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, 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 17,236,345 shares outstanding at
November 8, 1999
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
INTERNATIONAL BANCSHARES CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CONDITION (UNAUDITED)
(DOLLARS IN THOUSANDS)
SEPTEMBER 30, DECEMBER 31,
ASSETS 1999 1998
------ ------------ -----------
Cash and due from banks ............................ $ 108,195 $ 94,594
Federal funds sold ................................. 21,500 26,000
----------- -----------
Total cash and cash equivalents ....... 129,695 120,594
Time deposits with banks ........................... 1,778 1,373
Investment securities:
Held to maturity
(Market value of $2,405 on September 30,
1999 and $2,505 on December 31, 1998) .......... 2,406 2,508
Available for sale
(Amortized cost of $3,043,097 on September 30,
1999 and $2,991,836 on December 31, 1998) ...... 2,995,884 3,005,369
----------- -----------
Total investment securities ........... 2,998,290 3,007,877
Loans:
Commercial, financial and agricultural .......... 1,031,258 896,060
Real estate - mortgage .......................... 268,212 215,689
Real estate - construction ...................... 102,947 94,374
Consumer ........................................ 173,814 250,917
Foreign ......................................... 199,482 166,324
----------- -----------
Total loans ........................... 1,775,713 1,623,364
Less unearned discounts ......................... (8,109) (8,025)
----------- -----------
Loans, net of unearned discounts ...... 1,767,604 1,615,339
Less allowance for possible loan losses ......... (26,808) (25,551)
----------- -----------
Net loans ............................. 1,740,796 1,589,788
----------- -----------
Bank premises and equipment, net ................... 143,370 137,568
Accrued interest receivable ........................ 33,755 31,542
Other investments .................................. 127,882 16,026
Intangible assets .................................. 44,588 44,971
Other assets ....................................... 54,731 38,138
----------- -----------
Total assets .......................... $ 5,274,885 $ 4,987,877
=========== ===========
(Continued)
2
INTERNATIONAL BANCSHARES CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CONDITION, CONTINUED
(DOLLARS IN THOUSANDS)
SEPTEMBER 30, DECEMBER 31,
1999 1998
------------ -----------
LIABILITIES AND SHAREHOLDERS' EQUITY
Liabilities:
Deposits:
Demand - non-interest bearing ...... $ 473,872 $ 414,412
Savings and interest bearing demand 892,766 947,408
Time ............................... 2,058,318 2,007,817
----------- -----------
Total deposits ............. 3,424,956 3,369,637
Federal funds purchased and securities
sold under repurchase agreements ... 131,681 135,700
Other borrowed funds ................. 1,325,000 1,074,000
Other liabilities .................... 48,812 38,257
----------- -----------
Total liabilities .......... 4,930,449 4,617,594
----------- -----------
Shareholders' equity:
Common stock of $1.00 par value ......
Authorized 40,000,000 shares;
issued 21,072,378 shares in 1999
and 16,790,999 shares in 1998 ...... 21,072 16,791
Surplus .............................. 23,681 22,250
Retained earnings .................... 369,516 341,025
Accumulated other comprehensive income (30,688) 8,797
----------- -----------
383,581 388,863
Less cost of shares in treasury,
3,816,781 shares in 1999 and
2,670,927 shares in 1998 ........... (39,145) (18,580)
----------- -----------
Total shareholders' equity . 344,436 370,283
----------- -----------
Total liabilities and
shareholders' equity .... $ 5,274,885 $ 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 NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
--------------------- ---------------------
1999 1998 1999 1998
--------- --------- --------- ---------
Interest income:
Loans, including fees ................. $ 40,702 $ 37,603 $ 117,235 $ 108,222
Time deposits with banks .............. 24 17 75 66
Federal funds sold .................... 158 207 599 1,093
Investment securities:
Taxable ............................. 45,573 45,968 127,119 131,400
Tax-exempt .......................... 1,148 45 2,980 85
Other interest income ................. 75 103 269 279
--------- --------- --------- ---------
Total interest income .......... 87,680 83,943 248,277 241,145
--------- --------- --------- ---------
Interest expense:
Savings deposits ...................... 6,811 6,555 20,461 19,629
Time deposits ......................... 24,305 25,747 72,002 76,568
Federal funds purchased and securities
sold under repurchase agreements ..... 1,499 2,219 4,441 11,023
Other borrowings ...................... 14,857 12,779 35,288 26,087
--------- --------- --------- ---------
Total interest expense ...... 47,472 47,300 132,192 133,307
--------- --------- --------- ---------
Net interest income ......... 40,208 36,643 116,085 107,838
Provision for possible loan losses ....... 636 2,170 5,150 6,373
--------- --------- --------- ---------
Net interest income after
provision for possible
loan losses .............. 39,572 34,473 110,935 101,465
--------- --------- --------- ---------
Non-interest income:
Service charges on deposit accounts ... 7,926 5,381 22,517 15,594
Other service charges, commissions
and fees ............................ 2,159 2,329 7,108 7,063
Investment securities transactions .... (121) 1,642 (16) 3,345
Other investments ..................... 1,419 (3,824) 4,285 (2,267)
Gain on sale of credit card receivables 6,530 -- 6,530 --
Other income .......................... 1,790 3,086 5,857 6,176
--------- --------- --------- ---------
Total non-interest income ... 19,703 8,614 46,281 29,911
--------- --------- --------- ---------
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,
------------------------ ------------------------
1999 1998 1999 1998
----------- ----------- ----------- -----------
Non-interest expense:
Employee compensation and benefits ... 10,835 9,738 31,672 29,446
Occupancy ............................ 1,755 1,984 5,009 5,509
Depreciation of premises and equipment 2,917 2,594 8,708 7,664
Professional fees .................... 1,434 877 3,739 2,693
Stationery and supplies .............. 699 637 2,130 2,296
Amortization of intangible assets .... 990 979 2,907 2,964
Other ................................ 9,778 7,593 24,586 22,884
----------- ----------- ----------- -----------
Total non-interest expense . 28,408 24,402 78,751 73,456
----------- ----------- ----------- -----------
Income before income taxes . 30,867 18,685 78,465 57,920
Income taxes ............................ 12,982 5,264 28,642 18,099
----------- ----------- ----------- -----------
Net Income ................. $ 17,885 $ 13,421 $ 49,823 $ 39,821
=========== =========== =========== ===========
Basic earnings per common share:
Net Income ........................... $ 1.03 $ .76 $ 3.17 $ 2.52
Weighted average number of shares
outstanding ........................ 17,336,751 17,704,884 15,741,034 15,823,369
Diluted earnings per common share:
Net Income ........................... $ 1.01 $ .74 $ 3.11 $ 2.45
Weighted average number of shares
outstanding ........................ 17,662,026 18,111,814 16,042,218 16,270,707
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,
------------------- -------------------
1999 1998 1999 1998
-------- -------- -------- --------
Net Income ............................ $ 17,885 $ 13,421 $ 49,823 $ 39,821
-------- -------- -------- --------
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 ......... (10,975) (6,169) (39,485) (11,854)
-------- -------- -------- --------
Comprehensive income .................. $ 6,910 $ 7,252 $ 10,338 $ 27,967
======== ======== ======== ========
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,
-------------------------
1999 1998
----------- -----------
Operating activities:
Net Income ....................................... $ 49,823 $ 39,821
Adjustments to reconcile net income to net
cash provided by operating activities:
Provision for possible loan losses ........... 5,150 6,373
Recoveries on charged-off loans .............. 932 1,105
Net cost of operations for other
real estate owned .......................... 132 101
Write down of credit card receivables to
net realizable value ....................... 2,766 --
Gain on sale of credit card receivables ...... (6,530) --
Depreciation of bank premises and equipment .. 8,708 7,664
Accretion of investment securities discounts . (10,972) (7,118)
Amortization of investment securities premiums 9,548 10,403
Realized loss (gain) on investment securities
transactions, net .......................... 16 (3,345)
Gain on sale of bank premises and equipment .. (30) (1,693)
Increase in accrued interest receivable ...... (2,189) (472)
Increase in other liabilities ................ 10,493 15,528
----------- -----------
Net cash provided by operating activities 67,847 68,367
----------- -----------
Investing activities:
Cash acquired in purchase transaction ............ 20,320 --
Proceeds from maturities of securities ........... 2,350 975
Proceeds from sales of available
for sale securities ............................ 613,051 500,877
Purchases of available for sale securities ....... (1,226,580) (1,603,681)
Principal collected on mortgage-backed securities 582,689 699,154
Proceeds from matured time deposits with banks ... 684 1,191
Purchases of time deposits with banks ............ (1,089) (779)
Net increase in loans ............................ (148,823) (85,314)
Net (increase) decrease in other assets .......... (125,632) 37,592
Purchase of bank premises and equipment .......... (14,012) (14,760)
Proceeds from sale of bank premises and equipment 54 2,500
----------- -----------
Net cash used in investing activities ... (296,988) (462,245)
----------- -----------
7
INTERNATIONAL BANCSHARES CORPORATION AND SUBSIDIARIES
Consolidated Statements of Cash Flows, continued
(Dollars in Thousands)
NINE MONTHS ENDED
SEPTEMBER 30,
-------------------------
1999 1998
----------- -----------
Financing activities:
Net increase (decrease) in non-interest
bearing demand deposits ........................ $ 58,534 $ (52,517)
Net (decrease) increase in savings and interest
bearing demand deposits ........................ (62,866) 48,681
Net increase in time deposits .................... 31,778 84,406
Net decrease in federal funds purchased and
securities sold under repurchase agreements .... (4,019) (286,164)
Proceeds from issuance of other borrowed funds ... 1,630,000 1,795,000
Principal payments on other borrowed funds ....... (1,379,000) (1,286,000)
Purchase of treasury stock ....................... (20,565) (2,770)
Proceeds from stock transactions ................. 1,508 2,595
Payments of cash dividends ....................... (17,102) (11,297)
Payments of cash dividends in lieu of
fractional shares .............................. (26) (41)
----------- -----------
Net cash provided by financing activities 238,242 291,893
----------- -----------
Increase (decrease) in cash and
cash equivalents ..................... 9,101 (101,985)
Cash and cash equivalents
at beginning of year ........................... 120,594 237,763
----------- -----------
Cash and cash equivalents
at end of period ............................... $ 129,695 $ 135,778
=========== ===========
Supplemental cash flow information:
Interest paid .................................. $ 133,895 $ 107,034
Income taxes paid .............................. 23,320 17,049
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 practices 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 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, 2000. 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. The adoption of SFAS No. 134 did not 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 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 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 to maturity and securities
available for sale as reflected on the books of the Company is as follows:
SEPTEMBER 30, DECEMBER 31,
1999 1998
------------ -----------
(Dollars in Thousands)
U. S. Treasury and federal agencies
Held to maturity ............... $ -- $ --
Available for sale ............. 2,773,315 2,759,083
States and political subdivisions
Held to maturity ............... 321 518
Available for sale ............. 92,024 28,200
Other
Held to maturity ............... 2,085 1,990
Available for sale ............. 130,545 218,086
----------- -----------
Total investment securities .... $ 2,998,290 $ 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:
SEPTEMBER 30, SEPTEMBER 30,
1999 1998
------------ ------------
(Dollars in Thousands)
Balance at January 1 ................. $ 25,551 $ 24,516
Losses charged to allowance .... (4,825) (5,474)
Recoveries credited to allowance 932 1,105
----------- -----------
Net losses charged to allowance (3,893) (4,369)
Provisions charged to operations 5,150 6,373
----------- -----------
Balance at September 30 .............. $ 26,808 $ 26,520
=========== ===========
The Company classifies as impaired those loans where it is probable that
all amounts due will not be collected according to contractual terms of the loan
agreement. 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
10
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. The Company's
impaired loan balances at September 30, 1999 and 1998 were 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 September 30, 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 25% stock
splits effected through stock dividends which became effective May 22, 1998 and
May 20, 1999 and were paid on June 12, 1998 and June 11, 1999, respectively.
Such stock dividends resulted in the issuance of 3,349,777 and 4,204,251 shares
of Common Stock in 1998 and 1999, respectively. Special cash dividends of $.50
and $.40 per share were paid to holders of record of Common Stock on April 20,
1998 and October 15, 1998, respectively. Special cash dividend of $.60 and $.50
per share were paid to holders of record of Common Stock on April 15, 1999 and
October 15, 1999, respectively.
The Company announced a new formal stock repurchase program on June 22,
1999 and announced it expanded the stock repurchase program on July 16, 1999.
Under the stock repurchase program, the Company is authorized to repurchase up
to $22,500,000 of its common stock through June 2000. Stock repurchases may be
made from time to time, on the open market or through private transactions.
Shares repurchased in this program will be held in treasury for reissue for
various corporate purposes, including employee stock option plans. As of
November 8, 1999 a total of 442,014 shares were repurchased under this program
at a cost of $19,379,000. Stock repurchases are presented quarterly at the
Company's Board of Directors meetings and the Board of Directors has stated that
the aggregate investment in treasury stock should not exceed $45,000,000. In the
past, the board has increased previous caps on treasury stock once they were
met, but there are no assurances that an increase of the $45,000,000 cap will
occur in the future. As of November 8, 1999 the Company has approximately
$40,352,000 invested in treasury shares, which amount has been accumulated since
the inception of the Company.
11
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 666,606 with 25,485
shares remaining available for the issuance of options under the new Plan. The
236,034 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, 1999, options to acquire 236,034 and 666,606
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 various legal
proceedings that are in various stages of litigation. Some of these actions
allege "lender liability" claims on a variety of theories and claim substantial
actual and punitive damages. The Company and its subsidiaries have determined,
based on discussions with their counsel, that any material loss in such actions,
individually or in the aggregate, is remote or the damages sought, even if fully
recovered, would not be considered significant 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 IRS has issued a Notice of
Proposed Adjustments to Affected Items of a Partnership for the other
transaction and 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. Management currently estimates its exposure
to be approximately $3,000,000, which amount has been accrued for and included
in income tax expense. Management intends to continue to evaluate the merits of
this matter and make appropriate revisions if warranted.
ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
Net income for the third quarter of 1999 was $17,885,000 or $1.03 per
share basic ($1.01 per share - diluted) compared to $13,421,000 or $.76 per
share - basic ($.74 per share - diluted) in 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. "Income before goodwill charges" reflects
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
12
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 income before goodwill charges table below. The
table reconciles reported earnings to net income excluding intangible
amortization ("income before goodwill charges") to help facilitate peer group
comparisons.
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
------------------- -------------------
1999 1998 1999 1998
-------- -------- -------- --------
(Dollars in Thousands, except per share data)
Reported net income ............................ $ 17,885 $ 13,421 $ 49,823 $ 39,821
Amortization of intangible assets .............. 990 979 2,907 2,964
Income tax adjustment .......................... (83) (79) (226) (246)
-------- -------- -------- --------
Income before goodwill charges ................. $ 18,792 $ 14,321 $ 52,504 $ 42,539
======== ======== ======== ========
Income before goodwill charges per common share:
Basic ....................................... $ 1.19 $ .91 $ 3.34 $ 2.69
Diluted ..................................... $ 1.17 $ .88 $ 3.27 $ 2.61
Total assets at September 30, 1999 were $5,274,885,000 which represents a
9% increase over total assets of $4,853,234,000 at September 30, 1998 and a 6%
increase over total assets of $4,987,877,000 as of December 31, 1998. Deposits
at September 30, 1999 were $3,424,956,000 an increase of 5% over the
$3,256,130,000 amount reported at September 30, 1998, and an increase of 2% over
the $3,369,637,000 amount reported at December 31, 1998. Total loans at
September 30, 1999 increased 16% to $1,775,713,000 over $1,532,829,000 reported
at September 30, 1998 and increased 9% over the $1,623,364,000 amount reported
at December 31, 1998. Other investments increased $111,856,000 to $127,882,000
primarily due to the purchase of bank owned life insurance. The increase in
assets and deposits during the first nine months in 1999 reflects growth
opportunities in the Company's market through its 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 $1,325,000,000 at September 30, 1999, from $1,074,000,000
at December 31, 1998. Such 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
1999 increased $3,565,000 (10%) over the same period in 1998 and the increase is
the result of the Company's efforts to manage interest rate risk.
Investment securities increased 1% to $2,998,290,000 at September 30, 1999
over $2,962,718,000 at September 30, 1998. Time deposits with other banks at
September 30, 1999 increased to $1,778,000 from $1,175,000 at September 30,
1998. Total federal funds sold decreased 53% to $21,500,000 at September 30,
1999 as compared to $46,000,000 at September 30, 1998.
Interest and fees on loans for the third quarter in 1999 increased
$3,099,000 (8%) over the same quarter in 1998 and increased $9,013,000 (8%) for
the nine month period ended September 30, 1999 as compared to the same period in
1998. Interest income on taxable and tax exempt investment securities for the
third quarter in 1999
13
increased $708,000 (2%) over the same quarter in 1998 and decreased $1,386,000
(1%) for the nine month period ended September 30, 1999 as compared to the same
period in 1998. Interest income on time deposits with banks for the third
quarter in 1999 increased $7,000 (41%) over the same quarter in 1998 and
increased $9,000 (14%) for the nine month period ended September 30, 1999 as
compared to the same period in 1998. Interest income on federal funds sold for
the third quarter in 1999 decreased $49,000 (24%) from the same quarter in 1998
and decreased $494,000 (45%) for the nine month period ended September 30, 1999
as compared to the same period in 1998. Overall, total interest income from
loans, time deposits, federal funds sold, investment securities and other
interest income for the third quarter in 1999 increased $3,737,000 (4%) over the
same quarter in 1998 and increased $7,132,000 (3%) for the nine month period
ended September 30, 1999 as compared to the same period in 1998. The increase in
total interest income was primarily due to income derived from the Company's
loan portfolio.
Total interest expense for savings deposit, time deposits and other
borrowings increased $172,000 (.4%) for the third quarter of 1999 from the same
quarter in 1998 and decreased $1,115,000 (1%) for the nine month period ended
September 30, 1999 from the same period in 1998. The slight decrease in total
interest expense was primarily due to the decrease of the cost of funds compared
to the corresponding 1998 period. As a result, net interest income for the third
quarter of 1999 increased $3,565,000 (10%) over the same period in 1998 and
increased $8,247,000 (8%) for the nine month period ended September 30, 1999
over the corresponding 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 $11,089,000 (129%) to $19,703,000 in the
third quarter of 1999 as compared to $8,614,000 for the quarter ended September
30, 1998 and increased $16,370,000 (55%) to $46,281,000 for the nine month
period ended September 30, 1999 as compared to $29,911,000 for the nine months
ended September 30, 1998. The increase in non-interest income was primarily due
to the $6,530,000 gain recognition on the sale of $62,400,000 of credit card
receivables and the premium paid on the related transfer of $87,454,000 of
deposits in the third quarter. The increase in service charges was attributable
to the amount of account transaction fees received as a result of the deposit
growth, new deposit products and increased collection efforts.
Non-interest expense increased $4,006,000 (16%) to $28,408,000 for the
third quarter of 1999 as compared to $24,402,000 for the quarter ended September
30, 1998 and increased $5,295,000 (7%) to $78,751,000 for the nine month period
ended September 30, 1999 as compared to $73,456,000 for the nine months ended
September 30, 1998. Noninterest expense increased primarily due to the write
down of the Company's credit card receivables in the amount of $2,766,000 and
the increased operations at the bank subsidiaries.
The efficiency ratio, a measure of non-interest expense to net interest
income plus non-interest income was 49% for the nine month period ended
September 30, 1999, compared to the year ago ratio of 53%.
The allowance for possible loan losses increased 1% to $26,808,000 at the
end of the third quarter of 1999 from $26,520,000 for the corresponding date in
1998. The provision for possible loan losses charged to expense decreased 19% to
$5,150,000 for the first nine months of 1999 compared to $6,373,000 for the
first nine months of 1998. Decrease in the allowance for possible loan losses
were largely due to the sale of the credit card receivables in the third
quarter. The allowance for possible loan losses was 1.51% of total loans at
September 30, 1999, compared to 1.73% at September 30, 1998 and 1.57% at
December 31, 1998.
14
On September 30, 1999, the Company had $5,274,885,000 of consolidated
assets of which approximately $201,320,000 or 4% were related to loans
outstanding to borrowers domiciled in Mexico. Of the $201,320,000, 63% is
directly or indirectly secured by U.S. assets, principally certificates of
deposits and real estate; 34% 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 three quarters 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 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, and FHLMC and large certificates of
deposit, requiring management to closely monitor its asset/liability mix in
terms of both rate sensitivity and maturity distribution. Primary liquidity of
the Company and its subsidiaries has been maintained by means of increased
investment in shorter-term securities, certificates of deposit and loans. As in
the past, the Company will continue to monitor the volatility and cost of funds
in an attempt to match maturities of rate-sensitive assets and liabilities, and
respond accordingly to anticipated fluctuations in interest rates over
reasonable periods of time.
During the first nine months 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 nine months 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 September 30, 1999, shareholders' equity
was $344,436,000 compared to $357,698,000 at September 30, 1998, a decrease of
$13,262,000 or 4%. The decrease in capital resulted primarily from the negative
impact of comprehensive income and the stock repurchase program.
The Company had a leverage ratio of 6.50% and 6.50%, risk-weighted Tier 1
capital ratio of 13.35% and 13.36% and risk-weighted total capital ratio of
14.44% and 14.45% at September 30, 1999 and December 31, 1998, respectively. The
core deposit intangibles and goodwill of $43,487,000 at September 30, 1999,
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.
15
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, 1999 is
illustrated in the table below. This information reflects the balances of assets
and liabilities whose rates are subject to change. A mix of assets and
liabilities that are roughly equal in volume and repricing characteristics
represents a matched interest rate sensitivity position. Any excess of assets or
liabilities results in an interest rate sensitivity gap.
The Company undertakes the interest rate sensitivity analysis to monitor
the potential risk on future earnings resulting from the impact of possible
future changes in interest rates on currently existing net asset or net
liability positions. However, this type of analysis is as of a point-in-time
position, when in fact that position can quickly change as market conditions,
customer needs, and management strategies change. Thus, interest rate changes do
not affect all categories of asset and liabilities equally or at the same time.
As indicated in the table, the Company is liability sensitive during the early
time periods and becomes asset sensitive in the longer periods. The Company's
Asset and Liability Committee reviews semi-annually the consolidated position
along with simulation and duration models, and makes adjustments as needed to
control the Company's interest rate risk position. The Company uses modeling of
future events as a primary tool for monitoring interest rate risk.
INTEREST RATE SENSITIVITY
(Dollars in Thousands)
RATE/MATURITY RATE/MATURITY RATE/MATURITY RATE/MATURITY
SEPTEMBER 30, 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 ................... 21,500 -- -- -- 21,500
DUE FROM BANK INT EARNING ........ 396 1,382 -- -- 1,778
INVESTMENT SECURITIES ............ 271,287 624,067 1,837,471 265,465 2,998,290
LOANS, NET OF NON-ACCRUALS ....... 1,185,473 133,104 288,314 161,243 1,768,134
- ----------------------------------------------------------------------------------------------------------
TOTAL EARNING ASSETS ............. 1,478,656 758,553 2,125,785 426,708 4,789,702
- ----------------------------------------------------------------------------------------------------------
CUMULATIVE EARNING ASSETS ........ 1,478,656 2,237,209 4,362,994 4,789,702
==========================================================================================================
SECTION B
- ----------------------------------------------------------------------------------------------------------
RATE SENSITIVE LIABILITIES
TIME DEPOSITS .................... 997,455 850,629 209,829 405 2,058,318
OTHER INT BEARING DEPOSITS ....... 892,766 -- -- -- 892,766
FED FUNDS PURCHASED & REPOS ...... 78,970 50,289 2,422 -- 131,681
OTHER BORROWINGS ................. 1,325,000 -- -- -- 1,325,000
- ----------------------------------------------------------------------------------------------------------
TOTAL INTEREST BEARING LIABILITIES 3,294,191 900,918 212,251 405 4,407,765
- ----------------------------------------------------------------------------------------------------------
CUMULATIVE SENSITIVE LIABILITIES . 3,294,191 4,195,109 4,407,360 4,407,765
==========================================================================================================
SECTION C
- ----------------------------------------------------------------------------------------------------------
REPRICING GAP .................... (1,815,535) (142,365) 1,913,534 426,303 381,937
CUMULATIVE REPRICING GAP ......... (1,815,535) (1,957,900) (44,366) 381,937
RATIO OF INTEREST-SENSITIVE ...... .45 .84 10.02 -- 1.09
ASSETS TO LIABILITIES
RATIO OF CUMULATIVE, INTEREST- ... .45 .53 .99 1.09
SENSITIVE ASSETS TO LIABILITIES
==========================================================================================================
16
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 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, 1999, the Company was completing the
implementation phase 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 $695,000 for the year 1998 and the first three quarters of 1999.
These 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.
17
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 half 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 contingency plans addressing funding
and liquidity needs as well as 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.
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
18
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.
19
ITEM 5. OTHER INFORMATION
None
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, 1999.
(b) REPORTS ON FORM 8-K
Registrant filed a current report on Form 8-K on September 2, 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 November 8, 1999,
covering Item 5 - Other Events and Item 7 - Financial Statements and Exhibits in
connection with the announcement of the Company's Third Quarter 1999 Earnings.
20
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, 1999 /s/ DENNIS E. NIXON
Dennis E. Nixon
PRESIDENT
DATE: NOVEMBER 12, 1999 /s/ IMELDA NAVARRO
Imelda Navarro
TREASURER (CHIEF ACCOUNTING OFFICER)
21