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, 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 14,127,427 shares outstanding at
November 3, 1998
PART 1 - FINANCIAL INFORMATION
Item 1. FINANCIAL STATEMENTS
INTERNATIONAL BANCSHARES CORPORATION AND SUBSIDIARIES
Consolidated Statements of Condition (Unaudited)
(Dollars in Thousands)
SEPTEMBER 30, DECEMBER 31,
1998 1997
------------- -------------
ASSETS
Cash and due from banks .......................... $ 89,778 $ 229,788
Federal funds sold ............................... 46,000 7,975
----------- -----------
Total cash and cash equivalents ..... 135,778 237,763
Time deposits with banks ......................... 1,175 1,587
Investment securities:
Held to maturity
(Market value of $2,530 on September 30,
1998 and $2,705 on December 31, 1997) ......... 2,533 2,710
Available for sale
(Amortized cost of $2,945,219 on September 30,
1998 and $2,547,545 on December 31, 1997) ..... 2,960,185 2,580,748
----------- -----------
Total investment securities ......... 2,962,718 2,583,458
Loans:
Commercial, financial and agricultural ........ 843,013 800,964
Real estate - mortgage ........................ 211,394 188,122
Real estate - construction .................... 80,013 59,239
Consumer ...................................... 254,352 272,478
Foreign ....................................... 144,057 130,401
----------- -----------
Total loans ......................... 1,532,829 1,451,204
Less unearned discounts ....................... (8,293) (6,508)
----------- -----------
Loans, net of unearned discounts .... 1,524,536 1,444,696
Less allowance for possible loan losses ....... (26,520) (24,516)
----------- -----------
Net loans ........................... 1,498,016 1,420,180
----------- -----------
Bank premises and equipment, net ................. 135,910 129,621
Accrued interest receivable ...................... 31,743 31,271
Intangible assets ................................ 46,469 49,692
Other assets ..................................... 41,425 64,274
----------- -----------
Total assets ........................ $ 4,853,234 $ 4,517,846
=========== ===========
(Continued)
2
INTERNATIONAL BANCSHARES CORPORATION AND SUBSIDIARIES
Consolidated Statements of Condition, continued
(Dollars in Thousands)
SEPTEMBER 30, DECEMBER 31,
1998 1997
-------------- --------------
LIABILITIES AND SHAREHOLDERS' EQUITY
Liabilities:
Deposits:
Demand - non-interest bearing ........... $ 227,812 $ 450,537
Savings and interest bearing demand ..... 1,038,648 819,759
Time .................................... 1,989,670 1,905,264
----------- -----------
Total deposits .................. 3,256,130 3,175,560
Federal funds purchased and securities
sold under repurchase agreements ........ 192,245 478,409
Other borrowed funds ...................... 999,000 490,000
Other liabilities ......................... 48,161 32,633
----------- -----------
Total liabilities ............... 4,495,536 4,176,602
----------- -----------
Shareholders' equity:
Common stock of $1.00 par value.
Authorized 40,000,000 shares;
issued 16,783,785 shares in 1998
and 13,196,469 shares in 1997 ........... 16,784 13,196
Surplus ................................... 21,368 19,012
Retained earnings ......................... 327,122 301,988
Accumulated other comprehensive income .... 9,728 21,582
----------- -----------
375,002 355,778
Less cost of shares in treasury,
2,646,012 shares in 1998 and
2,079,126 shares in 1997 ................ (17,304) (14,534)
----------- -----------
Total shareholders' equity ...... 357,698 341,244
----------- -----------
Total liabilities and
shareholders' equity ......... $ 4,853,234 $ 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 NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
--------------------- --------------------
1998 1997 1998 1997
---------- -------- -------- --------
Interest income:
Loans, including fees ................ $ 37,603 $ 32,185 $108,222 $ 93,215
Time deposits with banks ............. 17 11 66 20
Federal funds sold ................... 207 185 1,093 821
Investment securities:
Taxable ............................ 45,968 39,096 131,400 104,445
Tax-exempt ......................... 45 22 85 68
Other interest income ................ 103 76 279 230
-------- -------- -------- --------
Total interest income ......... 83,943 71,575 241,145 198,799
-------- -------- -------- --------
Interest expense:
Savings deposits ..................... 6,555 5,505 19,629 16,035
Time deposits ........................ 25,747 22,896 76,568 65,211
Federal funds purchased and securities
sold under repurchase agreements .... 2,219 5,107 11,023 8,956
Other borrowings ..................... 12,779 5,172 26,087 12,410
-------- -------- -------- --------
Total interest expense ..... 47,300 38,680 133,307 102,612
-------- -------- -------- --------
Net interest income ........ 36,643 32,895 107,838 96,187
Provision for possible loan losses ...... 2,170 1,748 6,373 5,726
-------- -------- -------- --------
Net interest income after
provision for possible
loan losses ............. 34,473 31,147 101,465 90,461
-------- -------- -------- --------
Non-interest income:
Service charges on deposit accounts .. 5,381 4,857 15,594 13,592
Other service charges, commissions
and fees ........................... 2,329 1,960 7,063 5,989
Investment securities transactions ... 1,642 (13) 3,345 148
Other income ......................... (738) 2,975 3,909 6,731
-------- -------- -------- --------
Total non-interest income .. 8,614 9,779 29,911 26,460
-------- -------- -------- --------
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,
------------------------- ----------------------
1998 1997 1998 1997
----------- ----------- ----------- -----------
Non-interest expense:
Employee compensation and benefits ... 9,738 8,184 29,446 24,157
Occupancy ............................ 1,984 1,618 5,509 4,305
Depreciation of premises and equipment 2,594 2,039 7,664 5,939
Professional fees .................... 877 836 2,693 2,596
Stationary and supplies .............. 637 732 2,296 2,040
Amortization of intangible assets .... 979 698 2,964 2,052
Other ................................ 7,593 7,772 22,884 20,602
----------- ----------- ----------- -----------
Total non-interest expense . 24,402 21,879 73,456 61,691
----------- ----------- ----------- -----------
Income before income taxes . 18,685 19,047 57,920 55,230
Income taxes ............................ 5,264 6,233 18,099 18,399
----------- ----------- ----------- -----------
Net Income ................. $ 13,421 $ 12,814 $ 39,821 $ 36,831
=========== =========== =========== ===========
Basic earnings per common share:
Net Income ........................... $ .95 $ .93 $ 3.15 $ 2.97
Weighted average number of shares
outstanding ........................ 14,163,907 13,765,342 12,658,695 12,390,875
Diluted earnings per common share:
Net Income ........................... $ .93 $ .90 $ 3.06 $ 2.87
Weighted average number of shares
outstanding ........................ 14,492,214 14,297,590 13,018,683 12,848,308
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 NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
--------------------- --------------------
1998 1997 1998 1997
-------- -------- -------- --------
Net Income .............................. $ 13,421 $ 12,814 $ 39,821 $ 36,831
-------- -------- -------- --------
Other comprehensive income, net of tax:
Unrealized holding gains (losses) on
securities arising during period,
net of reclassification adjustment
for gains (losses) included in
net income ....................... (6,169) 7,997 (11,854) 7,608
-------- -------- -------- --------
Comprehensive income .................... $ 7,252 $ 20,811 $ 27,967 $ 44,439
======== ======== ======== ========
See accompanying notes to interim condensed consolidated financial statements.
6
INTERNATIONAL BANCSHARES CORPORATION AND SUBSIDIARIES
Consolidated Statements of Cash Flows (Unaudited)
(Dollars in Thousands)
NINE MONTHS ENDED
SEPTEMBER 30,
---------------------------
1998 1997
----------- -------------
Operating activities:
Net Income ....................................... $ 39,821 $ 36,831
Adjustments to reconcile net income to net
cash provided by operating activities:
Provision for possible loan losses ........... 6,373 5,726
Recoveries on charged-off loans .............. 1,105 724
Net cost of operations for other
real estate owned .......................... 101 122
Depreciation of bank premises and equipment .. 7,664 5,939
Accretion of investment securities discounts . (7,118) (1,009)
Amortization of investment securities premiums 10,403 7,167
Realized gain on investment securities
transactions, net .......................... (3,345) (148)
Gain on sale of bank premises and equipment .. (1,693) (15)
Increase in accrued interest receivable ...... (472) (4,983)
Increase in other liabilities ................ 15,528 14,656
----------- -----------
Net cash provided by operating activities 68,367 65,010
----------- -----------
Investing activities:
Cash acquired in purchase transaction ............ -- 80,501
Proceeds from maturities of securities ........... 975 1,160
Proceeds from sales of available
for sale securities ............................ 500,877 99,883
Purchases of available for sale securities ....... (1,603,681) (919,948)
Principal collected on mortgage-backed securities 699,154 225,858
Proceeds from matured time deposits with banks ... 1,191 198
Purchases of time deposits with banks ............ (779) (396)
Net increase in loans ............................ (85,314) (54,920)
Net decrease in other assets ..................... 37,592 6,111
Purchase of bank premises and equipment .......... (14,760) (17,851)
Proceeds from sale of bank premises and equipment 2,500 31
----------- -----------
Net cash used in investing activities ... (462,245) (579,373)
----------- -----------
7
INTERNATIONAL BANCSHARES CORPORATION AND SUBSIDIARIES
Consolidated Statements of Cash Flows, continued
(Dollars in Thousands)
NINE MONTHS ENDED
SEPTEMBER 30,
----------------------------
1998 1997
--------- ----------
Financing activities:
Net (decrease) increase in non-interest
bearing demand deposits ........................ $ (222,725) $ 22,384
Net increase in savings and interest bearing
demand deposits ................................ 218,889 839
Net increase in time deposits .................... 84,406 76,143
Net (decrease) increase in federal funds purchased
and securities sold under repurchase agreements (286,164) 283,274
Proceeds from issuance of other borrowed funds ... 1,795,000 713,347
Principal payments on other borrowed funds ....... (1,286,000) (567,347)
Purchase of treasury stock ....................... (2,770) (4,286)
Proceeds from stock transactions ................. 2,595 1,169
Payments of cash dividends ....................... (11,297) (4,400)
Payments of cash dividends in lieu of
fractional shares .............................. (41) (26)
----------- -----------
Net cash provided by financing activities 291,893 521,097
----------- -----------
(Decrease) increase in cash and
cash equivalents ..................... (101,985) 6,734
Cash and cash equivalents
at beginning of year ........................... 237,763 171,992
----------- -----------
Cash and cash equivalents
at end of period ............................... $ 135,778 $ 178,726
=========== ===========
Supplemental cash flow information:
Interest paid .................................. $ 107,034 $ 106,020
Income taxes paid .............................. 17,049 19,060
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 value. Unrealized
holding gains and losses are included in net income for those
9
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:
SEPTEMBER 30, DECEMBER 31,
1998 1997
------------ ------------
(DOLLARS IN THOUSANDS)
U. S. Treasury and federal agencies
Held to maturity ............ $ -- $ --
Available for sale .......... 2,761,988 2,549,845
States and political subdivisions
Held to maturity ............ 518 695
Available for sale .......... 6,791 520
Other
Held to maturity ............ 2,015 2,015
Available for sale .......... 191,406 30,383
---------- ----------
Total investment securities . $2,962,718 $2,583,458
========== ==========
Note 3 - Allowance for Possible Loan Losses
A summary of the transactions in the allowance for possible loan losses is
as follows:
SEPTEMBER 30, SEPTEMBER 30,
1998 1997
-------------- -------------
(DOLLARS IN THOUSANDS)
Balance at January 1 ................. $ 24,516 $ 21,036
Losses charged to allowance .... (5,474) (4,082)
Recoveries credited to allowance 1,105 724
-------- --------
Net losses charged to allowance (4,369) (3,358)
Provisions charged to operations 6,373 5,726
-------- --------
Balance at September 30 .............. $ 26,520 $ 23,404
======== ========
The Company classifies as impaired those loans where it is probable that
all amounts due according to contractual terms of the loan agreement will not be
collected. The Company has identified these loans through its normal loan review
procedures. Impaired loans included 1) all non-accrual loans, 2) loans which are
90 days or over past due unless they are well secured (the collateral value is
sufficient to cover principal and accrued interest) and are in the process of
collection, and 3) other loans which management believes are impaired.
Substantially all of the Company's impaired loans are measured at the fair value
of the collateral. In limited cases the Company may use other methods to
determine the level of impairment of a loan if such loan is not collateral
dependent. Amounts received on non-accruals are applied, for financial
accounting purposes, first to principal and then to interest after all principal
has been collected.
Management of the Company recognizes the risks associated with impaired
loans. However, management's decision to place loans in this category does not
necessarily mean that the Company expects losses to occur. Impaired loans at
September 30, 1998 and December 31, 1997 were not significant to the Company's
consolidated financial position.
10
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, 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. A special cash dividend of $.40 per share was declared on
September 30, 1998 for all shareholders of record of Common Stock and was paid
on October 15, 1998.
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 $21,000,000 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
$21,000,000 cap will occur in the future. The Company had repurchased shares of
Common Stock in the amount of $2,770,000 for the nine month period ended
September 30, 1998 resulting in a cumulative total of $17,304,000.
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 578,286 with 159,021
shares remaining available for the issuance of options under the new Plan. The
261,142 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 September 30, 1998, options to acquire 261,142 and 419,265
shares of common stock remain outstanding under the 1987 Plan and the new Plan,
respectively.
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
11
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 1998 was $13,421,000 or $.95 per share
basic ($.93 per share - diluted) compared to $12,814,000 or $.93 per share -
basic ($.90 per share - diluted) in the corresponding 1997 period. The following
table presents selected financial data regarding results of operations:
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
-------------------- --------------------
1998 1997 1998 1997
--------- --------- -------- ---------
(Dollars in Thousands, except per share data)
Interest income ............ $ 83,943 $ 71,575 $241,145 $198,799
Interest expense ........... 47,300 38,680 133,307 102,612
-------- -------- -------- --------
Net interest income ........ 36,643 32,895 107,838 96,187
Provision for possible loan
losses .................. 2,170 1,748 6,373 5,726
Non-interest income ........ 8,614 9,779 29,911 26,460
Non-interest expense ....... 24,402 21,879 73,456 61,691
-------- -------- -------- --------
Income before income taxes . 18,685 19,047 57,920 55,230
Income taxes ............... 5,264 6,233 18,099 18,399
-------- -------- -------- --------
Net income ................. $ 13,421 $ 12,814 $ 39,821 $ 36,831
======== ======== ======== ========
Net income per common share:
Basic ................... $ .95 $ .93 $ 3.15 $ 2.97
Diluted ................. .93 .90 3.06 2.87
The Company paid cash and used the purchase method in accounting for
acquisitions which has resulted in the creation of intangible assets. These
intangible assets are deducted from capital in the determination of regulatory
capital. Thus, "cash" earnings represent the regulatory capital generated during
the year and can be viewed as net income excluding intangible amortization, net
of tax. Cash earnings for the third quarter of 1998 were $14,189,000 or $1.00
per share - basic ($.98 per share - diluted) compared to $13,299,000 or $.97 -
basic ($.93 per share - diluted) in the corresponding 1997 period. The following
table reconciles reported net income to net income excluding intangible assets
amortization ("cash" earnings):
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
--------------------- ---------------------
1998 1997 1998 1997
--------- ---------- ---------- ----------
(Dollars in Thousands, except per share data)
Reported Net income ...... $ 13,421 $ 12,814 $ 39,821 $ 36,831
Amortization of intangible
assets .................. 979 698 2,964 2,052
Income tax adjustment .... (211) (213) (642) (623)
-------- -------- -------- --------
Cash earnings ............ $ 14,189 $ 13,299 $ 42,143 $ 38,260
======== ======== ======== ========
Cash earnings per common
share:
Basic ................. $ 1.00 $ .97 $ 3.33 $ 3.09
Diluted ............... .98 .93 3.24 2.98
12
Total assets at September 30, 1998 were $4,853,234,000 which represents a
21% increase over total assets of $4,016,603,000 at September 30, 1997 and a 7%
increase over total assets of $4,517,846,000 at December 31, 1997. Deposits at
September 30, 1998 were $3,256,130,000 an increase of 14% over the
$2,846,353,000 amount reported at September 30, 1997 and an increase of 3% over
the $3,175,560,000 amount reported at December 31, 1997. Total loans at
September 30, 1998 increased 19% to $1,532,829,000 over $1,291,695,000 reported
at September 30, 1997 and increased 6% over the $1,451,204,000 amount reported
at December 31, 1997. The increase in assets and deposits during the first nine
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") increased to $999,000,000 at September 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 third quarter of
1998 increased $3,748,000 (11%) over the same period in 1997.
Investment securities increased 26% to $2,962,718,000 at September 30,
1998 over $2,348,080,000 at September 30, 1997. Time deposits with other banks
increased 197% to $1,175,000 at September 30, 1998 over $396,000 at September
30, 1997. Total federal funds sold increased 48% to $46,000,000 at September 30,
1998 as compared to $31,000,000 at September 30, 1997.
Interest and fees on loans for the third quarter in 1998 increased
$5,418,000 (17%) over the same quarter in 1997 and increased $15,007,000 (16%)
for the nine month period ended September 30, 1998 as compared to the same
period in 1997. Interest income on taxable and tax exempt investment securities
for the third quarter in 1998 increased $6,895,000 (18%) over the same quarter
in 1997 and increased $26,972,000 (26%) for the nine month period ended
September 30, 1998 as compared to the same period in 1997. Interest income on
time deposits with banks for the third quarter in 1998 increased $6,000 (55%)
over the same quarter in 1997 and increased $46,000 (230%) for the nine month
period ended September 30, 1998 as compared to the same period in 1997. Interest
income on federal funds sold for the third quarter in 1998 increased $22,000
(12%) over the same quarter in 1997 and increased $272,000 (33%) for the nine
month period ended September 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 third quarter in 1998
increased $12,368,000 (17%) over the same quarter in 1997 and increased
$42,346,000 (21%) for the nine month period ended September 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 $8,620,000 (22%) for the third quarter of 1998 over the
same quarter in 1997 and increased $30,695,000 (30%) for the nine month period
ended September 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 $3,748,000 (11%) over the same period in 1997
and increased $11,651,000 (12%) for the nine month period ended September 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.
13
Non-interest income decreased $1,165,000 (12%) to $8,614,000 in the third
quarter of 1998 as compared to $9,779,000 for the quarter ended September 30,
1997 and increased $3,451,000 (13%) to $29,911,000 for the nine month period
ended September 30, 1998 as compared to $26,460,000 for the nine months ended
September 30, 1997. The decrease in other income is primarily due to the other
investment writedowns of $4,444,000 recorded in the third quarter of 1998.
Investment securities gains of $3,345,000 was recorded in the first nine months
of 1998 compared to $148,000 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 $2,523,000 (12%) to $24,402,000 for the
third quarter of 1998 as compared to $21,879,000 for the quarter ended September
30, 1997 and increased $11,765,000 (19%) to $73,456,000 for the nine month
period ended September 30, 1998 as compared to $61,691,000 for the nine months
ended September 30, 1997. The increase is attributable 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 nine month period ended
September 30, 1998, compared to the year ago ratio of 50%.
The allowance for possible loan losses increased 13% to $26,520,000 at the
end of the third quarter of 1998 from $23,404,000 for the corresponding date in
1997. The provision for possible loan losses charged to expense increased 11% to
$6,373,000 for the first nine months of 1998 compared to $5,726,000 for the
first nine 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 1.74% of September 30, 1998 loans,
net of unearned income, compared to 1.82% at September 30, 1997 and 1.70% at
December 31, 1997.
On September 30, 1998, the Company had $4,853,234,000 of consolidated
assets of which approximately $145,527,000 or 3% were related to loans
outstanding to borrowers domiciled in Mexico. Of the $145,527,000, 73% is
directly or indirectly secured by U.S. assets, principally certificates of
deposits and real estate; 24% 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.
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
14
maturities of rate-sensitive assets and liabilities, and respond accordingly to
anticipated fluctuations in interest rates over reasonable periods of time.
During the first nine 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 nine 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 September 30, 1998, shareholders' equity
was $357,698,000 compared to $320,663,000 at September 30, 1997, an increase of
$37,035,000 or 12%. This increase in capital resulted primarily from the
retention of earnings. The Company had a leverage ratio of 6.49% and 6.41%,
risk-weighted Tier 1 capital ratio of 13.68% and 13.95% and risk-weighted total
capital ratio of 14.88% and 15.20% at September 30, 1998 and December 31, 1997,
respectively. The core deposit intangibles and goodwill of $45,099,000 at
September 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 September 30, 1998 is
illustrated in the table on page 16. This information reflects the balances of
assets and liabilities whose rates are subject to change. A mix of assets and
liabilities that are roughly equal in volume and repricing characteristics
represents a matched interest rate sensitivity position. Any excess of assets or
liabilities results in an interest rate sensitivity gap.
The 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.
15
INTEREST RATE SENSITIVITY
(Dollars in Thousands)
RATE/MATURITY RATE/MATURITY RATE/MATURITY RATE/MATURITY
SEPTEMBER 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 ................... 46,000 -- -- -- 46,000
DUE FROM BANK INT EARNING ........ 99 977 99 -- 1,175
INVESTMENT SECURITIES ............ 344,946 490,954 1,625,593 501,225 2,962,718
LOANS, NET OF NON-ACCRUALS ....... 1,079,524 113,473 230,827 103,666 1,527,490
- ------------------------------------------------------------------------------------------------------
TOTAL EARNING ASSETS ............. 1,470,569 605,404 1,856,519 604,891 4,537,383
- ------------------------------------------------------------------------------------------------------
CUMULATIVE EARNING ASSETS ........ 1,470,569 2,075,973 3,932,492 4,537,383
======================================================================================================
SECTION B
- ------------------------------------------------------------------------------------------------------
RATE SENSITIVE LIABILITIES
TIME DEPOSITS .................... 870,902 850,483 268,015 270 1,989,670
OTHER INT BEARING DEPOSITS ....... 1,038,648 -- -- -- 1,038,648
FED FUNDS PURCHASED & REPOS ...... 168,630 23,615 -- -- 192,245
OTHER BORROWINGS ................. 899,000 100,000 -- -- 999,000
- ------------------------------------------------------------------------------------------------------
TOTAL INTEREST BEARING LIABILITIES 2,977,180 974,098 268,015 270 4,219,563
- ------------------------------------------------------------------------------------------------------
CUMULATIVE SENSITIVE LIABILITIES . 2,977,180 3,951,278 4,219,293 4,219,563
======================================================================================================
SECTION C
- ------------------------------------------------------------------------------------------------------
REPRICING GAP .................... (1,506,611) (368,694) 1,588,504 604,621 317,820
CUMULATIVE REPRICING GAP ......... (1,506,611) (1,875,305) (286,801) 317,820
RATIO OF INTEREST-SENSITIVE ...... .49 .62 6.93 -- 1.08
ASSETS TO LIABILITIES
RATIO OF CUMULATIVE, INTEREST- ... .49 .53 .93 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 consists of a five-phase program ("Action Plan")
recommended by the Federal Financial Institutions Examination Council. This
Action Plan consists of awareness, assessment, renovation, validation and
implementation processes. The Action Plan provides for addressing critical and
noncritical issues, with the assignment of responsibility and target dates for
completion, and as of September 30, 1998, the Company was principally involved
in the validation phase of the Action Plan. Testing of core applications, such
as mainframe software, hardware, and network applications are scheduled to be
substantially complete by December 31, 1998.
Currently, the Company estimates that the dollar amount to remediate its
Year 2000 issue will be less than one million dollars. The Company's estimated
remediation costs are relatively low because the data processing system which
the Company purchased in 1990 was substantially Year 2000 compliant. The cost of
remediating the remaining Year
16
2000 issues are based on management's best estimates which were derived
utilizing assumptions of future events including the continued availability of
certain resources, third party vendor remediation plans and other factors. The
related costs totaled approximately $460,000 for the first three quarters of
1998. The eligible costs are being expensed as incurred.
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. However, the Year 2000 issue is
pervasive and complex and can potentially affect any computer process.
Accordingly, no assurance can be given that Year 2000 compliance can be achieved
without additional unanticipated expenditures and uncertainties that might
affect future financial results.
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 ongoing 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 urging them to adequately address their Year 2000 issues,
and such communication is planned to continue throughout 1998 and 1999. However,
there can be no guarantee that customers and suppliers will become Year 2000
compliant on a timely basis or in a manner that is compatible with the Company's
systems. Significant business interruptions or failures by key business
customers, suppliers, trading partners or governmental agencies resulting from
the effects of the Year 2000 issue could have a material adverse effect on the
Company.
The Company currently has in place a remediation and contingency plan in
the event an application has unresolved Year 2000 issues as well as a disaster
recovery plan in the event of an unforeseen interruption in the Company's data
processing capabilities. These plans focus on an application-by-application
strategy that would be implemented in the event of Year 2000 related problems in
particular applications, which strategies include, among others, the replacement
of the faulty application as well as strategies to be employed should the
Company suffer an area wide interruption of data processing capabilities due to
loss of power or communications or a similar failure, which strategies would
include, among other, alternate processing facilities.
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
17
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.
18
Item 5. OTHER INFORMATION
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, 1998.
(b) Registrant filed a current report on Form 8-K dated September 4, 1998,
covering Item 5 - Other Events and Item 7 - Financial Statements and Exhibits in
connection with the announcement of a cash dividend by the Company.
19
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, 1998 /s/ DENNIS E. NIXON
Dennis E. Nixon
President
Date: NOVEMBER 12, 1998 /s/ IMELDA NAVARRO
Imelda Navarro
Treasurer (Chief Accounting Officer)
20