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, 1998
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)
(956) 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 14,166,386 shares outstanding at
August 5, 1998
PART 1 - FINANCIAL INFORMATION
Item 1. FINANCIAL STATEMENTS
INTERNATIONAL BANCSHARES CORPORATION AND SUBSIDIARIES
Consolidated Statements of Condition (Unaudited)
(Dollars in Thousands)
June 30, December 31,
ASSETS 1998 1997
----------- -------------
Cash and due from banks .......................... $ 138,933 $ 229,788
Federal funds sold ............................... 10,000 7,975
----------- -----------
Total cash and cash equivalents ..... 148,933 237,763
Time deposits with banks ......................... 977 1,587
Investment securities:
Held to maturity
(Market value of $2,530 on June 30, 1998
and $2,705 on December 31, 1997) ............ 2,534 2,710
Available for sale
(Amortized cost of $2,741,634 on June 30,
1998 and $2,547,545 on December 31, 1997) ... 2,766,091 2,580,748
----------- -----------
Total investment securities ......... 2,768,625 2,583,458
Loans:
Commercial, financial and agricultural ........ 814,569 800,964
Real estate - mortgage ........................ 202,441 188,122
Real estate - construction .................... 72,299 59,239
Consumer ...................................... 258,411 272,478
Foreign ....................................... 139,936 130,401
----------- -----------
Total loans ......................... 1,487,656 1,451,204
Less unearned discounts ....................... (8,012) (6,508)
----------- -----------
Loans, net of unearned discounts .... 1,479,644 1,444,696
Less allowance for possible loan losses ....... (26,120) (24,516)
----------- -----------
Net loans ........................... 1,453,524 1,420,180
----------- -----------
Bank premises and equipment, net ................. 134,792 129,621
Accrued interest receivable ...................... 29,012 31,271
Intangible assets ................................ 47,699 49,692
Other assets ..................................... 57,651 64,274
----------- -----------
Total assets ........................ $ 4,641,213 $ 4,517,846
----------- -----------
(Continued)
2
INTERNATIONAL BANCSHARES CORPORATION AND SUBSIDIARIES
Consolidated Statements of Condition, continued
(Dollars in Thousands)
June 30, December 31,
1998 1997
----------- -----------
LIABILITIES AND SHAREHOLDERS' EQUITY
Liabilities:
Deposits:
Demand - non-interest bearing ............. $ 312,938 $ 450,537
Savings and interest bearing demand ....... 976,135 819,759
Time ...................................... 1,970,321 1,905,264
----------- -----------
Total deposits .................... 3,259,394 3,175,560
Federal funds purchased and securities
sold under repurchase agreements .......... 155,148 478,409
Other borrowed funds ........................ 834,000 490,000
Other liabilities ........................... 34,874 32,633
----------- -----------
Total liabilities ................. 4,283,416 4,176,602
----------- -----------
Shareholders' equity:
Common stock of $1.00 par value .............
Authorized 40,000,000 shares;
issued 16,764,279 shares in 1998
and 13,196,469 shares in 1997 ............. 16,764 13,196
Surplus ..................................... 20,945 19,012
Retained earnings ........................... 319,355 301,988
Accumulated other comprehensive income ...... 15,897 21,582
----------- -----------
372,961 355,778
Less cost of shares in treasury,
2,609,125 shares in 1998 and
2,079,126 shares in 1997 .................. (15,164) (14,534)
----------- -----------
Total shareholders' equity ........ 357,797 341,244
----------- -----------
Total liabilities and
shareholders' equity ........... $ 4,641,213 $ 4,517,846
=========== -----------
See accompanying notes to interim condensed 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,
------------------ -------------------
1998 1997 1998 1997
------- ------- -------- --------
Interest income:
Loans, including fees ................ $35,643 $30,984 $ 70,619 $ 61,030
Time deposits with banks ............. 21 6 49 9
Federal funds sold ................... 388 216 886 636
Investment securities:
Taxable ............................ 42,644 33,936 85,432 65,349
Tax-exempt ......................... 21 21 40 46
Other interest income ................ 56 78 176 154
------- ------- -------- --------
Total interest income ......... 78,773 65,241 157,202 127,224
------- ------- -------- --------
Interest expense:
Savings deposits ..................... 6,507 5,398 13,074 10,530
Time deposits ........................ 25,687 21,697 50,821 42,315
Federal funds purchased and securities
sold under repurchase agreements .... 2,612 2,143 8,804 3,849
Other borrowings ..................... 8,442 3,902 13,308 7,238
------- ------- -------- --------
Total interest expense ..... 43,248 33,140 86,007 63,932
------- ------- -------- --------
Net interest income ........ 35,525 32,101 71,195 63,292
Provision for possible loan losses ...... 2,077 1,980 4,203 3,978
------- ------- -------- --------
Net interest income after
provision for possible
loan losses ............. 33,448 30,121 66,992 59,314
------- ------- -------- --------
Non-interest income:
Service charges on deposit accounts .. 5,339 4,547 10,213 8,735
Other service charges, commissions
and fees ........................... 2,337 2,006 4,734 4,029
Investment securities transactions ... 1,300 -- 1,703 161
Other income ......................... 1,753 1,499 4,647 3,756
------- ------- -------- --------
Total non-interest income .. 10,729 8,052 21,297 16,681
------- ------- -------- --------
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,
------------------------- -------------------------
1998 1997 1998 1997
----------- ----------- ----------- -----------
Non-interest expense:
Employee compensation and benefits ... 9,999 8,147 19,708 15,973
Occupancy ............................ 1,908 1,551 3,525 2,687
Depreciation of premises and equipment 2,669 2,015 5,070 3,900
Professional fees .................... 936 919 1,816 1,760
Stationary and supplies .............. 750 716 1,659 1,308
Amortization of intangible assets .... 992 697 1,985 1,354
Other ................................ 7,783 6,954 15,291 12,830
----------- ----------- ----------- -----------
Total non-interest expense . 25,037 20,999 49,054 39,812
----------- ----------- ----------- -----------
Income before income taxes . 19,140 17,174 39,235 36,183
Income taxes ............................ 6,338 5,825 12,835 12,166
----------- ----------- ----------- -----------
Net Income ................. $ 12,802 $ 11,349 $ 26,400 $ 24,017
----------- ----------- ----------- -----------
Basic earnings per common:
Net Income ........................... $ 1.02 $ .91 $ 2.22 $ 2.05
Weighted average number of shares
outstanding ........................ 12,548,908 12,423,682 11,893,615 11,692,252
Diluted earnings per common share:
Net Income ........................... $ .99 $ .88 $ 2.15 $ 1.98
Weighted average number of shares
outstanding ........................ 12,963,606 12,895,615 12,269,826 12,112,278
See accompanying notes to interim condensed consolidated financial statements.
5
INTERNATIONAL BANCSHARES CORPORATION AND SUBSIDIARIES
Consolidated Statement of Comprehensive Income (Unaudited)
(Dollars in Thousands)
Three Months Ended Six Months Ended
June 30, June 30,
------------------- --------------------
1998 1997 1998 1997
-------- ------- -------- --------
Net Income .............................. $ 12,802 $11,349 $ 26,400 $ 24,017
-------- ------- -------- --------
Other comprehensive income, net of tax:
Unrealized holding gains on securities
arising during period, net of
reclassification adjustment for
gains included in net income ..... (3,780) 7,486 (5,685) (389)
-------- ------- -------- --------
Comprehensive income .................... $ 9,022 $18,835 $ 20,715 $ 23,628
======== ======= ======== ========
See accompanying notes to interim condensed consolidated financial
statements.
6
INTERNATIONAL BANCSHARES CORPORATION AND SUBSIDIARIES
Consolidated Statements of Cash Flows (Unaudited)
(Dollars in Thousands)
Six Months Ended
June 30,
----------------------
1998 1997
-------- --------
Operating activities:
Net Income ....................................... $ 26,400 $ 24,017
Adjustments to reconcile net income to net
cash provided by operating activities:
Provision for possible loan losses ........... 4,203 3,978
Recoveries on charged-off loans .............. 902 417
Net (profit) cost of operations for other
real estate owned .......................... (28) 97
Depreciation of bank premises and equipment .. 5,070 3,900
Accretion of investment securities discounts . (3,591) (503)
Amortization of investment securities premiums 6,841 4,441
Realized gain on investment securities
transactions, net .......................... (1,703) (161)
Gain on sale of bank premises and equipment .. (56) --
Decrease (increase) in accrued interest
receivable ................................. 2,259 (2,796)
Increase in other liabilities ................ 2,241 2,811
----------- ---------
Net cash provided by operating activities 42,538 36,201
----------- ---------
Investing activities:
Cash acquired in purchase transaction ............ -- 80,501
Proceeds from maturities of securities ........... 975 660
Proceeds from sales of available
for sale securities ............................ 385,729 80,441
Purchases of available for sale securities ....... (1,054,741) (588,958)
Principal collected on mortgage-backed securities 464,017 136,373
Proceeds from matured time deposits with banks ... 1,092 198
Purchases of time deposits with banks ............ (482) (396)
Net increase in loans ............................ (38,449) (27,083)
Net decrease in other assets ..................... 20,265 8,872
Purchase of bank premises and equipment .......... (10,463) (12,176)
Proceeds from sale of bank premises and equipment 278 --
----------- ---------
Net cash used in investing activities ... (231,779) (321,568)
----------- ---------
7
INTERNATIONAL BANCSHARES CORPORATION AND SUBSIDIARIES
Consolidated Statements of Cash Flows, continued
(Dollars in Thousands)
Six Months Ended
June 30,
-----------------------
1998 1997
---------- ---------
Financing activities:
Net (decrease) increase in non-interest
bearing demand deposits ........................ $ (137,599) $ 8,830
Net increase in savings and interest bearing
demand deposits ................................ 156,376 1,084
Net increase in time deposits .................... 65,057 33,074
Net (decrease) increase in federal funds purchased
and securities sold under repurchase agreements (323,261) 137,716
Proceeds from issuance of other borrowed funds ... 1,276,000 541,347
Principal payments on other borrowed funds ....... (932,000) (450,347)
Purchase of treasury stock ....................... (630) (874)
Proceeds from stock transactions ................. 2,151 806
Payments of cash dividends ....................... (5,642) (4,400)
Payments of cash dividends in lieu of
fractional shares .............................. (41) (26)
----------- ---------
Net cash provided by financing activities 100,411 267,210
----------- ---------
Decrease in cash and cash equivalents ... (88,830) (18,157)
Cash and cash equivalents
at beginning of year ........................... 237,763 171,992
----------- ---------
Cash and cash equivalents
at end of period ............................... $ 148,933 $ 153,835
=========== =========
Supplemental cash flow information:
Interest paid .................................. $ 88,729 $ 66,505
Income taxes paid .............................. 12,834 14,121
Supplemental schedule of noncash investing
and financing activities relating to
the purchase transaction:
Loans acquired ............................... $ -- $ 381
Other assets acquired ........................ -- 4,298
Deposits and other liabilities assumed ....... -- 85,180
See accompanying notes to interim condensed consolidated financial statements.
8
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 ("Corporation") and Subsidiaries (the Corporation and Subsidiaries
collectively referred to herein as the "Company") 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, Laredo ("IBC"),
Commerce Bank, International Bank of Commerce, Zapata, International Bank of
Commerce, Brownsville and the Corporation's 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 in consolidation. 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.
All per share data presented has been restated to reflect the stock splits
effected through stock dividends.
In June 1997, the Financial Accounting Standards Board issued SFAS No.
130, "Reporting Comprehensive Income." SFAS No. 130 establishes standards for
reporting and display of comprehensive income and its components (revenues,
expenses, gains, and losses) in a full set of general-purpose financial
statements. SFAS No. 130 requires that an enterprise (a) classify items of other
comprehensive income by their nature in a financial statement and (b) display
the accumulated balance of other comprehensive income separately from retained
earnings and additional paid-in capital in the equity section of a statement of
financial position. SFAS No. 130, which is effective for fiscal years beginning
after December 15, 1997, was adopted by the Company as of January 1, 1998.
In June 1997, the Financial Accounting Standards Board issued SFAS No.
131, "Disclosures about Segments of an Enterprise and Related Information." SFAS
No. 131 establishes standards for the way that public business enterprises
report information about operation segments in annual financial statements and
requires that those enterprises report selected information about operation
segments in interim financial reports issued to shareholders. SFAS No. 131 also
establishes standards for related disclosures about products and services,
geographic areas, and major customers. SFAS No. 131 is effective for financial
statements for periods beginning after December 15, 1997 and need not be applied
to interim financial statements in the initial year of its application. Thus,
SFAS No. 131 will be effective for the Company's 1998 annual financial
statements.
Note 2 - Investment Securities
The Company classifies debt and equity securities into one of three
categories: held-to maturity, available-for-sale, or trading. Such
classifications are reassessed for appropriate classification at each reporting
date. Securities classified as "held- to-maturity" are carried at amortized cost
for financial statement reporting, while securities classified as
"available-for-sale" and "trading" are carried at their fair
9
value. Unrealized holding gains and losses are included in net income for those
securities classified as "trading", while unrealized holding gains and losses
related to those securities classified as "available-for-sale" are excluded from
net income and reported at a net amount as a separate component of shareholders'
equity until realized.
A summary of the investment securities held to maturity and securities
available for sale as reflected on the books of the Company is as follows:
June 30, December 31,
1998 1997
---------- -------------
(Dollars in Thousands)
U. S. Treasury and federal agencies
Held to maturity ............... $ -- $ --
Available for sale ............. 2,606,421 2,549,845
States and political subdivisions
Held to maturity ............... 519 695
Available for sale ............. 1,018 520
Other
Held to maturity ............... 2,015 2,015
Available for sale ............. 158,652 30,383
---------- ----------
Total investment securities .... $2,768,625 $2,583,458
========== ==========
The Company may invest in collateralized mortgage obligations and
structured notes. At June 30, 1998 the Company did not have outstanding
investments in these type of securities. However, at June 30, 1997 such
investments in the portfolio were not significant to the financial position of
the Company.
Note 3 - Allowance for Possible Loan Losses
A summary of the transactions in the allowance for possible loan losses is
as follows:
June 30, June 30,
1998 1997
--------- ----------
(Dollars in Thousands)
Balance at January 1 ...................... $ 24,516 $ 21,036
Losses charged to allowance ......... (3,501) (2,406)
Recoveries credited to allowance .... 902 417
-------- --------
Net losses charged to allowance ..... (2,599) (1,989)
Provisions charged to operations .... 4,203 3,978
-------- --------
Balance at June 30 ........................ $ 26,120 $ 23,025
======== ========
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
10
financial accounting purposes, first to principal and then to interest after all
principal has been collected.
Management of the Company recognizes the risks associated with impaired
loans. However, management's decision to place loans in this category does not
necessarily mean that the Company expects losses to occur. Impaired loans at
June 30, 1998 and December 31, 1997 were not significant to the Company's
consolidated financial position.
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, 1998, was adequate to absorb possible losses from loans in
the portfolio at that date.
Note 4 - Stock and Cash Dividends
Cash dividends of $.50 per share were declared on April 1, 1997 and April
2, 1998 for all shareholders of record of Common Stock and were paid on April
15, 1997 and April 20, 1998. Stock split-ups of 25% effective through stock
dividends were declared on April 1, 1997 and April 2, 1998 for all holders of
Common Stock of record on May 15, 1997 and May 22, 1998 and said dividends were
paid on June 9, 1997 and June 12, 1998. Such stock dividends resulted in the
issuance of 2,601,071 and 3,349,777 shares of Common Stock in 1997 and 1998,
respectively.
The Company does not have a formal stock repurchase program; however, the
Company occasionally repurchases shares of Common Stock, including repurchases
related to the exercise of stock options through the surrender of other shares
of Common Stock of the Company owned by the option holders. Stock repurchases
are presented quarterly at the Company's Board of Director meetings and the
Board of Directors has stated that they will not permit purchases of more than a
total of $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. As of June 30, 1998 the Company had
repurchased shares in the cumulative total amount of $15,164,000.
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 583,125 with 159,021
shares remaining available for the issuance of options under the new Plan. The
277,323 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, 1998, options to acquire 277,323 and 424,104
shares of common stock remain outstanding under the 1987 Plan and the new Plan,
respectively.
11
Note 5 - 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 1998 was $12,802,000 or $1.02 per
share basic ($.99 per share - diluted) compared to $11,349,000 or $.91 per share
- - basic ($.88 per share - diluted) in the corresponding 1997 period.
Total assets at June 30, 1998 were $4,641,213,000 which represents a 24%
increase over total assets of $3,730,060,000 at June 30, 1997 and a 3% increase
over total assets of $4,517,846,000 as of December 31, 1997. Deposits at June
30, 1998 were $3,259,394,000 an increase of 17% over the $2,789,975,000 amount
reported at June 30, 1997, and an increase of 3% over the $3,175,560,000 amount
reported at December 31, 1997. Total loans at June 30, 1998 increased 18% to
$1,487,656,000 over $1,264,778,000 reported at June 30, 1997 and increased 3%
over the $1,451,204,000 amount reported at December 31, 1997. The increase in
assets and deposits during the first six months in 1998 was caused by growth in
the Company's expanded market branch system. The aggregate amount of repurchase
agreements, short term fixed borrowings and certificates of indebtedness with
the Federal Home Bank of Dallas ("FHLB"), Federal National Mortgage Association
("FNMA") and Federal Home Loan Mortgage Corporation ("FHLMC") decreased to
$834,000,000 at June 30, 1998, from $855,000,000 at December 31, 1997, which
funds are used to fund the earning asset base of the Company.
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
1998 increased $3,424,000 (11%) over the same period in 1997.
Investment securities increased 31% to $2,768,625,000 at June 30, 1998
over $2,120,753,000 at June 30, 1997. Time deposits with other banks at June 30,
1998 increased to $977,000 from $396,000 at June 30, 1997. Total federal funds
sold increased (150%) to $10,000,000 at June 30, 1998 as compared to $4,000,000
at June 30, 1997.
Interest and fees on loans for the second quarter in 1998 increased
$4,659,000 (15%) over the same quarter in 1997 and increased $9,589,000 (16%)
for the six month period ended June 30, 1998 as compared to the same period in
1997. Interest income on taxable and tax exempt investment securities for the
second quarter in 1998 increased $8,708,000 (26%) over the same quarter in 1997
and increased $20,077,000 (31%) for the six month period ended June 30, 1998 as
compared to the same period in 1997. Interest income on time deposits with banks
for the second quarter in 1998 increased $15,000 (250%) over the same quarter in
1997 and increased $40,000 (444%) for the six month period ended June 30, 1998
as compared to the same period in 1997. Interest income on federal funds sold
for the second quarter in 1998 increased $172,000 (80%) over the same quarter in
1997 and increased $250,000 (39%) for the six month period ended June
12
30, 1998 as compared to the same period in 1997. Overall, total interest income
from loans, time deposits, federal funds sold, investment securities and other
interest income for the second quarter in 1998 increased $13,532,000 (21%) over
the same quarter in 1997 and increased $29,978,000 (24%) for the six month
period ended June 30, 1998 as compared to the same period in 1997. 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 $10,108,000 (31%) for the second quarter of 1998 over the
same quarter in 1997 and increased $22,075,000 (35%) for the six month period
ended June 30, 1998 over the same period in 1997. 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 1998 increased $3,424,000 (11%) over the same period in 1997 and
increased $7,903,000 (12%) for the six month period ended June 30, 1998 over the
corresponding period in 1997. 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 $2,677,000 (33%) to $10,729,000 in the
second quarter of 1998 as compared to $8,052,000 for the quarter ended June 30,
1997 and increased $4,616,000 (28%) to $21,297,000 for the six month period
ended June 30, 1998 as compared to $16,681,000 for the six months ended June 30,
1997. The increase is primarily due to the investment securities gains of
$1,703,000 recorded in the first six months of 1998 compared to $161,000 for the
same period in 1997. 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 $4,038,000 (19%) to $25,037,000 for the
second quarter of 1998 as compared to $20,999,000 for the quarter ended June 30,
1997 and increased $9,242,000 (23%) to $49,054,000 for the six month period
ended June 30, 1998 as compared to $39,812,000 for the six months ended June 30,
1997. 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 efficiency ratio, a measure of non-interest expense to net interest
income plus non-interest income was 53% for the six month period ended June 30,
1998, compared to the year ago ratio of 50%.
The allowance for possible loan losses increased 13% to $26,120,000 at the
end of the second quarter of 1998 from $23,025,000 for the corresponding date in
1997. The provision for possible loan losses charged to expense increased 6% to
$4,203,000 for the first six months of 1998 compared to $3,978,000 for the first
six months of 1997. Increases in the allowance for possible loan losses were
largely due to Management's belief that conservative allowance allocations
should be maintained in a period when the business cycle is deemed to be mature.
The allowance for possible loan losses was 1.77% of June 30, 1998 loans, net of
unearned income, compared to 1.83% at June 30, 1997 and 1.70% at December 31,
1997.
On June 30, 1998, the Company had $4,641,213,000 of consolidated assets of
which approximately $141,617,000 or 3% were related to loans outstanding to
borrowers domiciled in Mexico. Of the $141,617,000, 76% is directly or
indirectly secured by U.S. assets, principally certificates of deposits and real
estate; 21% 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.
13
LIQUIDITY AND CAPITAL RESOURCES
The maintenance of adequate liquidity provides the Company's bank
subsidiaries with the ability to meet potential depositor withdrawals, provide
for customer credit needs, maintain adequate statutory reserve levels and take
full advantage of high-yield investment opportunities as they arise. Liquidity
is afforded by access to financial markets and by holding appropriate amounts of
liquid assets. The bank subsidiaries of the Company derive their liquidity
largely from deposits of individuals and business entities. In recent years,
deposit growth has largely been attributable to acquisitions. Historically, the
Mexico based deposits of the Company's bank subsidiaries have been a stable
source of funding. Deposits from persons and entities domiciled in Mexico
comprise a significant portion of the deposit base of the Company's bank
subsidiaries. Other important funding sources for the Company's bank
subsidiaries during 1998 and 1997 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.
During the first six months of 1998, there were no material changes in
market risk exposures that affected the quantitative and qualitative disclosures
regarding market risk presented in the Company's Form 10-K for the year ended
December 31, 1997.
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 six months in 1998 and expects to continue to fund during 1998
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, 1998, shareholders' equity was
$357,797,000 compared to $302,901,000 at June 30, 1997, an increase of
$54,896,000 or 18%. This increase in capital resulted primarily from the
retention of earnings. The Company had a leverage ratio of 6.80% and 6.41%,
risk-weighted Tier 1 capital ratio of 13.88% and 13.95% and risk-weighted total
capital ratio of 15.10% and 15.20% at June 30, 1998 and December 31, 1997,
respectively. The core deposit intangibles and goodwill of $46,011,000 at June
30, 1998, recorded in connection with financial institution acquisitions of the
Company, are deducted from the sum of core capital elements when determining the
capital ratios of the Company.
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, 1998 is
illustrated in the table on page 15. This information reflects the balances of
assets and liabilities whose rates are subject to change. A mix of assets and
liabilities that are roughly equal in volume and repricing characteristics
represents a matched interest rate sensitivity position. Any excess of assets or
liabilities results in an interest rate sensitivity gap.
The Company undertakes the interest rate sensitivity analysis to monitor
the potential risk on future earnings resulting from the impact of possible
future changes in interest rates on currently existing net asset or net
liability positions. However,
14
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, 1998 3 MONTHS OVER 3 MONTHS OVER 1 YEAR TOTAL
(Dollars in Thousands) OR LESS TO 1 YEAR TO 5 YEARS OVER 5 YEARS
==========================================================================================================
SECTION A
----------------------------------------------------------------------------------------------------------
RATE SENSITIVE ASSETS
FED FUNDS SOLD 10,000 - - - 10,000
DUE FROM BANK INT EARNING 396 482 99 - 977
INVESTMENT SECURITIES 290,584 422,780 1,634,085 421,176 2,768,625
LOANS, NET OF NON-ACCRUALS 1,062,282 115,619 202,934 100,996 1,481,831
----------------------------------------------------------------------------------------------------------
TOTAL EARNING ASSETS 1,363,262 538,881 1,837,118 522,172 4,261,433
----------------------------------------------------------------------------------------------------------
CUMULATIVE EARNING ASSETS 1,363,262 1,902,143 3,739,261 4,261,433
==========================================================================================================
SECTION B
----------------------------------------------------------------------------------------------------------
RATE SENSITIVE LIABILITIES
TIME DEPOSITS 829,068 906,874 234,233 146 1,970,321
OTHER INT BEARING DEPOSITS 976,135 - - - 976,135
FED FUNDS PURCHASED & REPOS 107,956 47,192 - - 155,148
OTHER BORROWINGS 834,000 - - - 834,000
----------------------------------------------------------------------------------------------------------
TOTAL INTEREST BEARING LIABILITIES 2,747,159 954,066 234,233 146 3,935,604
----------------------------------------------------------------------------------------------------------
CUMULATIVE SENSITIVE LIABILITIES 2,747,159 3,701,225 3,935,458 3,935,604
==========================================================================================================
SECTION C
----------------------------------------------------------------------------------------------------------
REPRICING GAP (1,383,897) (415,185) 1,602,885 522,026 325,829
CUMULATIVE REPRICING GAP (1,383,897) (1,799,082) (196,197) 325,829
RATIO OF INTEREST-SENSITIVE .50 .57 7.84 - 1.08
ASSETS TO LIABILITIES
RATIO OF CUMULATIVE, INTEREST- .50 .51 .95 1.08
SENSITIVE ASSETS TO LIABILITIES
==========================================================================================================
YEAR 2000
Many existing computer programs use only two digits to identify a year.
These programs were designed and developed without considering the impact of the
upcoming change in the century. If uncorrected, many computer applications could
fail or create erroneous results by or at the Year 2000. The Year 2000 issue
affects virtually all companies and organizations.
The Company has developed and implemented a plan to deal with the Year
2000 problem. The plan provides for addressing critical and noncritical issues,
with the
15
assignment of responsibility and target dates for completion. Testing of core
applications, such as mainframe software and hardware and some platform
software, is largely complete and reflects that they will be Year 2000
compliant. The Company is expensing applicable costs incurred as a result of
addressing the Year 2000 issue.
The Company does not expect that the cost of addressing the Year 2000
issue will be a material event or uncertainty that would cause its reported
financial information not to be indicative of future operating results or future
financial condition, or that the costs or consequences of incomplete or untimely
resolution of any Year 2000 issue represent a known material event or
uncertainty that is reasonably likely to affect its future financial results, or
cause its reported financial information not to be indicative of future
operating results or future financial condition.
Additionally, the federal bank regulators have enforcement powers with
respect to Year 2000 compliance. Failure to institute an acceptable Year 2000
readiness plan could result in the disapproval of expansion applications filed
with bank regulatory agencies or the imposition of cease and desist orders or
civil money penalties.
Regardless of the Year 2000 compliance of the Company's systems, there is
no complete assurance that the Company will not be adversely affected to the
extent other entities not affiliated with the Company are unsuccessful in
properly addressing this issue. In an effort to minimize this possibility,
active communication has been on-going between the Company and its external
service providers and intermediaries. In addition, a risk reduction program was
initiated in 1998 that addresses potential Year 2000 exposure in the loan
portfolio. Correspondence has been sent by the Company to customers and
suppliers during 1998, and such communication is planned to continue throughout
1998.
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. The words
"estimate," "expect," "intend" and "project," as well as other words or
expressions of similar meaning are intended to identify forward- looking
statements. Readers are cautioned not to place undue reliance on forward-
looking statements, which speak only as of the date of this quarterly report.
Such statements are based on current expectations, are inherently uncertain, are
subject to risks and should be viewed with caution. Actual results and
experience may differ materially from the forward-looking statements as a result
of many factors.
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. It is not possible to foresee or identify all
such factors. The Company makes no commitment to update any forward-looking
statement, or to disclose any facts, events or circumstances after the date
hereof that may affect the accuracy of any forward-looking statement.
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 21, 1998
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 eleven (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 9,109,821 0 7,524
R. David Guerra 9,109,821 0 7,524
Irving Greenblum 9,109,821 0 7,524
Richard E. Haynes 9,109,821 0 7,524
Roy Jennings, Jr. 9,109,821 0 7,524
Sioma Neiman 9,109,821 0 7,524
Peggy J. Newman 9,109,509 312 7,524
Dennis E. Nixon 9,109,821 0 7,524
Leonardo Salinas 9,093,870 15,951 7,524
A.R. Sanchez Jr. 9,109,821 0 7,524
Alberto A. Santos 9,109,821 0 7,524
2) To approve the appointment
of independent auditors for
the 1998 fiscal year 9,085,396 12,049 19,900
3) To consider and vote upon
a proposal to amend the
Certificate of Incorporation
of the Company to increase the
number of authorized shares of
Common Stock of the Company 9,025,257 84,607 7,481
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 9,109,821 NONE NONE
17
Item 5. OTHER INFORMATION
Proxies will exercise discretionary authority to vote proxies at the
Company's next annual meeting of shareholders on any shareholder proposal for
which the shareholder has not timely requested inclusion in the Company's proxy
statement unless the shareholder notifies the Company of the shareholder's
intention to present the proposal from the floor of the meeting not later than
March 8, 1999.
The Articles of Amendment increasing the authorized shares to forty
million shares was effective May 22, 1998.
As of June 4, 1998, Imelda Navarro was appointed by the Board of Directors
to Treasurer of the Company.
Item 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) EXHIBITS
Exhibit 27. International Bancshares Corporation Financial Data Schedule
for the Period ended June 30, 1998.
(b) REPORTS ON FORM 8-K
None
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, 1998 /s/ DENNIS E. NIXON
Dennis E. Nixon
President
Date: AUGUST 13, 1998 /s/ IMELDA NAVARRO
Imelda Navarro
Treasurer (Chief Accounting Officer)
19