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, 1996
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
(Address of principal executive offices)
(Zip Code)
(210) 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 [ ]
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 6,985,234 shares outstanding at
May 10, 1996
PART 1 - FINANCIAL INFORMATION
Item 1. FINANCIAL STATEMENTS
INTERNATIONAL BANCSHARES CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CONDITION
(Dollars in Thousands)
March 31, December 31,
Assets 1996 1995
------ --------- --------
Cash and due from banks $ 99,936 86,827
Federal funds sold 7,300 37,000
--------- ---------
Total cash and cash equivalents 107,236 123,827
Time deposits with banks 1,899 1,800
Investment securities:
Held to maturity
(Market value of $2,751 on March 31, 1996
and $2,895 on December 31, 1995 2,762 2,909
Available for sale
(Amortized cost of $1,346,229 on March 31,
1996 and $1,439,823 on December 31, 1995 1,359,153 1,460,432
--------- ---------
Total investment securities 1,361,915 1,463,341
Loans:
Commercial, financial and agricultural 702,553 718,364
Lease financing receivables, net 3,910 3,910
Real estate - mortgage 191,885 200,998
Real estate - construction 40,909 39,527
Consumer 127,817 124,843
Foreign 123,984 120,748
--------- ---------
Total loans 1,191,058 1,208,390
Less unearned discounts (3,348) (3,479)
--------- ---------
Loans, net of unearned discounts 1,187,710 1,204,911
Less allowance for possible loan losses (19,212) (18,455)
--------- ---------
Net loans 1,168,498 1,186,456
--------- ---------
Bank premises and equipment, net 82,091 80,410
Accrued interest receivable 21,288 22,204
Other assets 60,073 57,568
--------- ---------
Total assets $ 2,803,000 2,935,606
========= =========
(Continued)
2
INTERNATIONAL BANCSHARES CORPORATION AND SUBSIDIARIES
Consolidated Statements of Condition, continued
(Dollars in Thousands)
March 31, December 31,
1996 1995
--------- ---------
Liabilities and Shareholders' Equity
Liabilities:
Deposits:
Demand - non-interest bearing $ 287,503 295,301
Savings and interest bearing demand 592,223 576,878
Time 1,306,308 1,271,167
--------- ---------
Total deposits 2,186,034 2,143,346
Federal funds purchased and securities
sold under repurchase agreements 289,762 462,602
Other borrowed funds 52,250 66,500
Other liabilities 22,460 17,397
--------- ---------
Total liabilities 2,550,506 2,689,845
--------- ---------
Shareholders' equity:
Common stock of $1.00 par value.
Authorized 15,000,000 shares;
issued 8,204,923 shares in 1996
and 8,159,814 shares in 1995 8,205 8,160
Surplus 10,915 10,637
Retained earnings 233,339 221,350
Net unrealized holding gains on
available for sale securities,
net of deferred income taxes 8,400 13,396
--------- ---------
260,859 253,543
Less cost of shares in treasury,
1,243,567 shares in 1996 and
1,229,332 shares in 1995 (8,365) (7,782)
--------- ---------
Total shareholders' equity 252,494 245,761
--------- ---------
Total liabilities and
shareholders' equity $ 2,803,000 2,935,606
========= =========
See accompanying notes to consolidated financial statements.
3
INTERNATIONAL BANCSHARES CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(Dollars in Thousands, except per share data)
Three Months Ended
March 31,
------------------
1996 1995
---- ----
Interest income:
Loans, including fees $ 29,737 30,200
Time deposits with banks 11 6
Federal funds sold 280 172
Investment securities:
Taxable 23,672 20,154
Tax-exempt 406 487
Other interest income 120 105
------ ------
Total interest income 54,226 51,124
------ ------
Interest expense:
Savings deposits 4,296 4,217
Time deposits 16,122 14,321
Federal funds purchased and securities
sold under repurchase agreements 5,641 5,023
Other borrowings 556 1,867
------ ------
Total interest expense 26,615 25,428
------ ------
Net interest income 27,611 25,696
Provision for possible loan losses 1,559 1,219
------ ------
Net interest income after
provision for possible
loan losses 26,052 24,477
------ ------
Non-interest income:
Service charges on deposit accounts 3,512 3,316
Other service charges, commissions
and fees 1,621 1,702
Insurance premiums earned 218 138
Investment securities transactions, net 890 198
Operations of other real estate owned - 19
Other income 2,028 1,595
------ ------
Total non-interest income 8,269 6,968
------ ------
(Continued)
4
INTERNATIONAL BANCSHARES CORPORATION AND SUBSIDIARIES
Consolidated Statements of Income, continued
(Dollars in Thousands, except per share data)
Three Months Ended
March 31,
------------------
1996 1995
---- ----
Non-interest expense:
Employee compensation and benefits 6,741 6,150
Occupancy 1,135 784
Depreciation of bank premises and equipment 1,544 1,671
Professional fees 1,575 1,653
Net costs of operations for other real
estate owned 76 -
Stationary and supplies 408 517
Other 5,234 4,092
------ ------
Total non-interest expense 16,713 14,867
------ ------
Income before income taxes 17,608 16,578
Income taxes 5,619 5,386
------ ------
Net income $ 11,989 11,192
====== ======
Per share (Note 5):
Net income - primary $ 1.68 1.54
Net income - fully diluted $ 1.68 1.54
Weighted average number of shares
outstanding 7,128,903 7,258,422
See accompanying notes to consolidated financial statements.
5
INTERNATIONAL BANCSHARES CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollars in Thousands)
Three Months Ended
March 31
------------------
1996 1995
---- ----
Operating activities:
Net Income $ 11,989 11,192
Adjustments to reconcile net income to net
cash provided by operating activities:
Provision for possible loan losses 1,559 1,219
Recoveries on charged-off loans 173 147
Net cost (profit) of operations for other real
estate owned 76 (19)
Lease asset write-downs 233 49
Depreciation of bank premises and equipment 1,544 1,671
Accretion of investment securities discounts (305) (327)
Amortization of investment securities premiums 1,519 3,421
Realized gain on investment securities
transactions, net (890) (198)
Gain on sale of bank premises and equipment (107) (7)
Decrease (increase) in accrued interest receivable 916 (639)
Increase in other liabilities 6,229 5,900
------ ------
Net cash provided by operating activities 22,936 22,409
------ ------
Investing activities:
Cash acquired in purchase transaction - 6,007
Proceeds from maturities of securities 45 25,513
Proceeds from sales of available for sale
securities 192,504 27,318
Purchases of available for sale securities (179,536) (123,515)
Principal collected on mortgage-backed securities 75,880 38,812
Proceeds from matured time deposits with banks - 99
Purchases of time deposits with banks (99) -
Net decrease (increase) in loans 16,226 (31,966)
Net increase in other assets 3,233 495
Purchase of bank premises and equipment (3,613) (2,479)
Proceeds from sale of bank premises and equipment 495 18
------ ------
Net cash provided by (used in) in investing
activities 105,135 (59,698)
------- ------
(Continued)
6
INTERNATIONAL BANCSHARES CORPORATION AND SUBSIDIARIES
Consolidated Statements of Cash Flows, continued
(Dollars in Thousands)
Three Months Ended
March 31
------------------
1996 1995
---- ----
Financing activities:
Net decrease in non-interest bearing
demand deposits $ (7,798) (21,850)
Net increase (decrease) in savings and interest
bearing demand deposits 15,345 (53,021)
Net increase (decrease) in time deposits 35,141 (11,388)
Net (decrease) increase in federal funds purchased
and securities sold under repurchase agreements (172,840) 119,078
Principal payments on other borrowed funds (14,250) (250)
Purchase of treasury stock (583) (310)
Proceeds from exercise of stock options 323 25
------- -------
Net cash (used in) provided by financing
activities (144,662) 32,284
-------- -------
Decrease in cash and cash equivalents (16,591) (5,005)
Cash and cash equivalents
at beginning of year 123,827 90,200
------- -------
Cash and cash equivalents
at end of period $ 107,236 85,195
======== =======
Supplemental cash flow information:
Interest paid $ 26,282 26,173
Income taxes paid 25 25
Supplemental schedule of noncash investing and financing activities relating
to the purchase transaction:
Loans acquired - 28,501
Investment securities and other assets acquired - 45,535
Deposit liabilities assumed - 80,043
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 ("Company") and Subsidiaries 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 ("IBC"), Commerce
Bank, International Bank of Commerce, Zapata, International Bank of Commerce,
Brownsville and its wholly-owned non-bank subsidiaries, IBC Subsidiary
Corporation, IBC Life Insurance Company and IBC Trading Company. All significant
intercompany balances and transactions have been eliminated. The consolidated
financial statements are unaudited, but include all adjustments which, in the
opinion of management, are necessary for a fair presentation of the results of
the periods presented. All such adjustments were of a normal and recurring
nature. It is suggested that these financial statements be read in conjunction
with the financial statements and the notes thereto in the Company's latest
Annual Report on Form 10K.
The Company adopted Statement of Financial Accounting Standards No.114,
"Accounting by Creditors for Impairment of a Loan" ("SFAS 114"), and SFAS No.
118, "Accounting by Creditors for Impairment of a Loan - Income Recognition and
Disclosure" effective January 1, 1995. These Statements are applicable to all
creditors and to all loans, uncollateralized as well as collateralized, except
consumer loans. These Statements require that impaired loans be 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. The adoption
of this accounting standard did not have a material effect on the Company's
financial position or results of operations since the Company's previous
recognition and measurement policies regarding non-performing loans were
consistent with the accounting requirements for impaired loans.
On January 1, 1996, the Company adopted SFAS No. 122, "Accounting for
Mortgage Servicing Rights. This Statement requires that a mortgage banking
enterprise assess its capitalized mortgage servicing rights for impairment based
on the fair value of those rights that are capitalized after the adoption of
this Statement based on one or more of the predominant risk characteristics of
the underlying loans. Impairment should be recognized through a valuation
allowance for each impaired stratum. The adoption of this accounting standard
did not have a material effect on the Company's financial position or results of
operations.
Note 2 - Acquisitions
On February 27, 1996, the Company entered into a purchase and assumption
agreement whereby IBC will purchase certain assets and will assume certain
liabilities of River Valley Bank, F.S.B., headquartered in Weslaco, Texas. This
agreement is subject to regulatory approval. IBC will purchase loans of
approximately $22,915,000 and assume deposits of approximately $137,780,000 and
will receive cash or other assets in the amount of approximately $114,865,000.
Effective September 8, 1995, Stone Oak National Bank, in San Antonio,
Texas, ("SONB") a national banking association organized under the laws of the
United States, was merged with and into IBC. At the date of closing, total
assets acquired were approximately $18,000,000. The acquisition was accounted
for as a purchase transaction. IBC recorded intangible assets, goodwill and core
deposit premium totaling $1,387,000. These assets are being amortized on a
straight line basis over a fifteen year period.
Effective February 1, 1995, The Bank of Corpus Christi, Corpus Christi,
Texas ("BCC") a state bank organized under the laws of the state of Texas, was
merged with and into IBC. At the date of closing, total assets acquired were
approximately $80,000,000. The acquisition was accounted for as a purchase
transaction. IBC recorded intangible assets, goodwill and core deposit premium
totaling $4,042,000. These assets are being amortized on a straight line basis
8
over a fifteen year period.
Note 3 - Investment Securities
The Financial Accounting Standard Board's ("FASB") Statement of
Financial Accounting Standards ("SFAS") No. 115, "Accounting for Certain
Investments Securities in Debt and Equity Securities", requires that investment
securities be classified into one of these categories: held-to-maturity,
available-for-sale, or trading. SFAS No. 115 also states that these
classifications need to be reassessed for appropriate classification at each
reporting date. Securities classified as "held-to-maturity" are to be carried at
amortized cost for financial statement reporting, while securities classified as
"available for sale" and "trading" are to be 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 at a net amount as a separate component of shareholders'
equity until realized. A summary of the investment securities held for
investment and securities available for sale is presented in the following
table:
March 31, March 31,
1996 1995
U. S. Treasury and federal agencies
Held to maturity $ - 573,488
Available for sale 1,313,188 756,556
States and political subdivisions
Held to maturity 897 8,427
Available for sale 29,987 24,856
Other
Held to maturity 1,865 3,640
Available for sale 15,978 14,149
------- -------
Total investment securities $ 1,361,915 1,381,116
========= =========
The Company may invest in collateralized mortgage obligations and structured
notes. However, at March 31, 1996 the Company did not have outstanding
investments in these type of securities. At March 31, 1995 such investments in
the portfolio were not significant to the financial position of the Company.
Note 4 - Allowance for Possible Loan Losses
A summary of the allowance for possible loan losses follows:
Three Months Ended
March 31,
1996 1995
---- ----
(Dollars in Thousands)
Balance at January 1 $ 18,455 17,025
Losses charged to allowance (975) (249)
Recoveries credited to allowance 173 147
------ ------
Net losses charged to allowance (802) (102)
Provisions charged to operations 1,559 1,219
------ ------
Allowances acquired in purchase
transactions - 332
------ ------
Balance at March 31 $ 19,212 18,474
====== ======
9
On January 1, 1995, the Company adopted SFAS 114 as amended by SFAS
118. 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.
The recorded investment in loans considered impaired during the first
quarter in 1996 was approximately $11,787,000, including five troubled debt
restructured loans in the amount of approximately $2,315,000 compared to
approximately $15,374,000, including three troubled debt restructured loans in
the amount of approximately $1,944,000 from the corresponding period in 1995.
The allowance for possible loan losses related to impaired loans at March 31,
1996 totaled approximately $809,000 compared to approximately $2,105,000 at
March 31, 1995. The average recorded investment in impaired loans during the
three months ended March 31, 1996 and for the corresponding period in 1995
(using month end quarterly balances), were approximately $14,800,000 and
$13,687,000, respectively.
The following table shows, for those loans accounted for as impaired
loans, the gross interest that would have been recorded if the loans had been
current in accordance with their original terms, and the amount of interest
income that was included in net income for the period.
For the three months ended
March 31
--------------------------
1996 1995
---- ----
(Dollars in Thousands)
Principal amount $ 11,787 15,374
====== ======
Interest income in accordance with original terms 318 861
Interest income recognized 91 563
--- ---
Net impact on interest income $ 227 298
--- ===
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 the Company expects losses to occur.
The Company had previously measured the allowance for credit losses
using methods similar to the prescribed method in SFAS 114. As a result, no
additional provision was required by the adoption of SFAS 114. 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, 1996, was adequate to absorb possible losses from loans in
the portfolio at that date.
10
Note 5 - Stock and Cash Dividends
Per share data for 1995 has been restated to reflect the stock split-up
effected through a stock dividend which became effective May 19, 1995 which
resulted in the issuance of 1,625,716 shares of Common Stock. A special cash
dividend of a $.50 per share was paid to holders of record of Common Stock on
April 3, 1995. A special cash dividend of $.50 per share and a 25% stock
split-up effected through a stock dividend was declared on March 28, 1996 for
all holders of Common Stock of record on April 3, 1996 and May 17, 1996,
respectively, said dividends to be made payable on April 15, 1996 and June 7,
1996, respectively.
The Company does not have a formal stock repurchase program; however, the
Company occasionally repurchases shares of Common Stock, which repurchases are
usually related to the exercise of stock options through the surrender of other
shares of Common Stock of the Company owned by the option holders. Stock
repurchases are presented quarterly at the Company's Board of Director meetings
and the Board of Directors has stated that they will not permit purchases of
more than a total of $9,000,000 of stock. In the past, the board has increased
previous caps once they were met, but there are no assurances that an increase
of the $9,000,000 cap will occur in the future.
The Company maintains a stock option plan, pursuant to which a total of
528,054 shares of the Company's common stock has been reserved for issuance. As
of March 31, 1996 options to acquire 510,552 shares of common stock remain
outstanding. The options did not have a material dilutive effect upon the
calculations of earnings per share and were, therefore, not included in such
calculation.
Note 6 - Legal Proceedings
The Company is involved in various legal proceedings that are in various
stages of litigation by the Company and its legal counsel. Some of these actions
allege "lender liability" claims on a variety of theories and claim substantial
actual and punitive damages. The Company has determined, based on discussions
with its counsel, that any material loss in such actions, individually or in the
aggregate, is remote or the damages sought, even if fully recovered, would not
be considered material. However, many of these matters are in various stages of
proceedings and further developments could cause Management to revise its
assessment of these matters.
Item 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
Net income for the first quarter of 1996 was $11,989,000 or $1.68 per share
- -primary ($1.68 per share - fully diluted) compared to $11,192,000 or $1.54 per
share - primary ($1.54 per share -
fully diluted) in the corresponding 1995 period. Total assets at March 31, 1996
were $2,803,000,000 which represents a 1% increase over total assets of
$2,801,514,000 at March 31, 1995 and a 5% decrease from total assets of
$2,935,606,000 as of December 31, 1995. Deposits at March 31, 1996 were
$2,186,034,000 an increase of 7% over the $2,046,286,000 amount reported at
March 31, 1995, and an increase of 2% over the $2,143,346,000 amount reported at
December 31, 1995. Total loans at March 31, 1996 decreased 1% to $1,191,058,000
from $1,206,841,000 reported at March 31, 1995 and decreased 1% from the
$1,208,390,000 amount reported at December 31, 1995. The decrease in total loans
is primarily attributable to the slow down of the economy caused by the Mexican
peso devaluation. In addition to the decrease in total loans the decrease in
assets during the first quarter of 1996 can be attributed in part to the
contraction of the Company's earning asset base caused by a decline in the
Company's wholesale liabilities, repurchase agreements and short term fixed
borrowings, in anticipation of the acquisition of the River Valley Bank, F.S.B.,
Weslaco, Texas, (see note 2 of notes to consolidated financial statements). As
stated above, there was a decrease in the aggregate amount of repurchase
agreements and short term fixed borrowings with the Federal Home Bank of Dallas
("FHLB"), Federal National Mortgage Association ("FNMA") and Federal Home Loan
Mortgage Corporation ("FHLMC") to $175,000,000 at March 31, 1996 compared to
$359,500,000 reflected at December 31, 1995.
In order to achieve a net yield that is relatively immune to major swings
in market rates, 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 1996 increased $1,915,000 (7%) over the same
period in 1995. The Company's average balances of domestic and foreign loans
increased for
11
the first quarter of 1996 to $1,211,278,000 compared to $1,098,204,000 for the
same period in 1995. Interest and fees on loans for the first quarter in 1996
decreased $463,000 (2%) compared to the first quarter in 1995.
Investment securities decreased 1% to $1,361,915,000 at March 31, 1996 from
$1,381,116,000 at March 31, 1995. Time deposits with other banks increased 380%
to $1,899,000 at March 31, 1996 from $396,000 at March 31, 1995. Total federal
funds sold decreased to $7,300,000 (59%) at March 31, 1996 from $18,000,000 for
the first quarter of 1995. The decreased investment in investment securities and
federal funds sold was largely due to a decline in the use of wholesale
liabilities, repurchase agreements and short term fixed borrowings. Unrealized
gains and losses created by changes in the market values of available for sale
securities are recognized as an adjustment to stockholders' equity, net of tax.
Interest income on taxable and tax exempt investment securities for the
first quarter of 1996 increased $3,437,000 (17%) from the same quarter in 1995.
Interest income on time deposits with banks and federal funds sold increased
$5,000 (83%) and $108,000 (63%) for the quarter ended March 31, 1996
respectively, over the same quarter in 1995. Overall, total interest income from
loans, time deposits, federal funds sold, investment securities and other
interest income for the first quarter in 1996 increased $3,102,000 (6%) over the
same quarter in 1995. The increase in total interest income was primarily due to
higher interest rates. Total interest expense increased $1,187,000 (5%) for the
quarter ended March 31, 1996 compared to the same period in 1995. The increase
in total interest expense was largely due to the increase in interest rates. As
a result, net interest income for the first quarter of 1996 increased $1,915,000
or 7% from the corresponding period in 1995. This increase is attributed to the
Company's efforts towards the maintenance of an adequate interest rate spread
between the cost of funds and the investment of those funds.
Non-interest income increased $1,301,000 to $8,269,000 in the first quarter
of 1996 as compared to $6,968,000 from the corresponding period of 1995. The
overall increase is due to the Company's efforts to improve non-interest income.
Non-interest expense increased $1,846,000 to $16,713,000 for the first
quarter of 1996 as compared to $14,867,000 for the quarter ended March 31, 1995.
The increase is largely due to the increased operations at each of the
subsidiary banks.
The allowance for possible loan losses increased 4% to $19,212,000 at March
31, 1996 from $18,474,000 for the corresponding period in 1995. The provision
for possible loan losses charged to expense increased 28% to $1,559,000 for the
quarter ended March 31, 1996 from $1,219,000 from the same quarter in 1995. The
Company continues to maintain an aggressive loan loss provision due to the
increase in the size of the loan portfolio and an uncertain economy. The
allowance for possible loan losses was 1.62% of March 31, 1996 loans, net of
unearned income, compared to 1.54% at March 31, 1995 and 1.53% at December 31,
1995.
On March 31, 1996, the Company had $2,803,000,000 of consolidated assets of
which approximately $125,357,000 or 4% were related to loans outstanding to
borrowers from Mexico. Of the $125,357,000, 84% is directly or indirectly
secured by U. S. assets, principally certificates of deposits and real estate;
10% is secured by Mexican real estate, 1% is Mexican sovereign debt extended to
Mexican banks; 2% is unsecured; 2% consists of direct unsecured Mexican
sovereign debt (principally former FICORCA debt) and 1% represents accrued
interest receivable on the portfolio. To date, the Company has not experienced a
material adverse impact related to the recent devaluation of the peso in Mexico.
The Company will continue to monitor the effect of the peso devaluation.
LIQUIDITY AND CAPITAL RESOURCES
Liquidity is the Company's 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.
The subsidiary banks of the Company derive their liquidity largely from deposits
of individuals and business entities; however, the deposits are not growing at
as high a rate as they did in the past. Consequently, the Company is relying
more on other funding sources. Other important funding sources for the Company's
bank subsidiaries during 1995 and 1996 have been securities sold under agreement
to repurchase, FHLB certificates of indebtedness and large time certificates of
deposit requiring management to closely monitor its asset/liability mix in terms
of both rate sensitivity and maturity distributions. Primary
12
liquidity of the Company has been maintained by means of increased investment in
shorter-term securities, certificates of deposit and loans.
The Company had a leverage ratio of 7.85% and 7.46%, risk-weighted Tier 1
capital ratio of 15.83% and 14.78% and risk-weighted total capital ratio of
17.04% and 15.93% for March 31, 1996 and December 31, 1995, respectively, which
ratios reflect the deduction of the goodwill and core deposit intangible booked
of approximately $5,429,000 in connection with the BCC and SONB transactions.
The amounts are well above the minimum regulatory requirements.
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, 1996 is
illustrated in the table on page 15. This information reflects the balances of
assets and liabilities whose 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. The purpose of this
analysis is to be aware of the potential risk to future earnings resulting from
the impact of possible future changes in interest rates on currently existing
net asset or net liability positions. The Company undertakes this 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 becomes asset sensitive in the
longer periods.
The Company's Asset and Liability Committee reviews semi-annually 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. The Federal banking agencies issued a final rule on the interest rate
component of risk based capital, which requires the banking agencies to take
into account the effect interest rates can have on a bank's capital. The federal
banking agencies have proposed an interagency supervisory policy to establish a
uniform framework for measuring banks' interest rate exposures. Adjustments to
the Company's interest rate risk position will be considered in conjunction with
the new rule and the policy statement.
The Company will depend upon earnings of subsidiaries, in addition to
borrowed funds, to finance its future 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 of 1996 and expects to continue to fund
during 1996 is a continuous effort to modernize and improve our existing
facilities and expand our bank branch network.
FORWARD LOOKING INFORMATION
Certain matters discussed in this report, excluding historical information,
include forwardlooking 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. These forward-looking statements
involve certain risks and uncertainties. Such statements are made in reliance on
the "safe harbor" protections provided under the private securities litigation
reform act of 1995.
Factors that could cause actual results to differ materially from any
results 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 customers, competitors and potential
competitors, are subject, including banking, tax, securities, insurance and
employment laws and regulations, and (IV) increased competition from both within
and without the banking industry.
13
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 16, 1996
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
1996 fiscal year; 3) To consider and vote upon a proposal to approve the 1996
International Bancshares Corporation Stock Option Plan adopted by the Board of
Directors on April 3, 1996; and 4) 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
27. International Bancshares Corporation Financial Data Schedule for the
period ended March 31, 1996.
(b) Registrant filed a current report on Form 8-K dated April 3, 1996, covering
Item 5 - Other Events and Item 7 - Financial Statements and Exhibits.
14
INTERNATIONAL BANCSHARES CORPORATION AND SUBSIDIARIES
INTEREST RATE SENSITIVITY
(Dollars in Thousands)
RATE/MATURITY RATE/MATURITY RATE/MATURITY RATE/MATURITY
March 31, 1996 3 MNTHS OVER 3 MNTHS OVER 1 YR TOTAL
(Dollars in Thousands) OR LESS TO 1 YR TO 5 YRS OVER 5 YRS
====================== ============= ============= ============= =============
SECTION A
- ---------
RATE SENSITIVE ASSETS
FED FUNDS SOLD 7,300 - - - 7,300
DUE FROM BANK INT EARNING 1,888 11 - - 1,899
INVESTMENT SECURITIES 165,377 233,359 962,229 950 1,361,915
LOANS, NET OF NON-ACCRUALS 928,586 90,063 90,478 74,952 1,184,079
--------- --------- --------- --------- ---------
TOTAL EARNING ASSETS 1,103,151 323,433 1,052,707 75,902 2,555,193
--------- --------- --------- --------- ---------
CUMULATIVE EARNING ASSETS 1,103,151 1,426,584 2,479,291 2,555,193
========= ========= ========= ========= =========
SECTION B
- ---------
RATE SENSITIVE LIABILITIES
TIME DEPOSITS 614,684 537,931 153,390 303 1,306,308
OTHER INT BEARING DEPOSITS 592,223 - - - 592,223
FED FUNDS PURCHASED & REPOS 257,365 16,763 15,634 - 289,762
OTHER BORROWINGS 52,250 - - - 52,250
--------- --------- --------- --------- ---------
TOTAL INTEREST BEARING LIABILITIES 1,516,522 554,694 169,024 303 2,240,543
--------- --------- --------- --------- ---------
CUMULATIVE SENSITIVE LIABILITIES 1,516,522 2,071,216 2,240,240 2,240,543
========= ========= ========= ========= =========
SECTION C
- ---------
REPRICING GAP (413,371) (231,261) 883,683 75,599 314,650
CUMULATIVE REPRICING GAP (413,371) (644,632) 239,051 314,650
RATIO OF INTEREST-SENSITIVE .73 .58 6.23 - 1.14
ASSETS TO LIABILITIES
RATIO OF CUMULATIVE, INTEREST- .73 .69 1.11 1.14
SENSITIVE ASSETS TO LIABILITIES
========= ========= ========= ========= =========
15
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 14, 1996 /s/ DENNIS E. NIXON
Dennis E. Nixon
President
Date: May 14, 1996 /s/ ARNOLDO CISNEROS
Arnoldo Cisneros
Secretary-Treasurer (Chief Accounting Officer)
16