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 JUNE 30, 2000
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 21,373,161 shares outstanding
at August 4, 2000
<PAGE>
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
INTERNATIONAL BANCSHARES CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CONDITION (UNAUDITED)
(DOLLARS IN THOUSANDS)
JUNE 30, DECEMBER 31,
ASSETS 2000 1999
------ ----------- -----------
Cash and due from banks .......................... $ 89,667 $ 121,695
Federal funds sold ............................... 39,900 13,300
----------- -----------
Total cash and cash equivalents ..... 129,567 134,995
Time deposits with banks ......................... 2,075 1,877
Investment securities:
Held to maturity
(Market value of $2,170 on June 30, 2000
and $2,405 on December 31, 1999) ............. 2,170 2,406
Available for sale
(Amortized cost of $3,116,655 on June 30,
2000 and $3,050,099 on December 31, 1999) .... 2,999,778 2,993,311
----------- -----------
Total investment securities ......... 3,001,948 2,995,717
Loans:
Commercial, financial and agricultural ........ 1,271,907 1,115,511
Real estate - mortgage ........................ 303,765 278,819
Real estate - construction .................... 150,509 129,813
Consumer ...................................... 164,523 171,104
Foreign ....................................... 238,674 216,632
----------- -----------
Total loans ......................... 2,129,378 1,911,879
Less unearned discounts ....................... (7,220) (8,355)
----------- -----------
Loans, net of unearned discounts .... 2,122,158 1,903,524
Less allowance for possible loan losses ....... (29,367) (26,770)
----------- -----------
Net loans ........................... 2,092,791 1,876,754
----------- -----------
Bank premises and equipment, net ................. 148,361 145,342
Accrued interest receivable ...................... 36,406 34,827
Other investments ................................ 129,943 130,089
Intangible assets ................................ 41,637 43,598
Other assets ..................................... 79,237 58,605
----------- -----------
Total assets ........................ $ 5,661,965 $ 5,421,804
=========== ===========
2
<PAGE>
INTERNATIONAL BANCSHARES CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CONDITION, CONTINUED
(DOLLARS IN THOUSANDS)
JUNE 30, DECEMBER 31,
2000 1999
----------- -----------
LIABILITIES AND SHAREHOLDERS' EQUITY
Liabilities:
Deposits:
Demand - non-interest bearing ............... $ 520,561 $ 499,369
Savings and interest bearing demand ......... 881,808 928,455
Time ........................................ 2,203,113 2,099,388
----------- -----------
Total deposits ...................... 3,605,482 3,527,212
Federal funds purchased and securities
sold under repurchase agreements ............ 135,694 123,752
Other borrowed funds .......................... 1,540,000 1,380,000
Other liabilities ............................. 42,627 37,404
----------- -----------
Total liabilities ................... 5,323,803 5,068,368
----------- -----------
Shareholders' equity:
Common stock of $1.00 par value ...............
Authorized 40,000,000 shares;
issued 26,427,551 shares in 2000
and 21,091,754 shares in 1999 ............... 26,428 21,092
Surplus ....................................... 25,094 24,050
Retained earnings ............................. 410,568 385,942
Accumulated other comprehensive income (loss) . (75,970) (36,912)
----------- -----------
386,120 394,172
Less cost of shares in treasury,
5,040,427 shares in 2000 and
3,851,844 shares in 1999 .................... (47,958) (40,736)
----------- -----------
Total shareholders' equity .......... 338,162 353,436
----------- -----------
Total liabilities and
shareholders' equity ............. $ 5,661,965 $ 5,421,804
=========== ===========
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)
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
--------------------- ----------------------
2000 1999 2000 1999
--------- --------- --------- ---------
<S> <C> <C> <C> <C>
Interest income:
Loans, including fees ................ $ 53,514 $ 38,924 $ 100,887 $ 76,533
Time deposits with banks ............. 37 29 68 51
Federal funds sold ................... 154 265 530 441
Investment securities:
Taxable ............................ 49,961 38,961 98,137 81,546
Tax-exempt ......................... 1,252 1,170 2,550 1,832
Other interest income ................ 75 74 173 194
--------- --------- --------- ---------
Total interest income ......... 104,993 79,423 202,345 160,597
--------- --------- --------- ---------
Interest expense:
Savings deposits ..................... 6,863 6,941 13,832 13,650
Time deposits ........................ 29,187 23,848 56,406 47,697
Federal funds purchased and securities
sold under repurchase agreements .... 1,958 1,456 3,605 2,942
Other borrowings ..................... 22,538 8,739 42,699 20,431
--------- --------- --------- ---------
Total interest expense ..... 60,546 40,984 116,542 84,720
--------- --------- --------- ---------
Net interest income ........ 44,447 38,439 85,803 75,877
Provision for possible loan losses ...... 1,758 2,327 3,334 4,514
--------- --------- --------- ---------
Net interest income after
provision for possible
loan losses ............. 42,689 36,112 82,469 71,363
--------- --------- --------- ---------
Non-interest income:
Service charges on deposit accounts .. 8,756 7,712 16,602 14,591
Other service charges, commissions
and fees ........................... 1,963 2,559 4,521 4,949
Investment securities transactions ... 25 (352) (1,294) 105
Other investments .................... 1,869 1,786 3,795 2,866
Other income ......................... 2,275 2,172 4,483 4,067
--------- --------- --------- ---------
Total non-interest income .. 14,888 13,877 28,107 26,578
--------- --------- --------- ---------
</TABLE>
4
<PAGE>
INTERNATIONAL BANCSHARES CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME - CONTINUED
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
------------------------- -------------------------
2000 1999 2000 1999
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Non-interest expense:
Employee compensation and benefits ... 11,488 10,722 22,675 20,837
Occupancy ............................ 1,911 1,709 3,838 3,254
Depreciation of premises and equipment 2,978 2,929 5,944 5,791
Professional fees .................... 1,072 1,328 2,099 2,305
Stationery and supplies .............. 780 769 1,480 1,431
Amortization of intangible assets .... 979 990 1,961 1,917
Other ................................ 7,522 7,878 13,850 14,808
----------- ----------- ----------- -----------
Total non-interest expense . 26,730 26,325 51,847 50,343
----------- ----------- ----------- -----------
Income before income taxes . 30,847 23,664 58,729 47,598
Income taxes ............................ 9,760 7,621 18,462 15,660
----------- ----------- ----------- -----------
Net Income ................. $ 21,087 $ 16,043 $ 40,267 $ 31,938
=========== =========== =========== ===========
Basic earnings per common:
Net Income ........................... $ 1.10 $ .82 $ 2.21 $ 1.71
Weighted average number of shares
outstanding ........................ 19,226,328 19,661,627 18,234,695 18,662,440
Diluted earnings per common share:
Net Income ........................... $ 1.08 $ .80 $ 2.18 $ 1.68
Weighted average number of shares
outstanding ........................ 19,519,167 20,116,017 18,501,128 19,023,862
</TABLE>
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)
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
-------------------- --------------------
2000 1999 2000 1999
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Net Income ............................ $ 21,087 $ 16,043 $ 40,267 $ 31,938
-------- -------- -------- --------
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 ......... (26,592) (28,689) (39,058) (28,510)
-------- -------- -------- --------
Comprehensive income (loss) ........... $ (5,505) $(12,646) $ 1,209 $ 3,428
======== ======== ======== ========
</TABLE>
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)
SIX MONTHS ENDED
JUNE 30,
----------------------
2000 1999
--------- ---------
Operating activities:
Net Income ......................................... $ 40,267 $ 31,938
Adjustments to reconcile net income to net cash
provided by operating activities:
Provision for possible loan losses ............. 3,334 4,514
Recoveries on charged-off loans ................ 538 755
Net cost (profit) of operations for other
real estate owned ............................ 45 114
Depreciation of bank premises and equipment .... 5,944 5,791
Depreciation and amortization of leasing assets 873 898
Accretion of investment securities discounts ... (9,089) (6,703)
Amortization of investment securities premiums . 5,887 6,387
Realized loss (gain) on investment securities
transactions, net ............................ 1,294 (105)
Gain on sale of bank premises and equipment .... (85) (30)
Deferred tax expense ........................... 158 1,744
Increase in accrued interest receivable ........ (1,579) (1,352)
Increase (decrease) in other liabilities ....... 5,223 (1,127)
--------- ---------
Net cash provided by operating activities . 52,810 42,824
--------- ---------
Investing activities:
Cash acquired in purchase transaction .............. -- 20,320
Proceeds from maturities of securities ............. 760 1,850
Proceeds from sales of available
for sale securities .............................. 48,241 560,097
Purchases of available for sale securities ......... (258,306) (932,959)
Principal collected on mortgage-backed securities .. 165,924 452,092
Proceeds from matured time deposits with banks ..... 392 288
Purchases of time deposits with banks .............. (590) (594)
Net increase in loans .............................. (219,909) (136,295)
Net increase in other assets ....................... (19,601) (108,249)
Purchase of bank premises and equipment ............ (9,089) (10,412)
Proceeds from sale of bank premises and equipment .. 211 54
--------- ---------
Net cash used in investing activities ..... (291,967) (153,808)
--------- ---------
7
<PAGE>
INTERNATIONAL BANCSHARES CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS, CONTINUED
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
SIX MONTHS ENDED
JUNE 30,
--------------------------
2000 1999
----------- -----------
<S> <C> <C>
Financing activities:
Net increase in non-interest bearing
demand deposits ................................ $ 21,192 $ 39,961
Net (decrease) increase in savings and
interest bearing demand deposits ............... (46,647) 27,696
Net increase in time deposits .................... 103,725 70,733
Net increase (decrease) in federal funds purchased
and securities sold under repurchase agreements 11,942 (19,966)
Proceeds from other borrowed funds ............... 655,000 1,090,000
Principal payments on other borrowed funds ....... (495,000) (1,109,000)
Purchase of treasury stock ....................... (7,222) (3,768)
Proceeds from stock transactions ................. 1,100 813
Payments of cash dividends ....................... (10,337) (8,474)
Payments of cash dividends in lieu of
fractional shares .............................. (24) (26)
----------- -----------
Net cash provided by financing activities 233,729 87,939
----------- -----------
Decrease in cash and cash equivalents ... (5,428) (23,045)
Cash and cash equivalents
at beginning of year ........................... 134,995 120,594
----------- -----------
Cash and cash equivalents
at end of period ............................... $ 129,567 $ 97,549
=========== ===========
Supplemental cash flow information:
Interest paid .................................. $ 120,780 $ 83,008
Income taxes paid .............................. 17,191 13,685
Supplemental schedule of noncash investing
and financing activities relating to the
purchase transaction:
Loans acquired ................................. $ -- $ 4,503
Other assets acquired ........................ -- 3,112
Deposits and other liabilities assumed ....... -- 27,935
</TABLE>
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 practices within the banking industry. The
consolidated financial statements include the accounts of the Company and its
wholly-owned subsidiaries, International Bank of Commerce, Laredo ("IBC"),
Commerce Bank, International Bank of Commerce, Zapata, International Bank of
Commerce, Brownsville and the Corporation's wholly-owned non-bank subsidiaries,
IBC Subsidiary Corporation, IBC Life Insurance Company, IBC Trading Company and
IBC Capital Corporation. All significant intercompany balances and transactions
have been eliminated in consolidation. The consolidated financial statements are
unaudited, but include all adjustments which, in the opinion of management, are
necessary for a fair presentation of the results of the periods presented. All
such adjustments were of a normal and recurring nature. It is suggested that
these financial statements be read in conjunction with the financial statements
and the notes thereto in the Company's latest Annual Report on Form 10K. The
balance sheet at December 31, 1999 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. SFAS No. 133 is effective for all
fiscal quarters of fiscal years beginning after June 15, 2000. Management of the
Company is in the process of assessing the impact, if any, of the future
adoption of SFAS No. 133.
NOTE 2 - INVESTMENT SECURITIES
The Company classifies debt and equity securities into one of three
categories: held-to maturity, available-for-sale, or trading. Such
classifications are reassessed for appropriate classification at each reporting
date. Securities classified as "held- to-maturity" are carried at amortized cost
for financial statement reporting, while securities classified as
"available-for-sale" and "trading" are carried at their fair value. Unrealized
holding gains and losses are included in net income for those securities
classified as "trading", while unrealized holding gains and losses related to
those securities classified as "available-for-sale" are excluded from net income
and reported net of tax as other comprehensive income and as a separate
component of shareholders' equity until realized.
9
<PAGE>
A summary of the investment securities held to maturity and securities
available for sale as reflected on the books of the Company is as follows:
JUNE 30, DECEMBER 31,
2000 1999
---------- ----------
(Dollars in Thousands)
U. S. Treasury and federal agencies
Held to maturity .............. $ -- $ --
Available for sale ............ 2,755,663 2,752,943
States and political subdivisions
Held to maturity .............. 60 321
Available for sale ............ 88,764 90,416
Other
Held to maturity .............. 2,110 2,085
Available for sale ............ 155,351 149,952
---------- ----------
Total investment securities ... $3,001,948 $2,995,717
========== ==========
NOTE 3 - ALLOWANCE FOR POSSIBLE LOAN LOSSES
A summary of the transactions in the allowance for possible loan losses
is as follows:
JUNE 30, JUNE 30,
2000 1999
-------- --------
(Dollars in Thousands)
Balance at January 1 ................... $ 26,770 $ 25,551
Losses charged to allowance ..... (1,275) (3,517)
Recoveries credited to allowance 538 755
-------- --------
Net losses charged to allowance . (737) (2,762)
Provisions charged to operations 3,334 4,514
-------- --------
Balance at June 30 ..................... $ 29,367 $ 27,303
======== ========
The Company classifies as impaired those loans where it is probable that
all amounts due will not be collected according to contractual terms of the loan
agreement. The Company has identified these loans through its normal loan review
procedures. Impaired loans included 1) all non-accrual loans, 2) loans which are
90 days or over past due unless they are well secured (the collateral value is
sufficient to cover principal and accrued interest) and are in the process of
collection, and 3) other loans which management believes are impaired.
Substantially all of the Company's 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.
10
<PAGE>
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 balance at the end of the six month period of both 2000 and 1999
was not material to the Company's consolidated financial position.
The subsidiary banks charge off that portion of any loan which
management considers to represent a loss as well as that portion of any other
loan which is classified as a "loss" by bank examiners. Commercial and
industrial or real estate loans are generally considered by management to
represent a loss, in whole or part, when an exposure beyond any collateral
coverage is apparent and when no further collection of the loss portion is
anticipated based on the borrower's financial condition and general economic
conditions in the borrower's industry. Generally, unsecured consumer loans are
charged-off when 90 days past due.
While management of the Company considers that it is generally able to
identify borrowers with financial problems reasonably early and to monitor
credit extended to such borrowers carefully, there is no precise method of
predicting loan losses. The determination that a loan is likely to be
uncollectible and that it should be wholly or partially charged-off as a loss,
is an exercise of judgment. Similarly, the determination of the adequacy of the
allowance for possible loan losses, can be made only on a subjective basis. It
is the judgment of the Company's management that the allowance for possible loan
losses at June 30, 2000, 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
splits effected through a stock dividend which became effective May 20, 1999 and
May 18, 2000 and were paid on June 11, 1999 and June 12, 2000, respectively.
Such stock dividends resulted in the issuance of 4,204,251 and 5,280,503 shares
of Common Stock in 1999 and 2000, respectively. A cash dividend of $.60 and $.50
per share was paid to holders of record of Common Stock on April 15, 1999 and
October 15, 1999, respectively. A cash dividend of $.60 per share was paid to
holders of record of Common Stock on April 14, 2000.
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 and
on January 11, 2000. Under the expanded stock repurchase program, the Company is
authorized to repurchase up to $35,000,000 of its common stock through December
2000. Stock repurchases may be made from time to time, on the open market or
through private transactions. Shares repurchased in this program will be held in
treasury for reissue for various corporate purposes, including employee stock
option plans. As of August 4, 2000, a total of 661,507 shares had been
repurchased under this program at a cost of $27,875,000. Stock repurchases are
presented quarterly at the Company's Board of Directors meetings and the Board
of Directors has stated that the aggregate investment in treasury stock should
not exceed $60,000,000. 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 $60,000,000 cap will occur in the future. As of August 4, 2000, the
Company has approximately $48,848,000 invested in 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 837,617 with 47,965
shares remaining available for the issuance of options under the new Plan. The
233,639 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 June 30, 2000, options to acquire 233,639 and 789,652
shares of common stock remain outstanding under the 1987 Plan and the new Plan,
respectively.
11
<PAGE>
NOTE 5 - COMMITMENTS AND CONTINGENT LIABILITIES
The Company and its bank subsidiaries are involved in various legal
proceedings that are in various stages of litigation. These actions allege
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 Protests;
however, if the Protests are decided adversely to the partnerships, all or a
portion of the $12 million in tax benefits previously recognized by the Company
in connection with these lease financing transactions would be in question.
Management 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 second quarter of 2000 was $21,087,000 or $1.10 per
share - basic ($1.08 per share - diluted) compared to $16,043,000 or $.82 per
share - basic ($.80 per share - diluted) in the corresponding 1999 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.
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
-------------------- --------------------
2000 1999 2000 1999
-------- -------- -------- --------
(Dollars in Thousands, except per share data)
<S> <C> <C> <C> <C>
Reported net income ............................ $ 21,087 $ 16,043 $ 40,267 $ 31,938
Amortization of intangible assets .............. 979 990 1,961 1,917
Income tax adjustment .......................... (79) (83) (159) (143)
-------- -------- -------- --------
Income before goodwill charges ................. $ 21,987 $ 16,950 $ 42,069 $ 33,712
======== ======== ======== ========
Income before goodwill charges per common share:
Basic ....................................... $ 1.14 $ .86 $ 2.31 $ 1.81
Diluted ..................................... $ 1.12 $ .84 $ 2.27 $ 1.77
</TABLE>
12
<PAGE>
Total assets at June 30, 2000 were $5,661,965,000 which represents an
11% increase over total assets of $5,106,052,000 at June 30, 1999 and a 4%
increase over total assets of $5,421,804,000 as of December 31, 1999. Deposits
at June 30, 2000 were $3,605,482,000 an increase of 2% over the $3,535,900,000
amount reported at June 30, 1999, and an increase of 2% over the $3,527,212,000
amount reported at December 31, 1999. Total loans at June 30, 2000 increased 21%
to $2,129,378,000 over $1,759,314,000 reported at June 30, 1999 an increase of
11% over the $1,911,879,000 amount reported at December 31, 1999. The increase
in assets and deposits during the first six months in 2000 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") increased to $1,540,000,000 at June 30, 2000 from the $1,380,000,000 at
December 31, 1999. The 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 second
quarter of 2000 increased $6,008,000 (16%) over the same period in 1999 and the
increase is the result of the Company's growth and efforts to manage interest
rate risk.
Investment securities increased 4% to $3,001,948,000 as of June 30, 2000
from $2,898,708,000 as of June 30, 1999. Time deposits with other banks as of
June 30, 2000 increased to $2,075,000 from $1,679,000 as of June 30, 1999.
Federal funds sold of $39,900,000 was reflected as of June 30, 2000 as compared
to no federal funds sold as of June 30, 1999.
Interest and fees on loans for the second quarter of 2000 increased
$14,590,000 (37%) over the same quarter in 1999 and increased $24,354,000 (32%)
for the six month period ended June 30, 2000 as compared to the same period in
1999. Interest income on taxable and tax exempt investment securities for the
second quarter in 2000 increased $11,082,000 (28%) over the same quarter in 1999
and increased $17,309,000 (21%) for the six month period ended June 30, 2000 as
compared to the same period in 1999. The increase in interest income on
investment securities was favorably affected by a special Federal Home Loan Bank
dividend of $1,235,000 received in the second quarter. Interest income on time
deposits with banks for the second quarter in 2000 increased $8,000 (28%) over
the same quarter in 1999 and increased $17,000 (33%) for the six month period
ended June 30, 2000 as compared to the same period in 1999. Interest income on
federal funds sold for the second quarter in 2000 decreased $111,000 (42%) from
the same quarter in 1999 and increased $89,000 (20%) for the six month period
ended June 30, 2000 as compared to the same period in 1999. Overall, total
interest income from loans, time deposits, federal funds sold, investment
securities and other interest income for the second quarter in 2000 increased
$25,570,000 (32%) over the same quarter in 1999 and increased $41,748,000 (26%)
for the six month period ended June 30, 2000 as compared to the same period in
1999. The increase in total interest income was primarily due to the increase in
the Company's loan and investment securities portfolio.
Total interest expense for savings deposits, time deposits and other
borrowings increased $19,562,000 (48%) for the second quarter of 2000 from the
same quarter in 1999 and increased $31,822,000 (38%) for the six month period
ended June 30, 2000 from the same period in 1999. The increase in total interest
expense was primarily due to higher interest rates and a larger volume of
borrowings. As a result, net interest income for the second quarter of 2000
increased $6,008,000 (16%) over the same period in 1999 and increased $9,926,000
(13%) for the six month period ended June 30, 2000 over the corresponding period
in 1999. This increase is attributed to the Company's efforts to maintain an
adequate interest rate spread between the cost of funds and the investment of
those funds.
13
<PAGE>
Non-interest income increased $1,011,000 (7%) to $14,888,000 in the
second quarter of 2000 as compared to $13,877,000 for the quarter ended June 30,
1999 and increased $1,529,000 (6%) to $28,107,000 for the six month period ended
June 30, 2000 as compared to $26,578,000 for the six months ended June 30, 1999.
The increase in non-interest income was primarily due to the increase in service
charge income. The increase in service charges was attributable to the amount of
account transaction fees received as a result of the deposit growth, new deposit
products and increased collection efforts. Investment securities losses of
$1,294,000 was recorded in the first six months of 2000 compared to gains of
$105,000 for the corresponding period in 1999.
Non-interest expense increased $405,000 (2%) to $26,730,000 for the
second quarter of 2000 as compared to $26,325,000 for the quarter ended June 30,
1999 and increased $1,504,000 (3%) to $51,847,000 for the six month period ended
June 30, 2000 as compared to $50,343,000 for the six months ended June 30, 1999.
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 improved to 46% for the six month period ended
June 30, 2000, compared to the year ago ratio of 49%. The improved efficiency
ratio is primarily due to the effective management of non-interest expense
relative to asset growth.
The allowance for possible loan losses increased 8% to $29,367,000 at
the end of the second quarter of 2000 from $27,303,000 for the corresponding
date in 1999. The provision for possible loan losses charged to expense
decreased 26% to $3,334,000 for the first six months of 2000 compared to
$4,514,000 for the first six months of 1999. Increase in the allowance for
possible loan losses was largely due to the decrease in loans charged off to
allowance. The allowance for possible loan losses was 1.38% of total loans at
June 30, 2000, compared to 1.55% at June 30, 1999 and 1.40% at December 31,
1999.
On June 30, 2000, the Company had $5,661,965,000 of consolidated assets
of which approximately $240,708,000 or 4% were related to loans outstanding to
borrowers domiciled in Mexico. Of the $240,708,000, 53% is directly or
indirectly secured by U.S. assets, principally certificates of deposits and real
estate; 30% is secured by Mexican real estate; 14% is secured by Mexican real
estate that is guaranteed under lease obligations by U.S. companies, of which
many are involved on the Fortune 500 list of companies; 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. 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 and stable portion of the deposit base of the Company's
bank subsidiaries. Other important funding sources for the Company's bank
subsidiaries during 2000 and 1999 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.
14
<PAGE>
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 six months in 2000 and expects to continue to fund during 2000
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 June 30, 2000, shareholders' equity was
$338,162,000 compared to $362,256,000 at June 30, 1999, a decrease of
$24,094,000 or 7%. The decrease in shareholders' equity is primarily due to the
negative impact of comprehensive income and the stock repurchase program. An
accounting standard relating to comprehensive income requires that unrealized
losses on securities held available for sale, net of tax, be deducted from
shareholders' equity; however, the unrealized losses on securities are not
deducted from capital in the calculation of regulatory capital requirements.
The Company had a leverage ratio of 6.70% and 6.58%, risk-weighted Tier
1 capital ratio of 13.24% and 13.41% and risk-weighted total capital ratio of
14.29% and 14.46% at June 30, 2000 and December 31, 1999, respectively. The core
deposit intangibles and goodwill of $40,729,000 at June 30, 2000, 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 June 30, 2000 is
illustrated in the table on page 16. This information reflects the balances of
assets and liabilities whose rates are subject to change. A mix of assets and
liabilities that are roughly equal in volume and repricing characteristics
represents a matched interest rate sensitivity position. Any excess of assets or
liabilities results in an interest rate sensitivity gap.
The Company undertakes the interest rate sensitivity analysis to monitor
the potential risk on future earnings resulting from the impact of possible
future changes in interest rates on currently existing net asset or net
liability positions. However, this type of analysis is as of a point-in-time
position, when in fact that position can quickly change as market conditions,
customer needs, and management strategies change. Thus, interest rate changes do
not affect all categories of asset and liabilities equally or at the same time.
As indicated in the table, the Company is liability sensitive during the early
time periods and becomes asset sensitive in the longer periods. The Company's
Asset and Liability Committee reviews semi-annually the consolidated position
along with simulation and duration models, and makes adjustments as needed to
control the Company's interest rate risk position. The Company uses modeling of
future events as a primary tool for monitoring interest rate risk.
15
<PAGE>
<TABLE>
<CAPTION>
INTEREST RATE SENSITIVITY
(Dollars in Thousands)
RATE/MATURITY RATE/MATURITY RATE/MATURITY RATE/MATURITY
-----------------------------------------------------------------------------------------------------------------------------
June 30, 2000 3 MONTHS OVER 3 MONTHS OVER 1 YEAR
(Dollars in Thousands) OR LESS TO 1 YEAR TO 5 YEARS OVER 5 YEARS TOTAL
=============================================================================================================================
SECTION A
-----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
RATE SENSITIVE ASSETS
FED FUNDS SOLD ............................. 39,900 -- -- -- 39,900
DUE FROM BANK INT EARNING .................. 693 1,283 99 -- 2,075
INVESTMENT SECURITIES ...................... 137,217 233,244 2,402,551 228,936 3,001,948
LOANS, NET OF NON-ACCRUALS ................. 1,498,496 149,142 289,805 187,144 2,124,587
-----------------------------------------------------------------------------------------------------------------------------
TOTAL EARNING ASSETS ....................... 1,676,306 383,669 2,692,455 416,080 5,168,510
-----------------------------------------------------------------------------------------------------------------------------
CUMULATIVE EARNING ASSETS .................. 1,676,306 2,059,975 4,752,430 5,168,510
=============================================================================================================================
SECTION B
-----------------------------------------------------------------------------------------------------------------------------
RATE SENSITIVE LIABILITIES
TIME DEPOSITS .............................. 1,108,423 920,582 173,904 204 2,203,113
OTHER INT BEARING DEPOSITS ................. 881,808 -- -- -- 881,808
FED FUNDS PURCHASED & REPOS ................ 63,329 68,845 3,520 -- 135,694
OTHER BORROWINGS ........................... 1,540,000 -- -- -- 1,540,000
-----------------------------------------------------------------------------------------------------------------------------
TOTAL INTEREST BEARING LIABILITIES ......... 3,593,560 989,427 177,424 204 4,760,615
-----------------------------------------------------------------------------------------------------------------------------
CUMULATIVE SENSITIVE LIABILITIES ........... 3,593,560 4,582,987 4,760,411 4.760,615
=============================================================================================================================
SECTION C
-----------------------------------------------------------------------------------------------------------------------------
REPRICING GAP .............................. (1,917,254) (605,758) 2,515,031 415,876 407,895
CUMULATIVE REPRICING GAP ................... (1,917,254) (2,523,012) (7,981) 407,895
RATIO OF INTEREST-SENSITIVE ................ .47 .39 15.18 -- 1.09
ASSETS TO LIABILITIES
RATIO OF CUMULATIVE, INTEREST- ............. .47 .45 1.00 1.09
SENSITIVE ASSETS TO LIABILITIES
=============================================================================================================================
</TABLE>
16
<PAGE>
FINANCIAL MODERNIZATION LEGISLATION
On November 12, 1999, President Clinton signed into law the
Gramm-Leach-Bliley Act of 1999 ("GLBA"). 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.
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. To date, the Company has not engaged in any additional financial
activities permitted by GLBA.
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 six months of 2000, 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, 1999.
17
<PAGE>
PART II - OTHER INFORMATION
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
The Annual Meeting of Shareholders of the Company was held May 18, 2000
for the consideration of the following items which were approved by the number
of votes set forth:
VOTES VOTES
FOR WITHHELD
---------- ----------
1) To elect ten (10) directors of the Company until the next Annual Meeting of
Shareholders and until their successors are elected and qualified; The
following directors, constituting the entire board of directors, were
elected:
Lester Avigael ..................... 11,476,100 0
R. David Guerra .................... 11,476,100 0
Irving Greenblum ................... 11,476,100 0
Daniel B. Hastings ................. 11,467,596 8,504
Richard E. Haynes .................. 11,476,100 0
Sioma Neiman ....................... 11,458,333 17,767
Peggy J. Newman .................... 11,476,100 0
Dennis E. Nixon .................... 11,464,993 11,107
Leonardo Salinas ................... 11,430,252 45,848
A.R. Sanchez Jr .................... 11,458,333 17,767
VOTES VOTES VOTES
FOR AGAINST ABSTAINED
---------- ---------- ----------
2) To approve the appointment of
independent auditors for the 2000
fiscal year 11,458,880 437 16,783
18
<PAGE>
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) EXHIBITS
Exhibit 27. International Bancshares Corporation Financial Data Schedule
for the Period ended June 30, 2000.
(b) REPORTS ON FORM 8-K
Registrant filed a current report on Form 8-K on August 9, 2000, covering
Item 5 - Other Events and Item 7 - Financial Statements and Exhibits in
connection with the announcement of the Company's Second Quarter 2000 Earnings.
19
<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: AUGUST 14, 2000 /s/ DENNIS E. NIXON
Dennis E. Nixon
President
Date: AUGUST 14, 2000 /s/ IMELDA NAVARRO
Imelda Navarro
Treasurer (Chief Accounting Officer)
20
