

 

1.92

%

LIBOR + 1.65

 

February 2037

 

February 2012

 

Trust XI

 

32,990

 

Quarterly

 

1.90

%

LIBOR + 1.62

 

July 2037

 

July 2012

 

Trust XII

 

20,619

 

Quarterly

 

1.72

%

LIBOR + 1.45

 

September 2037

 

September 2012

 

 

 

$

190,726

 

 

 

 

 

 

 

 

 

 

 

 


(1) The Capital Securities may be redeemed in whole or in part on any interest payment date after the Optional Redemption Date.

 

Note 9 — Common Stock and Dividends

 

The Company had outstanding 216,000 shares of Series A cumulative perpetual preferred stock (the “Senior Preferred Stock”), issued to the US Treasury under the Company’s participation in the Troubled Asset Relief Program Capital Purchase Program (the “TARP Capital Purchase Program”).  The Company redeemed all of the Senior Preferred Stock in 2012.  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 Company’s 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.  The Warrant is included as a component of Tier 1 capital.  On June 12, 2013, the U. S. Treasury sold the Warrant to a third party.  As of June 30, 2013, none of the Warrant had been exercised.

 

The Company paid cash dividends to the common shareholders of $.20 per share on April 19, 2013 to all holders of record on April 1, 2013.  Cash dividends of $.20 per share were paid to common shareholders on April 20, and October 15, 2012 to all holders of record on April 2 and September 28, 2012, respectively.

 

In April 2009, following receipt of the Treasury Department’s consent, the Board of Directors re-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 February 28, 2013, 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 commencing on April 9, 2013, which repurchase cap the Board is inclined to increase over time.  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 July 31, 2013, a total of 7,843,293 shares had been repurchased under all programs at a cost of $237,536,000.

 

Note 10 - Commitments and Contingent Liabilities

 

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, results of operations or cash flows 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.

 

30



 

Note 11 — Capital Ratios

 

The Company had a Tier 1 capital to average total asset (leverage) ratio of 11.65% and 10.86%, risk-weighted Tier 1 capital ratio of 19.58% and 19.65% and risk-weighted total capital ratio of  20.59% and 20.60% at June 30, 2013 and December 31, 2012, respectively.  The identified intangibles and goodwill of $288,056,000 as of June 30, 2013, 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, 2013, the total of $190,726,000 of the Capital Securities outstanding qualified as Tier 1 capital.  The Company actively monitors the regulatory capital ratios to ensure that the Company’s bank subsidiaries are well capitalized under the regulatory framework.

 

Item 2 - Management’s Discussion and Analysis of Financial Condition and Results of Operations

 

The following discussion should be read in conjunction with the Company’s consolidated financial statements, and notes thereto, for the year-ended December 31, 2012, included in the Company’s 2012 Form 10-K.  Operating results for the six months ended June 30, 2013 are not necessarily indicative of the results for the year ending December 31, 2013, 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 Company’s 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.

·                  The Company relies, in part, on external financing to fund the Company’s operations and the unavailability of such funds in the future could adversely impact the Company’s growth strategy and prospects.

·                  Changes in consumer spending, borrowings and savings habits.

·                  Changes in interest rates and market prices, which could reduce the Company’s net interest margins, asset valuations and expense expectations, including, without limitation, the repeal of federal prohibitions on the payment of interest on demand deposits.

·                  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, the impact of the Consumer Financial Protection Bureau as a new regulator of financial institutions, changes in the accounting, tax and regulatory treatment of trust preferred securities, as well as changes in banking, tax, securities, insurance, employment, environmental and immigration laws and regulations and the risk of litigation that may follow.

·                  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 reduction of deposits from nonresident alien individuals due to the new IRS rules requiring U.S. financial institutions to report to the IRS deposit interest payments made to nonresident alien individuals.

 

31



 

·                  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 Company’s potential future acquisitions including the Company’s ability to identify suitable potential future acquisition candidates, the success or failure in the integration of their operations and the Company’s ability to maintain its current branch network and to enter new markets successfully and capitalize on growth opportunities.

·                  Changes in the Company’s ability to pay dividends on its Common Stock.

·                  Additions to the Company’s loan loss allowance as a result of changes in local, national or international conditions which adversely affect the Company’s customers, including, without limitation, lower real estate values or environmental liability risks associated with foreclosed properties.

·                  Greater than expected costs or difficulties related to the development and integration of new products and lines of business.

·                  Increased labor costs and effects related to health care reform and other laws, regulations and legal developments impacting labor costs.

·                  Impairment of carrying value of goodwill could negatively impact our earnings and capital.

·                  Changes in the soundness of other financial institutions with which the Company interacts.

·                  Political instability in the United States or Mexico.

·                  Technological changes or system failure or breaches of our network security could subject us to increased operating costs as well as litigation and other liabilities.

·                  Acts of war or terrorism.

·                  Natural disasters.

·                  Reduced earnings resulting from the write down of the carrying value of securities held in our securities available-for-sale portfolio following a determination that the securities are other-than-temporarily impaired.

·                  The effect of changes in accounting policies and practices as may be adopted by the regulatory agencies, as well as the Public Company Accounting Oversight Board, the Financial Accounting Standards Board and other accounting standards setters.

·                  The costs and effects of regulatory developments, including the resolution of regulatory or other governmental inquiries and the results of regulatory examinations or reviews.

·                  The effect of final rules amending Regulation E that prohibit financial institutions from charging consumer fees for paying overdrafts on ATM and one-time debit card transactions, unless the consumer consents or opts-in to the overdraft service for those types of transactions, as well as the effect of any other regulatory or legal developments that limit overdraft services.

·                  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, including the Federal Reserve’s rule that establishes debit card interchange fee standards and prohibits network exclusivity arrangements and routing restrictions that is negatively affecting interchange revenue from debit card transactions as well as revenue from consumer services.

·                  The possible increase in required capital levels related to the implementation of capital rules of the federal banking agencies that address the Basel III capital standards.

·                  The enhanced due diligence burden imposed on banks related to the banks’ inability to rely on credit ratings under Dodd-Frank which may result in a limitation on the types of securities certain banks will be able to purchase as a result of the due diligence burden.

·                  The Company’s success at managing the risks involved in the foregoing items, or a failure or circumvention of the Company’s internal controls and risk management, policies and procedures.

 

Forward-looking statements speak only as of the date on which such statements are made.  It is not possible to foresee or identify all such factors.  The Company makes no commitment to update any forward-looking statement, or to disclose any facts, events or circumstances after the date hereof that may affect the accuracy of any forward-looking statement, unless required by law.

 

32



 

Overview

 

The Company, which is headquartered in Laredo, Texas, with 216 facilities and more than 320 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 Company’s 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 Company’s bank subsidiaries.  The Company also serves the growing Hispanic population through the Company’s facilities located throughout South, Central and Southeast Texas and the State of Oklahoma.

 

Expense control is an essential element in the Company’s 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.  As the Company adjusts to regulatory changes related to Dodd-Frank, the Company’s efficiency ratio may suffer because the additional regulatory compliance costs are expected to increase non-interest expense.  The Company monitors this ratio over time to assess the Company’s efficiency relative to its peers.  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 Company’s shareholders.

 

Results of Operations

 

Summary

 

Consolidated Statements of Condition Information

 

 

 

June 30, 2013

 

December 31, 2012

 

Percent Increase
(Decrease)

 

 

 

(Dollars in Thousands)

 

 

 

 

 

 

 

 

 

 

 

Assets

 

$

11,596,913

 

$

11,882,673

 

(2.4

)%

Net loans

 

4,846,898

 

4,716,811

 

2.8

 

Deposits

 

8,193,724

 

8,287,213

 

(1.1

)

Other borrowed funds

 

752,458

 

749,027

 

.5

 

Junior subordinated deferrable interest debentures

 

190,726

 

190,726

 

%

Shareholders’ equity

 

1,397,294

 

1,435,708

 

(2.7

)%

 

33



 

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

 

 

 

2013

 

2012

 

(Decrease)

 

2013

 

2012

 

(Decrease)

 

Interest income

 

$

86,324

 

$

93,683

 

(7.9

)%

$

173,434

 

$

189,465

 

(8.5

)%

Interest expense

 

13,700

 

20,040

 

(31.6

)

28,178

 

40,705

 

(30.8

)

Net interest income

 

72,624

 

73,643

 

(1.4

)

145,256

 

148,760

 

(2.4

)

Provision for probable loan losses

 

4,342

 

6,107

 

(28.9

)

11,761

 

11,392

 

3.2

 

Non-interest income

 

46,705

 

40,819

 

14.4

 

99,957

 

83,996

 

19.0

 

Non-interest expense

 

73,714

 

72,091

 

2.3

 

154,575

 

140,234

 

10.2

 

Net income available to common shareholders

 

27,513

 

21,195

 

29.8

 

55,582

 

49,539

 

12.2

 

Per common share:

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic

 

$

.41

 

$

.32

 

28.1

%

$

.83

 

$

.74

 

12.2

%

Diluted

 

.41

 

.31

 

32.3

 

.83

 

.74

 

12.2

 

 

Net Income

 

Net income available to common shareholders for the three months ended June 30, 2013 increased by 29.8% and net income available to common shareholders for the six months ended June 30, 2013 increased by 12.2% when compared to the same period in 2012.  Net income for the six months ended June 30, 2013 was positively affected by the repayment of the TARP funds in the fourth quarter of  2012 which eliminated the continued payment of dividends on the Senior Preferred Stock that had been held by the U.S. Treasury, as well as the sale of available-for-sale investment securities totaling $6.2 million, net of tax.  The securities sales were a result of the Company re-positioning a portion of the investment portfolio.  Net income for the same period was negatively impacted by a charge of $8.0 million, net of tax, as a result of the Company’s lead bank subsidiary’s early termination of a portion of its long-term repurchase agreements in order to help manage its long-term funding costs.  Net income was also negatively impacted by narrowing interest margins caused by slightly improving, but still low demand and declining yields in the bond markets coupled with lower levels of revenue on interchange fee income and overdraft programs due to regulatory changes.  Net income also continues to be negatively affected by the burden of increasing compliance costs arising from the Dodd-Frank Act and heightened regulatory oversight.

 

34



 

Net Interest Income

 

 

 

Three Months Ended
June 30,

 

Percent

 

Six Months Ended
June 30,

 

Percent

 

 

 

(in Thousands)

 

Increase

 

(in Thousands)

 

Increase

 

 

 

2013

 

2012

 

(Decrease)

 

2013

 

2012

 

(Decrease)

 

Interest income:

 

 

 

 

 

 

 

 

 

 

 

 

 

Loans, including fees

 

$

64,617

 

$

67,413

 

(4.1

)%

$

128,151

 

$

135,736

 

(5.6

)%

Investment securities:

 

 

 

 

 

 

 

 

 

 

 

 

 

Taxable

 

18,601

 

23,228

 

(19.9

)

39,120

 

47,740

 

(18.1

)

Tax-exempt

 

3,085

 

2,849

 

8.3

 

6,121

 

5,710

 

7.2

 

Other interest income

 

21

 

193

 

(89.1

)

42

 

279

 

(84.9

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total interest income

 

86,324

 

93,683

 

(7.9

)

173,434

 

189,465

 

(8.5

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest expense:

 

 

 

 

 

 

 

 

 

 

 

 

 

Savings deposits

 

956

 

1,479

 

(35.4

)

1,967

 

3,102

 

(36.6

)

Time deposits

 

3,978

 

6,255

 

(36.4

)

8,423

 

12,740

 

(33.9

)

Securities sold under repurchase agreements

 

7,312

 

10,267

 

(28.8

)

14,880

 

20,569

 

(27.7

)

Other borrowings

 

289

 

138

 

109.4

 

579

 

346

 

67.3

 

Junior subordinated interest deferrable debentures

 

1,165

 

1,901

 

(38.7

)

2,329

 

3,948

 

(41.0

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total interest expense

 

13,700

 

20,040

 

(31.6

)

28,178

 

40,705

 

(30.8

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net interest income

 

$

72,624

 

$

73,643

 

(1.4

)%

$

145,256

 

$

148,760

 

(2.4

)%

 

Net interest income is the spread between income on interest earning assets, such as loans and securities, and the interest expense on liabilities used to fund those assets, such as deposits, repurchase agreements and funds borrowed.  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.  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 39 for the June 30, 2013 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.

 

35



 

Non-Interest Income

 

 

 

Three Months Ended
June 30,

 

Percent

 

Six Months Ended
June 30,

 

Percent

 

 

 

(in Thousands)

 

Increase

 

(in Thousands)

 

Increase

 

 

 

2013

 

2012

 

(Decrease)

 

2013

 

2012

 

(Decrease)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Service charges on deposit accounts

 

$

23,507

 

$

23,100

 

1.8

%

$

47,337

 

$

45,853

 

3.2

%

Other service charges, commissions and fees

 

 

 

 

 

 

 

 

 

 

 

 

 

Banking

 

10,052

 

9,424

 

6.7

 

20,035

 

19,488

 

2.8

 

Non-banking

 

1,515

 

1,682

 

(9.9

)

2,576

 

2,933

 

(12.2

)

Investment securities transactions, net

 

 

1,420

 

(100.0

)

9,601

 

2,592

 

270.4

 

Other investments, net

 

8,635

 

2,647

 

226.2

 

15,632

 

7,781

 

100.9

 

Other income

 

2,996

 

2,546

 

17.7

 

4,776

 

5,349

 

(10.7

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total non-interest income

 

$

46,705

 

$

40,819

 

14.4

%

$

99,957

 

$

83,996

 

19.0

%

 

Total non-interest income increased 19.0% for the six months ended June 30, 2013 from the same period of 2012.  Investment securities transactions increased for the six months ended June 30, 2013 primarily due to the sale of residential mortgage-backed securities as a result of the Company re-positioning of a portion of its investment portfolio.  Other investments income for the six months ended June 30, 2013 was positively impacted due to the sale of assets in a partnership where the holding company held an equity position resulting in income of $5.5 million.

 

Non-Interest Expense

 

 

 

Three Months Ended
June 30,

 

Percent

 

Six Months Ended
June 30,

 

Percent

 

 

 

(in Thousands)

 

Increase

 

(in Thousands)

 

Increase

 

 

 

2013

 

2012

 

(Decrease)

 

2013

 

2012

 

(Decrease)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Employee compensation and benefits

 

$

30,764

 

$

30,210

 

1.8

%

$

60,975

 

$

59,611

 

2.3

%

Occupancy

 

7,180

 

8,107

 

(11.4

)

14,992

 

16,841

 

(11.0

)

Depreciation of bank premises and equipment

 

6,619

 

6,790

 

(2.5

)

13,244

 

13,717

 

(3.4

)

Professional fees

 

3,952

 

4,171

 

(5.3

)

7,675

 

7,541

 

1.8

 

Deposit insurance assessments

 

1,762

 

1,490

 

18.3

 

3,378

 

3,057

 

10.5

 

Net expense, other real estate owned

 

1,575

 

1,385

 

13.7

 

3,364

 

2,566

 

31.1

 

Amortization of identified intangible assets

 

1,158

 

1,163

 

(0.4

)

2,295

 

2,300

 

(0.2

)

Advertising

 

2,023

 

1,970

 

2.7

 

3,869

 

3,797

 

1.9

 

Early termination fee — securities sold under repurchase agreements

 

2,418

 

 

100

 

12,303

 

 

100

 

Impairment charges (Total other-than- temporary impairment losses, $(953), net of $(1,370), $(301), net of $(523), $15, net of $(712) and $1,349, net of $941 included in other comprehensive income)

 

417

 

222

 

87.8

 

727

 

408

 

78.2

 

Other

 

15,846

 

16,583

 

(4.4

)

31,753

 

30,396

 

4.5

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total non-interest expense

 

$

73,714

 

$

72,091

 

2.3

%

$

154,575

 

$

140,234

 

10.2

%

 

36



 

Non-interest expense increased 2.3% for the three months ended June 30, 2013 and 10.2% for the six months ended June 30, 2013 compared to the same periods of 2012.  Non-interest expense was negatively impacted by a charge of $12.3 million recorded by the Company’s lead bank subsidiary.  The lead bank subsidiary terminated a portion of its long-term repurchase agreements outstanding in order to help manage its long-term funding costs.

 

Financial Condition

 

Allowance for Probable Loan Losses

 

The allowance for probable loan losses increased 11.8% to $65,051,000 at June 30, 2013 from $58,193,000 at December 31, 2012.  The change is primarily driven by the addition of a specific reserve of approximately $10,000,000 on a previously identified impaired commercial loan that further deteriorated during the six months ended June 30, 2013, offset by a decrease in the general reserve due to the stability of general economic factors used in the calculation.  The provision for probable loan losses charged to expense increased 3.2% to $11,761,000 for the six months ended June 30, 2013 from $11,392,000 for the same period in 2012.  The allowance for probable loan losses was 1.3% and 1.2% of total loans at June 30, 2013 and December 31, 2012, respectively.

 

Investment Securities

 

Mortgage-backed securities are securities primarily issued by the Federal Home Loan Mortgage Corporation (“Freddie Mac”), Federal National Mortgage Association (“Fannie Mae”), and the Government National Mortgage Association (“Ginnie Mae”).  Investments in 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, however, the Company believes that the quality of the bonds is similar to other AAA rated bonds with limited credit risk, particularly given the placement of Fannie Mae and Freddie Mac into conservatorship by the federal government in early September 2008 and because securities issued by others that are collateralized by residential mortgage-backed securities issued by Fannie Mae or Freddie Mac are rated consistently as AAA rated securities.

 

Loans

 

Net loans increased 2.8% to $4,846,898,000 at June 30, 2013, from $4,716,811,000 at December 31, 2012.  The increase in loans can be attributed to improved opportunities for loan growth.

 

Deposits

 

Deposits decreased by 1.1% to $8,193,724,000 at June 30, 2013, from $8,287,213,000 at December 31, 2012.  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, 2013, the Company had $11,596,913,000 of consolidated assets, of which approximately $184,496,000, or 1.6%, was related to loans outstanding to borrowers domiciled in foreign countries, compared to $188,974,000, or 1.6%, at December 31, 2012.  Of the $184,496,000, 91.4% is directly or indirectly secured by U.S. assets, certificates of deposits and real estate; 8.2% is secured by foreign real estate; and .4% is unsecured.

 

Critical Accounting Policies

 

The Company has established various accounting policies which govern the application of accounting principles in the preparation of the Company’s 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.

 

37



 

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, which are based on a review of the individual characteristics of each loan, including the customer’s ability to repay the loan, the underlying collateral values, and the industry in which the customer operates (ii) allowances based on actual historical loss experience for similar types of loans in the Company’s loan portfolio and (iii) allowances based on general economic conditions, changes in the mix of loans, Company resources, border risk and credit quality indicators, among other things.   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 4 of the notes to Consolidated Financial Statements in the Company’s latest Annual Report on Form 10-K for further information regarding the Company’s provision and allowance for probable loan losses policy.

 

Liquidity and Capital Resources

 

The maintenance of adequate liquidity provides the Company’s 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 Company’s 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 Company’s bank subsidiaries. Other important funding sources for the Company’s bank subsidiaries during 2013 and 2012 were borrowings from FHLB, securities sold under repurchase agreements and large certificates of deposit, requiring management to closely monitor its asset/liability mix in terms of both rate sensitivity and maturity distribution.  Primary liquidity of the Company and its subsidiaries has been maintained by means of increased investment in shorter-term securities, certificates of deposit and repurchase agreements.  As in the past, the Company will continue to monitor the volatility and cost of funds in an attempt to match maturities of rate-sensitive assets and liabilities and respond accordingly to anticipated fluctuations in interest rates over reasonable periods of time.

 

The Company maintains an adequate level of capital as a margin of safety for its depositors and shareholders.  At June 30, 2013, shareholders’ equity was $1,397,294,000 compared to $1,435,708,000 at December 31, 2012, a decrease of $38,414,000, or 2.7%.  The decrease is primarily due to an increase in other comprehensive loss and the payment of cash dividends to shareholders, offset by the retention of earnings.

 

The Company had a leverage ratio of 11.65% and 10.86%, risk-weighted Tier 1 capital ratio of 19.58% and 19.65% and risk-weighted total capital ratio of 20.59% and 20.60% at June 30, 2013 and December 31, 2012, respectively.  The identified intangibles and goodwill of $288,056,000 as of June 30, 2013, recorded in connection with the Company’s 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, 2013 is illustrated in the table entitled “Interest Rate Sensitivity.”  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.

 

38



 

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 Company’s Asset and Liability Committee semi-annually reviews the consolidated position along with simulation and duration models, and makes adjustments as needed to control the Company’s interest rate risk position.  The Company uses modeling of future events as a primary tool for monitoring interest rate risk.

 

Interest Rate Sensitivity

(Dollars in Thousands)

 

 

 

Rate/Maturity

 

June 30, 2013

 

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

 

$

360,687

 

$

1,547,066

 

$

3,035,998

 

$

248,626

 

$

5,192,377

 

Loans, net of non-accruals

 

3,692,111

 

219,444

 

260,213

 

665,594

 

4,837,362

 

 

 

 

 

 

 

 

 

 

 

 

 

Total earning assets

 

$

4,052,798

 

$

1,766,510

 

$

3,296,211

 

$

914,220

 

$

10,029,739

 

 

 

 

 

 

 

 

 

 

 

 

 

Cumulative earning assets

 

$

4,052,798

 

$

5,819,308

 

$

9,115,519

 

$

10,029,739

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Rate sensitive liabilities

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Time deposits

 

$

1,049,453

 

$

1,382,529

 

$

314,121

 

$

132

 

$

2,746,235

 

Other interest bearing deposits

 

2,833,768

 

 

 

 

2,833,768

 

Securities sold under repurchase agreements

 

392,998

 

19,378

 

612,695

 

 

1,025,071

 

Other borrowed funds

 

746,000

 

 

 

6,458

 

752,458

 

Junior subordinated deferrable interest debentures

 

190,726

 

 

 

 

190,726

 

 

 

 

 

 

 

 

 

 

 

 

 

Total interest bearing liabilities

 

$

5,212,945

 

$

1,401,907

 

$

926,816

 

$

6,590

 

$

7,548,258

 

 

 

 

 

 

 

 

 

 

 

 

 

Cumulative sensitive liabilities

 

$

5,212,945

 

$

6,614,852

 

$

7,541,668

 

$

7,548,258

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Repricing gap

 

$

(1,160,147

)

$

364,603

 

$

2,369,395

 

$

907,630

 

$

2,481,481

 

Cumulative repricing gap

 

(1,160,147

)

(795,544

)

1,573,851

 

2,481,481

 

 

 

Ratio of interest-sensitive assets to liabilities

 

.78

 

1.26

 

3.56

 

138.73

 

1.33

 

Ratio of cumulative, interest-sensitive assets to liabilities

 

.78

 

.88

 

1.21

 

1.33

 

 

 

 

Item 3.  Quantitative and Qualitative Disclosures about Market Risk

 

During the first six months of 2013, 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 Company’s 2012 Annual Report as filed as an exhibit to the Company’s Form 10-K for the year ended December 31, 2012.

 

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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 Company’s principal executive officer and principal financial officer evaluated, with the participation of the Company’s management, the effectiveness of the Company’s 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 Company’s principal executive officer and principal financial officer concluded that the Company’s 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 Company’s internal control over financial reporting that occurred during the Company’s most recent fiscal quarter that have materially affected or are reasonably likely to materially affect the Company’s 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.

 

1A. Risk Factors

 

There were no material changes in the risk factors as previously disclosed in Item 1A to Part I of the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2012.

 

Item 2.  Unregistered Sales of Equity Securities and Use of Proceeds

 

From time to time, the Company’s Board of Directors has authorized stock repurchase plans.  In April 2009, 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 February 28, 2013, 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 commencing on April 9, 2013, which repurchase cap the Board is inclined to increase over time.  Stock repurchases may be made from time to time, on the open market or through private transactions.  During the second quarter, the Company’s 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 July 31, 2013, a total of 7,843,293 shares had been repurchased under all repurchase programs at a cost of $237,536,000.  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 Company’s 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, 2013.

 

40



 

 

 

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, 2013

 

 

 

 

$

40,000,000

 

May 1 — May 31, 2013

 

 

 

 

40,000,000

 

June 1 — June 30, 2013

 

 

 

 

40,000,000

 

 

 

 

 

 

 

 

 


(1) The repurchase program was extended on February 28, 2013 and allows for the repurchase of up to an additional $40,000,000 of treasury stock through April 9, 2014.

 

41



 

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++ — Interactive Data File

 


++  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, 2013 and 2012, (ii) the Condensed Consolidated Balance Sheet as of June 30, 2013 and December 31, 2012, and (iii) the Condensed Consolidated Statement of Cash Flows for the six months ended June 30, 2013 and 2012.  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.

 

42



 

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, 2013

 

/s/ Dennis E. Nixon

 

 

Dennis E. Nixon

 

 

President

 

 

 

 

 

 

 

Date:

August 5, 2013

 

/s/ Imelda Navarro

 

 

Imelda Navarro

 

 

Treasurer

 

43