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, 1998
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
Commission file number 0-9439
INTERNATIONAL BANCSHARES CORPORATION
(Exact name of registrant as specified in its charter)
TEXAS 74-2157138
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
1200 SAN BERNARDO AVENUE, LAREDO, TEXAS 78042-1359
(Address of principal executive offices)
(Zip Code)
(956) 722-7611
(Registrant's telephone number, including area code)
NONE
(Former name, former address and former fiscal year, if changed
since last report)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes X No
Indicate the number of shares outstanding of each of the issuer's classes
of common stock, as of the latest practicable date.
CLASS SHARES ISSUED AND OUTSTANDING
----- -----------------------------
Common Stock, $1.00 par value 11,300,859 shares outstanding at
May 5, 1998
<PAGE>
PART 1 - FINANCIAL INFORMATION
Item 1. FINANCIAL STATEMENTS
INTERNATIONAL BANCSHARES CORPORATION AND SUBSIDIARIES
Consolidated Statements of Condition (Unaudited)
(Dollars in Thousands)
March 31, December 31,
ASSETS 1998 1997
------ ---------- -----------
Cash and due from banks .......................... $ 161,236 $ 229,788
Federal funds sold ............................... 11,100 7,975
----------- -----------
Total cash and cash equivalents ..... 172,336 237,763
Time deposits with banks ......................... 779 1,587
Investment securities:
Held to maturity
(Market value of $2,579 on March 31, 1998
and $2,705 on December 31, 1997) ............. 2,584 2,710
Available for sale
(Amortized cost of $2,620,011 on March 31,
1998 and $2,547,545 on December 31, 1997) .... 2,650,283 2,580,748
----------- -----------
Total investment securities ......... 2,652,867 2,583,458
Loans:
Commercial, financial and agricultural ........ 782,427 800,964
Real estate - mortgage ........................ 193,229 188,122
Real estate - construction .................... 62,922 59,239
Consumer ...................................... 267,274 272,478
Foreign ....................................... 139,457 130,401
----------- -----------
Total loans ......................... 1,445,309 1,451,204
Less unearned discounts ....................... (6,977) (6,508)
----------- -----------
Loans, net of unearned discounts .... 1,438,332 1,444,696
Less allowance for possible loan losses ....... (25,138) (24,516)
----------- -----------
Net loans ........................... 1,413,194 1,420,180
----------- -----------
Bank premises and equipment, net ................. 132,050 129,621
Accrued interest receivable ...................... 30,188 31,271
Intangible assets ................................ 48,691 49,692
Other assets ..................................... 49,970 64,274
----------- -----------
Total assets ........................ $ 4,500,075 $ 4,517,846
----------- -----------
(Continued)
2
<PAGE>
INTERNATIONAL BANCSHARES CORPORATION AND SUBSIDIARIES
Consolidated Statements of Condition, continued
(Dollars in Thousands)
March 31, December 31,
1998 1997
---------- -----------
LIABILITIES AND SHAREHOLDERS' EQUITY
------------------------------------
Liabilities:
Deposits:
Demand - non-interest bearing ............. $ 447,536 $ 450,537
Savings and interest bearing demand ....... 859,570 819,759
Time ...................................... 1,982,646 1,905,264
----------- -----------
Total deposits .................... 3,289,752 3,175,560
Federal funds purchased and securities
sold under repurchase agreements .......... 349,799 478,409
Other borrowed funds ........................ 466,000 490,000
Other liabilities ........................... 40,832 32,633
----------- -----------
Total liabilities ................. 4,146,383 4,176,602
----------- -----------
Shareholders' equity:
Common stock of $1.00 par value .............
Authorized 15,000,000 shares;
issued 13,351,760 shares in 1998
and 13,196,469 shares in 1997 ............. 13,352 13,196
Surplus ..................................... 20,148 19,012
Retained earnings ........................... 315,586 301,988
Accumulated other comprehensive income ...... 19,677 21,582
----------- -----------
368,763 355,778
Less cost of shares in treasury,
2,086,135 shares in 1998 and
2,079,126 shares in 1997 .................. (15,071) (14,534)
----------- -----------
Total shareholders' equity ........ 353,692 341,244
----------- -----------
Total liabilities and
shareholders' equity ........... $ 4,500,075 $ 4,517,846
=========== -----------
See accompanying notes to interim condensed consolidated financial statements.
3
<PAGE>
INTERNATIONAL BANCSHARES CORPORATION AND SUBSIDIARIES
Consolidated Statements of Income (Unaudited)
(Dollars in Thousands, except per share data)
Three Months Ended
MARCH 31,
------------------
1998 1997
---- ----
Interest income:
Loans, including fees ............................. $34,976 $30,046
Time deposits with banks .......................... 28 3
Federal funds sold ................................ 498 420
Investment securities:
Taxable ......................................... 42,788 31,413
Tax-exempt ...................................... 19 25
Other interest income ............................. 120 76
------- -------
Total interest income ...................... 78,429 61,983
------- -------
Interest expense:
Savings deposits .................................. 6,567 5,132
Time deposits ..................................... 25,134 20,618
Federal funds purchased and securities
sold under repurchase agreements ................. 6,192 1,706
Other borrowings .................................. 4,866 3,336
------- -------
Total interest expense .................. 42,759 30,792
------- -------
Net interest income ..................... 35,670 31,191
Provision for possible loan losses ................... 2,126 1,998
------- -------
Net interest income after
provision for possible
loan losses .......................... 33,544 29,193
------- -------
Non-interest income:
Service charges on deposit accounts ............... 4,874 4,188
Other service charges, commissions
and fees ........................................ 2,397 2,023
Investment securities transactions ................ 403 161
Net profit of operations for other
real estate owned ............................... 110 4
Other income ...................................... 2,784 2,253
------- -------
Total non-interest income ............... 10,568 8,629
------- -------
4
<PAGE>
INTERNATIONAL BANCSHARES CORPORATION AND SUBSIDIARIES
Consolidated Statements of Income - continued
(Dollars in Thousands, except per share data)
Three Months Ended
MARCH 31,
--------------------------
1998 1997
----------- -----------
Non-interest expense:
Employee compensation and benefits ............ 9,709 7,826
Occupancy ..................................... 1,617 1,136
Depreciation of premises and equipment ........ 2,401 1,885
Professional fees ............................. 880 841
Stationary and supplies ....................... 909 592
Amortization of intangible assets ............. 993 657
Other ......................................... 7,508 5,876
----------- -----------
Total non-interest expense .......... 24,017 18,813
----------- -----------
Income before income taxes .......... 20,095 19,009
Income taxes ..................................... 6,497 6,341
----------- -----------
Net Income .......................... $ 13,598 $ 12,668
=========== ===========
Basic earnings per common share:
Net Income .................................... $ 1.21 $ 1.16
Weighted average number of shares
outstanding ................................. 11,231,041 10,952,694
Diluted earnings per common share:
Net Income .................................... $ 1.18 $ 1.13
Weighted average number of shares
outstanding ................................. 11,568,765 11,202,256
See accompanying notes to interim condensed consolidated financial statements.
5
<PAGE>
INTERNATIONAL BANCSHARES CORPORATION AND SUBSIDIARIES
Consolidated Statement of Comprehensive Income (Unaudited)
(Dollars in Thousands)
Three Months Ended
MARCH 31,
--------------------
1998 1997
---- ----
Net Income $ 13,598 $ 12,668
------ ------
Other comprehensive income, net of tax:
Unrealized holding gains on securities arising
during period, net of reclassification
adjustment for gains included in net income (1,905) (7,875)
----- -----
Comprehensive income $ 11,693 $ 4,793
====== =====
See accompanying notes to interim condensed consolidated financial statements.
6
<PAGE>
INTERNATIONAL BANCSHARES CORPORATION AND SUBSIDIARIES
Consolidated Statements of Cash Flows (Unaudited)
(Dollars in Thousands)
Three Months Ended
MARCH 31,
------------------
1998 1997
---- ----
Operating activities:
Net Income ........................................... $ 13,598 $ 12,668
Adjustments to reconcile net income to net
cash provided by operating activities:
Provision for possible loan losses ............... 2,126 1,998
Recoveries on charged-off loans .................. 439 296
Net profit of operations for other real
estate owned ................................... (110) (4)
Depreciation of bank premises and equipment ...... 2,401 1,885
Accretion of investment securities discounts ..... (960) (252)
Amortization of investment securities premiums ... 3,436 2,117
Realized gain on investment securities
transactions, net .............................. (403) (161)
Gain on sale of bank premises and equipment ...... (35) --
Decrease (increase) in accrued interest
receivable ..................................... 1,083 (902)
Increase in other liabilities .................... 8,199 7,223
--------- ---------
Net cash provided by operating activities ... 29,774 24,868
--------- ---------
Investing activities:
Cash acquired in purchase transaction ................ -- 80,501
Proceeds from maturities of securities ............... 425 660
Proceeds from sales of available
for sale securities ................................ 169,859 80,441
Purchases of available for sale securities ........... (447,960) (256,843)
Principal collected on mortgage-backed securities .... 192,668 68,403
Proceeds from matured time deposits with banks ....... 993 --
Purchases of time deposits with banks ................ (185) --
Net decrease in loans ................................ 4,421 14,708
Net decrease in other assets ......................... 27,036 10,984
Purchase of bank premises and equipment .............. (4,877) (7,370)
Proceeds from sale of bank premises and equipment .... 82 --
--------- ---------
Net cash used in investing activities ....... (57,538) (8,516)
--------- ---------
7
<PAGE>
INTERNATIONAL BANCSHARES CORPORATION AND SUBSIDIARIES
Consolidated Statements of Cash Flows, continued
(Dollars in Thousands)
Three Months Ended
MARCH 31,
-----------------
1998 1997
---- ----
Financing activities:
Net (decrease) increase in non-interest bearing
demand deposits .................................. (3,001) 11,342
Net increase (decrease) in savings and interest
bearing demand deposits .......................... 39,811 (3,767)
Net increase (decrease) in time deposits ........... 77,382 (1,001)
Net decrease in federal funds purchased and
securities sold under repurchase agreements ...... (128,610) (12,294)
Proceeds from issuance of other borrowed funds ..... 406,000 251,333
Principal payments on other borrowed funds ......... (430,000) (287,000)
Purchase of treasury stock ......................... (537) (205)
Proceeds from stock transactions ................... 1,292 403
--------- ---------
Net cash used in financing activities ..... (37,663) (41,189)
--------- ---------
Decrease in cash and cash equivalents ..... (65,427) (24,837)
Cash and cash equivalents
at beginning of year ............................. 237,763 171,992
--------- ---------
Cash and cash equivalents
at end of period ................................. $ 172,336 $ 147,155
========= =========
Supplemental cash flow information:
Interest paid .................................... $ 44,654 $ 32,573
Income taxes paid ................................ -- 250
Supplemental schedule of noncash investing and
financing activities relating to the purchase
transaction:
Loans acquired ................................. $ -- $ 381
Other assets acquired .......................... -- 4,298
Deposits and other liabilities assumed ......... -- 85,180
See accompanying notes to interim condensed consolidated financial statements.
8
<PAGE>
INTERNATIONAL BANCSHARES CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Unaudited)
Note 1 - Basis of Presentation
The accounting and reporting policies of International Bancshares
Corporation ("Corporation") and Subsidiaries (the Corporation and Subsidiaries
collectively referred to herein as the "Company") conform to generally accepted
accounting principles and to general practice within the banking industry. The
consolidated financial statements include the accounts of the Company and its
wholly-owned subsidiaries, International Bank of Commerce, Laredo ("IBC"),
Commerce Bank, International Bank of Commerce, Zapata, International Bank of
Commerce, Brownsville and the Corporation's wholly-owned non-bank subsidiaries,
IBC Subsidiary Corporation, IBC Life Insurance Company, IBC Trading Company and
IBC Capital Corporation. All significant intercompany balances and transactions
have been eliminated in consolidation. The consolidated financial statements are
unaudited, but include all adjustments which, in the opinion of management, are
necessary for a fair presentation of the results of the periods presented. All
such adjustments were of a normal and recurring nature. It is suggested that
these financial statements be read in conjunction with the financial statements
and the notes thereto in the Company's latest Annual Report on Form 10K.
In June 1997, the Financial Accounting Standards Board issued SFAS No.
130, "Reporting Comprehensive Income." SFAS No. 130 establishes standards for
reporting and display of comprehensive income and its components (revenues,
expenses, gains, and losses) in a full set of general-purpose financial
statements. SFAS No. 130 requires that an enterprise (a) classify items of other
comprehensive income by their nature in a financial statement and (b) display
the accumulated balance of other comprehensive income separately from retained
earnings and additional paid-in capital in the equity section of a statement of
financial position. SFAS No. 130 which is effective for fiscal years beginning
after December 15, 1997 has been adopted in the financial statements for the
quarter ended March 31, 1998.
In June 1997, the Financial Accounting Standards Board issued SFAS No.
131, "Disclosures about Segments of an Enterprise and Related Information." SFAS
No. No.131 establishes standards for the way that public business enterprises
report information about operation segments in annual financial statements and
requires that those enterprises report selected information about operation
segments in interim financial reports issued to shareholders. SFAS No. 131 also
establishes standards for related disclosures about products and services,
geographic areas, and major customers. SFAS No. 131 is effective for financial
statements for periods beginning after December 15, 1997 and need not be applied
to interim financial statements in the initial year of its application. Thus,
SFAS No. 131 will be effective for the Company's 1998 annual financial
statements.
Note 2 - Investment Securities
The Company classifies debt and equity securities into one of 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
9
<PAGE>
to those securities classified as "available-for-sale" are excluded from net
income and reported at a net amount as a separate component of shareholders'
equity until realized.
A summary of the investment securities held for investment and
securities available for sale as reflected on the books of the Company is as
follows:
March 31, March 31,
1998 1997
-------- ------
(Dollars in Thousands)
U. S. Treasury and federal agencies
Held to maturity $ - $ -
Available for sale ...................... 2,565,585 1,828,736
States and political subdivisions
Held to maturity ........................ 569 698
Available for sale ...................... 552 541
Other
Held to maturity ........................ 2,015 1,990
Available for sale ...................... 84,146 19,230
---------- ----------
Total investment securities ............. $2,652,867 $1,851,195
========== ==========
Note 3 - Allowance for Possible Loan Losses
A summary of the transactions in the
allowance for possible loan losses is as follows:
March 31, March 31,
1998 1997
-------- --------
(Dollars in Thousands)
Balance at January 1 ............................. $ 24,516 $ 21,036
Losses charged to allowance ............... (1,943) (895)
Recoveries credited to allowance .......... 439 296
-------- --------
Net losses charged to allowance ........... (1,504) (599)
Provisions charged to operations .......... 2,126 1,998
-------- --------
Balance at March 31 .............................. $ 25,138 $ 22,435
======== ========
On January 1, 1995, the Company adopted SFAS 114 as amended by SFAS 118.
The Company classifies as impaired those loans where it is probable that all
amounts due according to contractual terms of the loan agreement will not be
collected. The Company has identified these loans through its normal loan review
procedures. Impaired loans included 1) all non-accrual loans, 2) loans which are
90 days or over past due unless they are well secured (the collateral value is
sufficient to cover principal and accrued interest) and are in the process of
collection, and 3) other loans which management believes are impaired.
Substantially all of the Company's impaired loans are measured at the fair value
of the collateral. In limited cases the Company may use other methods to
determine the level of impairment of a loan if such loan is not collateral
dependent. Amounts received on non-accruals are applied, for financial
accounting purposes, first to principal and then to interest after all principal
has been collected.
Management of the Company recognizes the risks associated with impaired
loans. However, management's decision to place loans in this category does not
necessarily
10
<PAGE>
mean that the Company expects losses to occur. The Company's impaired loan
balances at the end of the three month period of both 1998 and 1997 was not
material to the Company's consolidated financial position.
The Company had previously measured the allowance for loan losses using
methods similar to the prescribed method in SFAS 114. As a result, no additional
provision was required by the adoption of SFAS 114. The subsidiary banks charge
off that portion of any loan which management considers to represent a loss as
well as that portion of any other loan which is classified as a "loss" by bank
examiners. Commercial and industrial or real estate loans are generally
considered by management to represent a loss, in whole or part, when an exposure
beyond any collateral coverage is apparent and when no further collection of the
loss portion is anticipated based on the borrower's financial condition and
general economic conditions in the borrower's industry. Generally, unsecured
consumer loans are charged-off when 90 days past due.
While management of the Company considers that it is generally able to
identify borrowers with financial problems reasonably early and to monitor
credit extended to such borrowers carefully, there is no precise method of
predicting loan losses. The determination that a loan is likely to be
uncollectible and that it should be wholly or partially charged-off as a loss,
is an exercise of judgment. Similarly, the determination of the adequacy of the
allowance for possible loan losses, can be made only on a subjective basis. It
is the judgment of the Company's management that the allowance for possible loan
losses at March 31, 1998, was adequate to absorb possible losses from loans in
the portfolio at that date.
Note 4 - Stock and Cash Dividends
All per share data presented has been restated to reflect the stock
split effected through a stock dividend which became effective May 15, 1997
which resulted in the issuance of 2,601,071 shares of Common Stock. A special
cash dividend of a $.50 per share was paid to holders of record of Common Stock
on April 15, 1997. A special cash dividend of $.50 per share and a 25% stock
split effected through a stock dividend was declared on April 2, 1998 for all
holders of Common Stock of record on April 2, 1998 and May 22, 1998,
respectively, and said dividends to be made payable on April 20, 1998 and June
12, 1998, respectively. However, the stock dividend is subject to the approval
by the shareholders at the Annual Meeting to be held on May 21, 1998 of a
proposal to increase the authorized shares of common stock of the Company.
The Company does not have a formal stock repurchase program; however,
the Company occasionally repurchases shares of Common Stock, including
repurchases related to the exercise of stock options through the surrender of
other shares of Common Stock of the Company owned by the option holders. Stock
repurchases are presented quarterly at the Company's Board of Director meetings
and the Board of Directors has stated that they will not permit purchases of
more than a total of $16,000,000 of stock. In the past, the board has increased
previous caps once they were met, but there are no assurances that an increase
of the $16,000,000 cap will occur in the future. As of March 31, 1998, the
Company had repurchased shares in the cumulative total amount of $15,071,000.
On April 3, 1996, the Board of Directors adopted the 1996 International
Bancshares Corporation Stock Option Plan. The Plan replaced the 1987
International Bancshares Corporation Key Contributor Stock Option Plan. Subject
to certain adjustments, the maximum number of shares of common stock which may
be made subject to options granted under the new Plan is 468,750 with 127,217
shares remaining available for the issuance of options under the new Plan. The
279,035 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, 1998, options to acquire 279,035 and 341,533
shares of common stock remain outstanding under the 1987 Plan and the new Plan,
respectively.
11
<PAGE>
Note 5 - Legal Proceedings
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.
Item 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
Net income for the first quarter of 1998 was $13,598,000 or $1.21 per
share basic ($1.18 per share - diluted) compared to $12,668,000 or $1.16 per
share - basic ($1.13 per share - diluted) in the corresponding 1997 period.
Total assets at March 31, 1998, were $4,500,075,000 which represents a
32% increase over total assets of $3,407,238,000 at March 31, 1997 and a .39%
decrease from total assets of $4,517,846,000 as of December 31, 1997. Deposits
at March 31, 1998 were $3,289,752,000 which represents an increase of 19% over
the $2,753,561,000 amount reported at March 31, 1997, and an increase of 4% over
the $3,175,560,000 reported at December 31, 1997. Total loans at March 31, 1998
increased 18% to $1,445,309,000 from $1,224,165,000 reported at March 31, 1997,
and decreased .41% from the $1,451,204,000 reported at December 31, 1997. The
slight decrease in total loans in the first quarter of 1998 is primarily
attributable to heightened competition for loans in the Company's market area
resulting in loan pricing by certain competitors which management believes is
not commensurate with the risk associated with making such loans. The result of
which has been a minor reduction of the Company's market penetration for loans.
The slight decrease in total assets during the first quarter of 1998 can be
attributed in part to the contraction of the Company's earning asset base caused
by a decline in the Company's wholesale liabilities, repurchase agreements and
short term fixed borrowings. The aggregate amount of repurchase agreements,
short term fixed borrowings and certificates of indebtedness with the Federal
Home Bank of Dallas ("FHLB"), Federal National Mortgage Association ("FNMA") and
Federal Home Loan Mortgage Corporation ("FHLMC") decreased to $661,000,000 at
March 31, 1998, from the $855,000,000 at December 31, 1997.
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 1998 increased $4,479,000 (14%) over the same period in 1997.
Investment securities increased 43% to $2,652,867,000 at March 31, 1998,
from $1,851,195,000 at March 31, 1997. Unrealized gains and losses created by
changes in the market values of available for sale securities are recognized as
an adjustment to stockholders' equity, net of tax. Time deposits with other
banks at March 31, 1998 increased 293% to $779,000 from $198,000 at March 31,
1997. Total federal funds sold decreased 45% to $11,100,000 for the first
quarter of 1998 as compared to $20,000,000 for the first quarter of 1997.
Interest and fees on loans for the three month period in 1998 increased
$4,930,000 (16%) compared to the same period in 1997. Interest income on taxable
and tax exempt investment securities for the first quarter in 1998 increased
$11,369,000
12
<PAGE>
(36%) over the same quarter in 1997. Interest income on time
deposits with banks for the first quarter in 1998 increased $25,000 (833%) from
the same quarter in 1997. Interest income on federal funds sold for the first
quarter in 1998 increased $78,000 (19%) over the same quarter in 1997. Overall,
total interest income from loans, time deposits, federal funds sold, investment
securities and other interest income for the first quarter in 1998 increased
$16,446,000 (27%) from the same quarter in 1997. The increase in total interest
income was primarily due to income derived from the investment securities
portfolio.
Total interest expense for savings deposits, time deposits and other
borrowings increased $11,967,000 (39%) for the first quarter of 1998 from the
same quarter in 1997. The increase in total interest expense was primarily due
to higher interest rates and larger volume partially attributable to
acquisitions. As a result, net interest income for the first quarter of 1998
increased $4,479,000 or 14% over the same period in 1997. This increase is
attributed to the Company's efforts to maintain an adequate interest rate spread
between the cost of funds and the investment of those funds.
Non-interest income increased $1,939,000 (22%) to $10,568,000 in the
first quarter of 1998 as compared to $8,629,000 for the quarter ended March 31,
1997. The increases in non-interest income were primarily due to the increase in
service charges. The increase in service charges is attributable to the amount
of account transaction fees received as a result of deposit growth and increased
collection efforts.
Non-interest expense increased $5,204,000 (28%) to $24,017,000 for the
first quarter of 1998 as compared to $18,813,000 for the quarter ended March 31,
1997. The increase in non-interest expense was largely due to the increased
operations at certain of the bank subsidiaries as a result of acquisitions.
The allowance for possible loan losses increased 12% to $25,138,000 at
the end of the first quarter of 1998 from $22,435,000 for the corresponding date
in 1997. The provision for possible loan losses charged to expense increased 6%
to $2,126,000 for the quarter ended March 31, 1998 from $1,998,000 from the same
quarter in 1997. Increases in the allowance for possible loan losses were
largely due to Management's belief that conservative allowance allocations
should be maintained in a period when the business cycle is deemed to be mature.
The allowance for possible loan losses was 1.75% of March 31, 1998 loans, net of
unearned income, compared to 1.84% at March 31, 1997 and 1.70% at December 31,
1997.
At March 31, 1998, the Company had $4,500,075,000 of consolidated assets
of which approximately $141,337,000 or 3% were related to loans outstanding to
borrowers domiciled in Mexico. Of the $141,337,000, 80% is directly or
indirectly secured by U.S. assets, principally certificates of deposits and real
estate; 17% 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
13
<PAGE>
acquisitions. Historically, the Mexico based deposits of the Company's bank
subsidiaries have been a stable source of funding. Deposits from persons and
entities domiciled in Mexico comprise a significant although a declining portion
of the deposit base of the Company's bank subsidiaries. Other important funding
sources for the Company's bank subsidiaries during 1998 and 1997 have been
wholesale liabilities with, FHLB, FNMA, FHLMC and large certificates of deposit,
requiring management to closely monitor its asset/liability mix in terms of both
rate sensitivity and maturity distribution. Primary liquidity of the Company and
its subsidiaries has been maintained by means of increased investment in
shorter-term securities, certificates of deposit and loans. As in the past, the
Company will continue to monitor the volatility and cost of funds in an attempt
to match maturities of rate-sensitive assets and liabilities, and respond
accordingly to anticipated fluctuations in interest rates over reasonable
periods of time.
During the first quarter of 1998, there were no material changes in
market risk exposures that affected the quantitative and qualitative disclosures
regarding market risk presented in the Company's Form 10-K for the year ended
December 31, 1997.
Principal sources of liquidity and funding for the Company are dividends
from subsidiaries and borrowed funds, with such funds being used to finance the
Company's cash flow requirements. The Company has a number of available
alternatives to finance the growth of its existing banks as well as future
growth and expansion. Among the activities and commitments the Company funded
during the first quarter in 1998 and expects to continue to fund during 1998 is
a continuous effort to modernize and improve our existing facilities and expand
our bank branch network.
The Company maintains an adequate level of capital as a margin of safety
for its depositors and shareholders. At March 31, 1998, shareholders' equity was
$353,692,000 compared to $288,758,000 at March 31, 1997, an increase of
$64,934,000 or 22%. This increase in capital resulted primarily from the
retention of earnings. The Company had a leverage ratio of 6.60% and 6.41%,
risk-weighted Tier 1 capital ratio of 14.39% and 13.95% and risk-weighted total
capital ratio of 15.64% and 15.20% at March 31, 1998 and December 31, 1997,
respectively. The core deposit intangibles and goodwill of $46,899,000 at March
31, 1998, booked in connection with financial institution acquisitions of the
Company, are deducted from the sum of core capital elements when determining the
capital ratios of the Company.
As in the past, the Company will continue to monitor the volatility and
cost of funds in an attempt to match maturities of rate-sensitive assets and
liabilities, and respond accordingly to anticipated fluctuations in interest
rates by adjusting the balance between sources and uses of funds as deemed
appropriate. The net-interest rate sensitivity as of March 31, 1998 is
illustrated in the table on page 15. This information reflects the balances of
assets and liabilities for which rates are subject to change. A mix of assets
and liabilities that are roughly equal in volume and repricing characteristics
represents a matched interest rate sensitivity position. Any excess of assets or
liabilities results in an interest rate sensitivity gap.
The Company undertakes the interest rate sensitivity analysis to monitor
the potential risk on future earnings resulting from the impact of possible
future changes in interest rates on currently existing net asset or net
liability positions. However, this type of analysis is as of a point-in-time
position, when in fact that position can quickly change as market conditions,
customer needs, and management strategies change. Thus, interest rate changes do
not affect all categories of asset and liabilities equally or at the same time.
As indicated in the table, the Company is liability sensitive during the early
time periods and asset sensitive in the longer periods. The Company's Asset and
Liability Committee semi-annually reviews the consolidated position along with
simulation and duration models, and makes adjustments as needed to control
14
<PAGE>
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)
<TABLE>
<CAPTION>
RATE/MATURITY RATE/MATURITY RATE/MATURITY RATE/MATURITY
March 31, 1998 3 MONTHS OVER 3 MONTHS OVER 1 YEAR TOTAL
(Dollars in Thousands) OR LESS TO 1 YEAR TO 5 YEARS OVER 5 YEARS
===========================================================================================================
SECTION A
-----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
RATE SENSITIVE ASSETS
FED FUNDS SOLD 11,100 - - - 11,100
DUE FROM BANK INT EARNING 339 341 99 - 779
INVESTMENT SECURITIES 149,070 297,040 1,707,684 499,073 2,652,867
LOANS, NET OF NON-ACCRUALS 1,024,614 126,640 186,339 100,907 1,438,500
----------------------------------------------------------------------------------------------------------
TOTAL EARNING ASSETS 1,185,123 424,021 1,894,122 599,980 4,103,246
-----------------------------------------------------------------------------------------------------------
CUMULATIVE EARNING ASSETS 1,185,123 1,609,144 3,503,266 4,103,246
===========================================================================================================
SECTION B
-----------------------------------------------------------------------------------------------------------
RATE SENSITIVE LIABILITIES
TIME DEPOSITS 898,711 997,843 85,831 261 1,982,646
OTHER INT BEARING DEPOSITS 859,570 - - - 859,570
FED FUNDS PURCHASED & REPOS 332,024 17,775 - - 349,799
OTHER BORROWINGS 466,000 - - - 466,000
-----------------------------------------------------------------------------------------------------------
TOTAL INTEREST BEARING LIABILITIES 2,556,305 1,015,618 85,831 261 3,658,015
-----------------------------------------------------------------------------------------------------------
CUMULATIVE SENSITIVE LIABILITIES 2,556,305 3,571,923 3,657,754 3,658,015
===========================================================================================================
SECTION C
-----------------------------------------------------------------------------------------------------------
REPRICING GAP (1,371,182) (591,597) 1,808,291 599,719 445,231
CUMULATIVE REPRICING GAP (1,371,182) (1,962,779) (154,488) 445,231
RATIO OF INTEREST-SENSITIVE .46 .42 22.07 - 1.12
ASSETS TO LIABILITIES
RATIO OF CUMULATIVE, INTEREST- .46 .45 .96 1.12
SENSITIVE ASSETS TO LIABILITIES
===========================================================================================================
</TABLE>
YEAR 2000
Many existing computer programs use only two digits to identify a year.
These programs were designed and developed without considering the impact of the
upcoming change in the century. If uncorrected, many computer applications could
fail or create erroneous results by or at the Year 2000. The Year 2000 issue
affects virtually all companies and organizations.
The Company has developed and implemented a plan to deal with the Year
2000 problem. The plan provides for addressing critical and noncritical issues,
with the assignment of responsibility and target dates for completion. Testing
of core applications, such as mainframe software and hardware and some platform
software, is largely complete and reflects that they will be Year 2000
compliant. The Company is expensing applicable costs incurred as a result of
addressing the Year 2000 issue.
The Company does not expect that the cost of addressing the Year 2000
issue will be a material event or uncertainty that would cause its reported
financial information not to be indicative of future operating results or future
financial condition, or that
15
<PAGE>
the costs or consequences of incomplete or untimely resolution of any Year 2000
issue represent a known material event or uncertainty that is reasonably likely
to affect its future financial results, or cause its reported financial
information not to be indicative of future operating results or future financial
condition.
Additionally, the federal bank regulators have enforcement powers with
respect to Year 2000 compliance. Failure to institute an acceptable Year 2000
readiness plan could result in the disapproval of expansion applications filed
with bank regulatory agencies or the imposition of cease and desist orders or
civil money penalties.
FORWARD LOOKING INFORMATION
Certain matters discussed in this report, excluding historical
information, include forward-looking statements. Although the Company believes
such forward-looking statements are based on reasonable assumptions, no
assurance can be given that every objective will be reached. The words
"estimate," "expect," "intend" and project," as well as other words or
expressions of similar meaning are intended to identify forward-looking
statements. Readers are cautioned not to place undue reliance on forward-looking
statements, which speak only as of the date of this quarterly report. Such
statements are based on current expectations, are inherently uncertain, are
subject to risks and should be viewed with caution. Actual results and
experience may differ materially from the forward-looking statements as a result
of many factors.
Factors that could cause actual results to differ materially from any
results 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) 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.
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 21,
1998 for the following purposes: 1) To elect eleven (11) directors of the
Company until the next Annual Meeting of Shareholders and until their successors
are elected and qualified; 2) To approve the appointment of independent auditors
for the 1998 fiscal year; 3) To consider and vote upon a proposal to amend the
Certificate of Incorporation of the Company to increase the number of authorized
shares of Common Stock of the Company; and 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
Exhibit 27. International Bancshares Corporation Financial Data Schedule
for the Period ended March 31, 1998.
16
<PAGE>
(b) Registrant filed a current report on Form 8-K dated April 23, 1998, covering
Item 5 - Other Events and Item 7 - Financial Statements and Exhibits in
connection with the announcement of a cash dividend and a stock dividend by the
Company.
17
<PAGE>
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 13, 1998 /s/ DENNIS E. NIXON
------------- --------------------
Dennis E. Nixon
President
Date: MAY 13, 1998 /s/ ARNOLDO CISNEROS
------------- --------------------
Arnoldo Cisneros
Secretary-Treasurer (Chief Accounting Officer)
18
<TABLE> <S> <C>
<ARTICLE> 9
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-END> MAR-31-1998
<CASH> 161,236
<INT-BEARING-DEPOSITS> 779
<FED-FUNDS-SOLD> 11,100
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 2,650,283
<INVESTMENTS-CARRYING> 2,584
<INVESTMENTS-MARKET> 2,579
<LOANS> 1,445,309
<ALLOWANCE> 25,138
<TOTAL-ASSETS> 4,500,075
<DEPOSITS> 3,289,752
<SHORT-TERM> 366,000
<LIABILITIES-OTHER> 40,832
<LONG-TERM> 100,000
0
0
<COMMON> 13,352
<OTHER-SE> 340,340
<TOTAL-LIABILITIES-AND-EQUITY> 4,500,075
<INTEREST-LOAN> 34,976
<INTEREST-INVEST> 43,333
<INTEREST-OTHER> 120
<INTEREST-TOTAL> 78,429
<INTEREST-DEPOSIT> 31,701
<INTEREST-EXPENSE> 42,759
<INTEREST-INCOME-NET> 35,670
<LOAN-LOSSES> 2,126
<SECURITIES-GAINS> 403
<EXPENSE-OTHER> 24,017
<INCOME-PRETAX> 20,095
<INCOME-PRE-EXTRAORDINARY> 20,095
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 13,598
<EPS-PRIMARY> 1.21
<EPS-DILUTED> 1.18
<YIELD-ACTUAL> 0
<LOANS-NON> 0
<LOANS-PAST> 0
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 0
<CHARGE-OFFS> 0
<RECOVERIES> 0
<ALLOWANCE-CLOSE> 0
<ALLOWANCE-DOMESTIC> 0
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 0
</TABLE>
