FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended MARCH 31, 1999
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 14,109,726 shares outstanding at
May 7, 1999
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
INTERNATIONAL BANCSHARES CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CONDITION (UNAUDITED)
(DOLLARS IN THOUSANDS)
March 31, December 31,
ASSETS 1999 1998
------ ----------- -----------
Cash and due from banks .......................... $ 109,780 $ 94,594
Federal funds sold ............................... 34,000 26,000
----------- -----------
Total cash and cash equivalents ..... 143,780 120,594
Time deposits with banks ......................... 1,481 1,373
Investment securities:
Held to maturity
(Market value of $2,310 on March 31, 1999
and $2,505 on December 31, 1998) ............. 2,312 2,508
Available for sale
(Amortized cost of $2,654,829 on March 31,
1999 and $2,991,836 on December 31, 1998) .... 2,668,639 3,005,369
----------- -----------
Total investment securities ......... 2,670,951 3,007,877
Loans:
Commercial, financial and agricultural ........ 903,573 896,060
Real estate - mortgage ........................ 231,992 215,689
Real estate - construction .................... 93,453 94,374
Consumer ...................................... 244,510 250,917
Foreign ....................................... 179,732 166,324
----------- -----------
Total loans ......................... 1,653,260 1,623,364
Less unearned discounts ....................... (7,115) (8,025)
----------- -----------
Loans, net of unearned discounts .... 1,646,145 1,615,339
Less allowance for possible loan losses ....... (26,324) (25,551)
----------- -----------
Net loans ........................... 1,619,821 1,589,788
----------- -----------
Bank premises and equipment, net ................. 141,380 137,568
Accrued interest receivable ...................... 30,087 31,542
Other investments ................................ 109,348 16,026
Intangible assets ................................ 46,569 44,971
Other assets ..................................... 43,318 38,138
----------- -----------
Total assets ........................ $ 4,806,735 $ 4,987,877
----------- -----------
(Continued)
2
INTERNATIONAL BANCSHARES CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CONDITION, CONTINUED
(DOLLARS IN THOUSANDS)
March 31, December 31,
1999 1998
----------- -----------
LIABILITIES AND SHAREHOLDERS' EQUITY
Liabilities:
Deposits:
Demand - non-interest bearing ........... $ 459,656 $ 414,412
Savings and interest bearing demand ..... 940,066 947,408
Time .................................... 2,045,055 2,007,817
----------- -----------
Total deposits .................. 3,444,777 3,369,637
Federal funds purchased and securities
sold under repurchase agreements ........ 121,550 135,700
Other borrowed funds ...................... 810,000 1,074,000
Other liabilities ......................... 53,001 38,257
----------- -----------
Total liabilities ............... 4,429,328 4,617,594
----------- -----------
Shareholders' equity:
Common stock of $1.00 par value ...........
Authorized 40,000,000 shares;
issued 16,814,259 shares in 1999
and 16,790,999 shares in 1998 ........... 16,814 16,791
Surplus ................................... 22,712 22,250
Retained earnings ......................... 348,446 341,025
Accumulated other comprehensive income .... 8,976 8,797
----------- -----------
396,948 388,863
Less cost of shares in treasury,
2,691,225 shares in 1999 and
2,670,927 shares in 1998 ................ (19,541) (18,580)
----------- -----------
Total shareholders' equity ...... 377,407 370,283
----------- -----------
Total liabilities and
shareholders' equity ......... $ 4,806,735 $ 4,987,877
=========== -----------
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
MARCH 31,
---------------------
1999 1998
------- -------
Interest income:
Loans, including fees ........................... $37,609 $34,976
Time deposits with banks ........................ 22 28
Federal funds sold .............................. 176 498
Investment securities:
Taxable ....................................... 42,585 42,788
Tax-exempt .................................... 662 19
Other interest income ........................... 120 120
------- -------
Total interest income .................... 81,174 78,429
------- -------
Interest expense:
Savings deposits ................................ 6,709 6,567
Time deposits ................................... 23,849 25,134
Federal funds purchased and securities
sold under repurchase agreements ............... 1,486 6,192
Other borrowings ................................ 11,692 4,866
------- -------
Total interest expense ................ 43,736 42,759
------- -------
Net interest income ................... 37,438 35,670
Provision for possible loan losses ................. 2,187 2,126
------- -------
Net interest income after
provision for possible
loan losses ........................ 35,251 33,544
------- -------
Non-interest income:
Service charges on deposit accounts ............. 6,879 4,874
Other service charges, commissions
and fees ...................................... 2,390 2,397
Investment securities transactions .............. 457 403
Other income .................................... 2,975 2,884
------- -------
Total non-interest income ............. 12,701 10,568
------- -------
4
INTERNATIONAL BANCSHARES CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME - CONTINUED
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
Three Months Ended
MARCH 31,
---------------------------
1999 1998
----------- -----------
Non-interest expense:
Employee compensation and benefits .......... 10,115 9,709
Occupancy ................................... 1,545 1,617
Depreciation of premises and equipment ...... 2,862 2,401
Professional fees ........................... 977 880
Stationery and supplies ..................... 662 909
Amortization of intangible assets ........... 927 993
Other ....................................... 6,930 7,508
----------- -----------
Total non-interest expense ........ 24,018 24,017
----------- -----------
Income before income taxes ........ 23,934 20,095
Income taxes ................................... 8,039 6,497
----------- -----------
Net Income ........................ $ 15,895 $ 13,598
=========== ===========
Basic earnings per common share:
Net Income .................................. $ 1.13 $ .97
Weighted average number of shares
outstanding ............................... 14,121,720 14,038,801
Diluted earnings per common share:
Net Income .................................. $ 1.11 $ .95
Weighted average number of shares
outstanding ............................... 14,336,483 14,305,654
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
MARCH 31,
---------------------
1999 1998
-------- --------
Net Income .......................................... $ 15,895 $ 13,598
-------- --------
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 ......... 179 (1,905)
-------- --------
Comprehensive income ................................ $ 16,074 $ 11,693
======== ========
See accompanying notes to interim condensed consolidated financial statements.
6
INTERNATIONAL BANCSHARES CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
(DOLLARS IN THOUSANDS)
Three Months Ended
MARCH 31,
1999 1998
--------- ---------
Operating activities:
Net Income ......................................... $ 15,895 $ 13,598
Adjustments to reconcile net income to net cash
provided by operating activities:
Provision for possible loan losses ............. 2,187 2,126
Recoveries on charged-off loans ................ 281 439
Net cost (profit) of operations for other
real estate owned ............................ 36 (110)
Depreciation of bank premises and equipment .... 2,862 2,401
Accretion of investment securities discounts ... (2,823) (960)
Amortization of investment securities premiums . 3,709 3,436
Realized gain on investment securities
transactions, net ............................ (457) (403)
Gain on sale of bank premises and equipment .... (11) (35)
Decrease in accrued interest receivable ........ 1,479 1,083
Increase in other liabilities .................. 14,682 8,199
--------- ---------
Net cash provided by operating activities . 37,840 29,774
--------- ---------
Investing activities:
Cash acquired in purchase transaction .............. 20,320 --
Proceeds from maturities of securities ............. 1,350 425
Proceeds from sales of available
for sale securities .............................. 253,463 169,859
Purchases of available for sale securities ......... (197,722) (447,960)
Principal collected on mortgage-backed securities .. 279,585 192,668
Proceeds from matured time deposits with banks ..... 189 993
Purchases of time deposits with banks .............. (297) (185)
Net (increase) decrease in loans ................... (27,998) 4,421
Net (increase) decrease in other assets ............ (97,570) 27,036
Purchase of bank premises and equipment ............ (6,172) (4,877)
Proceeds from sale of bank premises and equipment .. 31 82
--------- ---------
Net cash provided (used in)
investing activities ................... 225,179 (57,538)
--------- ---------
7
INTERNATIONAL BANCSHARES CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS, CONTINUED
(DOLLARS IN THOUSANDS)
Three Months Ended
MARCH 31,
----------------------
1999 1998
--------- ---------
Financing activities:
Net increase (decrease) in non-interest bearing
demand deposits .................................. 44,318 (3,001)
Net (decrease) increase in savings and interest
bearing demand deposits .......................... (15,566) 39,811
Net increase in time deposits ...................... 18,515 77,382
Net decrease in federal funds purchased and
securities sold under repurchase agreements ...... (14,150) (128,610)
Proceeds from issuance of other borrowed funds ..... 360,000 406,000
Principal payments on other borrowed funds ......... (624,000) (430,000)
Purchase of treasury stock ......................... (961) (537)
Proceeds from stock transactions ................... 485 1,292
Payment of cash dividends .......................... (8,474) --
--------- ---------
Net cash used in financing activities ..... (239,833) (37,663)
--------- ---------
Increase (decrease) in cash and cash equivalents ... 23,186 (65,427)
Cash and cash equivalents
at beginning of year ............................. 120,594 237,763
--------- ---------
Cash and cash equivalents
at end of period ................................. $ 143,780 $ 172,336
========= =========
Supplemental cash flow information:
Interest paid .................................... $ 42,455 $ 44,654
Income taxes paid ................................ 80 --
Supplemental schedule of noncash investing and
financing activities relating to the purchase
transaction:
Loans acquired ................................. $ 4,503 $ --
Other assets acquired .......................... 3,112 --
Deposits and other liabilities assumed ......... 27,935 --
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.
In June 1998, the Financial Accounting Standards Board issued SFAS No.
133, "Accounting for Derivative Instruments and Hedging Activities." SFAS No.
133 establishes accounting and reporting standards for derivative instruments,
including certain derivative instruments embedded in other contracts, and for
hedging activities. SFAS No. 133 requires that an entity recognize all
derivatives as either assets or liabilities in the statement of financial
position and measure those instruments at fair value. If certain conditions are
met, a derivative may be specifically designated as a "fair value hedge," a
"cash flow hedge," or a hedge of a foreign currency exposure of a net investment
in a foreign operation. The accounting for changes in the fair value of a
derivative (that is, gains and losses) depends on the intended use of the
derivative and the resulting designation. SFAS No. 133 is effective for all
fiscal quarters of fiscal years beginning after June 15, 1999. Management of the
Company does not expect that the adoption of SFAS No. 133 will have a material
impact on the Company's financial position, results of operation, or liquidity.
In October 1998, the Financial Accounting Standards Board issued SFAS No.
134, "Accounting for Mortgage-Backed Securities Retained after the
Securitization of Mortgage Loans Held for Sale by a Mortgage Banking
Enterprise." SFAS No. 134 further amends Statement 65, "Accounting for Certain
Mortgage Banking Activities, as amended by SFAS No. 115, "Accounting for Certain
Investments in Debt and Equity Securities," and SFAS No. 125, "Accounting for
Transfers and Servicing of Financial Assets and Extinguishments of Liabilities,"
requires that after securitization of mortgage loans held for sale, an entity
engaged in mortgage banking activities classify the resulting mortgage-backed
securities or other retained interests based on its ability and intent to sell
or hold those investments. SFAS No. 134 is effective for the first fiscal
quarter beginning after December 15, 1998. Management of the Company does not
expect that the adoption of SFAS No. 134 will have a material impact on the
Company's financial position, results of operation, or liquidity.
9
NOTE 2 - INVESTMENT SECURITIES
The Company classifies debt and equity securities into one of these
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 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 net of tax as other comprehensive income and as a separate
component of shareholders' equity until realized.
A summary of the investment securities held for investment and securities
available for sale as reflected on the books of the Company is as follows:
March 31, December 31,
1999 1998
---------- ----------
(Dollars in Thousands)
U. S. Treasury and federal agencies
Available for sale ..................... $2,441,817 $2,759,083
States and political subdivisions
Held to maturity ....................... 322 518
Available for sale ..................... 72,163 28,200
Other
Held to maturity ....................... 1,990 1,990
Available for sale ..................... 154,659 218,086
---------- ----------
Total investment securities ............ $2,670,951 $3,007,877
========== ==========
NOTE 3 - ALLOWANCE FOR POSSIBLE LOAN LOSSES
A summary of the transactions in the allowance for possible loan losses is
as follows:
March 31, March 31,
1999 1998
-------- --------
(Dollars in Thousands)
Balance at January 1 ........................... $ 25,551 $ 24,516
Losses charged to allowance .............. (1,695) (1,943)
Recoveries credited to allowance ......... 281 439
-------- --------
Net losses charged to allowance .......... (1,414) (1,504)
Provisions charged to operations ......... 2,187 2,126
-------- --------
Balance at March 31 ............................ $ 26,324 $ 25,138
======== ========
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
10
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. The Company's
impaired loan balances at the end of the three month period of both 1999 and
1998 was not material 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 March 31, 1999, was adequate to absorb possible losses from loans in
the portfolio at that date.
NOTE 4 - STOCK AND CASH DIVIDENDS
All per share data presented has been restated to reflect the stock split
effected through a stock dividend which became effective May 22, 1998 and
resulted in the issuance of 3,349,777 shares of Common Stock. A special cash
dividend of $.50 and $.40 per share was paid to holders of record of Common
Stock on April 20, 1998 and October 15, 1998, respectively. A special cash
dividend of $.60 per share and a 25% stock split effected through a stock
dividend was declared on March 18, 1999 and April 1, 1999 for all holders of
Common Stock of record on March 31, 1999 and May 20, 1999, respectively, with
said dividends made payable on April 15, 1999 and June 11, 1999, 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 $23,000,000 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
$23,000,000 cap will occur in the future. As of March 31, 1999, the Company had
repurchased shares in the cumulative total amount of $19,541,000.
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 567,408 and 153,784
shares remain available for the issuance of options under the new Plan. The
230,369 shares of common stock
11
remaining available under the 1987 Plan will be treated as authorized for
issuance upon exercise of options granted under the 1987 Plan only. As of March
31, 1999, options to acquire 230,369 and 413,624 shares of common stock remain
outstanding under the 1987 Plan and the new Plan, respectively.
NOTE 5 - COMMITMENTS AND CONTINGENT LIABILITIES
The Company and its bank subsidiaries are involved in certain 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.
The Company's lead bank subsidiary has invested in several lease financing
transactions. Two of the lease financing transactions have been examined by the
Internal Revenue Service ("IRS"). In both transactions, a subsidiary of the lead
bank is the owner of a ninety-nine percent (99%) limited partnership interest.
The IRS has issued a Notice of Proposed Adjustments to Affected Items of a
partnership for one of the transactions and the affected partnership has
submitted a Protest contesting the adjustments. The Company has been advised
that the IRS intends to issue a Notice of Proposed Adjustments to Affected Items
of a Partnership for the other transaction and that the partnership intends to
file a Protest contesting the proposed adjustments. No reliable prediction can
be made at this time as to the likely outcome of the Protests; however, if the
Protests are decided adversely to the partnerships, all or a portion of the $12
million in tax benefits previously recognized by the Company in connection with
these lease financing transactions would be in question.
ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
Net income for the first quarter of 1999 was $15,895,000 or $1.13 per
share basic ($1.11 per share - diluted) compared to $13,598,000 or $.97 per
share - basic ($.95 per share - diluted) in the first quarter of 1998, which
represents a 17% increase over the corresponding 1998 period.
Historically, the Company's acquisitions have been accounted for using the
purchase method of accounting which results in the creation of goodwill. The
Company's goodwill is being amortized as a non-cash reduction of net income over
time periods from ten to twenty years. "Cash" earnings reflect the net income of
the Company excluding goodwill amortization. In computing the income tax
adjustment, Management has considered tax deductible goodwill separately from
non-tax deductible goodwill in making this calculation. The income tax on tax
deductible goodwill has been computed using the standard corporate tax rate of
35%, and the non-tax deductible goodwill has been grossed-up using the same 35%
tax rate to reflect the earnings result. These two calculations have been
combined to reflect the net income tax adjustment displayed in the cash earnings
table below. The table on the following page reconciles reported earnings to net
income excluding intangible amortization ("cash" earnings) to help facilitate
peer group comparisons.
12
Three Months Ended
MARCH 31,
-------------------------
1999 1998
-------- --------
(Dollars in Thousands, except per share data)
Reported net income .......................... $ 15,895 $ 13,598
Amortization of intangible asset ............. 927 993
Income tax adjustment ........................ (61) (84)
-------- --------
Cash earnings ................................ $ 16,761 $ 14,507
======== ========
Cash earnings per common share:
Basic ...................................... $ 1.19 $ 1.03
Diluted .................................... 1.17 1.01
Total assets at March 31, 1999, were $4,806,735,000 which represents a 7%
increase over total assets of $4,500,075,000 at March 31, 1998 and a 4% decrease
from total assets of $4,987,877,000 at December 31, 1998. Deposits at March 31,
1999 were $3,444,777,000 which represents an increase of 5% over the
$3,289,752,000 amount reported at March 31, 1998, and an increase of 2% over the
$3,369,637,000 reported at December 31, 1998. Total loans at March 31, 1999
increased 14% to $1,653,260,000 from $1,445,309,000 reported at March 31, 1998,
and increased 2% from the $1,623,364,000 reported at December 31, 1998. Other
investments increased $93,322,000 to $109,348,000 at March 31, 1999 compared to
$16,026,000 at March 31, 1998. The increase is primarily due to the purchase of
bank owned life insurance. The slight decrease in total assets during the first
quarter of 1999 can be attributed primarily to the contraction of the Company's
earning asset base caused by a decline in the Company's wholesale liabilities,
repurchase agreements and short term fixed borrowings. The aggregate amount of
repurchase agreements, short term fixed borrowings and certificates of
indebtedness with the Federal Home Bank of Dallas ("FHLB") decreased to
$810,000,000 at March 31, 1999, from the $1,074,000,000 at December 31, 1998.
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 first quarter of
1999 increased $1,768,000 (5%) over the same period in 1998.
Investment securities increased .68% to $2,670,951,000 at March 31, 1999,
from $2,652,867,000 at March 31, 1998. Unrealized gains and losses created by
changes in the market values of available for sale securities are recognized as
an adjustment to stockholders' equity, net of tax. Time deposits with other
banks at March 31, 1999 increased 90% to $1,481,000 from $779,000 at March 31,
1998. Total federal funds sold increased (206%) to $34,000,000 for the first
quarter of 1999 as compared to $11,100,000 for the first quarter of 1998.
Interest and fees on loans for the three month period in 1999 increased
$2,633,000 (8%) compared to the same period in 1998. Interest income on taxable
and tax exempt investment securities for the first quarter in 1999 increased
$440,000 (1%) from the same quarter in 1998. Interest income on time deposits
with banks for the first quarter in 1999 decreased $6,000 (21%) from the same
quarter in 1998. Interest income on federal funds sold for the first quarter in
1999 decreased $322,000 (65%) from the same quarter in 1998. Overall, total
interest income from loans, time deposits, federal funds sold, investment
securities and other interest income for the first quarter in 1999 increased
$2,745,000 (4%) from the same quarter in 1998. The slight increase in total
interest income was primarily due to the income derived from the increase in the
Company's loan portfolio.
Total interest expense for savings deposits, time deposits and other
borrowings increased $977,000 (2%) for the first quarter of 1999 from the same
quarter in 1998. The increase in total interest expense was primarily due to
larger volume which is partially
13
attributable to the acquisition of the Laredo branch of Pacific Southwest Bank
in the first quarter of 1999. As a result, net interest income for the first
quarter of 1999 increased $1,768,000 or 5% over the same period in 1998. 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 $2,133,000 (20%) to $12,701,000 in the first
quarter of 1999 as compared to $10,568,000 for the quarter ended March 31, 1998.
The increases in non-interest income were primarily due to the increases in
service charge income. The increase in service charges were attributable to the
amount of account transaction fees received as a result of deposit growth and
increased collection efforts.
Non-interest expense increased $1,000 to $24,018,000 for the first quarter
of 1999 as compared to $24,017,000 for the quarter ended March 31, 1998.
Non-interest expense increased only slightly due to the Company's increased
efforts to control expenses by maintaining optimum staffing levels, an effective
budgeting process, and internal consolidation of bank functions.
The efficiency ratio, a measure of non-interest expense to net interest
income plus non-interest income was 48% for the first quarter of 1999, compared
to the year ago ratio of 52%.
The allowance for possible loan losses increased 5% to $26,324,000 at the
end of the first quarter of 1999 from $25,138,000 for the corresponding date in
1998. The provision for possible loan losses charged to expense increased 3% to
$2,187,000 for the quarter ended March 31, 1999 from $2,126,000 from the same
quarter in 1998. Increases in the allowance for possible loan losses were
largely due to the increase in the size of the loan portfolio. The allowance for
possible loan losses was 1.59% of total loans at March 31, 1999, compared to
1.74% at March 31, 1998 and 1.57% at December 31, 1998.
At March 31, 1999, the Company had $4,806,735,000 of consolidated assets
of which approximately $181,767,000 or 4% were related to loans outstanding to
borrowers domiciled in Mexico compared to $141,337,000 or 3% at March 31, 1998.
Of the $181,767,000, 66% is directly or indirectly secured by U.S. assets,
principally certificates of deposits and real estate; 31% 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, however the
deposit growth during the first quarter of 1999 was only partially attributable
to a branch acquisition. 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 although a
stable portion of the deposit base of the Company's bank subsidiaries. Other
important funding sources for the Company's bank subsidiaries during 1999 and
1998 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
14
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 quarter of 1999, 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, 1998.
Principal sources of liquidity and funding for the Company are dividends
from subsidiaries and borrowed funds, with such funds being used to finance the
Company's cash flow requirements. The Company has a number of available
alternatives to finance the growth of its existing banks as well as future
growth and expansion. Among the activities and commitments the Company funded
during the first quarter in 1999 and expects to continue to fund during 1999 is
a continuous effort to modernize and improve our existing facilities and expand
our bank branch network.
The Company maintains an adequate level of capital as a margin of safety
for its depositors and shareholders. At March 31, 1999, shareholders' equity was
$377,407,000 compared to $353,692,000 at March 31, 1998, an increase of
$23,715,000 or 7%. This increase in capital resulted primarily from the
retention of earnings. The Company had a leverage ratio of 6.64% and 6.50%,
risk-weighted Tier 1 capital ratio of 13.50% and 13.36% and risk-weighted total
capital ratio of 14.61% and 14.45% at March 31, 1999 and December 31, 1998,
respectively. The core deposit intangibles and goodwill of $45,326,000 at March
31, 1999, booked 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 March 31, 1999 is
illustrated in the table on page 16. This information reflects the balances of
assets and liabilities for which 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 asset sensitive in the longer periods. The Company's Asset and
Liability Committee semi-annually reviews 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
March 31, 1999 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 $ 34,000 - - - $ 34,000
DUE FROM BANK INT EARNING 198 1,283 - - 1,481
INVESTMENT SECURITIES 313,038 528,286 1,412,943 416,684 2,670,951
LOANS, NET OF NON-ACCRUALS 1,154,154 113,357 243,766 137,938 1,649,215
----------------------------------------------------------------------------------------------------------
TOTAL EARNING ASSETS $ 1,501,390 $ 642,926 $ 1,656,709 $ 554,622 $ 4,355,647
-----------------------------------------------------------------------------------------------------------
CUMULATIVE EARNING ASSETS $ 1,501,390 $ 2,144,316 $ 3,801,025 $ 4,355,647
===========================================================================================================
SECTION B
-----------------------------------------------------------------------------------------------------------
RATE SENSITIVE LIABILITIES
TIME DEPOSITS $ 940,290 $ 850,188 $ 254,266 $ 311 $ 2,045,055
OTHER INT BEARING DEPOSITS 940,066 - - - 940,066
FED FUNDS PURCHASED & REPOS 85,464 32,726 3,360 - 121,550
OTHER BORROWINGS 810,000 - - - 810,000
-----------------------------------------------------------------------------------------------------------
TOTAL INTEREST BEARING LIABILITIES $ 2,775,820 $ 882,914 $ 257,626 $ 311 $ 3,916,671
-----------------------------------------------------------------------------------------------------------
CUMULATIVE SENSITIVE LIABILITIES $ 2,775,820 $ 3,658,734 $ 3,916,360 $ 3,916,671
===========================================================================================================
SECTION C
-----------------------------------------------------------------------------------------------------------
REPRICING GAP $(1,274,430) $ (239,988) $ 1,399,083 $ 554,311 $ 438,976
CUMULATIVE REPRICING GAP $(1,274,430) $(1,514,418) $ (115,335) $ 438,976
RATIO OF INTEREST-SENSITIVE .54 .73 6.43 - 1.11
ASSETS TO LIABILITIES
RATIO OF CUMULATIVE, INTEREST- .54 .59 .97 1.11
SENSITIVE ASSETS TO LIABILITIES
===========================================================================================================
YEAR 2000
This section contains forward-looking statements that have been prepared
on the basis of the Company's best judgments and currently available
information. These forward-looking statements are inherently subject to
significant business, third party, and regulatory uncertainties and other
contingencies, many of which are beyond the control of the Company. In addition,
these forward-looking statements are based upon the Company's current internal
assessments and remediation plans, incorporating certain representations of
third-party servicers, and are subject to change. Accordingly, there can be no
assurance that the Company's results of operations will not be adversely
affected by difficulties or delays in the Company's or third parties' Year 2000
readiness efforts.
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
16
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 March
31, 1999, the Company was principally involved in the validation and
implementation phases of the Action Plan. Testing of core applications, such as
mainframe software, hardware, and network applications were substantially
complete by December 31, 1998.
Currently, the Company estimates that the total dollar amount to remediate
its Year 2000 issue will be less than one million dollars. The data processing
system which the Company purchased in 1990 was substantially Year 2000
compliant. The cost of remediating the remaining Year 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 $660,000 for the year 1998 and the first quarter of 1999. 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 and the first quarter of 1999 urging them to adequately
address their Year 2000 issues, and such communication is planned to continue
throughout 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 others, alternate processing facilities.
17
While the Company will have contingency plans in place to address a
temporary disruption in these services, there can be no assurance that any
disruption or failure will be only temporary, that the Company's contingency
plans will function as anticipated, or that the results of operations, financial
condition, or liquidity of the Company will not be adversely affected in the
event of a prolonged disruption or failure.
Additionally, there can be no assurance that the banking or other federal
regulators will not issue new regulatory requirements that require additional
work by the Company and, if issued, that new regulatory requirements will not
increase the cost or delay the completion of the Company's Action Plan.
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 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 that are 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 their customers, competitors and
potential competitors, are subject, including, without limitation, banking, tax,
securities, insurance and employment laws and regulations, and (IV) the loss of
senior management or operating personnel, (V) the Company's inability to
complete its Year 2000 action plan on a timely basis, and (VI) 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
PART II - OTHER INFORMATION
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
The Annual Meeting of Shareholders of the Company will be held May 20,
1999 for the following purposes: 1) To elect ten (10) directors of the Company
until the next Annual Meeting of Shareholders and until their successors are
elected and qualified; 2) To approve the appointment of independent auditors for
the 1999 fiscal year; 3) To transact such other business as may lawfully come
before the meeting or any adjournment thereof. Proxies have been solicited
pursuant to Regulation 14A under the Securities Exchange Act of 1934.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) EXHIBITS
Exhibit 27. International Bancshares Corporation Financial Data Schedule
for the Period ended March 31, 1999.
(b) Registrant filed a current report on Form 8-K on March 23, 1999, covering
Item 5 - Other Events and Item 7 - Financial Statements and Exhibits in
connection with the announcement of a cash dividend by the Company.
Registrant filed a current report on Form 8-K on April 28, 1999, covering
Item 5 - Other Events and Item 7 - Financial Statements and Exhibits in
connection with the announcement of a stock 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: MAY 17, 1999 /s/ DENNIS E. NIXON
------------ --------------------
Dennis E. Nixon
President
Date: MAY 17, 1999 /s/ IMELDA NAVARRO
------------ -------------------
Imelda Navarro
Treasurer (Chief Accounting Officer)
20