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 JUNE 30, 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 8,744,952 shares outstanding at
August 12, 1996
-1-
PART 1 - FINANCIAL INFORMATION
Item 1. FINANCIAL STATEMENTS
INTERNATIONAL BANCSHARES CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CONDITION
(Dollars in Thousands)
June 30, December 31,
ASSETS 1996 1995
- ------------------------------------------------- ----------- ----------
Cash and due from banks ......................... $ 92,403 86,827
Federal funds sold .............................. 69,000 37,000
----------- ----------
Total cash and cash equivalents .... 161,403 123,827
Time deposits with banks ........................ 11 1,800
Investment securities:
Held to maturity
(Market value of $2,875 on June 30, 1996
and $2,895 on December 31, 1995 ............. 2,885 2,909
Available for sale
(Amortized cost of $1,418,851 on June 30,
1996 and $1,439,823 on December 31, 1995 .... 1,418,673 1,460,432
----------- ----------
Total investment securities ........ 1,421,558 1,463,341
Loans:
Commercial, financial and agricultural ....... 690,208 718,364
Lease financing receivables, net ............. 3,910 3,910
Real estate - mortgage ....................... 200,358 200,998
Real estate - construction ................... 39,701 39,527
Consumer ..................................... 138,185 124,843
Foreign ...................................... 128,456 120,748
----------- ----------
Total loans ........................ 1,200,818 1,208,390
Less unearned discounts ...................... (3,388) (3,479)
----------- ----------
Loans, net of unearned discounts ... 1,197,430 1,204,911
Less allowance for possible loan losses ...... (19,753) (18,455)
----------- ----------
Net loans .......................... 1,177,677 1,186,456
----------- ----------
Bank premises and equipment, net ................ 86,938 80,410
Accrued interest receivable ..................... 21,831 22,204
Other assets .................................... 72,747 57,568
----------- ----------
Total assets ....................... $ 2,942,165 2,935,606
----------- ----------
(Continued)
2
INTERNATIONAL BANCSHARES CORPORATION AND SUBSIDIARIES
Consolidated Statements of Condition, continued
(Dollars in Thousands)
June 30, December 31,
1996 1995
----------- ----------
LIABILITIES AND SHAREHOLDERS' EQUITY
Liabilities:
Deposits:
Demand - non-interest bearing .............. $ 295,701 295,301
Savings and interest bearing demand ........ 632,474 576,878
Time ....................................... 1,412,389 1,271,167
----------- ----------
Total deposits ..................... 2,340,564 2,143,346
Federal funds purchased and securities
sold under repurchase agreements ........... 167,941 462,602
Other borrowed funds ......................... 162,000 66,500
Other liabilities ............................ 20,982 17,397
----------- ----------
Total liabilities .................. 2,691,487 2,689,845
----------- ----------
Shareholders' equity:
Common stock of $1.00 par value ..............
Authorized 15,000,000 shares;
issued 10,312,821 shares in 1996
and 8,159,814 shares in 1995 ............... 10,313 8,160
Surplus ...................................... 11,232 10,637
Retained earnings ............................ 238,393 221,350
Net unrealized holding (losses) gains on
available for sale securities,
net of deferred income taxes ............... (116) 13,396
----------- ----------
259,822 253,543
Less cost of shares in treasury,
1,576,696 shares in 1996 and
1,229,332 shares in 1995 ................... (9,144) (7,782)
----------- ----------
Total shareholders' equity ......... 250,678 245,761
----------- ----------
Total liabilities and
shareholders' equity ............ $ 2,942,165 2,935,606
=========== ==========
See accompanying notes to consolidated financial statements.
3
INTERNATIONAL BANCSHARES CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME (Unaudited)
(Dollars in Thousands, except per share data)
Three Months Ended Six Months Ended
JUNE 30, JUNE 30,
------------------- -----------------
1996 1995 1996 1995
-------- ------- ------- -------
Interest income:
Loans, including fees ................ $ 29,286 31,092 59,023 61,292
Time deposits with banks ............. 74 10 85 16
Federal funds sold ................... 312 188 592 360
Investment securities:
Taxable ............................ 22,847 22,749 46,519 42,903
Tax-exempt ......................... 408 445 814 932
Other interest income ................ 80 105 200 210
-------- ------- ------- -------
Total interest income ...... 53,007 54,589 107,233 105,713
-------- ------- ------- -------
Interest expense:
Savings deposits ..................... 4,451 4,134 8,747 8,351
Time deposits ........................ 16,365 15,526 32,487 29,847
Federal funds purchased and securities
sold under repurchase agreements .... 3,197 7,010 8,838 12,033
Other borrowings ..................... 1,204 1,923 1,760 3,790
-------- ------- ------- -------
Total interest expense ..... 25,217 28,593 51,832 54,021
-------- ------- ------- -------
Net interest income ........ 27,790 25,996 55,401 51,692
Provision for possible loan losses ...... 1,713 1,238 3,272 2,457
-------- ------- ------- -------
Net interest income after
provision for possible
loan losses ............. 26,077 24,758 52,129 49,235
-------- ------- ------- -------
Non-interest income:
Service charges on deposit accounts .. 3,616 3,274 7,128 6,590
Other service charges, commissions
and fees ........................... 1,650 1,366 3,271 3,068
Insurance premiums earned ............ 177 145 395 283
Investment securities transactions ... (500) (180) 390 18
Net profit of operations for other
real estate owned .................. -- (19) -- --
Other income ......................... 2,348 1,563 4,376 3,158
-------- ------- ------- -------
Total non-interest income .. 7,291 6,149 15,560 13,117
-------- ------- ------- -------
4
INTERNATIONAL BANCSHARES CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME - continued
(Dollars in Thousands, except per share data)
Three Months Ended Six Months Ended
June 30, June 30,
---------------- --------------
1996 1995 1996 1995
---- ---- ---- ----
Non-interest expense:
Employee compensation and benefits 7,044 6,311 13,785 12,461
Occupancy 1,275 809 2,410 1,593
Depreciation of premises and equipment 1,644 1,656 3,188 3,327
Professional fees 1,670 1,916 3,245 3,569
Net cost of operations for other real
estate owned 21 68 97 68
Other 6,232 6,431 11,874 11,040
------ ------ ------ ------
Total non-interest expense 17,886 17,191 34,599 32,058
------ ------ ------ ------
Income before income taxes 15,482 13,716 33,090 30,294
Income taxes 4,861 4,529 10,480 9,915
------ ------ ------ ------
Net Income $ 10,621 9,187 22,610 20,379
------ ------ ------ ------
Net income per share (Note 5) $ 1.17 1.01 2.50 2.25
Weighted average number of shares
outstanding 9,059,232 9,064,347 9,059,232 9,064,347
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
---------------------
1996 1995
--------- --------
Operating activities:
Net Income .......................................................... $ 22,610 20,379
Adjustments to reconcile net income to net cash provided by operating
activities:
Provision for possible loan losses .............................. 3,272 2,457
Recoveries on charged-off loans ................................. 280 309
Net cost of operations for other real estate
owned ......................................................... 97 68
Depreciation of bank premises and equipment ..................... 3,188 3,327
Accretion of investment securities discounts .................... (930) (781)
Amortization of investment securities premiums .................. 3,534 6,276
Realized gain on investment securities
transactions, net ............................................. (390) (18)
Gain on sale of bank premises and equipment ..................... (110) (46)
Decrease (increase) in accrued interest
receivable .................................................... 373 (789)
Increase in other liabilities ................................... 4,720 3,820
--------- --------
Net cash provided by operating activities .................. 36,644 35,002
Investing activities:
Cash acquired in purchase transaction ............................... 99,747 6,007
Proceeds from maturities of securities .............................. 47 25,548
Proceeds from sales of available
for sale securities ............................................... 276,552 71,502
Purchases of available for sale securities .......................... (418,267) (295,292)
Principal collected on mortgage-backed securities ................... 160,512 82,269
Proceeds from matured time deposits with banks ...................... 2,284 297
Purchases of time deposits with banks ............................... (495) (198)
Net decrease (increase) in loans .................................... 26,635 (40,183)
Net increase in other assets ........................................ (1,612) (2,274)
Purchase of bank premises and equipment ............................. (6,712) (5,465)
Proceeds from sale of bank premises and equipment ................... 498 74
--------- --------
Net cash provided by (used in)
investing activities ..................................... 139,189 (157,715)
--------- --------
(Continued)
6
INTERNATIONAL BANCSHARES CORPORATION AND SUBSIDIARIES
Consolidated Statements of Cash Flows, continued
(Dollars in Thousands)
Six Months Ended
June 30
--------------------
1996 1995
--------- --------
Financing activities:
Net decrease in non-interest bearing demand
deposits ................................................................. $ (554) (14,447)
Net increase (decrease) in savings and interest
bearing demand deposits .................................................. 14,562 (88,295)
Net increase (decrease) in time deposits ................................... 51,077 (25,960)
Net (decrease) increase in federal funds purchased
and securities sold under repurchase agreements .......................... (294,661) 249,824
Proceeds from issuance of other borrowed funds ............................. 464,000 --
Principal payments on other borrowed funds ................................. (368,500) (500)
Purchase of treasury stock ................................................. (1,362) (428)
Proceeds from exercise of stock options .................................... 688 320
Payments of cash dividends ................................................. (3,489) (2,762)
Payments of cash dividends in lieu of fractional
shares ................................................................... (18) (3)
--------- --------
Net cash (used in) provided by
financing activities ............................................ (138,257) 117,749
--------- --------
Increase (decrease) in cash and cash
equivalents ..................................................... 37,576 (4,964)
Cash and cash equivalents
at beginning of year ..................................................... 123,827 90,200
--------- --------
Cash and cash equivalents
at end of period ......................................................... $ 161,403 85,236
========= ========
Supplemental cash flow information:
Interest paid ............................................................ $ 51,936 55,175
Income taxes paid ........................................................ 11,121 11,425
Supplemental schedule of noncash investing and financing activities relating
to the purchase transaction:
Loans acquired ......................................................... 21,408 28,501
Investment securities acquired ......................................... -- 36,259
Other assets acquired .................................................. 11,009 9,276
Deposits and other liabilities assumed ................................. 132,164 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 July 30, 1996, the Company entered into a purchase of assets and
liability assumption agreement whereby IBC will purchase certain assets and will
assume certain liabilities of Home Savings of America F.S.B., Irwindale,
California. This agreement is subject to regulatory approval. IBC will purchase
loans of approximately $625,000 and assume deposits of approximately
$216,000,000 and will receive cash or other assets in the amount of
approximately $203,000,000.
Effective June 27, 1996, the Company purchased certain assets and assumed
certain liabilities of River Valley Bank, F.S.B., in Weslaco, Texas, ("RVB"), a
federal savings bank organized under the laws of the United States. At the date
of closing, total loans acquired were approximately $21,408,000, deposits
assumed of approximately $132,133,000 and received cash and other assets in the
amount of approximately $110,756,000. The acquisition was accounted for as a
purchase transaction. IBC recorded intangible assets, goodwill and core deposit
premium totaling $6,599,000. These assets are being amortized on a straight line
basis over a fifteen year period.
8
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
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 in Debt and Equity Securities", requires that an enterprise classify
debt and equity securities 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. The Company adopted SFAS No. 115 on January 1, 1994. A
summary of the investment securities held for investment and securities
available for sale is as follows:
June 30, June 30,
1996 1995
--------- -------
(Dollars in Thousands)
U. S. Treasury and federal agencies
Held to maturity $ - 584,661
Available for sale 1,372,889 839,765
States and political subdivisions
Held to maturity 895 8,624
Available for sale 29,807 24,919
Other
Held to maturity 1,990 3,640
Available for sale 15,977 14,215
------- -------
Total investment securities $ 1,421,558 1,475,824
========= =========
The Company may invest in collateralized mortgage obligations and structured
notes. However, at June 30, 1996 the Company did not have outstanding
investments in these type of securities. At June 30, 1995 such investments in
the portfolio were not significant to the financial position of the Company.
9
Note 4 - Allowance for Possible Loan Losses
A summary of the allowance for possible loan losses follows:
Six Months Ended
June 30,
--------------------
1996 1995
---- ----
(Dollars in Thousands)
Balance at January 1 $ 18,455 17,025
Losses charged to allowance (2,254) (1,354)
Recoveries credited to allowance 280 309
------ ------
Net losses charged to allowance (1,974) (1,045)
Provisions charged to operations 3,272 2,457
------ ------
Allowances acquired in purchase
transactions - 332
------ ------
Balance at June 30 $ 19,753 18,769
====== ======
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.
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 six month period of both 1996 and 1995
was not material to the Company's consolidated financial position.
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 June 30, 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 were paid 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 $10,000,000 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 $10,000,000 cap will occur in the future.
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 300,000. The 598,522
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 June 30, 1996 options to acquire 581,020 shares of common stock
remain outstanding, all of which options were granted under the 1987 Plan. 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 second quarter of 1996 was $10,621,000 or $1.17 per
share -primary ($1.17 per share - fully diluted) compared to $9,187,000 or $1.01
per share - primary ($1.01 per share -
fully diluted) in the corresponding 1995 period. Total assets at June 30, 1996
were $2,942,165,000 which represents a 1% increase over total assets of
$2,907,274,000 at June 30, 1995 and a .22% increase over total assets of
$2,935,606,000 as of December 31, 1995. Deposits at June 30, 1996 were
$2,340,564,000 an increase of 17% over the $2,003,843,000 amount reported at
June 30, 1995, and an increase of 9% over the $2,143,346,000 amount reported at
December 31, 1995. Total loans at June 30, 1996 decreased 1% to $1,200,818,000
from $1,213,881,000 reported at June 30, 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 local economy caused by the
Mexican peso devaluation. Total asset growth basically remained flat during the
first six months of 1996. There was a decrease in the aggregate amount of
repurchase agreements, short term fixed borrowings and certificate of
indebtedness with the Federal Home Bank of Dallas (FHLB"), Federal National
Mortgage Association ("FNMA") and Federal Home Loan Mortgage Corporation
("FHLMC") to $220,000,000 at June 30, 1996 compared to $359,500,000 reflected at
December 31, 1995. The primary changes noted during this period were changes to
the asset and liability mix of the Company. The increase to total deposits and
federal funds sold during this first six months can be partially attributed to
the acquisition of RVB, (see note 2 of notes to consolidated financial
statements). The decrease in wholesale liabilities, repurchase agreements, short
term fixed borrowings and certificates of indebtedness related to the Company's
contraction of its earning asset base in anticipation of the acquisition of RVB.
11
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 second quarter of 1996 increased $1,794,000 (7%) over the same
period in 1995. The Company's average balances of domestic and foreign loans for
the six month period of 1996 to $1,204,027,000 compared to $1,143,466,000 for
the same period in 1995. Interest and fees on loans for the six month period in
1996 decreased $2,269,000 (4%) compared to the same period in 1995.
Investment securities decreased 4% to $1,421,558,000 at June 30, 1996 from
$1,475,824,000 at June 30, 1995. Time deposits with other banks decreased to
$11,000 at June 30, 1996, representing a 97% decrease from $396,000 at June 30,
1995. Total federal funds sold increased to $69,000,000 at June 30, 1996 from
$3,500,000 for the second quarter of 1995. The decreased investment in
investment securities and time deposits with other banks 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
second quarter in 1996 increased $61,000 over the same quarter in 1995 and
increased $3,498,000 (8%) for the six month period ended June 30, 1996 as
compared to the same period in 1995. Interest income on time deposits with banks
and federal funds sold for the second quarter in 1996 increased $188,000 (95%)
from the same quarter in 1995 and increased $301,000 (8%) for the six month
period ended June 30, 1996 as compared to the same period in 1995. Overall,
total interest income from loans, time deposits, federal funds sold, investment
securities and other interest income for the second quarter in 1996 increased
$1,520,000 (1%) from the same quarter in 1995. The increase in total interest
income was primarily due to the increase in the volume of earning assets of the
Company.
Total interest expense for savings deposit, time deposits and other
borrowings decreased $3,376,000 (12%) for the second quarter of 1996 from the
same quarter in 1995 and decreased $2,189,000 (4%) for the six month period
ended June 30, 1996 over the same period in 1995. The decrease in total interest
expense was largely due to a decline in the use of wholesale liabilities,
repurchase agreements and short term fixed borrowings. As a result, net interest
income for the second quarter of 1996 increased $1,794,000 or 7% over the same
period in 1995 and increased $3,709,000 (7%) for the six month period ended June
30, 1996 over the corresponding period in 1995. 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 $1,142,000 to $7,291,000 in the second
quarter of 1996 as compared to $6,149,000 for the quarter ended June 30, 1995
and increased $2,443,000 (19%) to $15,560,000 for the six month period ended
June 30, 1996 as compared to $13,117,000 for the six months ended June 30, 1995.
The overall increase is due to the Company's efforts to improve non-interest
income.
Non-interest expense increased $695,000 (4%) to $17,886,000 for the second
quarter of 1996 as compared to $17,191,000 for the quarter ended June 30, 1995
and increased $2,541,000 (8%) to $34,599,000 for the six month period ended June
30, 1996 as compared to $32,058,000 for the six months ended June 30, 1995. The
increase is largely due to the increased operations at each of the subsidiary
banks.
The allowance for possible loan losses increased $541,000 in the second
quarter of 1996 as compared to the $295,000 increase in the second quarter of
1995. For the first six months of 1996, the provision for possible loan losses
was $3,272,000 compared to $2,457,000 for the first six months of 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 Company
charged off $1,279,000 against the allowance for possible loan losses during the
second quarter of 1996 compared to $1,105,000 in the second quarter for the
prior year. For the six month period ending June 30, 1996 net losses charged
against the allowance for possible loan losses amounted to $1,974,000 compared
to net losses charged against the allowance for possible loan losses of
$1,045,000 for the six months ended June 30, 1995. The allowance for possible
loan losses was 1.65% of June 30, 1996 loans, net of unearned income, compared
to 1.55% of the corresponding period in 1995 and 1.53% at December 31, 1995.
12
On June 30 1996, the Company had $2,942,165,000 of consolidated assets of
which approximately $129,843,000 or 4% were related to loans outstanding to
borrowers from Mexico. Of the $129,843,000, $105,388,000 or 81% is directly or
indirectly secured by U. S. assets, principally certificates of deposits and
real estate; 14% is secured by Mexican real estate, 1% is Mexican sovereign debt
extended to Mexican banks; 2% is unsecured; 1% 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 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 7.86% and 6.84%, risk-weighted Tier 1
capital ratio of 15.55% and 13.41% and risk-weighted total capital ratio of
16.77% and 14.57% for June 30, 1996 and December 31, 1995, respectively, which
ratios reflect the deduction of the goodwill and core deposit intangible booked
of approximately $12,028,000 in connection with the RVB, BCC and SONB
transactions (see note 2 of notes to consolidated financial statements). 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 June 30, 1996 is
illustrated in the table on page 16. 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. On July 12,
1996, the federal banking agencies adopted an interagency policy statement which
establishes a uniform framework for evaluating the adequacy and effectiveness of
a bank's interest rate risk management. Adjustments to the Company's interest
rate risk management will be considered in conjunction with the new 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
13
activities and commitments the Company funded during the first six months 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 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. These forward-looking statements
involve certain risks and uncertainties. Such statements are made in reliance on
the "safe harbor" protection 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.
14
PART II - OTHER INFORMATION
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
The Annual Meeting of Shareholders of the Company was held May 18, 1995 for
the consideration of the following items which were approved by the number of
votes set forth:
Votes Votes Votes
For Against Abstained
--------- ------- ---------
1) To elect ten (10) directors of the
Company until the next Annual
Meeting of Shareholders and until
their successors are elected and
qualified;
The following directors, constituting
the entire board of directors, were
elected:
Lester Avigael ............................ 4,960,739 627 NONE
R. David Guerra ........................... 4,961,246 120 NONE
Irving Greenblum .......................... 4,961,246 120 NONE
Richard E. Haynes ......................... 4,960,949 417 NONE
Roy Jennings, Jr .......................... 4,961,246 120 NONE
Sioma Neiman .............................. 4,960,739 627 NONE
Dennis E. Nixon ........................... 4,961,246 120 NONE
Leonardo Salinas .......................... 4,949,436 11,930 NONE
A.R. Sanchez Jr ........................... 4,960,794 572 NONE
Alberto A. Santos ......................... 4,961,246 120 NONE
2) To approve of the appointment
independent auditors for the 1996
fiscal year ............................... 4,958,930 NONE 2,436
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 ................ 4,930,431 24,716 6,219
4) To transact such other business as
may lawfully come before the meeting
or any adjournment thereof ................ 4,961,366 NONE NONE
Proxies were solicited pursuant to
Schedule 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 June 30, 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 in
connection with the Registrants'cash dividend and 25% stock split-up effected
through a stock dividend.
15
INTERNATIONAL BANCSHARES CORPORATION AND SUBSIDIARIES
INTEREST RATE SENSITIVITY
(Dollars in Thousands)
RATE/MATURITY RATE/MATURITY RATE/MATURITY RATE/MATURITY
June 30, 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 ................... 69,000 -- -- -- 69,000
DUE FROM BANK INT EARNING ........ _ 11 -- -- 11
INVESTMENT SECURITIES ............ 94,579 272,534 1,052,964 1,481 1,421,558
LOANS, NET OF NON-ACCRUALS ....... 929,997 103,207 91,083 70,760 1,195,047
- -------------------------------------------------------------------------------------------------------------
TOTAL EARNING ASSETS ............. 1,093,576 375,752 1,144,047 72,241 2,685,616
- -------------------------------------------------------------------------------------------------------------
CUMULATIVE EARNING ASSETS ........ 1,093,576 1,469,328 2,613,375 2,685,616 --
=============================================================================================================
SECTION B
- -------------------------------------------------------------------------------------------------------------
RATE SENSITIVE LIABILITIES
TIME DEPOSITS .................... 644,734 600,868 166,479 308 1,412,389
OTHER INT BEARING DEPOSITS ....... 632,474 -- -- -- 632,474
FED FUNDS PURCHASED & REPOS ...... 109,837 41,478 16,626 -- 167,941
OTHER BORROWINGS ................. 160,000 2,000 -- -- 162,000
- -------------------------------------------------------------------------------------------------------------
TOTAL INTEREST BEARING LIABILITIES 1,547,045 644,346 183,105 308 2,374,804
- -------------------------------------------------------------------------------------------------------------
CUMULATIVE SENSITIVE LIABILITIES . 1,547,045 2,191,391 2,374,496 2,374,804 --
=============================================================================================================
SECTION C
- -------------------------------------------------------------------------------------------------------------
REPRICING GAP .................... (453,469) (268,594) 960,942 71,933 310,812
CUMULATIVE REPRICING GAP ......... (453,469) (722,063) 238,879 310,812
RATIO OF INTEREST-SENSITIVE ...... .71 .58 6.25 -- 1.13
ASSETS TO LIABILITIES
RATIO OF CUMULATIVE, INTEREST- ... .71 .67 1.10 1.13
SENSITIVE ASSETS TO LIABILITIES
=============================================================================================================
16
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
INTERNATIONAL BANCSHARES CORPORATION
------------------------------------
Date: AUGUST 14, 1996 /s/ DENNIS E. NIXON
---------------- --------------------
Dennis E. Nixon
President
Date: AUGUST 14, 1996 /s/ ARNOLDO CISNEROS
---------------- ---------------------
Arnoldo Cisneros
Secretary-Treasurer
(Chief Accounting Officer)
17