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, 2001
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
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(Address of principal executive offices)
(Zip Code)
(956) 722-7611
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(Registrant's telephone number, including area code)
NONE
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(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 21,312,755 shares outstanding at
May 10, 2001
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 2001 2000
----------- -----------
Cash and due from banks $ 134,793 $ 125,628
Federal funds sold 18,000 500
----------- -----------
Total cash and cash equivalents 152,793 126,128
Time deposits with banks 2,570 2,471
Investment securities:
Held to maturity
(Market value of $2,160 on March 31, 2001
and $2,220 on December 31, 2000) 2,160 2,220
Available for sale
(Amortized cost of $3,239,539 on March 31,
2001 and $3,126,107 on December 31, 2000) 3,268,488 3,096,626
----------- -----------
Total investment securities 3,270,648 3,098,846
Loans:
Commercial, financial and agricultural 1,288,129 1,286,576
Real estate - mortgage 298,909 287,319
Real estate - construction 250,803 232,589
Consumer 159,533 165,875
Foreign 293,342 278,119
----------- -----------
Total loans 2,290,716 2,250,478
Less unearned discounts (6,757) (7,199)
----------- -----------
Loans, net of unearned discounts 2,283,959 2,243,279
Less allowance for possible loan losses (31,761) (30,812)
----------- -----------
Net loans 2,252,198 2,212,467
----------- -----------
Bank premises and equipment, net 158,667 155,523
Accrued interest receivable 39,984 40,159
Other investments 135,919 132,848
Intangible assets 59,144 55,580
Other assets 38,579 36,692
----------- -----------
Total assets $ 6,110,502 $ 5,860,714
=========== ===========
(Continued)
2
INTERNATIONAL BANCSHARES CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CONDITION, CONTINUED
(DOLLARS IN THOUSANDS)
March 31, December 31,
2001 2000
----------- -----------
LIABILITIES AND SHAREHOLDERS' EQUITY
Liabilities:
Deposits:
Demand - non-interest bearing $ 557,968 $ 573,681
Savings and interest bearing demand 974,456 913,894
Time 2,277,399 2,257,023
----------- -----------
Total deposits 3,809,823 3,744,598
Federal funds purchased and securities
sold under repurchase agreements 442,996 230,108
Other borrowed funds 1,310,124 1,432,500
Other liabilities 83,219 36,616
----------- -----------
Total liabilities 5,646,162 5,443,822
----------- -----------
Shareholders' equity:
Common stock of $1.00 par value
Authorized 40,000,000 shares;
issued 26,501,489 shares in 2001
and 26,481,211 shares in 2000 26,501 26,481
Surplus 26,255 25,933
Retained earnings 445,745 434,796
Accumulated other comprehensive income 18,817 (19,163)
----------- -----------
517,318 468,047
Less cost of shares in treasury,
5,189,463 shares in 2001 and
5,139,863 shares in 2000 (52,978) (51,155)
----------- -----------
Total shareholders' equity 464,340 416,892
----------- -----------
Total liabilities and
shareholders' equity $ 6,110,502 $ 5,860,714
=========== ===========
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,
------------------------
2001 2000
--------- ---------
Interest income:
Loans, including fees $ 55,065 $ 47,373
Time deposits with banks 48 31
Federal funds sold 238 376
Investment securities:
Taxable 52,566 48,176
Tax-exempt 1,292 1,298
Other interest income 363 98
--------- ---------
Total interest income 109,572 97,352
--------- ---------
Interest expense:
Savings deposits 7,211 6,969
Time deposits 32,056 27,219
Federal funds purchased and securities
sold under repurchase agreements 5,817 1,647
Other borrowings 17,950 20,161
--------- ---------
Total interest expense 63,034 55,996
--------- ---------
Net interest income 46,538 41,356
Provision for possible loan losses 2,127 1,576
--------- ---------
Net interest income after
provision for possible
loan losses 44,411 39,780
--------- ---------
Non-interest income:
Service charges on deposit accounts 9,821 7,846
Other service charges, commissions
and fees 2,485 2,558
Investment securities transactions (462) (1,319)
Other investments 1,941 1,926
Other income 4,969 2,208
--------- ---------
Total non-interest income 18,754 13,219
--------- ---------
4
INTERNATIONAL BANCSHARES CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME - CONTINUED
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
Three Months Ended
March 31,
-------------------------
2001 2000
----------- -----------
Non-interest expense:
Employee compensation and benefits 13,516 11,187
Occupancy 2,580 1,927
Depreciation of premises and equipment 3,314 2,966
Professional fees 1,080 1,027
Stationery and supplies 849 700
Amortization of intangible assets 1,268 982
Other 8,125 6,328
----------- -----------
Total non-interest expense 30,732 25,117
----------- -----------
Income before provision for income
taxes and minority interest 32,433 27,882
Provision for income taxes 10,734 8,702
Minority interest in consolidated income 94 -
----------- -----------
Net Income $ 21,605 $ 19,180
=========== ===========
Basic earnings per common share:
Net Income $ 1.01 $ .89
Weighted average number of shares
outstanding 21,313,950 21,553,827
Diluted earnings per common share:
Net Income $ 1.00 $ .89
Weighted average number of shares
outstanding 21,640,790 21,643,927
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,
---------------------
2001 2000
-------- --------
Net Income $ 21,605 $ 19,180
-------- --------
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 37,980 (12,466)
-------- --------
Comprehensive income $ 59,585 $ 6,714
======== ========
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,
----------------------
2001 2000
--------- ---------
Operating activities:
Net Income $ 21,605 $ 19,180
Adjustments to reconcile net income to net
cash provided by operating activities:
Provision for possible loan losses 2,127 1,576
Recoveries on charged-off loans 225 323
Net expense (income) from operations of other
real estate owned 21 (24)
Gain on sale of loans (20) (15)
Depreciation of bank premises and equipment 3,314 2,966
Depreciation and amortization of leasing assets 767 437
Accretion of investment securities discounts (4,021) (4,568)
Amortization of investment securities premiums 1,795 2,984
Realized loss on investment securities
transactions, net 462 1,319
Gain on sale of bank premises and equipment (5) (45)
Deferred tax expense 1,396 1,398
Decrease (increase) in accrued interest
receivable 175 (1,109)
Increase in other liabilities 46,603 13,245
--------- ---------
Net cash provided by
operating activities 74,444 37,667
--------- ---------
Investing activities:
Proceeds from maturities of securities 560 760
Proceeds from sales of available
for sale securities 132,322 48,216
Purchases of available for sale securities (413,685) (83,452)
Principal collected on mortgage-backed securities 148,745 80,434
Proceeds from matured time deposits with banks 297 293
Purchases of time deposits with banks (396) (392)
Net increase in loans (42,063) (111,792)
Net increase in other assets (10,706) (2,092)
Purchase of bank premises and equipment (6,464) (3,651)
Proceeds from sale of bank premises and equipment 11 135
--------- ---------
Net cash used in
investing activities (191,379) (71,541)
--------- ---------
7
INTERNATIONAL BANCSHARES CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS, CONTINUED
(DOLLARS IN THOUSANDS)
Three Months Ended
March 31,
-----------------------
2001 2000
--------- ---------
Financing activities:
Net (decrease) increase in non-interest
bearing demand deposits (15,713) 48,407
Net increase in savings and interest
bearing demand deposits 60,562 9,733
Net increase in time deposits 20,376 46,709
Net increase in federal funds purchased and
securities sold under repurchase agreements 212,888 2,457
Proceeds from issuance of other borrowed funds 482,124 217,500
Principal payments on other borrowed funds (604,500) (290,000)
Purchase of treasury stock (1,823) (1,538)
Proceeds from stock transactions 342 549
Payment of cash dividends (10,656) (10,337)
--------- ---------
Net cash provided by
financing activities 143,600 23,480
--------- ---------
Increase (decrease) in cash and
cash equivalents 26,665 (10,394)
Cash and cash equivalents
at beginning of year 126,128 134,995
--------- ---------
Cash and cash equivalents
at end of period $ 152,793 $ 124,601
========= =========
Supplemental cash flow information:
Interest paid $ 61,586 $ 54,608
Income taxes paid 45 --
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, IBC
Capital Corporation and International Bancshares Capital Trust I as well as the
GulfStar Group in which the Company owns a controlling interest. 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. The balance sheet at December 31, 2000 has
been derived from the audited financial statements at that date but does not
include all of the information and footnotes required by generally accepted
accounting principles for complete financial statements. Certain
reclassifications have been made to make prior periods comparable.
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. In June 1999, the Financial Accounting
Standards Board issued SFAS No. 138, "Accounting for Derivative Instruments and
Hedging Activities-Deferral of the Effective Date of SFAS No. 133", which
deferred the effective date of SFAS No. 133 to fiscal years beginning after June
15, 2000. The Company currently does not engage in hedging activities and does
not hold any derivative instruments or embedded derivatives. The Company adopted
SFAS No. 133 on January 1, 2001 and the adoption did not have any impact on its
consolidated financial statements.
In September 2000, the Financial Accounting Standards Board's issued SFAS
No. 140, "Accounting for Transfers and Servicing of Financial Assets and
9
Extinguishments of Liabilities", which replaces the Financial Accounting
Standards Board's Statement No. 125, "Accounting for Transfers and Servicing of
Financial Assets and Extinguishments of Liabilities", but carries over most of
SFAS No. 125's provisions without change. SFAS No. 140 elaborates on the
qualifications necessary for a special-purpose entity, clarifies sales
accounting criteria in certain circumstances, refines accounting for collateral,
and adds disclosures for collateral, securitizations, and retained interests in
securitized assets. This statement should be applied prospectively and is
effective for transactions occurring after March 31, 2001. Disclosure
requirements of this statement and any changes in accounting for collateral are
effective for fiscal years ending after December 15, 2000. The Company has
adopted the disclosure requirements and does not expect that the adoption of the
remaining provisions of SFAS No. 140 will have a material impact on its
consolidated financial statements.
NOTE 2 - ACQUISITIONS
Effective April 1, 2001, IBC acquired the assets of Grove Agency
Insurance, Inc., of Corpus Christi, Texas. The acquisition was accounted for as
a purchase transaction. In connection with the acquisition, IBC recorded
goodwill totaling $1,575,000 which is being amortized on a straight line basis
over a fifteen year period.
Effective February 16, 2001, IBC acquired the assets of First Equity
Corporation, an Austin, Texas based mortgage company. The acquisition was
accounted for as a purchase transaction. In connection with the acquisition, IBC
recorded goodwill totaling $4,864,000 which is being amortized on a straight
line basis over a fifteen year period.
Effective October 2, 2000, the Company purchased a controlling interest in
the GulfStar Group, a Houston-based investment banking firm serving
middle-market corporations primarily in Texas. The acquisition was accounted for
as a purchase transaction. In connection with the acquisition, the Company
recorded goodwill totaling $13,199,000 which is being amortized on a straight
line basis over a fifteen year period.
During 2000, IBC established an insurance subsidiary and acquired the
assets of two insurance agencies in Texas. The acquisitions were accounted for
as a purchase transaction. In connection with the acquisitions, IBC recorded
goodwill totaling $3,003,000 which is being amortized on a straight line basis
over a fifteen year period.
NOTE 3 - 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.
10
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,
2001 2000
----------- -----------
(Dollars in Thousands)
U. S. Treasury and federal agencies
Available for sale $ 3,003,966 $ 2,828,134
States and political subdivisions
Held to maturity -- 60
Available for sale 100,739 96,791
Other
Held to maturity 2,160 2,160
Available for sale 163,783 171,701
----------- -----------
Total investment securities $ 3,270,648 $ 3,098,846
=========== ===========
NOTE 4 - ALLOWANCE FOR POSSIBLE LOAN LOSSES
A summary of the transactions in the allowance for possible loan losses
is as follows:
March 31, March 31,
2001 2000
----------- -----------
(Dollars in Thousands)
Balance at January 1 $ 30,812 $ 26,770
Losses charged to allowance (1,403) (437)
Recoveries credited to allowance 225 323
----------- -----------
Net losses charged to allowance (1,178) (114)
Provisions charged to operations 2,127 1,576
----------- -----------
Balance at March 31 $ 31,761 $ 28,232
=========== ===========
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 based on 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 the end of the three month period of both 2001 and
2000 was not material to the Company's consolidated financial position.
The subsidiary banks charge off that portion of any loan which management
11
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, 2001, was adequate to absorb possible losses from loans in
the portfolio at that date.
NOTE 5 - 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 18, 2000 and
resulted in the issuance of 5,280,503 shares of Common Stock. A cash dividend of
$.60 and $.50 per share was paid to holders of record of Common Stock on April
14, 2000 and October 16, 2000, respectively. A cash dividend of $.50 per share
and a 25% stock split effected through a stock dividend was declared on February
22, 2001 and April 5, 2001 for all holders of Common Stock of record on March
30, 2001 and May 17, 2001, respectively, with said dividends made payable on
April 16, 2001 and June 15, 2001, 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,
January 11, 2000 and on December 21, 2000. Under the formal stock repurchase
program, the Company is authorized to repurchase up to $45,000,000 of its common
stock through December 2001. 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 May 10, 2001, a total of 789,627
shares were repurchased under this program at a cost of $32,266,000 which shares
are now reflected as 931,783 shares of treasury stock as adjusted for stock
dividends. 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 $70,000,000. 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 $70,000,000 cap will occur in
the future. As of May 10, 2001, the Company has approximately $53,239,000
invested in 5,196,683 treasury shares, which amount has been accumulated since
the inception of the Company.
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 812,124, including
37,465 shares remaining available for the issuance of options under the new
Plan. The 185,194 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 March 31, 2001, options to acquire 185,194 and
774,659 shares of common stock remain outstanding under the 1987 Plan and the
new Plan, respectively.
12
On October 2, 2000, the Company granted nonqualified stock options
exercisable for a total of 120,000 shares of Common Stock to certain employees
of the GulfStar Group. The grants were not made under either the 1987 Plan or
the 1996 Plan. As of March 31, 2001, options to acquire 120,000 shares of common
stock remain outstanding to certain employees of the GulfStar Group.
NOTE 6 - 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 each of the transactions and the affected partnership has
submitted a Protest contesting the adjustments. No reliable prediction can be
made at this time as to the likely outcome of the IRS proceedings regarding the
lease transactions; however, if the IRS proceedings 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 has estimated the Company's exposure in
connection with these transactions and has reserved the estimated amount.
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 first quarter of 2001 was $21,605,000 or $1.01 per
share - basic ($1.00 per share - diluted) compared to $19,180,000 or $.89 per
share - basic ($.89 per share - diluted) in the first quarter of 2000, which
represents a 13% increase over the corresponding 2000 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 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 reconciles reported
earnings to net income excluding intangible amortization ("income before
goodwill charges") to help facilitate peer group comparisons.
13
Three Months Ended
March 31,
-----------------------
2001 2000
-------- --------
(Dollars in Thousands, except per share data)
Reported net income $ 21,605 $ 19,180
Amortization of intangible asset 1,268 982
Income tax adjustment (180) (80)
-------- --------
Income before goodwill charges $ 22,693 $ 20,082
======== ========
Income before goodwill charges per
common share:
Basic $ 1.06 $ .93
Diluted 1.05 .93
Total assets at March 31, 2001, were $6,110,502,000 which represents a 12%
increase over total assets of $5,465,243,000 at March 31, 2000 and a 4% increase
over total assets of $5,860,714,000 at December 31, 2000. Deposits at March 31,
2001 were $3,809,823,000 which represents an increase of 5% over the
$3,632,061,000 amount reported at March 31, 2000, and an increase of 2% over the
$3,744,598,000 reported at December 31, 2000. Total loans at March 31, 2001
increased 13% to $2,290,716,000 from $2,023,330,000 reported at March 31, 2000,
and increased 2% from the $2,250,478,000 reported at December 31, 2000. The
increase in assets and deposits during the first three months in 2001 reflects
growth opportunities in the Company's market through its branch system. The
aggregate amount of certificates of indebtedness with the Federal Home Bank of
Dallas ("FHLB") decreased to $1,300,124,000 at March 31, 2001 from the
$1,432,500,000 at December 31, 2000. Certificates of indebtedness and the
deposits 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 first quarter of
2001 increased $5,182,000 (13%) over the same period in 2000 and the increase is
the result of the Company's efforts to manage interest rate risk.
Investment securities increased 11% to $3,270,648,000 at March 31, 2001,
from $2,937,558,000 at March 31, 2000 and a 6% increase over investment
securities of $3,098,846,000 at December 31, 2000. Time deposits with other
banks at March 31, 2001 increased 30% to $2,570,000 over $1,976,000 at March 31,
2000 and a 4% increase over time deposits of $2,471,000 at December 31, 2000.
Total federal funds sold decreased 2% to $18,000,000 at March 31, 2001 as
compared to $18,300,000 at March 31, 2000 and increased from $500,000 at
December 31, 2000. The changes reflected during the first quarter of 2001 and
2000 were primarily from the results of continued increases in deposits,
repurchase agreements and borrowings, which provide the Company with available
funds for investments.
Interest and fees on loans for the three month period in 2001 increased
$7,692,000 (16%) compared to the same period in 2000. Interest income on taxable
and tax exempt investment securities for the first quarter in 2001 increased
$4,384,000 (9%) from the same quarter in 2000. Interest income on time deposits
with banks for the first quarter in 2001 increased $17,000 (55%) from the same
quarter in 2000. Interest income on federal funds sold for the first quarter in
2001 decreased $138,000 (37%) from the same quarter in 2000. Overall, total
interest income from loans, time deposits, federal funds sold, investment
securities and other interest income for the
14
first quarter in 2001 increased $12,220,000 (13%) from the same quarter in 2000.
The increase in total interest income was primarily due to the income derived
from the increase in the Company's loan and investment portfolio.
Total interest expense for savings deposits, time deposits and other
borrowings increased $7,038,000 (13%) for the first quarter of 2001 from the
same quarter in 2000. The increase in total interest expense was primarily due
to higher interest rates and larger volume. As a result, net interest income for
the first quarter of 2001 increased $5,182,000 or 13% over the same period in
2000. 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 $5,535,000 (42%) to $18,754,000 in the first
quarter of 2001 as compared to $13,219,000 for the quarter ended March 31, 2000.
The increases in non-interest income were primarily due to the increases in
service charges and the increase in other income. The increase in service
charges were attributable to the amount of account transaction fees received as
a result of deposit growth, new deposit products and increased collection
efforts. The increase in other income was due to the activities of the GulfStar
Group affiliate of the Company. Investment securities losses of $462,000 were
recorded in the first quarter of 2001 compared to losses of $1,319,000 for 2000.
These losses occurred due to a bond program initiated by management in 2000 to
reposition a portion of the Company's bond portfolio and take advantage of
higher bond yields.
Non-interest expense increased $5,615,000 to $30,732,000 for the first
quarter of 2001 as compared to $25,117,000 for the quarter ended March 31, 2000.
Non-interest expense increased due to the Company's expanded operations at the
bank subsidiaries.
The efficiency ratio, a measure of non-interest expense to net interest
income plus non-interest income was 47% for the first quarter of 2001, compared
to the year ago ratio of 46%.
The allowance for possible loan losses increased 13% to $31,761,000 at the
end of the first quarter of 2001 from $28,232,000 for the corresponding date in
2000. The provision for possible loan losses charged to expense increased 35% to
$2,127,000 for the quarter ended March 31, 2001 from $1,576,000 for the same
quarter in 2000. The increase in the allowance for possible loan losses was
largely due to the increase in the size of the loan portfolio. The allowance for
possible loan losses was 1.39% of total loans, net of unearned income, at March
31, 2001, compared to 1.40% at March 31, 2000 and 1.37% at December 31, 2000.
On March 31, 2001, the Company had $6,110,502,000 of consolidated assets
of which approximately $295,872,000 or 5% were related to loans outstanding to
borrowers domiciled in Mexico compared to $233,651,000 or 4% at March 31, 2000.
Of the $295,872,000, 54% is directly or indirectly secured by U.S. assets,
principally certificates of deposits and real estate; 28% is secured by Mexican
real estate; 16% is secured by Mexican real estate, related to maquiladora
plants, guaranteed under lease obligations primarily by U.S. companies, many of
which are on the Fortune 500 list of companies; 1% is unsecured; 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
15
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. Deposits from persons and entities domiciled
in Mexico comprise a significant and stable portion of the deposit base of the
Company's bank subsidiaries. Other important funding sources for the Company's
bank subsidiaries during 2001 and 2000 have been borrowings from FHLB,
securities sold under repurchase agreements and large certificates of deposit,
requiring management to closely monitor its asset/liability mix in terms of both
rate sensitivity and maturity distribution. Primary liquidity of the Company and
its subsidiaries has been maintained by means of increased investment in
shorter-term securities, certificates of deposit and loans. As in the past, the
Company will continue to monitor the volatility and cost of funds in an attempt
to match maturities of rate-sensitive assets and liabilities, and respond
accordingly to anticipated fluctuations in interest rates over reasonable
periods of time.
Principal sources of liquidity and funding for the Company are dividends
from subsidiaries and borrowed funds, with such funds being used to finance the
Company's cash flow requirements. The Company has a number of available
alternatives to finance the growth of its existing banks as well as future
growth and expansion. Among the activities and commitments the Company funded
during the first quarter in 2001 and expects to continue to fund during 2001 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, 2001, shareholders' equity was
$464,340,000 compared to $348,824,000 at March 31, 2000, an increase of
$115,516,000 or 33%. The increase in shareholders equity resulted from the
retention of earnings and comprehensive income. Comprehensive income includes
unrealized gains or losses on securities held available for sale, net of tax.
The net unrealized gains or losses on securities are not included in the
calculation of regulatory capital requirements.
The Company had a leverage ratio of 6.68 and 6.54%, risk-weighted Tier 1
capital ratio of 13.38% and 13.23% and risk-weighted total capital ratio of
14.45% and 14.29% at March 31, 2001 and December 31, 2000, respectively. The
core deposit intangibles and goodwill of $58,415,000 as of March 31, 2001,
recorded in connection with the 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, 2001 is
illustrated in the table on page 17. 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 an 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
16
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.
INTEREST RATE SENSITIVITY
(Dollars in Thousands)
RATE/MATURITY RATE/MATURITY RATE/MATURITY RATE/MATURITY
March 31, 2001 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 $ 18,000 -- -- -- $ 18,000
DUE FROM BANK INT EARNING 392 2,079 99 -- 2,570
INVESTMENT SECURITIES 317,386 299,987 2,457,483 195,792 3,270,648
LOANS, NET OF NON-ACCRUALS 1,633,302 204,999 251,772 197,887 2,287,960
- -----------------------------------------------------------------------------------------------------------------------------
TOTAL EARNING ASSETS $ 1,969,080 $ 507,065 $ 2,709,354 $ 393,679 $ 5,579,178
- -----------------------------------------------------------------------------------------------------------------------------
CUMULATIVE EARNING ASSETS $ 1,969,080 $ 2,476,145 $ 5,185,499 $ 5,579,178
=============================================================================================================================
SECTION B
- -----------------------------------------------------------------------------------------------------------------------------
RATE SENSITIVE LIABILITIES
TIME DEPOSITS $ 1,140,909 $ 970,470 $ 165,805 $ 215 $ 2,277,399
OTHER INT BEARING DEPOSITS 974,456 -- -- -- 974,456
FED FUNDS PURCHASED & REPOS 381,980 61,016 -- -- 442,996
OTHER BORROWINGS 1,310,124 -- -- -- 1,310,124
- -----------------------------------------------------------------------------------------------------------------------------
TOTAL INTEREST BEARING LIABILITIES $ 3,807,469 $ 1,031,486 $ 165,805 $ 215 $ 5,004,975
- -----------------------------------------------------------------------------------------------------------------------------
CUMULATIVE SENSITIVE LIABILITIES $ 3,807,469 $ 4,838,955 $ 5,004,760 $ 5,004,975
=============================================================================================================================
SECTION C
- -----------------------------------------------------------------------------------------------------------------------------
REPRICING GAP $(1,838,389) $ (524,421) $ 2,543,549 $ 393,464 $ 574,203
CUMULATIVE REPRICING GAP $(1,838,389) $(2,362,810) $ 180,739 $ 574,203
RATIO OF INTEREST-SENSITIVE .52 .49 16.34 -- 1.12
ASSETS TO LIABILITIES
RATIO OF CUMULATIVE, INTEREST- .52 .51 1.04 1.12
SENSITIVE ASSETS TO LIABILITIES
=============================================================================================================================
FINANCIAL MODERNIZATION LEGISLATION
On November 12, 1999, the Gramm-Leach-Bliley Act of 1999 ("GLBA") was
enacted. This comprehensive legislation eliminates the barriers to affiliations
among banks, securities firms, insurance companies and other financial service
providers. GLBA provides for a new type of financial holding company structure
under which affiliations among these entities may occur. Under GLBA, a financial
holding company may engage in a broad list of financial activities and any
non-financial activity that the FRB determines is complementary to a financial
activity and poses no substantial risk to the safety and soundness of depository
institutions or the financial system. In addition, GLBA permits certain
non-banking financial and financially related activities to be conducted by
financial subsidiaries of a national bank. Additionally, GLBA imposes strict new
privacy disclosure and opt-out requirements regarding the ability of financial
institutions to share personal non-public customer information with third
parties.
17
Under the GLBA, a bank holding company may become certified as a financial
holding company by filing a declaration with the FRB, together with a
certification that each of its subsidiary banks is well capitalized, is well
managed, and has at least a satisfactory rating under the Community Reinvestment
Act of 1977 ("CRA"). The Company has elected to become a financial holding
company under GLBA and the election was made effective by the FRB as of March
13, 2000. Effective October 2, 2000, the Company acquired a controlling interest
in the GulfStar Group, a Houston-based investment banking firm serving
middle-market corporations primarily in Texas. The GulfStar acquisition was the
first financial activity permitted by GLBA to be engaged in by the Company.
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, and (V) 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.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
During the first quarter of 2001, 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, 2000.
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 17,
2001 for the following purposes: 1) To elect ten (10) directors of the Company
to serve until the next Annual Meeting of Shareholders and until their
successors shall have been duly elected and qualified; 2) To approve the
appointment of independent auditors for the 2001 fiscal year; 3) To consider and
vote on a proposal to approve an amendment to add 300,000 additional shares to
the 1996 International Bancshares Corporation Stock Option Plan; 4) 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
None.
(b) REPORTS ON FORM 8-K
Registrant filed a current report on Form 8-K on April 12, 2001, covering
Item 5 - Other Events and Item 7 - Financial Statements and Exhibits in
connection with the announcement of a stock dividend by the Company.
Registrant filed a current report on Form 8-K on May 15, 2001, covering
Item 5 - Other Events and Item 7 - Financial Statements and Exhibits in
connection with the announcement of the Company's First Quarter 2001 Earnings.
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 15, 2001 /s/ DENNIS E. NIXON
------------ ------------------------------------
Dennis E. Nixon
President
Date: MAY 15, 2001 /s/ IMELDA NAVARRO
------------ ------------------------------------
Imelda Navarro
Treasurer (Chief Accounting Officer)
20