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 SEPTEMBER 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 11,015,594 shares outstanding at
November 10, 1997
PART 1 - FINANCIAL INFORMATION
Item 1. FINANCIAL STATEMENTS
INTERNATIONAL BANCSHARES CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CONDITION
(Dollars in Thousands)
September 30, December 31,
1997 1996
----------- ----------
ASSETS
Cash and due from banks ........................... $ 147,726 135,992
Federal funds sold ................................ 31,000 36,000
----------- ----------
Total cash and cash equivalents ...... 178,726 171,992
Time deposits with banks .......................... 396 198
Investment securities:
Held to maturity
(Market value of $2,680 on September 30, 1997
and $2,840 on December 31, 1996) .............. 2,685 2,848
Available for sale
(Amortized cost of $2,316,171 on September 30,
1997 and $1,739,198 on December 31, 1996) ..... 2,345,395 1,756,719
----------- ----------
Total investment securities .......... 2,348,080 1,759,567
Loans:
Commercial, financial and agricultural ......... 749,217 723,061
Real estate - mortgage ......................... 187,497 193,101
Real estate - construction ..................... 46,990 32,610
Consumer ....................................... 177,719 161,594
Foreign ........................................ 130,272 128,932
----------- ----------
Total loans .......................... 1,291,695 1,239,298
Less unearned discounts ........................ (4,481) (3,303)
----------- ----------
Loans, net of unearned discounts ..... 1,287,214 1,235,995
Less allowance for possible loan losses ........ (23,404) (21,036)
----------- ----------
Net loans ............................ 1,263,810 1,214,959
----------- ----------
Bank premises and equipment, net .................. 106,638 94,195
Accrued interest receivable ....................... 27,896 22,913
Other assets ...................................... 91,057 87,407
----------- ----------
Total assets ......................... $ 4,016,603 3,351,231
----------- ----------
(Continued)
2
INTERNATIONAL BANCSHARES CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CONDITION, continued
(Dollars in Thousands)
September 30, December 31,
1997 1996
----------- ----------
LIABILITIES AND SHAREHOLDERS' EQUITY
Liabilities:
Deposits:
Demand - non-interest bearing ............ $ 373,769 346,162
Savings and interest bearing demand ...... 713,070 684,867
Time ..................................... 1,759,514 1,631,124
----------- ----------
Total deposits ................... 2,846,353 2,662,153
Federal funds purchased and securities
sold under repurchase agreements ......... 431,757 148,483
Other borrowed funds ....................... 385,000 239,000
Other liabilities .......................... 32,830 17,828
----------- ----------
Total liabilities ................ 3,695,940 3,067,464
----------- ----------
Shareholders' equity:
Common stock of $1.00 par value ............
Authorized 15,000,000 shares;
issued 13,068,723 shares in 1997
and 10,353,202 shares in 1996 ............ 13,069 10,353
Surplus .................................... 12,988 11,935
Retained earnings .......................... 289,939 260,134
Net unrealized holding gains on
available for sale securities,
net of deferred income taxes ............. 18,996 11,388
----------- ----------
334,992 293,810
Less cost of shares in treasury,
2,075,842 shares in 1997 and
1,599,788 shares in 1996 ................. (14,329) (10,043)
----------- ----------
Total shareholders' equity ....... 320,663 283,767
----------- ----------
Total liabilities and
shareholders' equity .......... $ 4,016,603 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 NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
------------------- -----------------
1997 1996 1997 1996
-------- ------- ------- -------
Interest income:
Loans, including fees ................ $ 32,185 29,850 93,215 88,873
Time deposits with banks ............. 11 3 20 52
Federal funds sold ................... 185 312 821 904
Investment securities:
Taxable ............................ 39,096 25,445 104,445 72,000
Tax-exempt ......................... 22 390 68 1,204
Other interest income ................ 76 53 230 253
-------- ------- ------- -------
Total interest income ......... 71,575 56,053 198,799 163,286
-------- ------- ------- -------
Interest expense:
Savings deposits ..................... 5,505 4,660 16,035 13,407
Time deposits ........................ 22,896 17,911 65,211 50,398
Federal funds purchased and securities
sold under repurchase agreements .... 5,107 1,517 8,956 10,355
Other borrowings ..................... 5,172 3,433 12,410 5,193
-------- ------- ------- -------
Total interest expense ..... 38,680 27,521 102,612 79,353
-------- ------- ------- -------
Net interest income ........ 32,895 28,532 96,187 83,933
Provision for possible loan losses ...... 1,748 1,427 5,726 4,699
-------- ------- ------- -------
Net interest income after
provision for possible
loan losses ............. 31,147 27,105 90,461 79,234
-------- ------- ------- -------
Non-interest income:
Service charges on deposit accounts .. 4,857 4,091 13,592 11,219
Other service charges, commissions
and fees ........................... 1,960 1,692 5,989 4,963
Insurance premiums earned ............ 214 196 531 591
Investment securities transactions ... (13) (97) 148 293
Other income ......................... 2,761 1,326 6,200 5,702
-------- ------- ------- -------
Total non-interest income .. 9,779 7,208 26,460 22,768
-------- ------- ------- -------
4
INTERNATIONAL BANCSHARES CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME - continued
(Dollars in Thousands, except per share data)
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
------------------------ -----------------------
1997 1996 1997 1996
----------- ---------- ---------- ----------
Non-interest expense:
Employee compensation and benefits ... 8,184 7,354 24,157 21,139
Occupancy ............................ 1,618 1,540 4,305 3,950
Depreciation of premises and equipment 2,039 1,712 5,939 4,900
Professional fees .................... 836 1,712 2,596 4,957
Net cost of operations for other real
estate owned ....................... 25 140 122 237
Other ................................ 9,177 6,374 24,572 18,248
----------- ---------- ---------- ----------
Total non-interest expense . 21,879 18,832 61,691 53,431
----------- ---------- ---------- ----------
Income before income taxes . 19,047 15,481 55,230 48,571
Income taxes ............................ 6,233 4,883 18,399 15,363
----------- ---------- ---------- ----------
Net Income ................. $ 12,814 10,598 36,831 33,208
----------- ---------- ---------- ----------
Net income per share (Note 5) ........ $ 1.12 .94 3.21 2.95
Weighted average number of shares
outstanding ........................ 11,461,967 11,270,717 11,461,967 11,270,717
See accompanying notes to consolidated financial statements.
5
INTERNATIONAL BANCSHARES CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)
(Dollars in Thousands)
NINE MONTHS ENDED
SEPTEMBER 30,
---------------------
1997 1996
--------- --------
Operating activities:
Net Income .......................................... $ 36,831 33,208
Adjustments to reconcile net income to net
cash provided by operating activities:
Provision for possible loan losses .............. 5,726 4,699
Recoveries on charged-off loans ................. 724 501
Net cost of operations for other real estate
owned ......................................... 122 237
Depreciation of bank premises and equipment ..... 5,939 4,900
Accretion of investment securities discounts .... (1,009) (1,278)
Amortization of investment securities premiums .. 7,167 5,213
Realized gain on investment securities
transactions, net ............................. (148) (293)
Gain on sale of bank premises and equipment ..... (15) (112)
Increase in accrued interest receivable ......... (4,983) (66)
Increase in other liabilities ................... 14,656 8,048
--------- --------
Net cash provided by operating activities .. 65,010 55,057
--------- --------
Investing activities:
Cash acquired in purchase transaction ............... 80,501 99,747
Proceeds from maturities of securities .............. 1,160 82
Proceeds from sales of available
for sale securities ............................... 99,883 338,503
Purchases of available for sale securities .......... (919,948) (634,220)
Principal collected on mortgage-backed securities ... 225,858 226,135
Proceeds from matured time deposits with banks ...... 198 2,295
Purchases of time deposits with banks ............... (396) (495)
Net (increase) decrease in loans .................... (54,920) 37,186
Net decrease (increase) in other assets ............. 6,111 (5,380)
Purchase of bank premises and equipment ............. (17,851) (10,107)
Proceeds from sale of bank premises and equipment ... 31 500
--------- --------
Net cash (used in) provided by
investing activities ..................... (579,373) 54,246
--------- --------
6
INTERNATIONAL BANCSHARES CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS, continued
(Dollars in Thousands)
NINE MONTHS ENDED
SEPTEMBER 30,
---------------------
1997 1996
--------- --------
Financing activities:
Net increase in non-interest bearing
demand deposits ................................... $ 22,384 25,444
Net increase in savings and interest bearing
demand deposits ................................... 839 1,079
Net increase in time deposits ....................... 76,143 61,727
Net increase (decrease) in federal funds purchased
and securities sold under repurchase agreements ... 283,274 (347,490)
Proceeds from issuance of other borrowed funds ...... 713,347 806,000
Principal payments on other borrowed funds .......... (567,347) (638,500)
Purchase of treasury stock .......................... (4,286) (2,016)
Proceeds from exercise of stock options ............. 1,169 865
Payments of cash dividends .......................... (4,400) (3,490)
Payments of cash dividends in lieu of fractional
shares ............................................ (26) (18)
--------- --------
Net cash provided by (used in)
financing activities ..................... 521,097 (96,399)
--------- --------
Increase in cash and cash equivalents ...... 6,734 12,904
Cash and cash equivalents
at beginning of year .............................. 171,992 123,827
--------- --------
Cash and cash equivalents
at end of period .................................. $ 178,726 136,731
========= ========
Supplemental cash flow information:
Interest paid ..................................... $ 106,020 79,606
Income taxes paid ................................. 19,060 15,401
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 November 5, 1997, University Bank, Houston, Texas 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 $228,000,000. The
acquisition was accounted for as a purchase transaction. IBC recorded intangible
assets, goodwill and core deposit premium of approximately $21,000,000 at such
date. These assets will be amortized on a straight line basis over a fifteen
year period.
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 Annual Report on Form 10-K 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
9
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 as reflected on the books of the Company is as follows:
September 30, September 30,
1997 1996
---------- ---------
(Dollars in Thousands)
U. S. Treasury and federal agencies
Held to maturity ........................ $ -- --
Available for sale ...................... 2,323,091 1,470,221
States and political subdivisions
Held to maturity ........................ 695 859
Available for sale ...................... 520 19,654
Other
Held to maturity ........................ 1,990 2,308
Available for sale ...................... 21,784 15,884
---------- ---------
Total investment securities ............. $2,348,080 1,508,926
========== =========
The Company may invest in collateralized mortgage obligations and
structured notes. At September 30, 1997 and September 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:
September 30, September 30,
1997 1996
-------- -------
(Dollars in Thousands)
Balance at January 1 ........................... $ 21,036 18,455
Losses charged to allowance .............. (4,082) (3,352)
Recoveries credited to allowance ......... 724 501
-------- -------
Net losses charged to allowance .......... (3,358) (2,851)
Provisions charged to operations ......... 5,726 4,699
-------- -------
Balance at September 30 ........................ $ 23,404 20,303
======== =======
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
10
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 nine 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 September 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 dividend 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 $16,000,000 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
$16,000,000 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 468,750 with 122,218
shares remaining available for the issuance of options under the new Plan. The
509,697 shares of common stock remaining available under the 1987 Plan will be
treated as authorized for issuance upon
11
exercise of options granted under the 1987 Plan only. As of September 30, 1997
options to acquire 856,228 shares of common stock remain outstanding, all of
which options were granted under the 1987 Plan, except options to acquire
346,532 shares granted under the new plan.
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 third quarter of 1997 was $12,814,000 or $1.12 per
share compared to $10,598,000 or $.94 per share in the corresponding 1996
period.
Total assets at September 30, 1997 were $4,016,603,000 which represents a
34% increase over total assets of $2,998,401,000 at September 30, 1996 and a 20%
increase over total assets of $3,351,231,000 as of December 31, 1996. Deposits
at September 30, 1997 were $2,846,353,000 an increase of 20% over the
$2,363,729,000 amount reported at September 30, 1996, and an increase of 7% over
the $2,662,153,000 amount reported at December 31, 1996. Total loans at
September 30, 1997 increased 9% to $1,291,695,000 over $1,189,180,000 reported
at September 30, 1996 and increased 4% over the $1,239,298,000 amount reported
at December 31, 1996. The increase in assets and deposits during the first nine
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 $685,000,000 at September 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 nine month period of 1997 to $1,243,652,000 compared to $1,202,396,000 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 third quarter in 1997 increased $2,335,000 (8%) compared to the
same period in 1996 and the nine month period ended September 30, 1997 reflects
an increase in interest and fees on loans of $4,342,000 (5%) 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 third quarter of
1997 increased $4,363,000 (15%) over the same period in 1996 and increased
$12,254,000 (15%) for the first nine
12
months of 1997 over the corresponding period in 1996.
Investment securities increased 56% to $2,348,080,000 at September 30,
1997 over $1,508,926,000 at September 30, 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 September 30, 1997 increased to $396,000 from a zero balance
at September 30, 1996. Total federal funds sold increased (15%) to $31,000,000
for the third quarter of 1997 as compared to $27,000,000 for the third quarter
of 1996.
Interest income on taxable and tax exempt investment securities for the
third quarter in 1997 increased $13,283,000 (51%) over the same quarter in 1996
and increased $31,309,000 (43%) for the nine month period ended September 30,
1997 as compared to the same period in 1996. Interest income on time deposits
with banks and federal funds sold for the third quarter in 1997 decreased
$119,000 (38%) from the same quarter in 1996 and decreased $115,000 (12%) for
the nine month period ended September 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 third quarter in
1997 increased $15,522,000 (28%) over the same quarter in 1996 and increased
$35,513,000 (22%) for the nine month period ended September 30, 1997 over the
corresponding period 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 $11,159,000 (41%) for the third quarter of 1997 over the
same quarter in 1996 and increased $23,259,000 (29%) for the nine month period
ended September 30, 1997 over the same period in 1996. The increase in total
interest expense was primarily due to increase in the use of wholesale
liabilities, repurchase agreements and short term fixed borrowings and larger
deposit volume primarily attributable to acquisitions. As a result, net interest
income for the third quarter of 1997 increased $4,363,000 or 15% over the same
period in 1996 and increased $12,254,000 (15%) for the nine month period ended
September 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 $2,571,000 (36%) to $9,779,000 in the third
quarter of 1997 as compared to $7,208,000 for the quarter ended September 30,
1996 and increased $3,692,000 (16%) to $26,460,000 for the nine month period
ended September 30, 1997 as compared to $22,768,000 for the nine months ended
September 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 $3,047,000 (16%) to $21,879,000 for the
third quarter of 1997 as compared to $18,832,000 for the quarter ended September
30, 1996 and increased $8,260,000 (15%) to $61,691,000 for the nine month period
ended September 30, 1997 as compared to $53,431,000 for the nine months ended
September 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 $379,000 in the third
quarter of 1997 as compared to the $550,000 increase in the third quarter of
1996. For the first nine months of 1997, the provision for possible loan losses
was $5,726,000 compared to $4,699,000 for the first nine months of 1996.
Increases in the allowance for possible loan losses were largely due to
uncertain, although improving, economic conditions. The Company charged off
$1,676,000 against the allowance for possible loan losses during the third
quarter of 1997 compared to $1,098,000 in the third quarter for the prior year.
For the nine month period ending September 30, 1997 net losses charged against
the allowance for possible loan losses amounted to $3,358,000 compared to net
13
losses charged against the allowance for possible loan losses of $2,851,000 for
the nine months ended September 30, 1996. The allowance for possible loan losses
was 1.82% of September 30, 1997 loans, net of unearned income, compared to 1.71%
of the corresponding period in 1996 and 1.70% at December 31, 1996.
On September 30 1997, the Company had $4,016,603,000 of consolidated
assets of which approximately $131,914,000 or 3% were related to loans
outstanding to borrowers domiciled in Mexico. Of the $131,914,000, 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. Although the economic
conditions have improved in Mexico, the Company will continue to monitor
Mexico's economic progress.
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 wholesale liabilities with FHLB,
FNMA, FHLMC and large certificates of deposit, requiring management to closely
monitor its asset/liability mix in terms of both rate sensitivity and maturity
distribution. Primary liquidity of the Company and its subsidiaries has been
maintained by means of increased investment in shorter-term securities,
certificates of deposit and loans. As in the past, the Company will continue to
monitor the volatility and cost of funds in an attempt to match maturities of
rate-sensitive assets and liabilities, and respond accordingly to anticipated
fluctuations in interest rates over reasonable periods of time.
Principal sources of liquidity and funding for the Company are dividends
from subsidiaries and borrowed funds, with such funds being used to finance the
Company's cash flow requirements. The Company has a number of available
alternatives to finance the growth of its existing banks as well as future
growth and expansion. Among the activities and commitments the Company funded
during the first nine months of 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 September 30, 1997, shareholders' equity
was $320,663,000 compared to $261,250,000 at September 30, 1996, an increase of
$59,413,000 or 23%. This increase in capital resulted primarily from the
retention of earnings. The Company had a leverage ratio of 6.70% and 7.80%,
risk-weighted Tier 1 capital ratio of 16.19% and 16.02% and risk-weighted total
capital ratio of 17.44% and 17.27% for September 30, 1997 and December 31, 1996,
respectively, which ratios reflect the deduction of the goodwill and core
deposit intangible booked of approximately $30,963,000 at September 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
14
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 September 30, 1997 is illustrated in the
table below. 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 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
September 30, 1997 3 MNTHS OVER 3 MNTHS OVER 1 YR RATE/MATURITY
(Dollars in Thousands) OR LESS TO 1 YR TO 5 YRS OVER 5 YRS TOTAL
==========================================================================================================
SECTION A
----------------------------------------------------------------------------------------------------------
RATE SENSITIVE ASSETS
FED FUNDS SOLD 31,000 - - - 31,000
DUE FROM BANK INT EARNING - 396 - - 396
INVESTMENT SECURITIES 109,408 217,177 1,123,050 898,445 2,348,080
LOANS, NET OF NON-ACCRUALS 1,007,752 116,235 99,637 63,564 1,287,188
----------------------------------------------------------------------------------------------------------
TOTAL EARNING ASSETS 1,148,160 333,808 1,222,687 962,009 3,666,664
----------------------------------------------------------------------------------------------------------
CUMULATIVE EARNING ASSETS 1,148,160 1,481,968 2,704,655 3,666,664
==========================================================================================================
SECTION B
----------------------------------------------------------------------------------------------------------
RATE SENSITIVE LIABILITIES
TIME DEPOSITS 772,649 799,222 187,325 318 1,759,514
OTHER INT BEARING DEPOSITS 713,070 - - - 713,070
FED FUNDS PURCHASED & REPOS 414,696 17,061 - - 431,757
OTHER BORROWINGS 385,000 - - - 385,000
----------------------------------------------------------------------------------------------------------
TOTAL INTEREST BEARING LIABILITIES 2,285,415 816,283 187,325 318 3,289,341
----------------------------------------------------------------------------------------------------------
CUMULATIVE SENSITIVE LIABILITIES 2,285,415 3,101,698 3,289,023 3,289,341
==========================================================================================================
SECTION C
----------------------------------------------------------------------------------------------------------
REPRICING GAP (1,137,255) (482,475) 1,035,362 961,691 377,323
CUMULATIVE REPRICING GAP (1,137,255) (1,619,730) (584,368) 377,323
RATIO OF INTEREST-SENSITIVE .50 .41 6.53 - 1.12
ASSETS TO LIABILITIES
RATIO OF CUMULATIVE, INTEREST- .50 .48 .82 1.12
SENSITIVE ASSETS TO LIABILITIES
==========================================================================================================
15
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.
16
Item 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) EXHIBITS
Exhibit 27. International Bancshares Corporation Financial Data Schedule
for the Period ended September 30, 1997.
(b) REPORTS ON FORM 8-K
Registrant filed a current report on Form 8-K dated August 21, 1997,
covering Item 5 - Other Events and Item 7 - Financial Statements and Exhibits in
connection with the announcement that IBC had entered into an agreement to
acquire University Bank, Houston, Texas.
17
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: NOVEMBER 12, 1997 /s/ DENNIS E. NIXON
Dennis E. Nixon
President
Date: NOVEMBER 12, 1997 /s/ ARNOLDO CISNEROS
Arnoldo Cisneros
Secretary-Treasurer
(Chief Accounting Officer)
19