FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF
THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly
period ended MARCH 31, 2000
OR
[ ] 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 (I.R.S. Employer Identification No.)
incorporation or organization)
1200 SAN BERNARDO AVENUE, LAREDO, TEXAS 78042-1359
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(Address of principal executive offices)
(Zip Code)
(956) 722-7611
---------------
(Registrant's telephone number, including area code)
NONE
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(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 [ ]
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 17,152,183 shares outstanding at
May 5, 2000
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
INTERNATIONAL BANCSHARES CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CONDITION (UNAUDITED)
(DOLLARS IN THOUSANDS)
MARCH 31, DECEMBER 31,
ASSETS 2000 1999
------ ----------- -----------
Cash and due from banks .......................... $ 106,301 $ 121,695
Federal funds sold ............................... 18,300 13,300
----------- -----------
Total cash and cash equivalents ..... 124,601 134,995
Time deposits with banks ......................... 1,976 1,877
Investment securities:
Held to maturity
(Market value of $2,145 on March 31, 2000
and $2,405 on December 31, 1999) ............. 2,145 2,406
Available for sale
(Amortized cost of $3,011,379 on March 31,
2000 and $3,050,099 on December 31, 1999) .... 2,935,413 2,993,311
----------- -----------
Total investment securities ......... 2,937,558 2,995,717
Loans:
Commercial, financial and agricultural ........ 1,195,343 1,115,511
Real estate - mortgage ........................ 291,657 278,819
Real estate - construction .................... 137,779 129,813
Consumer ...................................... 166,809 171,104
Foreign ....................................... 231,742 216,632
----------- -----------
Total loans ......................... 2,023,330 1,911,879
Less unearned discounts ....................... (8,436) (8,355)
----------- -----------
Loans, net of unearned discounts .... 2,014,894 1,903,524
Less allowance for possible loan losses ....... (28,232) (26,770)
----------- -----------
Net loans ........................... 1,986,662 1,876,754
----------- -----------
Bank premises and equipment, net ................. 145,937 145,342
Accrued interest receivable ...................... 35,936 34,827
Other investments ................................ 130,446 130,089
Intangible assets ................................ 42,616 43,598
Other assets ..................................... 59,511 58,605
----------- -----------
Total assets ........................ $ 5,465,243 $ 5,421,804
=========== ===========
(Continued)
2
INTERNATIONAL BANCSHARES CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CONDITION, CONTINUED
(DOLLARS IN THOUSANDS)
MARCH 31, DECEMBER 31,
2000 1999
----------- -----------
LIABILITIES AND SHAREHOLDERS' EQUITY
Liabilities:
Deposits:
Demand - non-interest bearing ............. $ 547,776 $ 499,369
Savings and interest bearing demand ....... 938,188 928,455
Time ...................................... 2,146,097 2,099,388
----------- -----------
Total deposits .................... 3,632,061 3,527,212
Federal funds purchased and securities
sold under repurchase agreements .......... 126,209 123,752
Other borrowed funds ........................ 1,307,500 1,380,000
Other liabilities ........................... 50,649 37,404
----------- -----------
Total liabilities ................. 5,116,419 5,068,368
----------- -----------
Shareholders' equity:
Common stock of $1.00 par value.
Authorized 40,000,000 shares;
issued 21,119,199 shares in 2000
and 21,091,754 shares in 1999 ............. 21,119 21,092
Surplus ..................................... 24,572 24,050
Retained earnings ........................... 394,785 385,942
Accumulated other comprehensive income ...... (49,378) (36,912)
----------- -----------
391,098 394,172
Less cost of shares in treasury,
3,891,263 shares in 2000 and
3,851,844 shares in 1999 .................. (42,274) (40,736)
----------- -----------
Total shareholders' equity ........ 348,824 353,436
----------- -----------
Total liabilities and
shareholders' equity ........... $ 5,465,243 $ 5,421,804
=========== ===========
See accompanying notes to interim condensed consolidated financial statements.
3
INTERNATIONAL BANCSHARES CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
THREE MONTHS ENDED
MARCH 31,
-----------------------
2000 1999
-------- --------
Interest income:
Loans, including fees .......................... $ 47,373 $ 37,609
Time deposits with banks ....................... 31 22
Federal funds sold ............................. 376 176
Investment securities:
Taxable ...................................... 48,176 42,585
Tax-exempt ................................... 1,298 662
Other interest income .......................... 98 120
-------- --------
Total interest income ................... 97,352 81,174
-------- --------
Interest expense:
Savings deposits ............................... 6,969 6,709
Time deposits .................................. 27,219 23,849
Federal funds purchased and securities
sold under repurchase agreements .............. 1,647 1,486
Other borrowings ............................... 20,161 11,692
-------- --------
Total interest expense ............... 55,996 43,736
-------- --------
Net interest income .................. 41,356 37,438
Provision for possible loan losses ................ 1,576 2,187
-------- --------
Net interest income after
provision for possible
loan losses ....................... 39,780 35,251
-------- --------
Non-interest income:
Service charges on deposit accounts ............ 7,846 6,879
Other service charges, commissions
and fees ..................................... 2,558 2,390
Investment securities transactions ............. (1,319) 457
Other investments .............................. 1,926 1,080
Other income ................................... 2,208 1,895
-------- --------
Total non-interest income ............ 13,219 12,701
-------- --------
4
INTERNATIONAL BANCSHARES CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME - CONTINUED
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
THREE MONTHS ENDED
MARCH 31,
---------------------------
2000 1999
----------- -----------
Non-interest expense:
Employee compensation and benefits .......... 11,187 10,115
Occupancy ................................... 1,927 1,545
Depreciation of premises and equipment ...... 2,966 2,862
Professional fees ........................... 1,027 977
Stationery and supplies ..................... 700 662
Amortization of intangible assets ........... 982 927
Other ....................................... 6,328 6,930
----------- -----------
Total non-interest expense ........ 25,117 24,018
----------- -----------
Income before income taxes ........ 27,882 23,934
Income taxes ................................... 8,702 8,039
----------- -----------
Net Income ........................ $ 19,180 $ 15,895
=========== ===========
Basic earnings per common share:
Net Income .................................. $ 1.11 $ .90
Weighted average number of shares
outstanding ............................... 17,243,062 17,652,151
Diluted earnings per common share:
Net Income .................................. $ 1.10 $ .90
Weighted average number of shares
outstanding ............................... 17,483,089 17,759,637
See accompanying notes to interim condensed consolidated financial statements.
5
INTERNATIONAL BANCSHARES CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME (UNAUDITED)
(DOLLARS IN THOUSANDS)
THREE MONTHS ENDED
MARCH 31,
----------------------
2000 1999
-------- --------
Net Income .......................................... $ 19,180 $ 15,895
-------- --------
Other comprehensive income, net of tax:
Unrealized holding gains (losses) on
securities arising during period, net
of reclassification adjustment for
(gains) losses included in net income ......... (12,466) 179
-------- --------
Comprehensive income ................................ $ 6,714 $ 16,074
======== ========
See accompanying notes to interim condensed consolidated financial statements.
6
INTERNATIONAL BANCSHARES CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
(DOLLARS IN THOUSANDS)
THREE MONTHS ENDED
MARCH 31,
----------------------
2000 1999
--------- ---------
Operating activities:
Net Income ......................................... $ 19,180 $ 15,895
Adjustments to reconcile net income to net
cash provided by operating activities:
Provision for possible loan losses ............. 1,576 2,187
Recoveries on charged-off loans ................ 323 281
Net (profit) cost of operations for other
real estate owned ............................ (24) 36
Depreciation of bank premises and equipment .... 2,966 2,862
Depreciation and amortization of leasing assets 437 449
Accretion of investment securities discounts ... (4,568) (2,823)
Amortization of investment securities premiums.. 2,984 3,709
Realized loss (gain) on investment securities
transactions, net ............................ 1,319 (457)
Gain on sale of bank premises and equipment .... (45) (11)
Deferred tax expense ........................... 1,398 829
(Increase) decrease in accrued interest
receivable ................................... (1,109) 1,479
Increase in other liabilities .................. 13,245 13,853
--------- ---------
Net cash provided by operating activities . 37,682 38,289
--------- ---------
Investing activities:
Cash acquired in purchase transaction .............. -- 20,320
Proceeds from maturities of securities ............. 760 1,350
Proceeds from sales of available
for sale securities .............................. 48,216 253,463
Purchases of available for sale securities ......... (83,452) (197,722)
Principal collected on mortgage-backed securities .. 80,434 279,585
Proceeds from matured time deposits with banks ..... 293 189
Purchases of time deposits with banks .............. (392) (297)
Net increase in loans .............................. (111,807) (27,998)
Net increase in other assets ....................... (2,092) (98,019)
Purchase of bank premises and equipment ............ (3,651) (6,172)
Proceeds from sale of bank premises and equipment .. 135 31
--------- ---------
Net cash (used in) provided
investing activities ................... (71,556) 224,730
--------- ---------
7
INTERNATIONAL BANCSHARES CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS, CONTINUED
(DOLLARS IN THOUSANDS)
THREE MONTHS ENDED
MARCH 31,
----------------------
2000 1999
--------- ---------
Financing activities:
Net increase in non-interest bearing demand
demand deposits .................................. 48,407 44,318
Net increase (decrease) in savings and interest
bearing demand deposits .......................... 9,733 (15,566)
Net increase in time deposits ...................... 46,709 18,515
Net increase (decrease) in federal funds purchased
and securities sold under repurchase agreements .. 2,457 (14,150)
Proceeds from issuance of other borrowed funds ..... 217,500 360,000
Principal payments on other borrowed funds ......... (290,000) (624,000)
Purchase of treasury stock ......................... (1,538) (961)
Proceeds from stock transactions ................... 549 485
Payment of cash dividends .......................... (10,337) (8,474)
--------- ---------
Net cash provided (used in)
financing activities .................... 23,480 (239,833)
--------- ---------
(Decrease) increase in cash and cash equivalents ... (10,394) 23,186
Cash and cash equivalents
at beginning of year ............................. 134,995 120,594
--------- ---------
Cash and cash equivalents
at end of period ................................. $ 124,601 $ 143,780
========= =========
Supplemental cash flow information:
Interest paid .................................... $ 54,608 $ 42,455
Income taxes paid ................................ -- 80
Supplemental schedule of noncash investing and
financing activities relating to the purchase
transaction:
Loans acquired ................................. $ -- $ 4,503
Other assets acquired .......................... -- 3,112
Deposits and other liabilities assumed ......... -- 27,935
See accompanying notes to interim condensed consolidated financial statements.
8
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 generally accepted
accounting principles and to general practice within the banking industry. The
consolidated financial statements include the accounts of the Company 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. All significant intercompany 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.
In June 1998, the Financial Accounting Standards Board issued SFAS No.
133, "Accounting for Derivative Instruments and Hedging Activities." SFAS No.
133 establishes accounting and reporting standards for derivative instruments,
including certain derivative instruments embedded in other contracts, and for
hedging activities. SFAS No. 133 requires that an entity recognize all
derivatives as either assets or liabilities in the statement of financial
position and measure those instruments at fair value. If certain conditions are
met, a derivative may be specifically designated as a "fair value hedge," a
"cash flow hedge," or a hedge of a foreign currency exposure of a net investment
in a foreign operation. The accounting for changes in the fair value of a
derivative (that is, gains and losses) depends on the intended use of the
derivative and the resulting designation. SFAS No. 133 is effective for all
fiscal quarters of fiscal years beginning after June 15, 2000. Management of the
Company is in the process of assessing the impact, if any, of the future
adoption of SFAS No. 133.
In October 1998, the Financial Accounting Standards Board issued SFAS No.
134, "Accounting for Mortgage-Backed Securities Retained after the
Securitization of Mortgage Loans Held for Sale by a Mortgage Banking
Enterprise." SFAS No. 134 further amends Statement 65, "Accounting for Certain
Mortgage Banking Activities, as amended by SFAS No. 115, "Accounting for Certain
Investments in Debt and Equity Securities," and SFAS No. 125, "Accounting for
Transfers and Servicing of Financial Assets and Extinguishments of Liabilities,"
requires that after securitization of mortgage loans held for sale, an entity
engaged in mortgage banking activities classify the resulting mortgage-backed
securities or other retained interests based on its ability and intent to sell
or hold those investments. SFAS No. 134 is effective for the first fiscal
quarter beginning after December 15, 1998. The adoption of this Statement did
not have a material impact on the Company's financial position, results of
operation, or liquidity.
SFAS No. 131, "Disclosures about Segments of an Enterprise and Related
Information," establishes standards for the way that public business enterprises
report information about operation segments in annual financial statements and
requires that
9
those enterprises report selected information about operation segments in
interim financial reports issued to shareholders. SFAS No. 131 also establishes
standards for related disclosures about products and services, geographic areas,
and major customers. Management of the Company believes that it does not have
separate reportable operating segments under the provision of SFAS No. 131.
NOTE 2 - INVESTMENT SECURITIES
The Company classifies debt and equity securities into one of these
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 and as a separate
component of shareholders' equity until realized.
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:
MARCH 31, DECEMBER 31,
2000 1999
---------- ----------
(DOLLARS IN THOUSANDS)
U. S. Treasury and federal agencies
Available for sale ......................... $2,692,312 $2,752,943
States and political subdivisions
Held to maturity ........................... 60 321
Available for sale ......................... 90,843 90,416
Other
Held to maturity ........................... 2,085 2,085
Available for sale ......................... 152,258 149,952
---------- ----------
Total investment securities ................ $2,937,558 $2,995,717
========== ==========
NOTE 3 - ALLOWANCE FOR POSSIBLE LOAN LOSSES
A summary of the transactions in the allowance for possible loan losses is
as follows:
MARCH 31, MARCH 31,
2000 1999
-------- --------
(DOLLARS IN THOUSANDS)
Balance at January 1 ................................ $ 26,770 $ 25,551
Losses charged to allowance ................... (437) (1,695)
Recoveries credited to allowance .............. 323 281
-------- --------
Net losses charged to allowance ............... (114) (1,414)
Provisions charged to operations .............. 1,576 2,187
-------- --------
Balance at March 31 ................................. $ 28,232 $ 26,324
======== ========
10
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 included 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 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. Amounts received on non-accruals are applied, for financial
accounting purposes, first to principal and then to interest after all principal
has been collected.
Management of the Company recognizes the risks associated with impaired
loans. However, management's decision to place loans in this category does not
necessarily mean that the Company expects losses to occur. The Company's
impaired loan balances at the end of the three month period of both 2000 and
1999 was not material to the Company's consolidated financial position.
The subsidiary banks 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 March 31, 2000, was adequate to absorb possible losses from loans in
the portfolio at that date.
NOTE 4 - STOCK AND CASH DIVIDENDS
All per share data presented has been restated to reflect the stock split
effected through a stock dividend which became effective May 20, 1999 and
resulted in the issuance of 4,204,251 shares of Common Stock. A special cash
dividend of $.60 and $.50 per share was paid to holders of record of Common
Stock on April 15, 1999 and October 15, 1999, respectively. A special cash
dividend of $.60 per share and a 25% stock split effected through a stock
dividend was declared on March 16, 2000 and April 6, 2000 for all holders of
Common Stock of record on March 31, 2000 and May 18, 2000, respectively, with
said dividends made payable on April 14, 2000 and June 12, 2000, respectively.
The Company announced a new formal stock repurchase program on June 22,
1999 and announced it expanded the stock repurchase program on July 16, 1999 and
on January 11, 2000. Under the stock repurchase program, the Company is
authorized to repurchase up to $35,000,000 of its common stock through December
2000. 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
11
purposes, including employee stock option plans. As of May 5, 2000, a total of
568,063 shares had been repurchased under this program at a cost of $24,450,000.
Stock repurchases are presented 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 $60,000,000. In the past, the board has
increased previous caps on treasury stock once they were met, but there are no
assurances that an increase of the $60,000,000 cap will occur in the future. As
of May 5, 2000, the Company has approximately $45,423,000 invested in treasury
shares, which amount has been accumulated since the inception of the Company.
On April 3, 1996, the Board of Directors adopted the 1996 International
Bancshares Corporation Stock Option Plan. The Plan replaced the 1987
International Bancshares Corporation Key Contributor Stock Option Plan. Subject
to certain adjustments, the maximum number of shares of common stock which may
be made subject to options granted under the new Plan is 641,500 and 40,372
shares remain available for the issuance of options under the new Plan. The
198,405 shares of common stock remaining available under the 1987 Plan will be
treated as authorized for issuance upon exercise of options granted under the
1987 Plan only. As of March 31, 2000, options to acquire 198,405 and 641,500
shares of common stock remain outstanding under the 1987 Plan and the new Plan,
respectively.
NOTE 5 - COMMITMENTS AND CONTINGENT LIABILITIES
The Company and its bank subsidiaries are involved in certain legal
proceedings that are in various stages of litigation. Some of these actions
allege "lender liability" claims on a variety of theories and claim substantial
actual and punitive damages. The Company and its subsidiaries have determined,
based on discussions with their 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 financial condition or
results of operations of the Company and its subsidiaries. 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 several lease financing
transactions. Two of the lease financing transactions have been examined by the
Internal Revenue Service ("IRS"). In both transactions, a subsidiary of the lead
bank is the owner of a ninety-nine percent (99%) limited partnership interest.
The IRS has issued a Notice of Proposed Adjustments to Affected Items of a
partnership for one of the transactions and the affected partnership has
submitted a Protest contesting the adjustments. The IRS has issued a Notice of
Proposed Adjustments to Affected Items of a Partnership for the other
transaction and the partnership intends to file a Protest contesting the
proposed adjustments. No reliable prediction can be made at this time as to the
likely outcome of the Protests; however, if the Protests 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 these lease financing
transactions would be in question. Management currently estimates its exposure
to be approximately $4,800,000, which amount has been accrued for and included
in income tax expense. Management intends to continue to evaluate the merits of
this matter and make appropriate revisions if warranted.
ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
Net income for the first quarter of 2000 was $19,180,000 or $1.11 per
share - basic ($1.10 per share - diluted) compared to $15,895,000 or $.90 per
share - basic
12
($.90 per share - diluted) in the first quarter of 1999, which represents a 21%
increase over the corresponding 1999 period.
Historically, the Company's acquisitions have been accounted for using the
purchase method of accounting which results in the creation of goodwill. The
Company's goodwill is being amortized as a non-cash reduction of net income over
time periods from ten to twenty years. "Income before goodwill charges" reflects
the net income of the Company excluding goodwill amortization. In computing the
income tax adjustment, Management has considered tax deductible goodwill
separately from non-tax deductible goodwill in making this calculation. The
income tax on tax deductible goodwill has been computed using the standard
corporate tax rate of 35%, and the non-tax deductible goodwill has been
grossed-up using the same 35% tax rate to reflect the earnings result. These two
calculations have been combined to reflect the net income tax adjustment
displayed in the cash earnings table below. The table reconciles reported
earnings to net income excluding intangible amortization ("income before
goodwill charges") to help facilitate peer group comparisons.
THREE MONTHS ENDED
MARCH 31,
--------------------
2000 1999
-------- --------
(DOLLARS IN THOUSANDS,
EXCEPT PER SHARE DATA)
Reported net income ................................... $ 19,180 $ 15,895
Amortization of intangible asset ...................... 982 927
Income tax adjustment ................................. (80) (61)
-------- --------
Income before goodwill charges ........................ $ 20,082 $ 16,761
======== ========
Income before goodwill charges per common share:
Basic ............................................... $ 1.16 $ .95
Diluted ............................................. 1.15 .94
Total assets at March 31, 2000, were $5,465,243,000 which represents a 14%
increase over total assets of $4,806,735,000 at March 31, 1999 and a 1% increase
over total assets of $5,421,804,000 at December 31, 1999. Deposits at March 31,
2000 were $3,632,061,000 which represents an increase of 5% over the
$3,444,777,000 amount reported at March 31, 1999, and an increase of 3% over the
$3,527,212,000 reported at December 31, 1999. Total loans at March 31, 2000
increased 22% to $2,023,330,000 from $1,653,260,000 reported at March 31, 1999,
and increased 6% from the $1,911,879,000 reported at December 31, 1999. The
increase in assets and deposits during the first three months in 2000 reflects
growth opportunities in the Company's market through its branch system. The
aggregate amount of certificates of indebtedness with the Federal Home Bank of
Dallas ("FHLB") decreased to $1,307,500,000 at March 31, 2000 from the
$1,380,000,000 at December 31, 1999. The certificates of indebtedness are used
to fund the earning asset base of the Company.
As part of its strategy to manage interest rate risk, the Company strives
to manage both assets and liabilities so that interest sensitivities match. In
this way both earning assets and funding sources of the Company respond to
changes in a similar time frame. Net interest income for the first quarter of
2000 increased $3,918,000 (10%) over the same period in 1999 and the increase is
the result of the Company's efforts to manage interest rate risk.
Investment securities increased 10% to $2,937,558,000 at March 31, 2000,
from $2,670,951,000 at March 31, 1999. Time deposits with other banks at March
31, 2000 increased 33% to $1,976,000 from $1,481,000 at March 31, 1999. Total
federal funds
13
sold decreased 46% to $18,300,000 for the first quarter of 2000 as compared to
$34,000,000 for the first quarter of 1999.
Interest and fees on loans for the three month period in 2000 increased
$9,764,000 (26%) compared to the same period in 1999. Interest income on taxable
and tax exempt investment securities for the first quarter in 2000 increased
$6,227,000 (14%) from the same quarter in 1999. Interest income on time deposits
with banks for the first quarter in 2000 increased $9,000 (41%) from the same
quarter in 1999. Interest income on federal funds sold for the first quarter in
2000 increased $200,000 (114%) from the same quarter in 1999. Overall, total
interest income from loans, time deposits, federal funds sold, investment
securities and other interest income for the first quarter in 2000 increased
$16,178,000 (20%) from the same quarter in 1999. The increase in total interest
income was primarily due to the income derived from the increase in the
Company's loan portfolio.
Total interest expense for savings deposits, time deposits and other
borrowings increased $12,260,000 (28%) for the first quarter of 2000 from the
same quarter in 1999. The increase in total interest expense was primarily due
to higher interest rates and larger volume. As a result, net interest income for
the first quarter of 2000 increased $3,918,000 or 10% over the same period in
1999. This increase is attributed to the Company's efforts to maintain an
adequate interest rate spread between the cost of funds and the investment of
those funds.
Non-interest income increased $518,000 (4%) to $13,219,000 in the first
quarter of 2000 as compared to $12,701,000 for the quarter ended March 31, 1999.
The increases in non-interest income were primarily due to the increases in
service charge income. The increase in service charges were attributable to the
amount of account transaction fees received as a result of deposit growth, new
deposit products and increased collection efforts. The Company executed a bond
sale program in the first quarter of 2000 to improve future earnings which
resulted in losses of $1,319,000 compared to gains of $457,000 for the same
period in 1999.
Non-interest expense increased $1,099,000 to $25,117,000 for the first
quarter of 2000 as compared to $24,018,000 for the quarter ended March 31, 1999.
Non-interest expense increased due to the Company's expanded operations at the
bank subsidiaries.
The efficiency ratio, a measure of non-interest expense to net interest
income plus non-interest income was 46% for the first quarter of 2000, compared
to the year ago ratio of 48%.
The allowance for possible loan losses increased 7% to $28,232,000 at the
end of the first quarter of 2000 from $26,324,000 for the corresponding date in
1999. The provision for possible loan losses charged to expense decreased 28% to
$1,576,000 for the quarter ended March 31, 2000 from $2,187,000 for the same
quarter in 1999. The increase in the allowance for possible loan losses were
largely due to the increase in the size of the loan portfolio. The allowance for
possible loan losses was 1.40% of total loans at March 31, 1999, compared to
1.59% at March 31, 1999 and 1.40% at December 31, 1999.
At March 31, 2000, the Company had $5,465,243,000 of consolidated assets
of which approximately $233,651,000 or 4% were related to loans outstanding to
borrowers domiciled in Mexico compared to $181,767,000 or 4% at March 31, 1999.
Of the $233,651,000, 54% is directly or indirectly secured by U.S. assets,
principally certificates of deposits and real estate; 43% is secured by Mexican
real estate; 1% is unsecured; 1% consists of direct unsecured Mexican sovereign
debt (principally former FICORCA debt) and 1% represents accrued interest
receivable on the portfolio.
14
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 bank subsidiaries of the Company derive their liquidity
largely from deposits of individuals and business entities. Historically, the
Mexico based deposits of the Company's bank subsidiaries have been a stable
source of funding. 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 2000 and 1999 have been wholesale liabilities with, FHLB,
FNMA, FHLMC 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. 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.
Principal sources of liquidity and funding for the Company are dividends
from subsidiaries and borrowed funds, with such funds being used to finance the
Company's cash flow requirements. The Company has a number of available
alternatives to finance the growth of its existing banks as well as future
growth and expansion. Among the activities and commitments the Company funded
during the first quarter in 2000 and expects to continue to fund during 2000 is
a continuous effort to modernize and improve our existing facilities and expand
our bank branch network.
The Company maintains an adequate level of capital as a margin of safety
for its depositors and shareholders. At March 31, 2000, shareholders' equity was
$348,824,000 compared to $377,407,000 at March 31, 1999, a decrease of
$28,583,000 or 8%. The decrease in shareholders' equity resulted from the stock
repurchase program and the negative impact of comprehensive income. An
accounting standard relating to comprehensive income requires that unrealized
losses on securities held available for sale, net of tax, be deducted from
shareholders' equity; however, the unrealized losses on securities are not
deducted from capital in the calculation of regulatory capital requirements.
The Company had a leverage ratio of 6.60% and 6.58%, risk-weighted Tier 1
capital ratio of 13.12% and 13.41% and risk-weighted total capital ratio of
14.18% and 14.46% at March 31, 2000 and December 31, 1999, respectively. The
core deposit intangibles and goodwill of $41,649,000 at March 31, 2000, booked
in connection with financial institution acquisitions of 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 anticipated fluctuations in interest
rates by adjusting the balance between sources and uses of funds as deemed
appropriate. The net-interest rate sensitivity as of March 31, 2000 is
illustrated in the table on page 16. 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 repricing characteristics
represents a matched interest rate sensitivity position. Any excess of assets or
liabilities results in an interest rate sensitivity gap.
15
The Company undertakes the interest rate sensitivity analysis to monitor
the potential risk on future earnings resulting from the impact of possible
future changes in interest rates on currently existing net asset or net
liability positions. However, this type of analysis is as of a point-in-time
position, when in fact that position can quickly change as market conditions,
customer needs, and management strategies change. Thus, interest rate changes do
not affect all categories of asset and liabilities equally or at the same time.
As indicated in the table, the Company is liability sensitive during the early
time periods and asset sensitive in the longer periods. The Company's Asset and
Liability Committee semi-annually reviews the consolidated position along with
simulation and duration models, and makes adjustments as needed to control the
Company's interest rate risk position. The Company uses modeling of future
events as a primary tool for monitoring interest rate risk.
INTEREST RATE SENSITIVITY
(Dollars in Thousands)
RATE/MATURITY RATE/MATURITY RATE/MATURITY RATE/MATURITY
March 31, 2000 3 MONTHS OVER 3 MONTHS OVER 1 YEAR TOTAL
(Dollars in Thousands) OR LESS TO 1 YEAR TO 5 YEARS OVER 5 YEARS
===========================================================================================================
SECTION A
-----------------------------------------------------------------------------------------------------------
RATE SENSITIVE ASSETS
FED FUNDS SOLD $ 18,300 - - - $ 18,300
DUE FROM BANK INT EARNING 396 1,580 - - 1,976
INVESTMENT SECURITIES 160,403 344,469 2,187,570 245,116 2,937,558
LOANS, NET OF NON-ACCRUALS 1,400,481 129,487 311,791 174,763 2,016,522
----------------------------------------------------------------------------------------------------------
TOTAL EARNING ASSETS $ 1,579,580 $ 475,536 $ 2,499,361 $ 419,879 $ 4,974,356
-----------------------------------------------------------------------------------------------------------
CUMULATIVE EARNING ASSETS $ 1,579,580 $ 2,055,116 $ 4,554,477 $ 4,974,356
===========================================================================================================
SECTION B
-----------------------------------------------------------------------------------------------------------
RATE SENSITIVE LIABILITIES
TIME DEPOSITS $ 1,104,182 $ 862,878 $ 178,897 $ 140 $ 2,146,097
OTHER INT BEARING DEPOSITS 938,188 - - - 938,188
FED FUNDS PURCHASED & REPOS 66,735 54,952 4,522 - 126,209
OTHER BORROWINGS 1,307,500 - - - 1,307,500
-----------------------------------------------------------------------------------------------------------
TOTAL INTEREST BEARING LIABILITIES $ 3,416,605 $ 917,830 $ 183,419 $ 140 $ 4,517,994
-----------------------------------------------------------------------------------------------------------
CUMULATIVE SENSITIVE LIABILITIES $ 3,416,605 $ 4,334,435 $ 4,517,854 $ 4,517,994
===========================================================================================================
SECTION C
-----------------------------------------------------------------------------------------------------------
REPRICING GAP $(1,837,025) $ (442,294) $ 2,315,942 $ 419,739 $ 456,362
CUMULATIVE REPRICING GAP $(1,837,025) $(2,279,319) $ 36,623 $ 456,362
RATIO OF INTEREST-SENSITIVE .46 .52 13.63 - 1.10
ASSETS TO LIABILITIES
RATIO OF CUMULATIVE, INTEREST- .46 .47 1.01 1.10
SENSITIVE ASSETS TO LIABILITIES
===========================================================================================================
YEAR 2000
This section contains forward-looking statements that have been prepared
on the basis of the Company's best judgments and currently available
information. These forward-looking statements are inherently subject to
significant business, third party, and regulatory uncertainties and other
contingencies, many of which are beyond the control of the Company.
16
The Company successfully completed its transition to the Year 2000 with no
impact to the Company's results of operations or financial condition other than
the cost of the project. In addition, management is not aware of any vendor or
provider used by the Company for data processing or related services which
experienced a material failure of its product or service due to a Year 2000
related problem. The Company is also subject to risks associated with Year 2000
noncompliance by its customers. Management is not aware of any customer which
suffered losses related to a Year 2000 problem which would adversely affect that
customer's financial condition or its ability to repay any outstanding loan it
has with the Company.
As of March 31, 2000, the Company incurred expenses to remediate the Year
2000 issue in the amount of $695,000, which amount includes expenses in years
1998, 1999 and 2000. These costs are being expensed as incurred. While the
Company believes that it will incur no additional material expenses related to
the Year 2000 issue, there can be no assurance that the Company will not be
impacted by a Year 2000 related problem which occurs after the date hereof or by
the failure of a third party to achieve proper Year 2000 compliance.
Although many of the critical dates related to potential Year 2000 related
problems have passed, experts predict that Year 2000 related failures could
occur throughout the year, such as December 31, 2000. Accordingly, the Company's
Year 2000 project team will continue to monitor the Company's programs and
systems and attempt to identify any potential problems during the course of the
year. In addition, the Company will continue to monitor the Year 2000 compliance
of the third parties with which the Company transacts business.
FINANCIAL MODERNIZATION LEGISLATION
On November 12, 1999, President Clinton signed into law the
Gramm-Leach-Bliley Act of 1999 ("GLBA"). This comprehensive legislation
eliminates the barriers to affiliations among banks, securities firms, insurance
companies and other financial service providers. GLBA provides for a new type of
financial holding company structure under which affiliations among these
entities may occur. Under GLBA, a financial holding company may engage in a
broad list of financial activities and any non- financial activity that the FRB
determines is complementary to a financial activity and poses no substantial
risk to the safety and soundness of depository institutions or the financial
system. In addition, GLBA permits certain non-banking financial and financially
related activities to be conducted by financial subsidiaries of a national bank.
Additionally, GLBA imposes strict new privacy disclosure and opt-out
requirements regarding the ability of financial institutions to share personal
non- public customer information with third parties.
Under the GLBA, a bank holding company may become certified as a financial
holding company by filing a declaration with the FRB, together with a
certification that each of its subsidiary banks is well capitalized, is well
managed, and has at least a satisfactory rating under the Community Reinvestment
Act of 1977 ("CRA"). The Company has elected to become a financial holding
company under GLBA and the election was made effective by the FRB as of March
13, 2000. To date, the Company has not engaged in any additional financial
activities permitted by GLBA.
17
FORWARD LOOKING INFORMATION
Certain matters discussed in this report, excluding historical
information, include forward-looking statements. 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" and "project," as well as other words or
expressions of 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:
(I) changes in local, state, national and international economic conditions,
(II) changes in the capital markets utilized by the Company and its
subsidiaries, including changes in the interest rate environment that may reduce
margins, (III) 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, banking, tax,
securities, insurance and employment laws and regulations, and (IV) the loss of
senior management or operating personnel, and (V) increased competition from
both within and without the banking industry. 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.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
During the first quarter of 2000, there were no material changes in market
risk exposures that affected the quantitative and qualitative disclosures
regarding market risk presented in the Company's Form 10-K for the year ended
December 31, 1999.
18
PART II - OTHER INFORMATION
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
---------------------------------------------------
The Annual Meeting of Shareholders of the Company will be held May 18,
2000 for the following purposes: 1) To elect ten (10) directors of the Company
until the next Annual Meeting of Shareholders and until their successors are
elected and qualified; 2) To approve the appointment of independent auditors for
the 2000 fiscal year; 3) To transact such other business as may lawfully come
before the meeting or any adjournment thereof. Proxies have been solicited
pursuant to Regulation 14A under the Securities Exchange Act of 1934.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) EXHIBITS
Exhibit 27. International Bancshares Corporation Financial Data Schedule
for the Period ended March 31, 2000.
(b) Registrant filed a current report on Form 8-K on April 10, 2000, covering
Item 5 - Other Events and Item 7 - Financial Statements and Exhibits in
connection with the announcement of a stock dividend by the Company.
Registrant filed a current report on Form 8-K on May 12, 2000, covering
Item 5 - Other Events and Item 7 - Financial Statements and Exhibits in
connection with the announcement the Company's First Quarter 2000 Earnings.
19
SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934,
the registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
INTERNATIONAL BANCSHARES CORPORATION
Date: MAY 15, 2000 /S/ DENNIS E. NIXON
------------ --------------------------------------
Dennis E. Nixon
President
Date: MAY 15, 2000 /S/ IMELDA NAVARRO
------------ --------------------------------------
Imelda Navarro
Treasurer (Chief Accounting Officer)
20