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, 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 11,026,574 shares outstanding at
August 8, 1997
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 1997 1996
----------- ----------
Cash and due from banks ........................... $ 149,835 135,992
Federal funds sold ................................ 4,000 36,000
----------- ----------
Total cash and cash equivalents ...... 153,835 171,992
Time deposits with banks .......................... 396 198
Investment securities:
Held to maturity
(Market value of $2,680 on June 30, 1997
and $2,840 on December 31, 1996) .............. 2,687 2,848
Available for sale
(Amortized cost of $2,101,144 on June 30,
1997 and $1,739,198 on December 31, 1996) ..... 2,118,066 1,756,719
----------- ----------
Total investment securities .......... 2,120,753 1,759,567
Loans:
Commercial, financial and agricultural ......... 740,171 723,061
Real estate - mortgage ......................... 182,569 193,101
Real estate - construction ..................... 40,474 32,610
Consumer ....................................... 169,458 161,594
Foreign ........................................ 132,106 128,932
----------- ----------
Total loans .......................... 1,264,778 1,239,298
Less unearned discounts ........................ (3,725) (3,303)
----------- ----------
Loans, net of unearned discounts ..... 1,261,053 1,235,995
Less allowance for possible loan losses ........ (23,025) (21,036)
----------- ----------
Net loans ............................ 1,238,028 1,214,959
----------- ----------
Bank premises and equipment, net .................. 103,018 94,195
Accrued interest receivable ....................... 25,709 22,913
Other assets ...................................... 88,321 87,407
----------- ----------
Total assets ......................... $ 3,730,060 3,351,231
----------- ----------
(Continued)
2
INTERNATIONAL BANCSHARES CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CONDITION, continued
(Dollars in Thousands)
JUNE 30, DECEMBER 31,
1997 1996
----------- ----------
LIABILITIES AND SHAREHOLDERS' EQUITY
Liabilities:
Deposits:
Demand - non-interest bearing .............. $ 360,215 346,162
Savings and interest bearing demand ........ 713,315 684,867
Time ....................................... 1,716,445 1,631,124
----------- ----------
Total deposits ..................... 2,789,975 2,662,153
Federal funds purchased and securities
sold under repurchase agreements ........... 286,199 148,483
Other borrowed funds ......................... 330,000 239,000
Other liabilities ............................ 20,985 17,828
----------- ----------
Total liabilities .................. 3,427,159 3,067,464
----------- ----------
Shareholders' equity:
Common stock of $1.00 par value ..............
Authorized 15,000,000 shares;
issued 13,039,571 shares in 1997
and 10,353,202 shares in 1996 .............. 13,040 10,353
Surplus ...................................... 12,654 11,935
Retained earnings ............................ 277,125 260,134
Net unrealized holding gains on
available for sale securities,
net of deferred income taxes ............... 10,999 11,388
----------- ----------
313,818 293,810
Less cost of shares in treasury,
2,018,802 shares in 1997 and
1,599,788 shares in 1996 ................... (10,917) (10,043)
----------- ----------
Total shareholders' equity ......... 302,901 283,767
----------- ----------
Total liabilities and
shareholders' equity ............ $ 3,730,060 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 SIX MONTHS ENDED
JUNE 30, JUNE 30,
------------------ ----------------
1997 1996 1997 1996
-------- ------- ------- -------
Interest income:
Loans, including fees ................ $ 30,984 29,286 61,030 59,023
Time deposits with banks ............. 6 74 9 85
Federal funds sold ................... 216 312 636 592
Investment securities:
Taxable ............................ 33,936 22,847 65,349 46,519
Tax-exempt ......................... 21 408 46 814
Other interest income ................ 78 80 154 200
-------- ------- ------- -------
Total interest income ......... 65,241 53,007 127,224 107,233
-------- ------- ------- -------
Interest expense:
Savings deposits ..................... 5,398 4,451 10,530 8,747
Time deposits ........................ 21,697 16,365 42,315 32,487
Federal funds purchased and securities
sold under repurchase agreements .... 2,143 3,197 3,849 8,838
Other borrowings ..................... 3,902 1,204 7,238 1,760
-------- ------- ------- -------
Total interest expense ..... 33,140 25,217 63,932 51,832
-------- ------- ------- -------
Net interest income ........ 32,101 27,790 63,292 55,401
Provision for possible loan losses ...... 1,980 1,713 3,978 3,272
-------- ------- ------- -------
Net interest income after
provision for possible
loan losses ............. 30,121 26,077 59,314 52,129
-------- ------- ------- -------
Non-interest income:
Service charges on deposit accounts .. 4,547 3,616 8,735 7,128
Other service charges, commissions
and fees ........................... 2,006 1,650 4,029 3,271
Insurance premiums earned ............ 175 177 317 395
Investment securities transactions ... -- (500) 161 390
Net profit of operations for other
real estate owned .................. (4) -- -- --
Other income ......................... 1,328 2,348 3,439 4,376
-------- ------- ------- -------
Total non-interest income .. 8,052 7,291 16,681 15,560
-------- ------- ------- -------
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,
----------------------- ----------------------
1997 1996 1997 1996
----------- ---------- ---------- ----------
Non-interest expense:
Employee compensation and benefits ... 8,147 7,044 15,973 13,785
Occupancy ............................ 1,551 1,275 2,687 2,410
Depreciation of premises and equipment 2,015 1,644 3,900 3,188
Professional fees .................... 919 1,670 1,760 3,245
Net cost of operations for other real
estate owned ....................... 97 21 97 97
Other ................................ 8,270 6,232 15,395 11,874
----------- ---------- ---------- ----------
Total non-interest expense . 20,999 17,886 39,812 34,599
----------- ---------- ---------- ----------
Income before income taxes . 17,174 15,482 36,183 33,090
Income taxes ............................ 5,825 4,861 12,166 10,480
----------- ---------- ---------- ----------
Net Income ................. $ 11,349 10,621 24,017 22,610
----------- ---------- ---------- ----------
Net income per share (Note 5) ........ $ .99 .93 2.10 1.99
Weighted average number of shares
outstanding ........................ 11,435,026 11,374,025 11,435,026 11,374,025
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,
--------------------
1997 1996
--------- --------
Operating activities:
Net Income ............................................ $ 24,017 22,610
Adjustments to reconcile net income to net cash
provided by operating activities:
Provision for possible loan losses ................ 3,978 3,272
Recoveries on charged-off loans ................... 417 280
Net cost of operations for other real estate
owned ........................................... 97 97
Depreciation of bank premises and equipment ....... 3,900 3,188
Accretion of investment securities discounts ...... (503) (930)
Amortization of investment securities premiums .... 4,441 3,534
Realized gain on investment securities
transactions, net ............................... (161) (390)
Gain on sale of bank premises and equipment ....... -- (110)
(Increase) decrease in accrued interest
receivable ...................................... (2,796) 373
Increase in other liabilities ..................... 2,811 4,720
--------- --------
Net cash provided by operating activities .... 36,201 36,644
--------- --------
Investing activities:
Cash acquired in purchase transaction ................. 80,501 99,747
Proceeds from maturities of securities ................ 660 47
Proceeds from sales of available
for sale securities ................................. 80,441 276,552
Purchases of available for sale securities ............ (588,958) (418,267)
Principal collected on mortgage-backed securities ..... 136,373 160,512
Proceeds from matured time deposits with banks ........ 198 2,284
Purchases of time deposits with banks ................. (396) (495)
Net (increase) decrease in loans ...................... (27,083) 26,635
Net decrease (increase) in other assets ............... 8,872 (1,612)
Purchase of bank premises and equipment ............... (12,176) (6,712)
Proceeds from sale of bank premises and equipment ..... -- 498
--------- --------
Net cash (used in) provided by
investing activities ....................... (321,568) 139,189
--------- --------
6
INTERNATIONAL BANCSHARES CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS, continued
(Dollars in Thousands)
SIX MONTHS ENDED
JUNE 30,
--------------------
1997 1996
--------- --------
Financing activities:
Net increase (decrease) in non-interest bearing
demand deposits ..................................... $ 8,830 (554)
Net increase in savings and interest bearing
demand deposits ..................................... 1,084 14,562
Net increase in time deposits ......................... 33,074 51,077
Net increase (decrease) in federal funds purchased
and securities sold under repurchase agreements ..... 137,716 (294,661)
Proceeds from issuance of other borrowed funds ........ 541,347 464,000
Principal payments on other borrowed funds ............ (450,347) (368,500)
Purchase of treasury stock ............................ (874) (1,362)
Proceeds from exercise of stock options ............... 806 688
Payments of cash dividends ............................ (4,400) (3,489)
Payments of cash dividends in lieu of fractional
shares .............................................. (26) (18)
--------- --------
Net cash provided by (used in)
financing activities ....................... 267,210 (138,257)
--------- --------
(Decrease) increase in cash and cash
equivalents ................................ (18,157) 37,576
Cash and cash equivalents
at beginning of year ................................ 171,992 123,827
--------- --------
Cash and cash equivalents
at end of period .................................... $ 153,835 161,403
========= ========
Supplemental cash flow information:
Interest paid $ 66,505 51,936
Income taxes paid 14,121 11,121
Supplemental schedule of noncash investing and financing
activities relating to the purchase transaction:
Loans acquired 381 21,408
Other assets acquired 4,298 11,009
Deposits and other liabilities assumed 85,180 132,164
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:
JUNE 30, JUNE 30,
1997 1996
---------- ---------
(Dollars in Thousands)
U. S. Treasury and federal agencies
Held to maturity ....................... $ -- --
Available for sale ..................... 2,097,517 1,372,889
States and political subdivisions
Held to maturity ....................... 697 895
Available for sale ..................... 515 29,807
Other
Held to maturity ....................... 1,990 1,990
Available for sale ..................... 20,034 15,977
---------- ---------
Total investment securities ............ $2,120,753 1,421,558
========== =========
The Company may invest in collateralized mortgage obligations and
structured notes. However, at June 30, 1997 such investments in the portfolio
were not significant to the financial position of the Company. At June 30, 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:
JUNE 30, JUNE 30,
1997 1996
-------- -------
(Dollars in Thousands)
Balance at January 1 .............................. $ 21,036 18,455
Losses charged to allowance .............. (2,406) (2,254)
Recoveries credited to allowance ......... 417 280
-------- -------
Net losses charged to allowance .......... (1,989) (1,974)
Provisions charged to operations ......... 3,978 3,272
-------- -------
Balance at June 30 ................................ $ 23,025 19,753
======== =======
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.
10
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 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 June 30, 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 were paid on April 15, 1997 and May 15, 1997,
respectively, which stock dividends resulted in the issuance of 2,601,071 shares
of Common Stock.
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 with 120,625
shares remaining available for the issuance of options under the new Plan. The
540,475 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, 1997 options to acquire 888,600 shares of common
stock remain outstanding, all of which options were granted under the 1987 Plan,
except options to acquire 348,125 shares granted under the
11
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 second quarter of 1997 was $11,349,000 or $2.10 per
share compared to $10,621,000 or $1.99 per share in the corresponding 1996
period.
Total assets at June 30, 1997 were $3,730,060,000 which represents a
27% increase over total assets of $2,942,165,000 at June 30, 1996 and a 11%
increase over total assets of $3,351,231,000 as of December 31, 1996. Deposits
at June 30, 1997 were $2,789,975,000 an increase of 19% over the $2,340,564,000
amount reported at June 30, 1996, and an increase of 5% over the $2,662,153,000
amount reported at December 31, 1996. Total loans at June 30, 1997 increased 5%
to $1,264,778,000 over $1,200,818,000 reported at June 30, 1996 and increased 2%
over the $1,239,298,000 amount reported at December 31, 1996. The increase in
assets and deposits during the first six months in 1997 was partially
attributable to the acquisition of the five branches of 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") increased to $330,000,000 at June 30, 1997 over the $237,000,000 at
December 31, 1996, which funds were used to expand the earning asset base of the
Company.
The Company's average balances of domestic and foreign loans increased
for the six month period of 1997 to $1,223,275,000 compared to $1,204,027,000
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. Interest and fees
on loans for the second quarter in 1997 increased $1,698,000 (6%) compared to
the same period in 1996 and the six month period ended June 30, 1997 reflects an
increase in interest and fees on loans of $2,007,000 (3%) 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 time frame. Net interest income for the second
quarter of 1997 increased $4,311,000 (16%) over the same period in 1996 and
increased $7,891,000 (14%) for the first six months of 1997 over the
corresponding period in 1996.
Investment securities increased 49% to $2,120,753,000 at June 30, 1997
over $1,421,558,000 at June 30, 1996. Unrealized gains and losses created by
changes in the
12
market values of available for sale securities are recognized as an adjustment
to stockholders' equity, net of tax. Time deposits with other banks at June 30,
1997 increased to $396,000 from $11,000 at June 30, 1996. Total federal funds
sold decreased (94%) to $4,000,000 for the second quarter of 1997 as compared to
$69,000,000 for the second quarter of 1996. The decreased investment in federal
funds sold was largely due to alternative investment opportunities, as evidenced
by the Company's increase in the investment securities portfolio.
Interest income on taxable and tax exempt investment securities for the
second quarter in 1997 increased $10,702,000 (46%) over the same quarter in 1996
and increased $18,062,000 (38%) for the six month period ended June 30, 1997 as
compared to the same period in 1996. Interest income on time deposits with banks
and federal funds sold for the second quarter in 1997 decreased $164,000 (42%)
from the same quarter in 1996 and decreased $32,000 (5%) for the six month
period ended June 30, 1997 as compared to the same period in 1996. Overall,
total interest income from loans, time deposits, federal funds sold, investment
securities and other interest income for the second quarter in 1997 increased
$12,234,000 (23%) over 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 $7,923,000 (31%) for the second quarter of 1997 over the
same quarter in 1996 and increased $12,100,000 (23%) for the six month period
ended June 30, 1997 over the same period 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 second
quarter of 1997 increased $4,311,000 or 16% over the same period in 1996 and
increased $7,891,000 (14%) for the six month period ended June 30, 1997 over the
corresponding 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 $761,000 (10%) to $8,052,000 in the second
quarter of 1997 as compared to $7,291,000 for the quarter ended June 30, 1996
and increased $1,121,000 (7%) to $16,681,000 for the six month period ended June
30, 1997 as compared to $15,560,000 for the six months ended June 30, 1996. 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 $3,113,000 (17%) to $20,999,000 for the
second quarter of 1997 as compared to $17,886,000 for the quarter ended June 30,
1996 and increased $5,213,000 (15%) to $39,812,000 for the six month period
ended June 30, 1997 as compared to $34,599,000 for the six months ended June 30,
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 $590,000 in the second
quarter of 1997 as compared to the $541,000 increase in the second quarter of
1996. For the first six months of 1997, the provision for possible loan losses
was $3,978,000 compared to $3,272,000 for the first six months of 1996.
Increases in the allowance for possible loan losses were largely due to
uncertain, although improving, economic conditions. The Company charged off
$1,511,000 against the allowance for possible loan losses during the second
quarter of 1997 compared to $1,279,000 in the second quarter for the prior year.
For the six month period ending June 30, 1997 net losses charged against the
allowance for possible loan losses amounted to $1,989,000 compared to net losses
charged against the allowance for possible loan losses of $1,974,000 for the six
months ended June 30, 1996. The allowance for possible loan losses was 1.83% of
June 30, 1997 loans, net of unearned income, compared to 1.65% of the
corresponding period in 1996 and 1.70% at December 31, 1996.
13
On June 30 1997, the Company had $3,730,060,000 of consolidated assets
of which approximately $133,629,000 or 4% were related to loans outstanding to
borrowers domiciled in Mexico. Of the $133,629,000, 82% is directly or
indirectly secured by U.S. assets, principally certificates of deposits and real
estate; 15% is secured by Mexican real estate; 1% is unsecured; 1% consists of
direct unsecured Mexican sovereign debt (principally former FICORCA debt) and 1%
represents accrued interest receivable on the portfolio. 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.
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 June 30, 1997, shareholders'
equity was $302,901,000 compared to $250,678,000 at June 30, 1996, an increase
of $52,223,000 or 21%. This increase in capital resulted primarily from the
retention of earnings. The Company had a leverage ratio of 7.49% and 7.80%,
risk-weighted Tier 1 capital ratio of 15.13% and 16.02% and risk-weighted total
capital ratio of 16.39% and 17.27% for June 30, 1997 and December 31, 1996,
respectively, which ratios reflect the deduction of the goodwill and core
deposit intangible booked of approximately $31,553,000 at June 30, 1997 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 June 30, 1997 is
illustrated in the table on page 15. This information reflects the balances of
assets and liabilities whose rates are subject to
14
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 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
June 30, 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 4,000 - - - 4,000
DUE FROM BANK INT EARNING 396 - - - 396
INVESTMENT SECURITIES 113,149 201,714 1,610,048 195,842 2,120,753
LOANS, NET OF NON-ACCRUALS 990,212 93,343 112,319 63,724 1,259,598
----------------------------------------------------------------------------------------------------------
TOTAL EARNING ASSETS 1,107,757 295,057 1,722,367 259,566 3,384,747
----------------------------------------------------------------------------------------------------------
CUMULATIVE EARNING ASSETS 1,107,757 1,402,814 3,125,181 3,384,747
==========================================================================================================
SECTION B
----------------------------------------------------------------------------------------------------------
RATE SENSITIVE LIABILITIES
TIME DEPOSITS 729,373 798,841 187,695 536 1,716,445
OTHER INT BEARING DEPOSITS 713,315 - - - 713,315
FED FUNDS PURCHASED & REPOS 226,237 59,962 - - 286,199
OTHER BORROWINGS 330,000 - - - 330,000
----------------------------------------------------------------------------------------------------------
TOTAL INTEREST BEARING LIABILITIES 1,998,925 858,803 187,695 536 3,045,959
----------------------------------------------------------------------------------------------------------
CUMULATIVE SENSITIVE LIABILITIES 1,998,925 2,857,728 3,045,423 3,045,959
==========================================================================================================
SECTION C
----------------------------------------------------------------------------------------------------------
REPRICING GAP (891,168) (563,746) 1,534,672 259,030 338,788
CUMULATIVE REPRICING GAP (891,168) (1,454,914) 79,758 338,788
RATIO OF INTEREST-SENSITIVE .55 .34 9.18 - 1.11
ASSETS TO LIABILITIES
RATIO OF CUMULATIVE, INTEREST- .55 .49 1.03 1.11
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
15
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.
16
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 15, 1997
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 (11) 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 6,021,015 0 NONE
R. David Guerra 6,021,015 0 NONE
Irving Greenblum 6,021,015 0 NONE
Richard E. Haynes 6,021,015 0 NONE
Roy Jennings, Jr. 6,021,015 0 NONE
Sioma Neiman 6,021,015 0 NONE
Peggy J. Newman 6,021,015 0 NONE
Dennis E. Nixon 6,021,015 0 NONE
Leonardo Salinas 6,021,015 0 NONE
A.R. Sanchez Jr. 6,021,015 0 NONE
Alberto A. Santos 6,021,015 0 NONE
2) To approve the appointment of
independent auditors for the 1997
fiscal year 6,016,138 1,583 4,877
3) To consider and vote upon a proposal
to approve the International
Bancshares Corporation 1997
Executive Incentive Compensation
Plan 6,001,182 76,067 19,833
4) To transact such other business as
may lawfully come before the meeting
of any adjournment thereof. Proxies
were solicited pursuant to Schedule
14A under the Securities Exchange
Act of 1934 6,021,015 NONE NONE
17
Item 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) EXHIBITS
(10m)* Executive Incentive Compensation Plan of International Bancshares
incorporated herein by reference to "Exhibit A" of the Registrant Proxy
Statement filed with the Securities Exchange Commission on April 15, 1997, SEC
file no. 0-9439.
Exhibit 27. International Bancshares Corporation Financial Data Schedule
for the Period ended June 30, 1997.
(b) REPORTS ON FORM 8-K
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.
18
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 13, 1997 /s/ DENNIS E. NIXON
Dennis E. Nixon
President
Date: AUGUST 13, 1997 /s/ ARNOLDO CISNEROS
Arnoldo Cisneros
Secretary-Treasurer
(Chief Accounting Officer)
19