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, 1997
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 8,800,188 shares outstanding at
May 14, 1997
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 1997 1996
------ ----------- -----------
Cash and due from banks $ 127,155 135,992
Federal funds sold 20,000 36,000
----------- -----------
Total cash and cash equivalents 147,155 171,992
Time deposits with banks 198 198
Investment securities:
Held to maturity
(Market value of $2,680 on March 31, 1997
and $2,840 on December 31, 1996) 2,688 2,848
Available for sale
(Amortized cost of $1,843,102 on March 31,
1997 and $1,739,198 on December 31, 1996) 1,848,507 1,756,719
----------- -----------
Total investment securities 1,851,195 1,759,567
Loans:
Commercial, financial and agricultural 706,762 723,061
Real estate - mortgage 185,937 193,101
Real estate - construction 37,805 32,610
Consumer 165,634 161,594
Foreign 128,027 128,932
----------- -----------
Total loans 1,224,165 1,239,298
Less unearned discounts (3,392) (3,303)
----------- -----------
Loans, net of unearned discounts 1,220,773 1,235,995
Less allowance for possible loan losses (22,435) (21,036)
----------- -----------
Net loans 1,198,338 1,214,959
----------- -----------
Bank premises and equipment, net 100,227 94,195
Accrued interest receivable 23,815 22,913
Other assets 86,310 87,407
----------- -----------
Total assets $ 3,407,238 3,351,231
=========== ===========
(Continued)
2
INTERNATIONAL BANCSHARES CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CONDITION, continued
(Dollars in Thousands)
March 31, December 31,
1997 1996
----------- -----------
LIABILITIES AND SHAREHOLDERS' EQUITY
Liabilities:
Deposits:
Demand - non-interest bearing $ 362,727 346,162
Savings and interest bearing demand 708,464 684,867
Time 1,682,370 1,631,124
----------- -----------
Total deposits 2,753,561 2,662,153
Federal funds purchased and securities
sold under repurchase agreements 136,189 148,483
Other borrowed funds 203,333 239,000
Other liabilities 25,397 17,828
----------- -----------
Total liabilities 3,118,480 3,067,464
----------- -----------
Shareholders' equity:
Common stock of $1.00 par value.
Authorized 15,000,000 shares;
issued 10,394,975 shares in 1997
and 10,353,202 shares in 1996 10,395 10,353
Surplus 12,296 11,935
Retained earnings 272,802 260,134
Net unrealized holding gains on
available for sale securities,
net of deferred income taxes 3,513 11,388
----------- -----------
299,006 293,810
Less cost of shares in treasury,
1,603,957 shares in 1997 and
1,599,788 shares in 1996 (10,248) (10,043)
----------- -----------
Total shareholders' equity 288,758 283,767
----------- -----------
Total liabilities and
shareholders' equity $ 3,407,238 3,351,231
=========== =========
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
MARCH 31,
-------------------------
1997 1996
---------- ----------
Interest income:
Loans, including fees $ 30,046 29,737
Time deposits with banks 3 11
Federal funds sold 420 280
Investment securities:
Taxable 31,413 23,672
Tax-exempt 25 406
Other interest income 76 120
---------- ----------
Total interest income 61,983 54,226
---------- ----------
Interest expense:
Savings deposits 5,132 4,296
Time deposits 20,618 16,122
Federal funds purchased and securities
sold under repurchase agreements 1,706 5,641
Other borrowings 3,336 556
---------- ----------
Total interest expense 30,792 26,615
---------- ----------
Net interest income 31,191 27,611
Provision for possible loan losses 1,998 1,559
---------- ----------
Net interest income after
provision for possible
loan losses 29,193 26,052
---------- ----------
Non-interest income:
Service charges on deposit accounts 4,188 3,512
Other service charges, commissions
and fees 2,023 1,621
Insurance premiums earned 142 218
Investment securities transactions 161 890
Net profit of operations for other
real estate owned 4 -
Other income 2,111 2,028
---------- ----------
Total non-interest income 8,629 8,269
---------- ----------
4
INTERNATIONAL BANCSHARES CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME - continued
(Dollars in Thousands, except per share data)
THREE MONTHS ENDED
MARCH 31,
------------------------
1997 1996
---------- ----------
Non-interest expense:
Employee compensation and benefits 7,826 6,741
Occupancy 1,136 1,135
Depreciation of premises and equipment 1,885 1,544
Professional fees 841 1,575
Net cost of operations for other real
estate owned - 76
Stationary and supplies 592 408
Other 6,533 5,234
---------- ----------
Total non-interest expense 18,813 16,713
---------- ----------
Income before income taxes 19,009 17,608
Income taxes 6,341 5,619
---------- ----------
Net Income $ 12,668 11,989
========== ==========
Net income per share (Note 5) 1.39 1.33
Weighted average number of shares
outstanding 9,105,652 9,038,945
See accompanying notes to consolidated financial statements.
5
INTERNATIONAL BANCSHARES CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)
(Dollars in Thousands)
THREE MONTHS ENDED
MARCH 31,
-------------------------
1997 1996
---------- ---------
Operating activities:
Net Income $ 12,668 11,989
Adjustments to reconcile net income to net
cash provided by operating
activities:
Provision for possible loan losses 1,998 1,559
Recoveries on charged-off loans 296 173
Net (profit) cost of operations for other real
estate owned (4) 76
Depreciation of bank premises and equipment 1,885 1,544
Accretion of investment securities discounts (252) (305)
Amortization of investment securities premiums 2,117 1,519
Realized gain on investment securities
transactions, net (161) (890)
Gain on sale of bank premises and equipment - (107)
(Increase) decrease in accrued interest
receivable (902) 916
Increase in other liabilities 7,223 6,229
---------- ---------
Net cash provided by operating activities 24,868 22,703
---------- ---------
Investing activities:
Cash acquired in purchase transaction 80,501 -
Proceeds from maturities of securities 660 45
Proceeds from sales of available
for sale securities 80,441 192,504
Purchases of available for sale securities (256,843) (179,536)
Principal collected on mortgage-backed securities 68,403 75,880
Purchases of time deposits with banks - (99)
Net decrease in loans 14,708 16,459
Net decrease in other assets 10,984 3,233
Purchase of bank premises and equipment (7,370) (3,613)
Proceeds from sale of bank premises and equipment - 495
---------- ---------
Net cash (used in) provided by
investing activities (8,516) 105,368
---------- ---------
6
INTERNATIONAL BANCSHARES CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS, continued
(Dollars in Thousands)
THREE MONTHS ENDED
MARCH 31,
------------------------
1997 1996
---------- ----------
Financing activities:
Net increase (decrease) in non-interest bearing
demand deposits $ 11,342 (7,798)
Net(decrease) increase in savings and interest
bearing demand deposits (3,767) 15,345
Net (decrease) increase in time deposits (1,001) 35,141
Net decrease in federal funds purchased and
securities sold under repurchase agreements (12,294) (172,840)
Proceeds from issuance of other borrowed funds 251,333 -
Principal payments on other borrowed funds (287,000) (14,250)
Purchase of treasury stock (205) (583)
Proceeds from exercise of stock options 403 323
---------- ----------
Net cash used in financing activities (41,189) (144,662)
---------- ----------
Decrease in cash and cash equivalents (24,837) (16,591)
Cash and cash equivalents
at beginning of year 171,992 123,827
---------- ----------
Cash and cash equivalents
at end of period $ 147,155 107,236
========== ==========
Supplemental cash flow information:
Interest paid $ 32,573 26,282
Income taxes paid 250 25
Supplemental schedule of noncash investing
and financing activities relating to
the purchase transaction:
Loans acquired 381 -
Other assets acquired 4,298 -
Deposits and other liabilities assumed 85,180 -
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 IBC Trading Company and IBC Capital
Corporation. 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.
The Company adopted SFAS No. 121, "Accounting for the Impairment of
Long-Lived Assets and for Long-Lived Assets to Be Disposed Of", effective
January 1, 1996. This Statement established accounting standards for the
impairment of long-lived assets, certain identifiable intangibles, and goodwill
related to those assets to be held and used and for long-lived assets and
certain identifiable intangibles which must be disposed. Long-lived assets and
certain identifiable intangibles to be disposed of must be reported at the lower
of carrying amount or fair value less cost to sell, except for assets that are
covered by APB Opinion No. 30. Adoption of this Statement did not have a
material impact on the Company's consolidated financial position, results of
operations or liquidity.
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 consolidated financial position,
results of operations or liquidity.
Effective January 1, 1996, the Company adopted the American Institute of
Certified Public Accountants Statement of Position ("SOP") 96-1, "Environmental
8
Remediation Liabilities". SOP 96-1 requires, among other things, environmental
remediation liabilities to be accrued when the criteria of SFAS No.5,
"Accounting for Contingencies," have been met and also provides guidance with
respect to the measurement of remediation liabilities. Such accounting is
consistent with the Company's previous method of accounting for environmental
remediation costs and therefore, adoption of this new Statement did not have a
material impact on the Company's consolidated financial position, results of
operations or liquidity.
Note 2 - Acquisitions
Effective March 7, 1997, IBC purchased certain assets and assumed certain
liabilities of five branches of Bank of America Texas, N. A., Irving, Texas. IBC
purchased loans of approximately $381,000 and assumed deposits of approximately
$84,834,000 and received cash and other assets in the amount of approximately
$84,799,000. The acquisition was accounted for as a purchase transaction. IBC
recorded intangible assets, goodwill and core deposit premium totaling
$3,705,000 at such date. These assets are being amortized on a straight line
basis over a fifteen year period. These amounts slightly differ from the amounts
reported on the Form 10K due to post settling adjustments.
Effective November 21, 1996, IBC purchased certain assets and assumed
certain liabilities of three branches of Home Savings of America F.S.B.,
Irwindale, California. IBC purchased loans of approximately $769,000 and assumed
deposits of approximately $196,813,000 and received cash or other assets in the
amount of approximately $196,081,000. The acquisition was accounted for as a
purchase transaction. IBC recorded intangible assets, goodwill and core deposit
premium totaling $9,670,000 as such date. These assets are being amortized on a
straight line basis over a fifteen year period.
Effective June 27, 1996, IBC purchased certain assets and assumed certain
liabilities of River Valley Bank, F.S.B., in Weslaco, Texas, 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 were
approximately $132,133,000 and cash and other assets received were 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 at such date. 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.
9
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, March 31,
1997 1996
----------- -----------
(Dollars in Thousands)
U. S. Treasury and federal agencies
Held to maturity $ - -
Available for sale 1,828,736 1,313,188
States and political subdivisions
Held to maturity 698 897
Available for sale 541 29,987
Other
Held to maturity 1,990 1,865
Available for sale 19,230 15,978
----------- -----------
Total investment securities $ 1,851,195 1,361,915
=========== ===========
The Company may invest in collateralized mortgage obligations and
structured notes. However, at March 31, 1997 such investments in the portfolio
were not significant to the financial position of the Company. At March 31, 1996
the Company did not have outstanding investments in these type of securities.
Note 4 - Allowance for Possible Loan Losses
A summary of the transactions in the allowance for possible loan losses is
as follows:
March 31, March 31,
1997 1996
------ ------
(Dollars in Thousands)
Balance at January 1 $ 21,036 18,455
Losses charged to allowance (895) (975)
Recoveries credited to allowance 296 173
------ ------
Net losses charged to allowance (599) (802)
Provisions charged to operations 1,998 1,559
------ ------
Balance at March 31 $ 22,435 19,212
====== ======
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
10
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 1997 and
1996 was not material to the Company's consolidated financial position.
The Company had previously measured the allowance for loan 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, 1997, was adequate to absorb possible losses from loans in
the portfolio at that date.
Note 5 - Stock and Cash Dividends
Per share data for 1996 has been restated to reflect the stock split-up
effected through a stock dividend which became effective May 17, 1996 which
resulted in the issuance of 2,059,375 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, 1996. A special cash dividend of $.50 per share and a 25% stock
split-up effected through a stock dividend was declared on April 1, 1997 for all
holders of Common Stock of record on April 1, 1997 and May 15, 1997,
respectively, and said dividends to be made payable on April 15, 1997 and June
9, 1997, respectively.
The Company does not have a formal stock repurchase program; however, the
Company occasionally repurchases shares of Common Stock, including repurchases
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 $12,000,000 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
$12,000,000 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 375,000. The 472,253
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, 1997 options to
11
acquire 474,253 shares of common stock remain outstanding, all of which options
were granted under the 1987 Plan, except options to acquire 2,000 shares granted
under the new 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 and its bank subsidiaries are involved in various legal
proceedings that are in various stages of litigation. Some of these actions
allege "lender liability" claims on a variety of theories and claim 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.
Item 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
Net income for the first quarter of 1997 was $12,668,000 or $1.39 per
share compared to $11,989,000 or $1.33 per share in the corresponding 1996
period.
Total assets at March 31, 1997 were $3,407,238,000 which represents a 22%
increase over total assets of $2,803,000,000 at March 31, 1996 and a 2% increase
over total assets of $3,351,231,000 as of December 31, 1996. Deposits at March
31, 1997 were $2,753,561,000 an increase of 26% over the $2,186,034,000 amount
reported at March 31, 1996, and an increase of 3% over the $2,662,153,000 amount
reported at December 31, 1996. Total loans at March 31, 1997 increased 3% to
$1,224,165,000 from $1,191,058,000 reported at March 31, 1996 and decreased 1%
from the $1,239,298,000 amount reported at December 31, 1996. The Company
believes that the decrease in loan demand in the first quarter of 1997, while
not material, was due in part to the effect of the 1994 peso devaluation. The
increase in assets and deposits during the first quarter in 1997 was primarily
attributable to the acquisition of the five branches Bank of America. See note 2
of notes to Consolidated Financial Statements. The aggregate amount of
repurchase agreements, short term fixed borrowings and certificates of
indebtedness with the Federal Home Bank of Dallas ("FHLB"), Federal National
Mortgage Association ("FNMA") and Federal Home Loan Mortgage Corporation
("FHLMC") decreased to $195,000,000 at March 31, 1997 from the $237,000,000 at
December 31, 1996. The decrease in wholesale liabilities, repurchase agreements,
short term fixed borrowings and certificates of indebtedness is related to the
assumption of Bank of America deposits and the payment of the premium for said
deposits.
The Company's average balances of domestic and foreign loans decreased for
the three month period of 1997 to $1,208,235,000 compared to $1,211,278,000 for
the same period in 1996. Although the economic conditions in the U.S./ Mexico
border region have improved, loan demand has not improved significantly.
Competition for loans in the Company's market area has intensified and has
resulted in loan pricing by certain competitors which management believes is not
commensurate with the risk associated with making such loans. The result of
which has been a reduction of the Company's market penetration for loans.
Interest and fees on loans for the three month period in 1997 increased $309,000
(1%) compared to the same period in 1996.
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
12
time frame. Net interest income for the first quarter of 1997 increased
$3,580,000 (13%) over the same period in 1996.
Investment securities increased 36% to $1,851,195,000 at March 31, 1997
from $1,361,915,000 at March 31, 1996. 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. Time deposits with other
banks at March 31, 1997 decreased (90%) to $198,000 from $1,899,000 at March 31,
1996. Total federal funds sold increased (174%) to $20,000,000 for the first
quarter of 1997 as compared to $7,300,000 for the first quarter of 1996.
Interest income on taxable and tax exempt investment securities for the
first quarter in 1997 increased $7,360,000 (31%) over the same quarter in 1996.
Interest income on time deposits with banks for the first quarter in 1997
decreased $8,000 (73%) from the same quarter in 1996. Interest income on federal
funds sold for the first quarter in 1997 increased $140,000 (50%) over the same
quarter in 1996. Overall, total interest income from loans, time deposits,
federal funds sold, investment securities and other interest income for the
first quarter in 1997 increased $7,757,000 (14%) from the same quarter in 1996.
The increase in total interest income was primarily due to income derived from
the investment securities portfolio.
Total interest expense for savings deposit, time deposits and other
borrowings increased $4,177,000 (16%) for the first quarter of 1997 from the
same quarter in 1996. The increase in total interest expense was primarily due
to higher interest rates and larger volume primarily attributable to
acquisitions. As a result, net interest income for the first quarter of 1997
increased $3,580,000 or (13%) over the same period in 1996. 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 $360,000 to $8,629,000 in the first quarter
of 1997 as compared to $8,269,000 for the quarter ended March 31, 1996. The
increases in non-interest income were primarily due to the increases in service
charges. The increase in service charges is attributable to the amount of
account transaction fees received as a result of the deposit growth and
increased collection efforts.
Non-interest expense increased $2,100,000 (13%) to $18,813,000 for the
first quarter of 1997 as compared to $16,713,000 for the quarter ended March 31,
1996. The increase in non-interest expense was largely due to the increased
operations at certain of the bank subsidiaries as a result of acquisitions.
The allowance for possible loan losses increased (17%) to $22,435,000 in
the first quarter of 1997 from $19,212,000 for the corresponding period of 1996.
The provision for possible loan losses charged to expense increased 28% to
$1,998,000 for the quarter ended March 31, 1997 from $1,559,000 from the same
quarter in 1996. Increases in the allowance for possible loan losses were
largely due to uncertain, although improving, economic conditions. The allowance
for possible loan losses was 1.84% of March 31, 1997 loans, net of unearned
income, compared to 1.62% of the corresponding period in 1996 and 1.70% at
December 31, 1996.
On March 31 1997, the Company had $3,407,238,000 of consolidated assets of
which approximately $129,423,000 or 4% were related to loans outstanding to
borrowers domiciled in Mexico. Of the $129,423,000, 80% is directly or
indirectly secured by U.S. assets, principally certificates of deposits and real
estate; 15% is secured by Mexican real estate; 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 1994 devaluation of
the peso in Mexico. The Company will continue to monitor the effects of the peso
devaluation.
13
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. In recent years,
deposit growth has largely been attributable to acquisitions. 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 portion of the deposit base of the Company's bank
subsidiaries. Other important funding sources for the Company's bank
subsidiaries during 1997 and 1996 have been securities sold under agreements to
repurchase, FHLB certificates of indebtedness 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 1997 and expects to continue to fund during 1997 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, 1997, shareholders' equity was
$288,758,000 compared to $252,494,000 at March 31, 1996, an increase of
$36,264,000 or 14%. This increase in capital resulted primarily from the
retention of earnings. The Company had a leverage ratio of 7.41% and 7.80%,
risk-weighted Tier 1 capital ratio of 16.11% and 16.02% and risk-weighted total
capital ratio of 17.37% and 17.27% for March 31, 1997 and December 31, 1996,
respectively, which ratios reflect the deduction of the goodwill and core
deposit intangible booked of approximately $32,190,000 in connection with the
acquisition 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, 1997 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 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
14
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.
INTEREST RATE SENSITIVITY
(Dollars in Thousands)
RATE/MATURITY RATE/MATURITY RATE/MATURITY RATE/MATURITY
March 31, 1997 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 20,000 - - - 20,000
DUE FROM BANK INT EARNING 198 - - - 198
INVESTMENT SECURITIES 99,750 206,176 1,543,903 1,366 1,851,195
LOANS, NET OF NON-ACCRUALS 962,454 92,896 98,262 65,039 1,218,651
- ----------------------------------------------------------------------------------------------------------
TOTAL EARNING ASSETS 1,082,402 299,072 1,642,165 66,405 3,090,044
- ----------------------------------------------------------------------------------------------------------
CUMULATIVE EARNING ASSETS 1,082,402 1,381,474 3,023,639 3,090,044
==========================================================================================================
SECTION B
- ----------------------------------------------------------------------------------------------------------
RATE SENSITIVE LIABILITIES
TIME DEPOSITS 719,879 746,957 214,756 778 1,682,370
OTHER INT BEARING DEPOSITS 708,464 - - - 708,464
FED FUNDS PURCHASED & REPOS 111,277 24,912 - - 136,189
OTHER BORROWINGS 203,333 - - - 203,333
- ----------------------------------------------------------------------------------------------------------
TOTAL INTEREST BEARING LIABILITIES 1,742,953 771,869 214,756 778 2,730,356
- ----------------------------------------------------------------------------------------------------------
CUMULATIVE SENSITIVE LIABILITIES 1,742,953 2,514,822 2,729,578 2,730,356
==========================================================================================================
SECTION C
- ----------------------------------------------------------------------------------------------------------
REPRICING GAP (660,551) (472,797) 1,427,409 65,627 359,688
CUMULATIVE REPRICING GAP (660,551) (1,133,348) 294,061 359,688
RATIO OF INTEREST-SENSITIVE .62 .39 7.65 - 1.13
ASSETS TO LIABILITIES
RATIO OF CUMULATIVE, INTEREST- .62 .55 1.11 1.13
SENSITIVE ASSETS TO LIABILITIES
==========================================================================================================
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
15
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.
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 15,
1997 for the following purposes: 1) To elect eleven (11) 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 1997 fiscal year; 3) To consider and vote upon a proposal to approve the
1997 International Bancshares Corporation 1997 Executive Incentive Compensation
Plan; 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
Exhibit 27. International Bancshares Corporation Financial Data Schedule
for the Period ended March 31, 1997.
(b) Registrant filed a current report on Form 8-K dated April 7, 1997, covering
Item 5 - Other Events and Item 7 - Financial Statements and Exhibits in
connection with the announcement of a cash dividend and a stock dividend by the
Company.
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: MAY 14, 1997 /s/ DENNIS E. NIXON
Dennis E. Nixon
President
Date: MAY 14, 1997 /s/ ARNOLDO CISNEROS
Arnoldo Cisneros
Secretary-Treasurer (Chief Accounting Officer)
17