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INTERNATIONAL BANCSHARES CORP - Quarter Report: 2004 June (Form 10-Q)

 

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

FORM 10-Q

 

(Mark One)

 

ý QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF

THE SECURITIES EXCHANGE ACT OF 1934

 

For the quarterly period ended June 30, 2004

 

 

 

OR

 

 

 

o TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE

SECURITIES EXCHANGE ACT OF 1934

 

For the transition period from         to

 

 

 

Commission file number  0-9439

 

INTERNATIONAL BANCSHARES CORPORATION

(Exact name of registrant as specified in its charter)

 

 

 

Texas

 

74-2157138

(State or other jurisdiction of
incorporation or organization)

 

(I.R.S. Employer Identification No.)

 

 

 

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 ý      No  o

 

Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act).  Yes  ý  No  o

 

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

 

50,706,708 shares outstanding at
August 3, 2004

 



 

PART I - FINANCIAL INFORMATION

 

Item 1. Financial Statements

 

INTERNATIONAL BANCSHARES CORPORATION AND SUBSIDIARIES

 

Consolidated Statements of Condition (Unaudited)

 

(Dollars in Thousands)

 

 

 

June 30,
2004

 

December 31,
2003

 

Assets

 

 

 

 

 

 

 

 

 

 

 

Cash and due from banks

 

$

191,534

 

$

152,229

 

Federal funds sold

 

85,000

 

63,500

 

 

 

 

 

 

 

Total cash and cash equivalents

 

276,534

 

215,729

 

 

 

 

 

 

 

Time deposits with banks

 

23,996

 

100

 

 

 

 

 

 

 

Investment securities:

 

 

 

 

 

Held to maturity (Market value of $2,385 on June 30, 2004 and $2,160 on December 31, 2003)

 

2,385

 

2,160

 

Available for sale (Amortized cost of $3,013,817 on June 30, 2004 and $3,019,584 on December 31, 2003)

 

2,979,381

 

3,039,341

 

 

 

 

 

 

 

Total investment securities

 

2,981,766

 

3,041,501

 

 

 

 

 

 

 

Loans:

 

 

 

 

 

Commercial, financial and agricultural

 

3,068,162

 

1,400,173

 

Real estate – mortgage

 

949,546

 

495,481

 

Real estate – construction

 

623,379

 

492,208

 

Consumer

 

223,391

 

139,987

 

Foreign

 

221,501

 

222,797

 

Total loans

 

5,085,979

 

2,750,646

 

 

 

 

 

 

 

Less unearned discounts

 

(1,300

)

(1,646

)

 

 

 

 

 

 

Loans, net of unearned discounts

 

5,084,679

 

2,749,000

 

 

 

 

 

 

 

Less allowance for possible loan losses

 

(84,571

)

(48,646

)

 

 

 

 

 

 

Net loans

 

5,000,108

 

2,700,354

 

 

 

 

 

 

 

Bank premises and equipment, net

 

282,259

 

220,602

 

Accrued interest receivable

 

36,898

 

28,891

 

Other investments

 

290,869

 

244,113

 

Identified intangible assets

 

47,589

 

5,892

 

Goodwill

 

277,098

 

67,442

 

Other assets

 

84,088

 

53,686

 

 

 

 

 

 

 

Total assets

 

$

9,301,205

 

$

6,578,310

 

 

1



 

INTERNATIONAL BANCSHARES CORPORATION AND SUBSIDIARIES

 

Consolidated Statements of Condition (Unaudited)

 

(Dollars in Thousands)

 

 

 

June 30,
2004

 

December 31,
2003

 

Liabilities

 

 

 

 

 

 

 

 

 

 

 

Deposits:

 

 

 

 

 

Demand – non-interest bearing

 

$

1,065,310

 

$

814,470

 

Savings and interest bearing demand

 

2,168,534

 

1,395,618

 

Time

 

3,227,671

 

2,225,611

 

 

 

 

 

 

 

Total deposits

 

6,461,515

 

4,435,699

 

 

 

 

 

 

 

Securities sold under repurchase agreements

 

552,182

 

501,296

 

Other borrowed funds

 

1,320,205

 

845,272

 

Junior subordinated deferrable interest debentures

 

234,882

 

172,254

 

Senior notes

 

21,295

 

 

Other liabilities

 

43,744

 

46,406

 

 

 

 

 

 

 

Total liabilities

 

8,633,823

 

6,000,927

 

 

 

 

 

 

 

Shareholders’ equity:

 

 

 

 

 

 

 

 

 

 

 

Common shares of $1.00 par value.  Authorized 75,000,000 shares; issued 68,288,065 shares on June 30, 2004 and 52,774,176 shares on December 31, 2003

 

68,288

 

52,774

 

Surplus

 

127,863

 

37,777

 

Retained earnings

 

659,614

 

639,606

 

Accumulated other comprehensive (loss) income

 

(22,383

)

12,842

 

 

 

833,382

 

742,999

 

 

 

 

 

 

 

Less cost of shares in treasury, 17,594,464 shares on June 30, 2004 and 14,068,296 shares on December 31, 2003

 

(166,000

)

(165,616

)

 

 

 

 

 

 

Total shareholders’ equity

 

667,382

 

577,383

 

 

 

 

 

 

 

Total liabilities and shareholders’ equity

 

$

9,301,205

 

$

6,578,310

 

 

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,

 

 

 

2004

 

2003

 

2004

 

2003

 

 

 

 

 

 

 

 

 

 

 

Interest income:

 

 

 

 

 

 

 

 

 

Loans, including fees

 

$

45,596

 

$

43,346

 

$

89,022

 

$

88,690

 

Time deposits with banks

 

14

 

1

 

20

 

5

 

Federal funds sold

 

433

 

185

 

902

 

316

 

Investment securities:

 

 

 

 

 

 

 

 

 

Taxable

 

25,078

 

33,692

 

50,701

 

68,766

 

Tax-exempt

 

1,272

 

1,287

 

2,556

 

2,575

 

Other interest income

 

111

 

90

 

273

 

222

 

 

 

 

 

 

 

 

 

 

 

Total interest income

 

72,504

 

78,601

 

143,474

 

160,574

 

 

 

 

 

 

 

 

 

 

 

Interest expense:

 

 

 

 

 

 

 

 

 

Savings deposits

 

2,504

 

2,790

 

4,721

 

5,740

 

Time deposits

 

9,835

 

10,519

 

18,886

 

21,797

 

Securities sold under repurchase agreements

 

4,783

 

4,647

 

9,540

 

9,260

 

Other borrowings

 

2,437

 

3,551

 

4,644

 

6,570

 

Junior subordinated interest deferrable debentures

 

2,638

 

2,195

 

5,125

 

4,328

 

Senior notes

 

84

 

 

84

 

 

 

 

 

 

 

 

 

 

 

 

Total interest expense

 

22,281

 

23,702

 

43,000

 

47,695

 

 

 

 

 

 

 

 

 

 

 

Net interest income

 

50,223

 

54,899

 

100,474

 

112,879

 

 

 

 

 

 

 

 

 

 

 

Provision for possible loan losses

 

1,375

 

2,124

 

2,717

 

4,113

 

 

 

 

 

 

 

 

 

 

 

Net interest income after provision for possible loan losses

 

48,848

 

52,775

 

97,757

 

108,766

 

 

 

 

 

 

 

 

 

 

 

Non-interest income:

 

 

 

 

 

 

 

 

 

Service charges on deposit accounts

 

15,911

 

14,714

 

30,320

 

29,049

 

Other service charges, commissions and fees

 

 

 

 

 

 

 

 

 

Banking

 

4,443

 

3,855

 

8,286

 

7,316

 

Non-banking

 

1,652

 

2,247

 

2,548

 

6,281

 

Gain on investment securities transactions, net

 

3,689

 

5,542

 

8,461

 

8,305

 

Other investments, net

 

3,313

 

2,443

 

5,825

 

4,426

 

Other income

 

2,082

 

2,563

 

3,963

 

5,133

 

 

 

 

 

 

 

 

 

 

 

Total non-interest income

 

31,090

 

31,364

 

59,403

 

60,510

 

 

3



 

 

 

Three Months Ended
June 30,

 

Six Months Ended
June 30,

 

 

 

2004

 

2003

 

2004

 

2003

 

 

 

 

 

 

 

 

 

 

 

Non-interest expense:

 

 

 

 

 

 

 

 

 

Employee compensation and benefits

 

$

17,123

 

$

17,629

 

$

33,564

 

$

36,093

 

Occupancy

 

3,626

 

3,519

 

6,899

 

6,479

 

Depreciation of bank premises and equipment

 

4,415

 

4,014

 

8,466

 

7,948

 

Professional fees

 

1,309

 

2,202

 

2,882

 

3,724

 

Stationery and supplies

 

910

 

991

 

1,889

 

1,877

 

Amortization of identified intangible assets

 

246

 

319

 

492

 

638

 

Advertising

 

2,237

 

2,029

 

4,093

 

3,772

 

Other

 

11,023

 

11,490

 

20,291

 

19,750

 

 

 

 

 

 

 

 

 

 

 

Total non-interest expense

 

40,889

 

42,193

 

78,576

 

80,281

 

 

 

 

 

 

 

 

 

 

 

Income before income taxes

 

39,049

 

41,946

 

78,584

 

88,995

 

 

 

 

 

 

 

 

 

 

 

Provision for income taxes

 

12,820

 

13,471

 

25,836

 

29,195

 

 

 

 

 

 

 

 

 

 

 

Net income

 

$

26,229

 

$

28,475

 

$

52,748

 

$

59,800

 

 

 

 

 

 

 

 

 

 

 

Basic earnings per common share:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Weighted average number of shares outstanding:

 

48,856,848

 

48,357,959

 

48,645,373

 

48,423,627

 

 

 

 

 

 

 

 

 

 

 

Net income

 

$

.54

 

$

.59

 

$

1.08

 

$

1.23

 

 

 

 

 

 

 

 

 

 

 

Fully diluted earnings per common share:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Weighted average number of shares outstanding:

 

49,978,541

 

49,402,854

 

49,643,608

 

49,263,468

 

 

 

 

 

 

 

 

 

 

 

Net income

 

$

.52

 

$

.58

 

$

1.06

 

$

1.21

 

 

See accompanying notes to consolidated financial statements.

 

4



 

INTERNATIONAL BANCSHARES CORPORATION AND SUBSIDIARIES

 

Consolidated Statements of Comprehensive (Loss) Income (Unaudited)

 

(Dollars in Thousands)

 

 

 

Three Months Ended
June 30,

 

Six Months Ended
June 30,

 

 

 

2004

 

2003

 

2004

 

2003

 

 

 

 

 

 

 

 

 

 

 

Net income

 

$

26,229

 

$

28,475

 

$

52,748

 

$

59,800

 

 

 

 

 

 

 

 

 

 

 

Other comprehensive loss, net of tax

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Unrealized holding losses on securities arising during period, net of reclassification adjustment for gains included in net income

 

(40,794

)

(7,505

)

(35,226

)

(6,890

)

 

 

 

 

 

 

 

 

 

 

Change in fair value of equity method investee’s derivatives

 

 

 

 

616

 

 

 

 

 

 

 

 

 

 

 

Comprehensive (loss) income

 

$

(14,565

)

$

20,970

 

$

17,522

 

$

53,526

 

 

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,

 

 

 

2004

 

2003

 

Operating activities:

 

 

 

 

 

 

 

 

 

 

 

Net income

 

$

52,748

 

$

59,800

 

 

 

 

 

 

 

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

 

 

 

 

 

Provision for possible loan losses

 

2,717

 

4,113

 

Depreciation of bank premises and equipment

 

8,466

 

7,948

 

Gain on sale of bank premises and equipment

 

(19

)

(89

)

Depreciation and amortization of leased assets

 

843

 

1,046

 

Accretion of investment securities discounts

 

(861

)

(624

)

Amortization of investment securities premiums

 

15,892

 

11,834

 

Gain on investment securities transactions, net

 

(8,461

)

(8,305

)

Accretion of junior subordinated debenture discounts

 

513

 

 

Amortization of identified intangible assets

 

492

 

638

 

Earnings from affiliates and other investments

 

(5,375

)

(3,463

)

Deferred tax benefit

 

(9,958

)

(246

)

Decrease in accrued interest receivable

 

237

 

1,998

 

Net decrease (increase) in other assets

 

26,597

 

(16,632

)

Net (decrease) increase in other liabilities

 

(18,153

)

1,513

 

 

 

 

 

 

 

Net cash provided by operating activities

 

65,678

 

59,531

 

 

 

 

 

 

 

Investing activities:

 

 

 

 

 

 

 

 

 

 

 

Proceeds from maturities of securities

 

27,062

 

2,800

 

Proceeds from sales of available for sale securities

 

647,828

 

237,147

 

Purchases of available for sale securities

 

(754,979

)

(1,440,050

)

Principal collected on mortgage-backed securities

 

410,717

 

891,616

 

Proceeds from matured time deposits with banks

 

63,800

 

 

Purchases of time deposits with banks

 

(296

)

 

Net (increase) decrease in loans

 

(149,558

)

26,959

 

Purchases of other investments

 

(223

)

(1,163

)

Distributions from other investments

 

50,684

 

2,094

 

(Purchases) disposals of bank premises and equipment

 

(19,979

)

1,094

 

Proceeds from sale of bank premises and equipment

 

30

 

645

 

Cash paid in purchase transaction (Note 2)

 

(276,555

)

 

Cash acquired in purchase transaction (Note 2)

 

66,009

 

 

 

 

 

 

 

 

Net cash provided by (used in) investing activities

 

64,540

 

(262,248

)

 

6



 

 

 

Six Months Ended
June 30,

 

 

 

2004

 

2003

 

 

 

 

 

 

 

Financing activities:

 

 

 

 

 

 

 

 

 

 

 

Net increase in non-interest bearing demand deposits

 

$

17,858

 

$

79,930

 

Net increase in savings and interest bearing demand deposits

 

6,738

 

33,352

 

Net increase (decrease) in time deposits

 

64,029

 

(71,009

)

Net increase in federal funds purchased and securities sold under repurchase agreements

 

6,748

 

20,490

 

Proceeds from issuance of other borrowed funds

 

720,000

 

1,485,000

 

Principal payments on other borrowed funds

 

(869,449

)

(1,290,329

)

Purchase of treasury stock

 

(384

)

(22,622

)

Proceeds from stock transactions

 

4,504

 

3,442

 

Payment of cash dividends

 

(19,419

)

(13,298

)

Payment of cash dividends in lieu of fractional shares

 

(38

)

(26

)

 

 

 

 

 

 

Net cash (used in) provided by financing activities

 

(69,413

)

224,930

 

 

 

 

 

 

 

Increase in cash and cash equivalents

 

60,805

 

3,017

 

 

 

 

 

 

 

Cash and cash equivalents at beginning of period

 

215,729

 

154,104

 

 

 

 

 

 

 

Cash and cash equivalents at end of period

 

$

276,534

 

$

157,121

 

 

 

 

 

 

 

Supplemental cash flow information:

 

 

 

 

 

Interest paid

 

$

42,861

 

$

44,888

 

Income taxes paid

 

35,239

 

39,395

 

 

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, and IBC Capital Corporation, as well as the GulfStar Group in which the Company owns a controlling interest.  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 10K.  The consolidated statement of condition at December 31, 2003 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.  Additionally, the June 2003 consolidated statement of income has been modified to reflect the effect of the deconsolidation under the provisions of FIN 46R, of eleven statutory business trusts, eight of which were formed by the Company to issue trust preferred securities and three that were acquired in the Company’s acquisition of Local Financial Corporation (“LFIN”). The Company early adopted the provisions of FIN 46R in December 2003.

 

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 applies the provisions of SFAS No. 131, “Disclosures about Segments of an Enterprise and Related Information,” in determining its reportable segments and related disclosures.  None of the Company’s other operating segments meets the 10% threshold for disclosure under SFAS No. 131.

 

All per share data presented has been restated to reflect the stock splits effected through stock dividends (Note 8).

 

Note 2 –Acquisition

 

On June 18, 2004, the Company acquired LFIN, an Oklahoma based bank holding company with approximately $2.8 billion in assets.  The acquisition was effected pursuant to the Agreement and Plan of Merger dated as of January 22, 2004 (the “Merger Agreement”).  The Company paid consideration totaling approximately $276.6 million in cash and 2.11 million shares of Company common stock. The aggregate purchase price was $367.4 million.  Under the terms of the Merger Agreement, LFIN shareholders were entitled to elect to receive either cash or Company shares in the merger, subject to the requirement that 75% of LFIN’s shares be exchanged for cash and 25% be exchanged for Company stock.  Based on the elections of LFIN shareholders and the terms of the Merger Agreement, LFIN shares held by LFIN shareholders who elected to receive shares of Company common stock in the Merger and LFIN shareholders who did not timely make a cash/stock election were exchanged entirely for shares of Company common stock.  As to those LFIN shares for which an election to receive cash was timely made, each such share was exchanged for approximately $20.59 in cash and 0.033 shares of Company common stock.  The exchange rate for those LFIN shareholders receiving Company shares in the Merger was 0.5170 shares of Company common stock for each share of LFIN.

 

The following table summarizes the estimated fair value of the assets acquired and liabilities assumed at the date of the acquisition, in thousands.  The Company is in the process of obtaining third party valuations of certain intangible assets; thus, the allocation of the purchase price is subject to adjustment.

 

8



 

 

 

As of
June 18, 2004

 

 

 

(Unaudited)

 

 

 

(Dollars in thousands)

 

Assets

 

 

 

Cash and cash equivalents

 

$

66,009

 

Time deposits with banks

 

87,400

 

Investment securities

 

331,656

 

Net loans

 

2,152,912

 

Bank premises and equipment

 

50,155

 

Accrued interest receivable

 

8,266

 

Other investments

 

91,820

 

Identified intangible asset

 

42,188

 

Goodwill

 

209,656

 

Other assets

 

31,948

 

Total assets acquired

 

3,072,010

 

 

 

 

 

Liabilities

 

 

 

Demand deposits

 

232,982

 

Savings deposits

 

766,178

 

Time deposits

 

938,031

 

Securities sold under repurchase agreements

 

44,138

 

Other borrowed funds

 

624,382

 

Senior notes

 

21,295

 

Other liabilities

 

77,606

 

Total liabilities assumed

 

2,704,612

 

 

 

 

 

Net assets acquired

 

$

367,398

 

 

The following table reflects the pro forma results of operations for the three months ended June 30, 2004 and 2003 and the six months ended June 30, 2004 and 2003, as though the acquisition had been completed as of January 1, 2003 (dollars in thousands, except per share data):

 

 

 

Three Months Ended
June 30, 2004

 

Three Months Ended
June 30, 2003

 

Six Months Ended
June 30, 2004

 

Six Months Ended
June 30, 2003

 

 

 

(Unaudited)

 

(Unaudited)

 

 

 

 

 

 

 

 

 

 

 

Interest income

 

$

102,800

 

$

115,914

 

$

209,041

 

$

237,581

 

Interest expense

 

35,282

 

40,370

 

71,284

 

81,716

 

Net interest income

 

67,518

 

75,544

 

137,757

 

155,865

 

Provision for possible loan losses

 

10,875

 

3,924

 

14,217

 

7,713

 

Non-interest income

 

38,104

 

40,182

 

75,504

 

77,153

 

Non-interest expense

 

98,330

 

60,348

 

153,517

 

117,395

 

(Loss) income before income taxes

 

(3,583

)

51,454

 

45,527

 

107,910

 

Income taxes

 

(1,006

)

16,684

 

15,148

 

35,541

 

 

 

 

 

 

 

 

 

 

 

Net (loss) income

 

$

(2,577

)

$

34,770

 

$

30,379

 

$

72,369

 

 

 

 

 

 

 

 

 

 

 

Per common share:

 

 

 

 

 

 

 

 

 

Basic

 

$

(.05

)

$

.72

 

$

.62

 

$

1.49

 

Diluted

 

$

(.05

)

$

.70

 

$

.61

 

$

1.47

 

 

Included in the non-interest expense of the combined operations are certain costs associated with contractual obligations related to the closing of the transaction.

 

9



 

Note 3 – Stock Options

 

At June 30, 2004, the Company had one stock-based employee compensation plan and certain options granted outside the plan.  The Company accounts for options under the recognition and measurement principles of Accounting Principles Board Opinion No. 25 (“APB 25”), “Accounting for Stock Issued to Employees,” and related interpretations.  No stock-based employee cost is reflected in net income, as all options granted under the plans had an exercise price equal to the market value of the underlying common stock on the date of grant.  The following table, as prescribed by Statement of Financial Accounting Standards No. 148, “Accounting for Stock-Based Compensation – Transition and Disclosure, an amendment of FASB Statement No. 123,” illustrates the effect on net income and earnings per share if the Company had applied the fair value recognition provisions of Statement of Financial Accounting Standards No. 123, (“SFAS No. 123”), “Accounting for Stock-Based Compensation,” to stock based employee compensation.

 

 

 

Three Months Ended
June 30,

 

Six Months Ended
June 30,

 

 

 

2004

 

2003

 

2004

 

2003

 

 

 

(Dollars in Thousands, except per share data)

 

 

 

 

 

 

 

 

 

 

 

Net income, as reported

 

$

26,229

 

$

28,475

 

$

52,748

 

$

59,800

 

 

 

 

 

 

 

 

 

 

 

Deduct:  Total stock-based compensation expense determined under the fair value based method for all awards, net of tax related tax effects

 

(143

)

(153

)

(286

)

(300

)

 

 

 

 

 

 

 

 

 

 

Pro forma net income

 

$

26,086

 

$

28,322

 

$

52,462

 

$

59,500

 

 

 

 

 

 

 

 

 

 

 

Earnings per share:

 

 

 

 

 

 

 

 

 

Basic earnings

 

 

 

 

 

 

 

 

 

As reported

 

$

.54

 

$

.59

 

$

1.08

 

$

1.23

 

Pro forma

 

.53

 

.59

 

1.08

 

1.23

 

 

 

 

 

 

 

 

 

 

 

Diluted earnings

 

 

 

 

 

 

 

 

 

As reported

 

$

.52

 

$

.58

 

$

1.06

 

$

1.21

 

Pro forma

 

.52

 

.57

 

1.05

 

1.21

 

 

Note 4 - Investment Securities

 

The Company classifies debt and equity securities into one of three categories:  held-to maturity, available-for-sale, or trading.  Such classifications 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 (loss) income and accumulated other comprehensive (loss) income until realized.

 

The unrealized losses on investments in mortgage-backed securities are caused by changes in market interest rates.  The contractual cash obligations of the securities are guaranteed by Freddie Mac, Fannie Mae, and Ginnie Mae.  Because the decrease in fair value is due to market interest rates and not other factors, and because the Company has the ability to hold these investments until a market price recovery, maturity of the securities, or a modification of the Company’s investment strategy, it is the conclusion of the Company that the investments are considered only temporarily impaired.

 

10



 

A summary of the investment securities held for investment and securities available for sale as reflected on the books of the Company is as follows:

 

 

 

June 30,
2004

 

December 31,
2003

 

 

 

(Dollars in Thousands)

 

 

 

 

 

 

 

U.S. Treasury and federal agencies

 

 

 

 

 

Available for sale

 

$

2,851,343

 

$

2,890,304

 

States and political subdivisions

 

 

 

 

 

Available for sale

 

106,417

 

110,382

 

Other

 

 

 

 

 

Held to maturity

 

2,385

 

2,160

 

Available for sale

 

21,621

 

38,655

 

 

 

 

 

 

 

Total investment securities

 

$

2,981,766

 

$

3,041,501

 

 

Note 5 - Allowance for Possible Loan Losses

 

A summary of the transactions in the allowance for possible loan losses is as follows:

 

 

 

June 30,
2004

 

June 30,
2003

 

 

 

(Dollars in Thousands)

 

 

 

 

 

 

 

Balance at December 31,

 

$

48,646

 

$

44,213

 

 

 

 

 

 

 

Losses charged to allowance

 

(1,391

)

(1,956

)

Recoveries credited to allowance

 

715

 

738

 

Net losses charged to allowance

 

(676

)

(1,218

)

 

 

 

 

 

 

Provision charged to operations

 

2,717

 

4,113

 

 

 

 

 

 

 

Net allowance acquired in purchase transaction

 

33,884

 

 

 

 

 

 

 

 

Balance at June 30,

 

$

84,571

 

$

47,108

 

 

The Company classifies as impaired 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 include 1) all non-accrual loans, 2) loans which are 90 days or over past due unless they are well secured (the collateral value is sufficient to cover principal and accrued interest) and are in the process of collection, and 3) other loans which management believes are impaired.  Substantially all of the Company’s impaired loans are measured based on 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.  Amounts received on non-accruals are applied, for financial accounting purposes, first to principal and then to interest after all principal has been collected.  Impaired loans at June 30, 2004 were $44,102,000.  The income associated with these loans is not significant.

 

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.

 

The subsidiary banks charge off that portion of any loan which management considers representing a loss as well as that portion of any other loan that 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.

 

11



 

While management of the Company considers that it is generally able to identify borrowers with financial problems reasonably early and to monitor credit extended to such borrowers carefully, there is no precise method of predicting loan losses.  The determination that a loan is likely to be uncollectible and that it should be wholly or partially charged-off as a loss is an exercise of judgment.  Similarly, the determination of the adequacy of the allowance for possible loan losses can be made only on a subjective basis.  It is the judgment of the Company’s management that the allowance for possible loan losses at June 30, 2004, was adequate to absorb possible losses from loans in the portfolio at that date.

 

Note 6 – Other Borrowed Funds

 

Other borrowed funds include Federal Home Loan Bank borrowings, which are short term fixed borrowings issued by the Federal Home Loan Bank of Dallas at the market price offered at the time of funding.  These borrowings are secured by mortgage-backed investment securities and a portion of the Company’s loan portfolio.  At June 30, 2004, other borrowed funds totaled $1,320,205,000 an increase of 56.2% from $845,272,000 at December 31, 2003.  The increase in other borrowed funds can be attributed to the LFIN acquisition.

 

Note 7 – Junior Subordinated Interest Deferrable Debentures

 

The Company has formed eight statutory business trusts under the laws of the State of Delaware, (the “Trusts”) for the purpose of issuing trust preferred securities.  The Trusts have issued Capital and Common Securities and invested the proceeds in an equivalent amount thereof in Junior Subordinated Deferrable Interest Debentures (the “Debentures”) issued by the Company.  The Debentures will mature on various dates; however, the Debentures may be redeemed at specified prepayment prices, in whole or in part after the specified dates, or in whole within 90 days upon the occurrence of any one of certain legal, regulatory or tax events specified in the Indenture.

 

As part of the LFIN acquisition, the Company acquired three statutory business trusts, previously formed by LFIN for the purpose of issuing trust preferred securities.  The outstanding amount of debentures acquired totaled $62,115,000.

 

The following table illustrates key information about each of the Capital and Common Securities and their interest rate at June 30, 2004:

 

 

 

Junior
Subordinated
Deferrable
Interest
Debentures

 

Repricing
Frequency

 

Interest Rate

 

Interest Rate
Index

 

Maturity Date

 

Optional
Redemption Date

 

 

 

(in thousands)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Trust I

 

$

10,164

 

Fixed

 

10.18

%

Fixed

 

June 2031

 

June 2011

 

Trust II

 

$

25,509

 

Semi-Annually

 

4.90

%

LIBOR + 3.75

 

July 2031

 

July 2006

 

Trust III

 

$

33,658

 

Semi-Annually

 

4.98

%

LIBOR + 3.75

 

December 2031

 

December 2006

 

Trust IV

 

$

22,327

 

Semi-Annually

 

4.92

%

LIBOR + 3.70

 

April 2032

 

April 2007

 

Trust V

 

$

20,259

 

Quarterly

 

4.80

%

LIBOR + 3.65

 

July 2032

 

July 2007

 

Trust VI

 

$

25,287

 

Quarterly

 

4.63

%

LIBOR + 3.45

 

November 2032

 

November 2007

 

Trust VII

 

$

10,310

 

Quarterly

 

4.41

%

LIBOR + 3.25

 

April 2033

 

April 2008

 

Trust VIII

 

$

25,253

 

Quarterly

 

4.19

%

LIBOR + 3.05

 

October 2033

 

October 2008

 

LFIN Trust I

 

$

41,495

 

Fixed

 

9.00

%

Fixed

 

September 2031

 

September 2006

 

LFIN Trust II

 

$

10,310

 

Semi-Annually

 

4.80

%

LIBOR + 3.625

 

July 2032

 

July 2007

 

LFIN Trust III

 

$

10,310

 

Quarterly

 

4.70

%

LIBOR + 3.45

 

November 2032

 

November 2007

 

 

 

$

234,882

 

 

 

 

 

 

 

 

 

 

 

 

12



 

Note 8 – Common Stock and Cash Dividends

 

All per share data presented has been restated to reflect the stock splits effected through stock dividends, which became effective May 3, 2004 and May 19, 2003 and were paid on May 28, 2004 and June 16, 2003, respectively.  Cash dividends of $.50 per share were paid on April 30, 2004 to all holders of record on April 15, 2004.  The Company issued 2,114,558 shares of Company stock in connection with the LFIN acquisition on June 18, 2004.

 

The Company expanded its formal stock repurchase program on December 18, 2003.  Under the expanded stock repurchase program, the Company is authorized to repurchase up to $175,000,000 of its common stock through December 2004.  Stock repurchases may be made from time to time, on the open market or through private transactions.  Shares repurchased in this program will be held in treasury for reissue for various corporate purposes, including employee stock option plans.  As of August 3, 2004, a total of 3,647,408 shares had been repurchased under this program at a cost of $145,042,000, which shares are now reflected as 7,237,287 shares of treasury stock as adjusted for stock dividends.  Stock repurchases are reviewed quarterly at the Company’s Board of Directors meetings and the Board of Directors has stated that the aggregate investment in treasury stock should not exceed $195,973,000.  In the past, the Board of Directors has increased previous caps on treasury stock once they were met, but there are no assurances that an increase of the $195,973,000 cap will occur in the future.  As of August 3, 2004, the Company has approximately $166,016,000 invested in treasury shares, which amount has been accumulated since the inception of the Company.

 

Note 9 - 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 actual and punitive damages.  The Company has determined, based on discussions with its counsel that any material loss in such actions, individually or in the aggregate, is remote or the damages sought, even if fully recovered, would not be considered material to the consolidated financial position or results of operations of the Company.  However, many of these matters are in various stages of proceedings and further developments could cause management to revise its assessment of these matters.

 

The Company’s lead bank subsidiary has invested in partnerships, which have entered into several lease-financing transactions.  The lease-financing transactions in two of the partnerships have been examined by the Internal Revenue Service (“IRS”).  In both partnerships, the lead bank subsidiary was the owner of a ninety-nine percent (99%) limited partnership interest.  The IRS has issued separate Notice of Final Partnership Administrative Adjustments (“FPAA”) to the partnerships and on September 25, 2001, and January 10, 2003, the Company filed lawsuits contesting the adjustments asserted in the FPAAs.

 

Prior to filing the lawsuits the Company was required to deposit the estimated tax due of approximately $4,083,000 with respect to the first FPAA, and $7,710,606 with respect to the second FPAA, with the IRS pursuant to the Internal Revenue Code.  If it is determined that the amount of tax due, if any, related to the lease-financing transactions is less than the amount of the deposits, the remaining amount of the deposits would be returned to the Company.

 

In order to curtail the accrual of additional interest related to the disputed tax benefits and because interest rates were unfavorable, on March 7, 2003, the Company submitted to the IRS a total of $13,640,797, which constitutes the interest that would have accrued based on the adjustments proposed in the FPAAs related to both of the lease-financing transactions.  If it is determined that the amount of interest due, if any, related to the lease-financing transactions is less than the $13,640,797, the remaining amount of the prepaid interest will be refunded to the Company, plus interest thereon.

 

No reliable prediction can be made at this time as to the likely outcome of the lawsuits; however, if the lawsuits are decided adversely to the partnerships, all or a portion of the $12 million in tax benefits previously recognized by the Company in connection with the Partnerships’ lease-financing transactions would be in question and penalties and interest could be assessed by the IRS.  The Company has accrued approximately $12 million at June 30, 2004 in connection with the lawsuits.  Management intends to continue to evaluate the merits of each matter and make appropriate revisions to the accrued amount as deemed necessary.

 

13



 

Note 10 – Capital Ratios

 

The Company had a leverage ratio of 8.60% and 8.75%, risk-weighted Tier 1 capital ratio of 10.23% and 17.3% and risk-weighted total capital ratio of 11.56% and 19.33% at June 30, 2004 and December 31, 2003, respectively.  The change in the Company’s capital ratios can be attributed to the LFIN acquisition, which was completed on June 18, 2004.  The identified intangibles and goodwill of $324,687,000 as of June 30, 2004, 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.

 

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

 

Special Cautionary Notice Regarding Forward Looking Information

 

Certain matters discussed in this report, excluding historical information, include forward-looking statements, within the meaning of Section 27A of the Securities Exchange Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended, and are subject to the safe harbor created by these sections.  Although the Company believes such forward-looking statements are based on reasonable assumptions, no assurance can be given that every objective will be reached.  The words “estimate,” “expect,” “intend,” “believe” and “project,” as well as other words or expressions of a similar meaning are intended to identify forward-looking statements.  Readers are cautioned not to place undue reliance on forward-looking statements, which speak only as of the date of this report.  Such statements are based on current expectations, are inherently uncertain, are subject to risks and should be viewed with caution.  Actual results and experience may differ materially from the forward-looking statements as a result of many factors.

 

Factors that could cause actual results to differ materially from any results that are projected, forecasted, estimated or budgeted by the Company in forward-looking statements include, among others the following possibilities:

                  Changes in interest rates and market prices, which could reduce the Company’s net interest margins, asset valuations and expense expectations.

                  Changes in the capital markets utilized by the Company and its subsidiaries, including changes in the interest rate environment that may reduce margins.

                  Changes in state and/or federal laws and regulations to which the Company and its subsidiaries, as well as their customers, competitors and potential competitors, are subject, including, without limitation, changes in the accounting, tax and regulatory treatment of trust preferred securities, as well as changes in banking, tax, securities, insurance and employment laws and regulations.

                  Changes in U.S. – Mexico trade, including, without limitation, reductions in border crossings and commerce resulting from the planned Homeland Security Programs called “US-VISIT,” which is derived from Section 110 of the Illegal Immigration Reform and Immigrant Responsibility Act of 1996.

                  The loss of senior management or operating personnel.

                  Increased competition from both within and outside the banking industry.

                  Changes in local, national and international economic business conditions that adversely affect the Company’s customers and their ability to transact profitable business with the Company, including the ability of its borrowers to repay their loans according to their terms or a change in the value of the related collateral.

                  The timing, impact and other uncertainties of the 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.

                  The effects of the litigation and proceedings pending with the Internal Revenue Service regarding the Company’s lease financing transactions.

                  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.

 

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.

 

14



 

Overview

 

The Company, which is headquartered in Laredo, Texas, with more than 160 facilities and more than 250 ATMs, provides banking services for commercial, consumer and international customers of the South, Central and Southeast Texas regions and Oklahoma.  The Company is the second largest independent commercial bank holding company 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 owns an insurance agency, a broker/dealer and a majority interest in an investment banking unit.  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.  At June 30, 2004, the Company had total assets of $9,301,205, net loans of $5,000,108, and deposits of $6,461,515.  The substantial increase in total assets, net loans, and deposits can be attributed primarily to the acquisition of Local Financial Corporation (“LFIN”) on June 18, 2004.

 

The Company is very active in facilitating trade along the United States border with Mexico.  The Company does a significant amount of business with customers domiciled in Mexico.  Deposits from persons and entities domiciled in Mexico comprise a significant and stable portion of the deposit base of the Company’s bank subsidiaries.  Many of the Texas markets served by the Company have a large Hispanic population.

 

Expense control is another essential element in the Company’s profitability.  As a result, one of the key ratios the Company monitors is the efficiency ratio, which is a measure of non-interest expense to net-interest income plus non-interest income.  The Company’s efficiency ratio has been under 53% for each of the last five years, which the Company believes is better than average compared to its national peer group.  One of the benefits derived from such operating efficiencies is that the Company is not subject to undue pressure to generate interest income from high-risk loans.

 

During the fourth quarter of 2003, the Company reduced its assets by approximately $1 billion dollars in anticipation of the LFIN acquisition.  The Company also increased its overnight liquidity in the form of fed funds sold to prepare for the cash payment required as part of the transaction.  On June 18, 2004, the Company completed its acquisition of LFIN.  The Company paid consideration totaling approximately $276.6 million in cash and 2.11 million shares of Company stock.  As a result of the reduction in assets, and the large increase in overnight liquidity in the form of fed funds sold, the Company’s first and second quarter earnings were negatively impacted.

 

15



 

Results of Operations

 

Summary

 

Consolidated Statements of Condition Information

 

 

 

June 30, 2004

 

December 31, 2003

 

Percent Increase
(Decrease)

 

 

 

 

 

(Dollars in Thousands)

 

 

 

 

 

 

 

 

 

 

 

Assets

 

$

9,301,205

 

$

6,578,310

 

41.4

%

Net loans

 

5,000,108

 

2,700,354

 

85.2

 

Deposits

 

6,461,515

 

4,435,699

 

45.7

 

Other borrowed funds

 

1,320,205

 

845,272

 

56.2

 

Junior subordinated deferrable interest  debentures

 

234,882

 

172,254

 

36.4

 

Shareholders’ equity

 

667,382

 

577,383

 

15.6

 

 

 

 

Three Months Ended
June 30,

 

Percent

 

Six Months Ended
June 30,

 

Percent

 

 

 

(Dollars in Thousands)

 

Increase

 

(Dollars in Thousands)

 

Increase

 

 

 

2004

 

2003

 

(Decrease)

 

2004

 

2003

 

(Decrease)

 

Interest income

 

$

72,504

 

$

78,601

 

(7.8

)%

$

143,474

 

$

160,574

 

(10.6

)%

Interest expense

 

22,281

 

23,702

 

(6.0

)

43,000

 

47,695

 

(9.8

)

Net interest income

 

50,223

 

54,899

 

(8.5

)

100,474

 

112,879

 

(11.0

)

Provision for possible loan losses

 

1,375

 

2,124

 

(35.3

)

2,717

 

4,113

 

(33.9

)

Non-interest income

 

31,090

 

31,364

 

(.9

)

59,403

 

60,510

 

(1.8

)

Non-interest expense

 

40,889

 

42,193

 

(3.1

)

78,576

 

80,281

 

(2.1

)

Net income

 

26,229

 

28,475

 

(7.9

)

52,748

 

59,800

 

(11.8

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Per common share:

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic

 

$

.54

 

$

.59

 

(8.5

)%

$

1.08

 

$

1.23

 

(12.2

)%

Diluted

 

.52

 

.58

 

(10.3

)

1.06

 

1.21

 

(12.4

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Efficiency Ratio

 

50.3

%

48.9

%

2.8

 

49.1

%

46.3

%

6.0

 

 

Net Income

 

Net income decreased by 7.9% for the three months ended and 11.8% for the six months ended 2004 from the same periods in 2003.   Net income was positively affected in June by the LFIN acquisition, which was completed on June 18, 2004.  Net income was negatively impacted by the current low interest rate environment and the Company’s strategic management of earning assets in anticipation of its acquisition of LFIN, which was completed on June 18, 2004.

 

16



 

Net Interest Income

 

 

 

Three Months Ended
June 30,

 

Percent

 

Six Months Ended 
June 30,

 

Percent

 

 

 

(in Thousands)

 

Increase

 

(in Thousands)

 

Increase

 

 

 

2004

 

2003

 

(Decrease)

 

2004

 

2003

 

(Decrease)

 

Interest income:

 

 

 

 

 

 

 

 

 

 

 

 

 

Loans, including fees

 

$

45,596

 

$

43,346

 

5.2

%

$

89,022

 

$

88,690

 

.4

%

Time deposits with banks

 

14

 

1

 

1,300.0

 

20

 

5

 

300.0

 

Federal funds sold

 

433

 

185

 

134.1

 

902

 

316

 

185.4

 

Investment securities:

 

 

 

 

 

 

 

 

 

 

 

 

 

Taxable

 

25,078

 

33,692

 

(25.6

)

50,701

 

68,766

 

(26.3

)

Tax-exempt

 

1,272

 

1,287

 

(1.2

)

2,556

 

2,575

 

(.7

)

Other interest income

 

111

 

90

 

23.3

 

273

 

222

 

23.0

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total interest income

 

72,504

 

78,601

 

(7.8

)

143,474

 

160,574

 

(10.6

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest expense:

 

 

 

 

 

 

 

 

 

 

 

 

 

Savings deposits

 

2,504

 

2,790

 

(10.3

)

4,721

 

5,740

 

(17.8

)

Time deposits

 

9,835

 

10,519

 

(6.5

)

18,886

 

21,797

 

(13.4

)

Securities sold under repurchase agreements

 

4,783

 

4,647

 

2.9

 

9,540

 

9,260

 

3.0

 

Other borrowings

 

2,437

 

3,551

 

(31.4

)

4,644

 

6,570

 

(29.3

)

Junior subordinated interest deferrable debentures

 

2,638

 

2,195

 

20.2

 

5,125

 

4,328

 

18.4

 

Senior notes

 

84

 

 

100.0

 

84

 

 

100.0

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total interest expense

 

22,281

 

23,702

 

(6.0

)

43,000

 

47,695

 

(9.8

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net interest income

 

$

50,223

 

$

54,899

 

(8.5

)%

$

100,474

 

$

112,879

 

(11.0

)%

 

Net interest income is the spread between income on interest earning assets, such as loans and securities, and the interest expense on liabilities used to fund those assets, such as deposits, repurchase agreements and funds borrowed.  Net interest income is the Company’s largest source of revenue.  Net interest income is affected by both changes in the level of interest rates and changes in the amount and composition of interest earning assets and interest bearing liabilities.

 

Net interest income was negatively impacted due to the Company’s strategic management of earning assets in anticipation of its acquisition of LFIN and the low interest rate environment.

 

As part of its strategy to manage interest rate risk, the Company strives to manage both assets and liabilities so that interest sensitivities match. One method of calculating interest rate sensitivity is through gap analysis.  A gap is the difference between the amount of interest rate sensitive assets and interest rate sensitive liabilities that re-price or mature in a given time period.  Positive gaps occur when interest rate sensitive assets exceed interest rate sensitive liabilities, and negative gaps occur when interest rate sensitive liabilities exceed interest rate sensitive assets.  A positive gap position in a period of rising interest rates should have a positive effect on net interest income as assets will re-price faster than liabilities.  Conversely, net interest income should contract somewhat in a period of falling interest rates.  Management can quickly change the Company’s interest rate position at any given point in time as market conditions dictate.  Additionally, interest rate changes do not affect all categories of assets and liabilities equally or at the same time.  Analytical techniques employed by the Company to supplement gap analysis include simulation analysis to quantify interest rate risk exposure.  The gap analysis prepared by management is reviewed by the Investment Committee of the Company twice a year (see table on page 22 for the June 30, 2004 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.

 

17



 

Non-Interest Income

 

 

 

Three Months Ended
June 30,

 

Percent

 

Six Months Ended
June 30,

 

Percent

 

 

 

(in Thousands)

 

Increase

 

(in Thousands)

 

Increase

 

 

 

2004

 

2003

 

(Decrease)

 

2004

 

2003

 

(Decrease)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Service charges on deposit accounts

 

$

15,911

 

$

14,714

 

8.1

%

$

30,320

 

$

29,049

 

4.4

%

Other service charges, commissions and fees

 

 

 

 

 

 

 

 

 

 

 

 

 

Banking

 

4,443

 

3,855

 

15.3

 

8,286

 

7,316

 

13.3

 

Non-banking

 

1,652

 

2,247

 

(26.5

)

2,548

 

6,281

 

(59.4

)

Investment securities transactions, net

 

3,689

 

5,542

 

(33.4

)

8,461

 

8,305

 

1.9

 

Other investments, net

 

3,313

 

2,443

 

35.6

 

5,825

 

4,426

 

31.6

 

Other income

 

2,082

 

2,563

 

(18.8

)

3,963

 

5,133

 

(22.8

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total non-interest income

 

$

31,090

 

$

31,364

 

(0.9

)%

$

59,403

 

$

60,510

 

(1.8

)%

 

The decrease in non-banking service charges, commissions and fees can be attributed to a decrease in fees earned by the Company’s investment services unit in 2004.  The Company recorded investment securities gains of $3,689,000 for the quarter ended June 30, 2004 compared to gains of $5,542,000 for the same period of 2003.  The gains in 2004 and 2003 occurred due to an ongoing program to reposition a portion of the Company’s bond portfolio to realize the equity that was eroding in the portfolio due to rapid principal repayments, the result of which accelerated future earnings.

 

Non-Interest Expense

 

 

 

Three Months Ended
June 30,

 

Percent

 

Six Months Ended
June 30,

 

Percent

 

 

 

(in Thousands)

 

Increase

 

(in Thousands)

 

Increase

 

 

 

2004

 

2003

 

(Decrease)

 

2004

 

2003

 

(Decrease)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Employee compensation and benefits

 

$

17,123

 

$

17,629

 

(2.9

)%

$

33,564

 

$

36,093

 

(7.0

)%

Occupancy

 

3,626

 

3,519

 

3.0

 

6,899

 

6,479

 

6.5

 

Depreciation of bank premises and equipment

 

4,415

 

4,014

 

10.0

 

8,466

 

7,948

 

6.5

 

Professional fees

 

1,309

 

2,202

 

(40.6

)

2,882

 

3,724

 

(22.6

)

Stationery and supplies

 

910

 

991

 

(8.2

)

1,889

 

1,877

 

0.6

 

Amortization of identified intangible assets

 

246

 

319

 

(22.9

)

492

 

638

 

(22.9

)

Advertising

 

2,237

 

2,029

 

10.3

 

4,093

 

3,772

 

8.5

 

Other

 

11,023

 

11,490

 

(4.1

)

20,291

 

19,750

 

2.7

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total non-interest expense

 

$

40,889

 

$

42,193

 

(3.1

)%

$

78,576

 

$

80,281

 

(2.1

)%

 

The 7% decrease in employee compensation expense and benefits for the six months ended June 30, 2004 compared to the six months ended June 30, 2003 can be partially attributed to decreased salaries and commissions paid to the Company’s investment services unit.  The decrease correlates with the decrease in income produced by the investment services unit during the first six months of 2004 compared to the same period in 2003.

 

Expense control is an essential element in the Company’s profitability.  This is achieved through maintaining optimum staffing levels, an effective budgeting process, and internal consolidation of bank functions.

 

18



 

Financial Condition

 

Allowance for Possible Loan Losses

 

The allowance for possible loan losses increased 73.8% to $84,571,000 at June 30, 2004 from $48,646,000 at December 31, 2003.  The increase in the allowance can be attributed to the acquired allowance in the LFIN acquisition, totaling $33,884,000.  The provision for possible loan losses charged to expense decreased 33.9% to $2,717,000 for the six months ended June 30, 2004 from $4,113,000 for the same period in 2003.  The decrease in the provision for possible loan losses charged to expense can be attributed to the lack of substantial growth in the loan portfolio prior to the LFIN acquisition.  The allowance for possible loan losses was 1.7% and 1.8% of total loans, net of unearned income, at June 30, 2004 and December 31, 2003, respectively.

 

Investment Securities

 

Investment securities decreased 2.0% to $2,981,766,000 at June 30, 2004, from $3,041,501,000 at December 31, 2003.  The changes reflected during the first six months of 2004 were primarily from the results of the intentional contraction of the asset base of the Company, to position the Company’s liquidity in anticipation of the LFIN acquisition.

 

Foreign Operations

 

On June 30, 2004, the Company had $9,301,205,000 of consolidated assets, of which approximately $221,501,000, or 2.4%, was related to loans outstanding to borrowers domiciled in Mexico, compared to $222,797,000, or 3.4%, at December 31, 2003.  Of the $221,501,000, 76.8% is directly or indirectly secured by U.S. assets, certificates of deposits and real estate; 20.9% is secured by Mexican real estate; .9% is secured by Mexican real estate related to maquiladora plants and guaranteed under lease obligations primarily by U.S. companies, many of which are on the Fortune 500 list of companies; .8% is unsecured; and .6% represents accrued interest receivable on the portfolio.

 

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 in the Company’s latest Annual Report on Form 10K.  Certain accounting policies involve significant judgments and assumptions by management which have a material impact on the carrying value of certain assets and liabilities; management considers such accounting policies to be critical accounting policies.

 

The Company considers its Allowance for Possible Loan Losses as a policy critical to the sound operations of the bank subsidiaries.  The allowance for possible loan losses consists of the aggregate loan loss allowances of the bank subsidiaries.  The allowances are established through charges to operations in the form of provisions for possible loan losses.  Loan losses or recoveries are charged or credited directly to the allowances.  The allowance for possible loan losses of each bank subsidiary is maintained at a level considered appropriate by management, based on estimated probable losses in the loan portfolio.  The allowance is derived from the following elements:  (i) allowances established on specific loans, and (ii) allowances based on historical loss experience on the Company’s remaining loan portfolio, which includes general economic conditions and other qualitative risk factors both internal and external to the Company.  See also discussion regarding the allowance for possible loan losses and provision for possible loan losses included in the results of operations and “Provision and Allowance for Possible Loan Losses” included in Notes 1 and 4 of the Notes to Consolidated Financial Statements in the Company’s latest Annual Report on Form 10K for further information regarding the Company’s provision and allowance for possible loan losses policy.

 

The specific loan loss provision is determined using the following methods.  On a weekly basis, loan past due reports are reviewed by the servicing loan officer to determine if a loan has a potential problem 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 loans regardless of whether they are past due and segregates any loans with potential problems for further review.  The credit department discusses the potential problem loans with the servicing loan officers to determine any relevant issues that were not discovered in the evaluation.  Also, any analysis on loans that is provided through examinations by regulatory authorities is considered in the review process.  After the above analysis is completed, the Company determines 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.

 

19



 

The Company’s internal classified report is segregated into the following categories:  (i) “Pass Credits,” (ii) “Special Review Credits,” (iii) “Watch List - Pass Credits,” or (iv) “Watch List – Substandard and Doubtful Credits.”  The loans placed in the “Pass Credits” category reflect the Company’s opinion that the loan conforms to the bank’s lending policies, which includes the borrower’s ability to repay, the value of the underlying collateral, if any, as it relates to the outstanding indebtedness of the loan, and the economic environment and industry in which the borrower operates.  The loans placed in the “Special Review Credits” category reflect the Company’s opinion that the loans reflect potential weaknesses which require monitoring on a more frequent basis; however, the “Special Review Credits” are not considered to need a specific reserve at the time, but 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 loans contain pronounced credit weaknesses and/or inherent financial weaknesses of the borrower.  The loans placed in the “Watch List – Substandard and Doubtful Credits” category reflect the Company’s opinion that the loans contain clearly pronounced credit weaknesses and/or inherent weaknesses of the borrower.  Credits classified as “Watch List – Substandard and Doubtful Credits” are evaluated under Statement of Financial Accounting Standards No. 114, “Accounting by Creditors for Impairment of a Loan,” criteria and, if deemed necessary a specific reserve is allocated to the credit.  The specific reserve allocated under SFAS No. 114, is 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.

 

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 and Doubtful 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 Statement of Financial Accounting Standards No. 5.

 

The Company’s management continually reviews the loan loss allowance of the bank subsidiaries using the amounts determined from the allowances established on specific loans, the allowance established based on historical percentages and the loans charged off and recoveries to establish an appropriate amount to maintain in the Company’s loan loss allowance.  If the basis of the Company’s assumptions change, the loan loss allowance would either decrease or increase and the Company would increase or decrease the provision for loan loss charged to operations accordingly.

 

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 significant and stable portion of the deposit base of the Company’s bank subsidiaries. Other important funding sources for the Company’s bank subsidiaries during 2004 and 2003 have been 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 loans.  The Company has also increased it overnight liquidity by a sufficient amount, in the form of fed funds sold, to prepare for the cash payment required by the LFIN acquisition.  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, 2004, shareholders’ equity was $667,382,000 compared to $577,383,000 at December 31, 2003, an increase of $89,999,000, or 15.6%.  The change in shareholders’ equity can be attributed to the retention of earnings and the issuance of 2,114,558 million shares of common stock as part of the LFIN acquisition.

 

20



 

The Company had a leverage ratio of 8.60% and 8.75%, risk-weighted Tier 1 capital ratio of 10.23% and 17.3% and risk-weighted total capital ratio of 11.56% and 19.33% at June 30, 2004 and December 31, 2003, respectively.  The change in the Company’s capital ratios can be attributed to the LFIN acquisition, which was completed on June 18, 2004.  The identified intangibles and goodwill of $324,687,000 as of June 30, 2004, 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.

 

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, 2004 is illustrated in the table on page 22.  This information reflects the balances of assets and liabilities for which rates are subject to change.  A mix of assets and liabilities that are roughly equal in volume and re-pricing characteristics represents a matched interest rate sensitivity position.  Any excess of assets or liabilities results in an interest rate sensitivity gap.

 

The Company undertakes an interest rate sensitivity analysis to monitor the potential risk on future earnings resulting from the impact of possible future changes in interest rates on currently existing net asset or net liability positions.  However, this type of analysis is as of a point-in-time position, when in fact that position can quickly change as market conditions, customer needs, and management strategies change. Thus, interest rate changes do not affect all categories of asset and liabilities equally or at the same time.  As indicated in the table, the Company is liability sensitive during the early time periods and asset sensitive in the longer periods.  The 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.

 

21



 

Interest Rate Sensitivity

(Dollars in Thousands)

 

 

 

Rate/Maturity

 

June 30, 2004

 

3 Months
or Less

 

Over 3 Months
to 1 Year

 

Over 1
Year to 5

Years

 

Over 5
Years

 

Total

 

 

 

 

 

 

 

 

 

 

 

 

 

Rate sensitive assets

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Federal funds sold

 

$

85,000

 

$

 

$

 

$

 

$

85,000

 

Time deposits with banks

 

23,996

 

 

 

 

23,996

 

Investment securities

 

46,087

 

283,281

 

535,806

 

2,116,592

 

2,981,766

 

Loans, net of non-accruals

 

3,141,043

 

370,453

 

885,110

 

660,357

 

5,056,963

 

 

 

 

 

 

 

 

 

 

 

 

 

Total earning assets

 

$

3,296,126

 

$

653,734

 

$

1,420,916

 

$

2,776,949

 

$

8,147,725

 

 

 

 

 

 

 

 

 

 

 

 

 

Cumulative earning assets

 

$

3,296,126

 

$

3,949,860

 

$

5,370,776

 

$

8,147,725

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Rate sensitive liabilities

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Time deposits

 

$

1,376,849

 

$

1,274,499

 

$

566,414

 

$

1,219

 

$

3,218,981

 

Other interest bearing deposits

 

2,168,535

 

 

 

 

2,168,535

 

Securities sold under repurchase  agreements

 

178,309

 

69,538

 

4,335

 

300,000

 

552,182

 

Other borrowed funds

 

1,320,000

 

124

 

 

81

 

1,320,205

 

Junior subordinated deferrable  interest debentures

 

127,237

 

55,985

 

 

51,660

 

234,882

 

Senior notes

 

21,295

 

 

 

 

21,295

 

 

 

 

 

 

 

 

 

 

 

 

 

Total interest bearing liabilities

 

$

5,192,225

 

$

1,400,146

 

$

570,749

 

$

352,960

 

$

7,516,080

 

 

 

 

 

 

 

 

 

 

 

 

 

Cumulative sensitive liabilities

 

$

5,192,225

 

$

6,592,371

 

$

7,163,120

 

$

7,516,080

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Repricing gap

 

$

(1,896,099

)

$

(746,412

)

$

850,167

 

$

2,423,989

 

$

631,645

 

Cumulative repricing gap

 

(1,896,099

)

(2,642,511

)

(1,792,344

)

631,645

 

 

 

Ratio of interest-sensitive assets  to liabilities

 

.64

 

.47

 

2.49

 

7.87

 

1.08

 

Ratio of cumulative, interest-  sensitive assets to liabilities

 

.64

 

.60

 

.75

 

1.08

 

 

 

 

Item 3.  Quantitative and Qualitative Disclosures about Market Risk

 

During the first six months of 2004, there were no material changes in market risk exposures that affected the quantitative and qualitative disclosures regarding market risk presented under the caption “Liquidity & Capital Resources” located on pages 17 through 22 of the Company’s 2003 Annual Report as filed as an exhibit to the Company’s Form 10-K for the year ended December 31, 2003.

 

22



 

Item 4.  Controls and Procedures

 

The Company has evaluated the effectiveness of its disclosure controls and procedures pursuant to Securities Exchange Act Rule 13a-15.  The evaluation was performed under the supervision and with the participation of the Company’s Disclosure Committee and Management, including the principal executive officer and the principal financial officer, as of the end of the period covered by this report.  Based on this evaluation, the principal executive officer and principal financial officer have concluded that the disclosure controls and procedures are effective in ensuring that all material information required to be disclosed in this quarterly report has been accumulated and communicated to them in a manner appropriate to allow timely decisions regarding disclosure.

 

During the most recent fiscal quarter, there were no significant changes in the internal controls or in other factors that have materially affected or are reasonably likely to materially affect the internal controls, including any corrective actions with regard to significant deficiencies and material weaknesses.

 

PART II - OTHER INFORMATION

 

Item 1.  Legal Proceedings

 

The Company is involved in various legal proceedings that are in various stages of litigation.  Some of these actions allege “lender liability” claims on a variety of theories and claim actual and punitive damages.  The Company has determined, based on discussions with its counsel that any material loss in such actions, individually or in the aggregate, is remote or the damages sought, even if fully recovered, would not be considered material to the consolidated financial position or results of operations of the Company.  However, many of these matters are in various stages of proceedings and further developments could cause management to revise its assessment of these matters.

 

The Company’s lead bank subsidiary has invested in partnerships, which have entered into several lease-financing transactions.  The lease-financing transactions in two of the partnerships have been examined by the Internal Revenue Service (“IRS”).  In both partnerships, the lead bank subsidiary was the owner of a ninety-nine percent (99%) limited partnership interest.  The IRS has issued separate Notice of Final Partnership Administrative Adjustments (“FPAA”) to the partnerships and on September 25, 2001, and January 10, 2003, the Company filed lawsuits contesting the adjustments asserted in the FPAAs.

 

Prior to filing the lawsuit the Company was required to deposit the estimated tax due of approximately $4,083,000 with respect to the first FPAA, and $7,710,606 with respect to the second FPAA, with the IRS pursuant to the Internal Revenue Code.  If it is determined that the amount of tax due, if any, related to the lease-financing transactions is less than the amount of the deposits, the remaining amount of the deposits would be returned to the Company.

 

In order to curtail the accrual of additional interest related to the disputed tax benefits and because interest rates were unfavorable, on March 7, 2003, the Company submitted to the IRS a total of $13,640,797, which constitutes the interest that would have accrued based on the adjustments proposed in the FPAAs related to both of the lease-financing transactions.  If it is determined that the amount of interest due, if any, related to the lease-financing transactions is less than the $13,640,797, the remaining amount of the prepaid interest will be refunded to the Company, plus interest thereon.

 

23



 

Item 2.  Changes in Securities, Use of Proceeds and Issuer Purchases of Equity Securities

 

The Company expanded its formal stock repurchase program on December 18, 2003. Under the expanded stock repurchase program, the Company is authorized to repurchase up to $175,000,000 of its common stock through December 2004.  Stock repurchases may be made from time to time, on the open market or through private transactions.  Shares repurchased in this program will be held in treasury for reissue for various corporate purposes, including employee stock option plans.  As of August 3, 2004, a total of 3,647,408 shares had been repurchased under this program at a cost of $145,042,000, which shares are now reflected as 7,237,287 shares of treasury stock as adjusted for stock dividends.  Stock repurchases are reviewed quarterly at the Company’s Board of Directors meetings and the Board of Directors has stated that the aggregate investment in treasury stock should not exceed $195,973,000.  In the past, the Board of Directors has increased previous caps on treasury stock once they were met, but there are no assurances that an increase of the $195,973,000 cap will occur in the future.  As of August 3, 2004, the Company has approximately $166,016,000 invested in treasury shares, which amount has been accumulated since the inception of the Company.

 

Share repurchases are only conducted under publicly announced repurchase programs approved by the Board of Directors.  The following table includes information about share repurchases for the quarter ended June 30, 2004 and reflects the 25% stock dividend that was paid in May 2004.

 

 

 

Total Shares
Purchased

 

Average Price
Per Share

 

Shares Purchased
as Part of a
Publicly-
Announced
Program

 

Maximum Shares
Still Available for
Repurchase
(1)

 

April 1 – April 30, 2004

 

 

$

 

 

560,461

 

May 1 – May 31, 2004

 

 

 

 

565,738

 

June 1 – June 30, 2004

 

1,237

 

43.25

 

 

722,390

 

 

 

1,237

 

$

43.25

 

 

 

 

 


(1)          The formal stock repurchase program was initiated in 1999 and has been expanded periodically through 2004.  The current program allows for the repurchase of up to $175,000,000 of treasury stock through December 2004 of which $29,994,000 is remaining.

 

24



 

Item 4.  Submission of Matters to a Vote of Security Holders

 

The Annual Meeting of Shareholders of the Company was held May 17, 2004 for the consideration of the following items which were approved by the number of votes set forth:

 

 

 

 

 

Votes
For

 

Votes
Withheld

 

 

 

 

 

 

 

1.

 

To elect eleven (11) directors of the Company until the next Annual Meeting of Shareholders and until their successors are elected and qualified; The following directors, constituting the entire board of directors, were elected:

 

 

 

 

 

 

 

 

 

 

 

 

 

Lester Avigael

 

32,902,714

 

95,297

 

 

Irving Greenblum

 

32,791,874

 

206,137

 

 

R. David Guerra

 

31,543,575

 

1,454,436

 

 

Daniel B. Hastings, Jr.

 

32,915,430

 

82,581

 

 

Richard E. Haynes

 

32,898,539

 

99,472

 

 

Imelda Navarro

 

31,556,636

 

1,441,375

 

 

Sioma Neiman

 

31,380,479

 

1,617,532

 

 

Peggy J. Newman

 

32,996,686

 

1,325

 

 

Dennis E. Nixon

 

31,338,141

 

1,659,870

 

 

Leonardo Salinas

 

31,536,303

 

1,461,708

 

 

A.R. Sanchez, Jr.

 

31,518,587

 

1,479,424

 

 

 

 

 

Votes
For

 

Votes
Withheld

 

 

 

 

 

 

 

2.

 

To approve the appointment of independent auditors for the 2004 fiscal year

 

32,928,939

 

79,986

 

Abstentions:                          5,718,841

 

Item 6.  Exhibits and Reports on Form 8-K

 

(a)           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

 

25



 

(b)           Reports on Form 8-K

 

Registrant filed a current report on Form 8-K on May 21, 2004 covering Item 5 – Other Events and Regulation FD Disclosure and Item 9 - Regulation FD Disclosure, in connection with the announcement that the shareholders of Local Financial Corporation (“LFIN”) approved the merger agreement between the Registrant and LFIN at the annual meeting of shareholders on May 19, 2004.

 

Registrant filed a current report on Form 8-K on May 28, 2004 covering Item 5 – Other Events and Regulation FD Disclosure and Item 9 – Regulation FD Disclosure in connection with the announcement of a correction to the telephone number for the American Stock Transfer & Trust Company included in the Election Form and Letter of Transmittal previously mailed to LFIN stockholders in connection with the pending merger between the Registrant and Local Financial Corporation.

 

Registrant filed a current report on Form 8-K on June 9, 2004 covering Item 5 – Other Events and Regulation FD Disclosure and Item 9 – Regulation FD Disclosure in connection with the announcement of an extension of the deadline for election of consideration of cash or common shares (or a combination of both) in connection with the acquisition of Local Financial Corporation by the Registrant.

 

Registrant filed a current report on Form 8-K on June 21, 2004 covering Item 2 – Acquisition or Disposition of Assets and Item 5 – Other Events and Regulation FD Disclosure in connection with consummation of the acquisition of Local Financial Corporation by the Registrant, pursuant to the Agreement and Plan of Merger dated January 22, 2004.

 

Registrant filed a current report on Form 8-K on July 16, 2004 covering Item 5 – Other Events and Regulation FD Disclosure and Item 9 – Regulation FD Disclosure in connection with the offer to purchase for cash any and all of the outstanding 11.0% Senior Notes due 2004, originally issued by Local Financial Corporation.

 

Registrant filed an amended report on Form 8-K on August 3, 2004 to the current report on Form 8K originally filed on June 21, 2004, covering Item 2 – Acquisition or Disposition of Assets and Item 5 – Other Events and Regulation FD Disclosure in connection with the consummation of the acquisition of Local Financial Corporation by the Registrant, pursuant to the Agreement and Plan of Merger dated January 22, 2004.

 

Registrant filed a current report on Form 8-K on August 5, 2004 covering Item 12 - Results of Operations and Financial Condition and Item 9 - Regulation FD Disclosure in connection with the announcement of second quarter 2004 earnings.

 

26



 

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 9, 2004

/s/ Dennis E. Nixon

 

 

Dennis E. Nixon

 

President

 

 

Date:  August 9, 2004

/s/ Imelda Navarro

 

 

Imelda Navarro

 

Treasurer

 

27