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, 2007

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)

 

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 if the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer.  See definition of “accelerated filer and large accelerated filer” in Rule 12b-2 of the Exchange Act.

 

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.

 

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,
		2007			2006
Assets
Cash and due from banks		$	256,219		$	268,207
Federal funds sold		124,000			29,000
Total cash and cash equivalents		380,219			297,207
Time deposits with banks		21,951			396
Investment securities:
Held-to-maturity (Market value of $2,325 on June 30, 2007 and $2,375 on December 31, 2006)		2,325			2,375
Available-for-sale (Amortized cost of $3,810,573 on June 30, 2007 and $4,548,236 on December 31, 2006)		3,768,993			4,488,078
Total investment securities		3,771,318			4,490,453
Loans, net of unearned discounts		5,127,584			5,034,810
Less allowance for possible loan losses		(66,938		)	(64,537		)
Net loans		5,060,646			4,970,273
Bank premises and equipment, net		411,340			390,323
Accrued interest receivable		54,518			57,288
Other investments		309,801			345,988
Identified intangible assets, net		34,166			34,358
Goodwill, net		283,198			282,246
Other assets		39,581			42,922
Total assets		$	10,366,738		$	10,911,454

 

1

		June 30,			December 31,
		2007			2006
Liabilities and Shareholders’ Equity
Liabilities:
Deposits:
Demand—non-interest bearing		$	1,459,623		$	1,453,476
Savings and interest bearing demand		2,353,327			2,204,451
Time		3,326,379			3,331,991
Total deposits		7,139,329			6,989,918
Securities sold under repurchase agreements		968,396			706,335
Other borrowed funds		1,066,414			2,095,576
Junior subordinated deferrable interest debentures		242,051			210,908
Other liabilities		76,311			66,661
Total liabilities		9,492,501			10,069,398
Commitments, Contingent Liabilities and Other Tax Matters (Note 10)
Shareholders’ equity:
Common shares of $1.00 par value. Authorized 275,000,000 shares; issued 95,279,649 shares on June 30, 2007 and 94,846,451 shares on December 31, 2006		95,280			86,224
Surplus		142,205			138,247
Retained earnings		883,720			861,251
Accumulated other comprehensive loss		(26,780		)	(40,390		)
		1,094,425			1,045,332
Less cost of shares in treasury, 26,290,228 shares on June 30, 2007 and 25,643,564 shares on December 31, 2006		(220,188		)	(203,276		)
Total shareholders’ equity		874,237			842,056
Total liabilities and shareholders’ equity		$	10,366,738		$	10,911,454

 

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,
		2007			2006			2007			2006
Interest income:
Loans, including fees		$	112,723		$	97,202		$	221,979		$	187,604
Federal funds sold		821			817			1,517			2,194
Investment securities:
Taxable		45,782			50,110			97,438			99,366
Tax-exempt		1,078			1,144			2,209			2,316
Other interest income		2,004			101			2,120			212
Total interest income		162,408			149,374			325,263			291,692
Interest expense:
Savings deposits		13,695			10,139			26,791			19,043
Time deposits		36,236			29,421			71,273			55,620
Securities sold under repurchase agreements		10,213			7,676			18,535			15,548
Other borrowings		18,177			24,728			45,382			44,733
Junior subordinated interest deferrable debentures		4,526			5,361			8,945			10,385
Total interest expense		82,847			77,325			170,926			145,329
Net interest income		79,561			72,049			154,337			146,363
Provision for possible loan losses		1,198			82			2,559			679
Net interest income after provision for possible loan losses		78,363			71,967			151,778			145,684
Non-interest income:
Service charges on deposit accounts		21,058			21,517			41,283			42,515
Other service charges, commissions and fees
Banking		8,843			7,301			16,961			14,229
Non-banking		3,887			4,022			8,831			8,011
Gain (loss) on investment securities transactions, net		2,257			410			(14,910		)	410
Other investments, net		4,785			7,384			10,568			11,957
Other income		6,436			6,388			10,774			10,517
Total non-interest income		47,266			47,022			73,507			87,639

 

3

		Three Months Ended June 30,						Six Months Ended June 30,
		2007			2006			2007			2006
Non-interest expense:
Employee compensation and benefits		$	31,962		$	30,152		$	63,155		$	59,624
Occupancy		8,303			6,506			15,343			12,748
Depreciation of bank premises and equipment		7,813			7,061			15,369			13,805
Professional fees		2,791			2,539			5,469			5,470
Stationery and supplies		1,490			1,343			2,971			2,901
Amortization of identified intangible assets		1,320			1,216			2,529			2,433
Advertising		3,169			3,088			6,420			6,044
Other		16,581			15,816			34,242			43,553
Total non-interest expense		73,429			67,721			145,498			146,578
Income before income taxes		52,200			51,268			79,787			86,745
Minority interest in consolidated subsidiaries		(78		)	—			—			—
Provision for income taxes		17,688			16,610			26,553			28,112
Net income		$	34,590		$	34,658		$	53,234		$	58,633
Basic earnings per common share:
Weighted average number of shares outstanding:		69,313,121			69,399,418			69,314,282			69,619,164
Net income		$	.50		$	.50		$	.77		$	.84
Fully diluted earnings per common share:
Weighted average number of shares outstanding:		69,686,149			70,117,255			69,820,072			70,350,981
Net income		$	.50		$	.49		$	.76		$	.83

 

See accompanying notes to consolidated financial statements.

4

INTERNATIONAL BANCSHARES CORPORATION AND SUBSIDIARIES

Consolidated Statements of Comprehensive Income (Unaudited)

(Dollars in Thousands)

		Three Months Ended June 30,						Six Months Ended June 30,
		2007			2006			2007			2006
Net income		$	34,590		$	34,658		$	53,234		$	58,633
Other comprehensive income (loss), net of tax
Net unrealized holding (losses) gains on securities available for sale arising during period		(6,815		)	(22,090		)	36,207			(23,053		)
Reclassification adjustment for gains (losses) on securities available for sale included in net income		—			38			(22,597		)	38
Comprehensive income		$	27,775		$	12,606		$	66,844		$	35,618

 

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,
		2007			2006
Operating activities:
Net income		$	53,234		$	58,633
Adjustments to reconcile net income to net cash provided by operating activities:
Provision for possible loan losses		2,559			679
Amortization of loan premiums		233			692
Accretion of time deposits with banks		(32		)	—
(Increase) decrease in loans held for sale		(9,801		)	12,462
Depreciation of bank premises and equipment		15,369			13,805
Gain on sale of bank premises and equipment		(2,431		)	(522		)
Depreciation and amortization of leased assets		1,083			1,083
Accretion of investment securities discounts		(321		)	(222		)
Amortization of investment securities premiums		2,076			2,022
Investment securities transactions, net		14,910			(410		)
Amortization of junior subordinated debenture discounts		215			294
Amortization of identified intangible assets		2,529			2,433
Stock based compensation expense		369			467
Earnings from affiliates and other investments		(5,038		)	(7,809		)
Deferred tax benefit		(349		)	(2,823		)
Decrease (increase) in accrued interest receivable		3,288			(3,133		)
Net decrease in other assets		2,347			1,987
Net increase in other liabilities		3,360			17,220
Net cash provided by operating activities		83,600			96,858
Investing activities:
Proceeds from maturities of securities		16,015			5,270
Proceeds from sales of available for sale securities		739,069			410
Purchases of available for sale securities		(484,958		)	(575,121		)
Principal collected on mortgage-backed securities		470,673			405,949
Maturities of time deposits with banks		25,084			—
Net increase in loans		(50,760		)	(217,729		)
Purchases of other investments		(5,412		)	(1,866		)
Distributions of other investments		49,187			4,771
Purchases of bank premises and equipment		(38,596		)	(40,378		)
Proceeds from sale of bank premises and equipment		5,966			9,421
Adjustment to goodwill related to prior acquisition (Note 10)		5,885			—
Cash paid in purchase transaction		(23,470		)	—
Cash acquired in purchase transaction		30,772			—
Net provided by (used in) investing activities		739,455			(409,273		)

 

6

		Six Months Ended June 30,
		2007			2006
Financing activities:
Net (decrease) increase in non-interest bearing demand deposits		$	(23,191	)	$	15,668
Net increase (decrease) in savings and interest bearing demand deposits		92,255			(95,896		)
Net (decrease) increase in time deposits		(37,654		)	74,158
Net increase (decrease) in securities sold under repurchase agreements		262,061			(92,797		)
Net (decrease) increase in other borrowed funds		(1,029,409		)	361,998
Proceeds of issuance of long-term debt		53,609			—
Principal payments of long term-debt		(22,681		)	—
Purchase of treasury stock		(16,912		)	(23,171		)
Proceeds from stock transactions		3,992			1,038
Payment of cash dividends		(22,086		)	(22,113		)
Payment of cash dividends in lieu of fractional shares		(27		)	—
Net cash (used in) provided by financing activities		(740,043		)	218,885
Increase (decrease) in cash and cash equivalents		83,012			(93,530		)
Cash and cash equivalents at beginning of period		297,207			458,118
Cash and cash equivalents at end of period		$	380,219		$	364,588
Supplemental cash flow information:
Interest paid		$	176,295		$	143,500
Income taxes paid		29,981			32,975
Adjustment to goodwill arising from prior acquisition (Note 10)		2,076			—

 

See accompanying notes to consolidated financial statements.

7

INTERNATIONAL BANCSHARES CORPORATION AND SUBSIDIARIES

Notes to Consolidated Financial Statements

(Unaudited)

Note 1—Basis of Presentation

The accounting and reporting policies of International Bancshares Corporation (“Corporation”) and Subsidiaries (the Corporation and Subsidiaries collectively referred to herein as the “Company”) conform to accounting principles generally accepted in the United States of America and to general practices within the banking industry.  The consolidated financial statements include the accounts of the Corporation and its wholly-owned subsidiaries, International Bank of Commerce, Laredo (“IBC”), Commerce Bank, International Bank of Commerce, Zapata, International Bank of Commerce, Brownsville and the 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 10-K.  The consolidated statement of condition at December 31, 2006 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 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 subsidiaries 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 9.

On January 1, 2007, the Company changed its accounting policy related to accounting for contingencies in connection with the adoption of Financial Accounting Standards Board (“FASB”) Interpretation No. 48, “Accounting for Uncertainty in Income Taxes, an Interpretation of FASB Statement 109.”  See Note 10 — Commitments, Contingent Liabilities and Other Tax Matters.

Note 2—Acquisition

On March 16, 2007, the Company completed its acquisition of Southwest First Community, Inc. (“Southwest Community”), a bank holding company with approximately $133 million in assets that owned State Bank & Trust in Beeville, Texas and Commercial State Bank in Sinton, Texas.  The transaction was pursuant to the Agreement and Plan of Merger dated December 1, 2006 (the “Merger Agreement”).  The Company paid consideration totaling $23.5 million in cash.

8

---

Note 3—Loans

A summary of net loans, by loan type at June 30, 2007 and December 31, 2006 is as follows:

 

Note 4—Allowance for Possible Loan Losses

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

 

                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.

9

---

The following table details key information regarding the Company’s impaired loans:

 

The impaired loans included in the table above were primarily comprised of collateral dependent commercial loans, which have not been fully charged off.  The average recorded investment in impaired loans was $21,081,000 and $25,684,000 for June 30, 2007 and December 31, 2006, respectively.  The interest recognized on impaired loans was 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 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.

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, 2007 was adequate to absorb probable losses from loans in the portfolio at that date.

Note 5—Stock Options

On April 1, 2005, the Board of Directors adopted the 2005 International Bancshares Corporation Stock Option Plan (the “2005 Plan”).  The 2005 Plan replaced the 1996 International Bancshares Corporation Key Contributor Stock Option Plan (the “1996 Plan”).  Under the 2005 Plan both qualified incentive stock options (“ISOs”) and non-qualified stock options (“NQSOs”) may be granted.  Options granted may be exercisable for a period of up to 10 years from the date of grant, excluding ISOs granted to 10% shareholders, which may be exercisable for a period of up to only five years.  As of June 30, 2007, 108,999 shares were available for future grants under the 2005 Plan.

Through June 30, 2007, the Company has granted non-qualified stock options exercisable for a total of 154,420 shares, adjusted for stock dividends, of Common Stock to certain employees of the GulfStar Group.  The grants were not made under either the 1996 Plan or the 2005 Plan.  The options are exercisable for a period of seven years and vest in equal increments over a period of five years.  All options granted to the GulfStar Group employees had an option price of not less than the fair market value of the Common Stock on the date of grant.  All options granted to the GulfStar Group employees have been exercised as of July 2007.

On January 1, 2006, the Company adopted the provisions of Statement of Financial Accounting Standards No. 123R, (“SFAS No. 123R”), “Share-Based Payment, (Revised 2004).”  SFAS No. 123R sets accounting requirements for “share-based” compensation to employees and non-employee directors, including employee stock purchase plans, and requires companies to recognize in the statement of operations the grant-date fair value of stock options and other equity-based compensation.

10

---

A summary of option activity under the stock option plans for the three months ended June 30, 2007 is as follows:

 

Stock-based compensation expense included in the consolidated statements of income for the three and six months ended June 30, 2007 was approximately $190,000 and $369,000, respectively.  As of June 30, 2007 there was approximately $1,755,000, 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 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 income (loss) and accumulated other comprehensive income (loss) until realized, or in the case of losses, when deemed other than temporary.

In the first quarter 2007, the Company wrote down approximately $732.0 million of investment securities to fair value, which resulted in an impairment charge of approximately $17.0 million.  The write down was a result of the Company’s strategic identification of certain investment securities that were sold in the second quarter of 2007 with the proceeds used to reduce Federal Home Loan Bank (“FHLB”) borrowings.  The investments sold were certain hybrid mortgage backed securities with a coupon re-set date that exceeded 30 months and a weighted average yield to coupon re-set that was approximately 100 basis points less than the FHLB certificate of indebtedness short term-rate.  The sale of the securities facilitated a repositioning of the balance sheet to a more neutral position in terms of interest rate risk and improved the Company’s operating ratios.

11

---

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:

 

Note 7—Other Borrowed Funds

Other borrowed funds include Federal Home Loan Bank borrowings, which are short or long term, variable or 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, 2007, other borrowed funds totaled $1,066,414,000, a decrease of 49.1% from $2,095,576,000 at December 31, 2006.  The decrease is attributable to the pay-down of borrowings due to the Company’s sale of certain identified investment securities in the second quarter 2007.

Note 8—Junior Subordinated Interest Deferrable Debentures

The Company has formed twelve statutory business trusts under the laws of the State of Delaware, for the purpose of issuing trust preferred securities.  As part of the Local Financial Corporation (“LFIN”) acquisition, the Company acquired three additional statutory business trusts previously formed by LFIN for the purpose of issuing trust preferred securities.  The twelve statutory business trusts formed by the Company and the three business trusts acquired in the LFIN transaction (the “Trusts”) have each issued Capital and Common Securities and invested the proceeds thereof in an equivalent amount of junior subordinated debentures (the “Debentures”) issued by the Company or LFIN, as appropriate.  The Company has succeeded to the obligations of LFIN under the LFIN Debentures, which have an outstanding principal balance of $20,620,000.  The Debentures will mature on various dates; however the Debentures may be redeemed at specified prepayment prices, in whole or in part after the optional redemption dates specified in the respective indentures or in whole upon the occurrence of any one of certain legal, regulatory or tax events specified in respective indentures.  As of August 1, 2007, the Debentures issued by four of the trusts formed by the Company and the Debentures issued by two of the trusts formed by LFIN have been redeemed by the Company.  As of June 30, 2007, the principal amount of debentures outstanding totaled $242,051,000.

On April 22, 2007, pursuant to the Indenture dated as of April 10, 2002, between the Company and Wilmington Trust Company, as Trustee, the Company redeemed all of its Floating Rate Junior Subordinated Debt Securities (the “Debt Securities”), issued to International Bancshares Capital Trust IV (“Trust IV”) at a redemption price equal to approximately $22,681,000, which includes accrued interest to, but not including, the redemption date.

In accordance with the Amended and Restated Declaration of Trust dated as of April 10, 2002 between the Company and Wilmington Trust Company, as Institutional Trustee, the proceeds from the redemption of the Debt Securities were used to simultaneously redeem an equal amount of Trust IV Floating Rate Capital Securities and Floating Rate Common Securities issued by Trust IV.

12

---

On April 13, 2007, the Company formed International Bancshares Corporation Trust XI (“Trust XI”), its eleventh statutory business trust formed under the laws of the State of Delaware, for the purpose of issuing trust preferred securities.  On April 19, 2007, Trust XI issued $32,000,000 of Capital Securities.  The Capital Securities accrue interest for the first five years at a fixed rate of 6.82% and subsequently at a floating rate of 1.62% over the three month LIBOR, and interest is payable quarterly beginning July 1, 2007.  The Trust XI Capital Securities will mature on July 1, 2037, however, the Capital Securities may be redeemed at specified prepayment prices (a) in whole or in part on any interest payment date on or after July 1, 2012, or (b) in whole or in part within 90 days upon the occurrence of certain legal, regulatory, or tax events.  The Capital Securities are subordinated and junior in right of payment to all present and future senior indebtedness of the Company.  The Company has fully and unconditionally guaranteed the obligation of Trust XI with respect to the Capital Securities.  The Company has the right, unless an Event of Default has occurred and is continuing, to defer payment of interest on the Capital Securities for up to twenty consecutive quarterly periods.  The redemption prior to maturity of any of the Capital Securities may require the prior approval of the Federal Reserve and/or other regulatory agencies.

On June 11, 2007, the Company formed International Bancshares Corporation Trust XII (“Trust XII”), its twelfth statutory business trust formed under the laws of the State of Delaware, for the purpose of issuing trust preferred securities.  On June 26, 2007, Trust XII issued $20,000,000 of Capital Securities.  The Capital Securities accrue interest for the first five years at a fixed rate of 6.851% and subsequently at a floating rate of 1.45% over the three month LIBOR, and interest is payable quarterly beginning September 1, 2007.  The Trust XII Capital Securities will mature on September 1, 2037;  however, the Capital Securities may be redeemed at specified prepayment prices (a) in whole or in part on any interest payment date on or after September 1, 2012, or (b) in whole or in part within 90 days upon the occurrence of certain legal, regulatory, or tax events.  The Capital Securities are subordinated and junior in right of payment to all present and future senior indebtedness of the Company.  The Company has fully and unconditionally guaranteed the obligation of Trust XII with respect to the Capital Securities.  The Company has the right, unless an Event of Default has occurred and is continuing, to defer payment of interest on the Capital Securities for up to twenty consecutive quarterly periods.  The redemption prior to maturity of any of the Capital Securities may require the prior approval of the Federal Reserve and/or other regulatory agencies.

The Debentures are subordinated and junior in right of payment to all present and future senior indebtedness (as defined in the respective indentures) of the Company, and are pari passu with one another.  The interest rate payable on, and the payment terms of the Debentures are the same as the distribution rate and payment terms of the respective issues of Capital and Common Securities issued by the Trusts.  The Company has fully and unconditionally guaranteed the obligations of each of the Trusts with respect to the Capital and Common Securities.  The Company has the right, unless an Event of Default (as defined in the Indentures) has occurred and is continuing, to defer payment of interest on the Debentures for up to ten consecutive semi-annual periods on Trusts I, IV and LFIN Trust II and for up to twenty consecutive quarterly periods on Trusts V, VI, VII, VIII, IX, X, XI and XII and LFIN Trust III.  If interest payments on any of the Debentures are deferred, distributions on both the Capital and Common Securities related to that Debenture would also be deferred.  The redemption prior to maturity of any of the Debentures may require the prior approval of the Federal Reserve and/or other regulatory bodies.

For financial reporting purposes, the Trusts are treated as investments of the Company and not consolidated in the consolidated financial statements.  Although the Capital Securities issued by each of the Trusts are not included as a component of shareholders’ equity on the consolidated statement of condition, the Capital Securities are treated as capital for regulatory purposes.  Specifically, under applicable regulatory guidelines, the Capital Securities issued by the Trusts qualify as Tier 1 capital up to a maximum of 25% of Tier 1 capital on an aggregate basis.  Any amount that exceeds the 25% threshold would qualify as Tier 2 capital.  For June 30, 2007, the total $242,051,000, of the Capital Securities outstanding qualified as Tier 1 capital.

In March 2005, the Federal Reserve Board issued a final rule that would continue to allow the inclusion of trust preferred securities in Tier 1 capital, but with stricter quantitative limits.  Under the final rule, after a transition period ending March 31, 2009, the aggregate amount of trust preferred securities and certain other capital elements would be limited to 25% of Tier 1 capital elements, net of goodwill, less any associated deferred tax liability.  The amount of trust preferred securities and certain other elements in excess of the limit could be included in Tier 2 capital, subject to restrictions.  Bank holding companies with significant international operations will be expected to limit trust preferred securities to 15% of Tier 1 capital elements, net of goodwill; however, they may include qualifying mandatory convertible preferred securities up to the 25% limit.  The Company believes that substantially all of the current trust preferred securities will be included in Tier 1 capital after the five-year transition period ending March 31, 2009.

13

---

The following table illustrates key information about each of the Capital and Common Securities and their interest rate at June 30, 2007:

Junior Subordinated Deferrable Interest Debentures

Repricing Frequency

Interest Rate

Interest Rate Index

Maturity Date

Optional Redemption Date

(in thousands)

Trust I

$

10,269

Fixed

10.18%

Fixed

June 2031

June 2011

Trust V

$

20,619

Semi-Annually

9.01%

LIBOR + 3.65

July 2032

July 2007

Trust VI

$

25,737

Semi-Annually

8.81%

LIBOR + 3.45

November 2032

November 2007

Trust VII

$

10,310

Quarterly

8.61%

LIBOR + 3.25

April 2033

April 2008

Trust VIII

$

25,628

Quarterly

8.41%

LIBOR + 3.05

October 2033

October 2008

Trust IX

$

41,238

Fixed

7.10%

Fixed

October 2036

October 2011

Trust X

$

34,021

Fixed

6.66%

Fixed

February 2037

February 2012

Trust XI

$

32,990

Fixed

6.82%

Fixed

July 2037

July 2012

Trust XII

$

20,619

Fixed

6.85%

Fixed

September 2037

September 2012

LFIN Trust II

$

10,310

Semi-Annually

9.03%

LIBOR + 3.625

July 2032

July 2007

LFIN Trust III

$

10,310

Quarterly

8.81%

LIBOR + 3.45

November 2032

November 2007

$

242,051

(1)             LFIN Trust II was redeemed in July 2007, pursuant to the Indenture

(2)             Trust V was redeemed in July 2007, pursuant to the Indenture

(3)             Trust IX, X, XI and XII accrue interest at a fixed rate for the first five years, then floating at LIBOR + 1.62%, 1.65%, 1.62% and 1.45% thereafter, respectively. 

14

---

Note 9—Common Stock and Dividends

Cash dividends of $.35 per share were paid on May 1, 2007 and May 1, 2006 to all holders of record on April 16, 2007 and April 17, 2006, respectively.  A 10% stock dividend was paid on June 8, 2007 to all holders of record on May 21, 2007.

The Company expanded its formal stock repurchase program on May 3, 2007.  Under the expanded stock repurchase program, the Company is authorized to repurchase up to $225,000,000 of its common stock through December 2008.  Stock repurchases may be made from time to time, on the open market or through private transactions.  Shares repurchased in this program will be held in treasury for reissue for various corporate purposes, including employee stock option plans.  As of August 1, 2007, a total of 5,680,022 shares had been repurchased under this program at a cost of $201,292,000.  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 $245,973,000.  In the past, the Board of Directors has increased previous caps on treasury stock once they were met, but there are no assurances that an increase of the $245,973,000 cap will occur in the future.  As of August 1, 2007, the Company has approximately $222,265,000 invested in treasury shares, which amount has been accumulated since the inception of the Company.

Note 10—Commitments and Contingent Liabilities and Other Tax Matters

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

The 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 approximately $13.7 million, which constitutes the interest that would have accrued based on the adjustments proposed in the FPAAs related to both of the lease-financing transactions.  If it is determined that the amount of interest due, if any, related to the lease-financing transactions is less than the approximate $13.7 million, the remaining amount of the prepaid interest would be refunded to the Company, plus interest thereon.

Beginning August 29, 2005, IBC proceeded to litigate one of the partnership tax cases in the Federal District Court in San Antonio, Texas.  The case was tried over nine days beginning August 29, 2005.  On March 31, 2006, the trial court rendered a judgment against the Company on the first FPAA.  IBC timely filed its notice of appeal to the Fifth Circuit Court of Appeals.  All appellate briefs have been filed the appeal will be argued on August 8, 2007.  The other partnership tax case has been stayed by the same Court during the pendency of the appeal.

The Company, through December 31, 2005, had previously expensed approximately $12.0 million connection with the lawsuits.  Because of the above-referenced trial court judgment against the Company on the first FPAA, the uncertainty of the outcome at the appellate level, and the similarity between the two FPAAs, the Company, through December 31, 2006, has expensed an additional $13.7 million, approximately.  The resultant approximately $25.7 million expensed is the total of the tax adjustments due and the interest due on such adjustments for both FPAAs.  Management intends to continue to appeal the judgment in the first case and will continue to evaluate the merits of each lawsuit and make any appropriate revisions to the amounts, as deemed necessary.

15

---

As part of the LFIN acquisition, two tax matters were transferred to the Company. The first relates to deductions taken on amended returns filed by LFIN during 2003 for the tax years ended June 30, 1999 through December 31, 2001. The refunds requested on the amended returns amounted to approximately $7.0 million. At December 31, 2003, LFIN had received approximately $2.0 million of the total refund requested. Because all the refunds are under review by the IRS, LFIN had established a reserve equal to the $2.0 million received and did not recognize any benefit for the remaining $5.0 million. The second tax contingency reserve of $7.0 million was resolved with the IRS in September 2006 and as a result, the second tax contingency reserve is no longer required.  The reserve was applied to the goodwill acquired as part of the LFIN acquisition.  During the first quarter of 2007, the Company favorably resolved the issues with the IRS on the first tax contingency for approximately $7.0 million plus interest accrued thereon.  The Company has applied the refund, including interest accrued prior to the LFIN acquisition, to the goodwill that resulted from the LFIN acquisition.  The Company has booked the remaining portion of the interest accrued on the tax matter subsequent to the LFIN acquisition to earnings.

In June 2006, the Financial Accounting Standards Board issued Financial Interpretation No. 48, (“FIN 48”), “Accounting for Uncertainty in Income Taxes — an interpretation of FASB Statement No. 109, Accounting for Income Taxes.”  FIN 48 addresses the determination of whether tax benefits claimed or expected to be claimed on a tax return should be recorded in the financial statements.  Under FIN 48, the Company may recognize the tax benefit from an uncertain tax position only if it is more likely than not that the tax position will be sustained on examination by the taxing authorities, based on the technical merits of the position.  The tax benefits recognized in the financial statements from such a position should be measured based on the largest benefit that has a greater than fifty percent likelihood of being realized upon ultimate settlement.  FIN 48 also provides guidance on derecognition, classification, interest and penalties on income taxes, accounting in interim periods and requires increased disclosures.

The Company adopted the provisions of FIN 48 on January 1, 2007.  As a result of the implementation of FIN 48, the Company recognized no change in the liability for unrecognized tax benefits, thus, there was no change to the January 1, 2007 retained earnings balance.  The total amount of unrecognized tax benefits at January 1, 2007 was $32.5 million, of which $11.8 million would impact the Company’s effective tax rate, if recognized.

The Company recognizes interest accrued related to unrecognized tax benefits in operating expenses and penalties in income tax expense, which is consistent with the recognition of these items in prior reporting periods.  As of January 1, 2007 the Company recorded no additional reserve to the existing $13.6 million liability for the payment of interest and penalties on issues under litigation.  The IRS has assessed approximately $11.8 million plus interest of $13.6 million on the issues under litigation.  The Company does not anticipate any significant changes to the unrecognized tax benefits in the next twelve months.  The Company files income tax returns in the U.S. federal jurisdiction and the State of Oklahoma.  The Company is not subject to examination by any taxing authority for any tax years prior to 2003.

Note 11—Capital Ratios

The Company had a leverage ratio of 7.99% and 7.36%, risk-weighted Tier 1 capital ratio of 12.99% and 12.49% and risk-weighted total capital ratio of 14.14% and 13.61% at June 30, 2007 and December 31, 2006, respectively.  The identified intangibles and goodwill of $317,364,000 as of June 30, 2007, recorded in connection with the acquisitions made by the Company, are deducted from the sum of core capital elements when determining the capital ratios of the Company.  The Company actively monitors the regulatory capital ratios to ensure that the Company’s bank subsidiaries are well capitalized under the regulatory framework.

In March 2005, the Federal Reserve Board issued a final rule that would continue to allow the inclusion of trust preferred securities in Tier 1 capital, but with stricter quantitative limits.  Under the final rule, after a five-year transition period ending March 31, 2009, the aggregate amount of trust preferred securities and certain other capital elements would be limited to 25% of Tier 1 capital elements, net of goodwill, less any associated deferred tax liability.  The amount of trust preferred securities and certain other elements in excess of the limit could be included in Tier 2 capital, subject to restrictions.  Bank holding companies with significant international operations will be expected to limit trust preferred securities to 15% of Tier 1 capital elements, net of goodwill; however, they may include qualifying mandatory convertible preferred securities up to the 25% limit.

16