FORM 10-Q SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 (Mark One) [X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended SEPTEMBER 30, 1996 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) (210) 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 8,748,069 shares outstanding at November 7, 1996
PART 1 - FINANCIAL INFORMATION Item 1. FINANCIAL STATEMENTS INTERNATIONAL BANCSHARES CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CONDITION (Dollars in Thousands) September 30, December 31, ASSETS 1996 1995 ----------- ----------- Cash and due from banks ............................ $ 109,731 $ 86,827 Federal funds sold ................................. 27,000 37,000 ----------- ----------- Total cash and cash equivalents ....... 136,731 123,827 Time deposits with banks ........................... _ 1,800 Investment securities: Held to maturity (Market value of $3,158 on September 30, 1996 and $2,895 on December 31, 1995) ............... 3,167 2,909 Available for sale (Amortized cost of $1,505,243 on September 30, 1996 and $1,439,823 on December 31, 1995) ...... 1,505,759 1,460,432 ----------- ----------- Total investment securities ........... 1,508,926 1,463,341 Loans: Commercial, financial and agricultural .......... 692,381 718,364 Lease financing receivables, net ................ 3,910 3,910 Real estate - mortgage .......................... 190,353 200,998 Real estate - construction ...................... 34,955 39,527 Consumer ........................................ 143,203 124,843 Foreign ......................................... 124,378 120,748 ----------- ----------- Total loans ........................... 1,189,180 1,208,390 Less unearned discounts ......................... (3,399) (3,479) ----------- ----------- Loans, net of unearned discounts ...... 1,185,781 1,204,911 Less allowance for possible loan losses ......... (20,303) (18,455) ----------- ----------- Net loans ............................. 1,165,478 1,186,456 ----------- ----------- Bank premises and equipment, net ................... 88,621 80,410 Accrued interest receivable ........................ 22,270 22,204 Other assets ....................................... 76,375 57,568 ----------- ----------- Total assets .......................... $ 2,998,401 2,935,606 =========== =========== (Continued) 2
INTERNATIONAL BANCSHARES CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CONDITION, continued (Dollars in Thousands) September 30, December 31, 1996 1995 ----------- ---------- LIABILITIES AND SHAREHOLDERS' EQUITY Liabilities: Deposits: Demand - non-interest bearing ............ $ 321,699 295,301 Savings and interest bearing demand ...... 618,991 576,878 Time ..................................... 1,423,039 1,271,167 ----------- ---------- Total deposits ................... 2,363,729 2,143,346 Federal funds purchased and securities sold under repurchase agreements ......... 115,112 462,602 Other borrowed funds ....................... 234,000 66,500 Other liabilities .......................... 24,310 17,397 ----------- ---------- Total liabilities ................ 2,737,151 2,689,845 ----------- ---------- Shareholders' equity: Common stock of $1.00 par value ............ Authorized 15,000,000 shares; issued 10,343,480 shares in 1996 and 8,159,814 shares in 1995 ............. 10,343 8,160 Surplus .................................... 11,378 10,637 Retained earnings .......................... 248,991 221,350 Net unrealized holding gains on available for sale securities, net of deferred income taxes ............. 336 13,396 ----------- ---------- 271,048 253,543 Less cost of shares in treasury, 1,594,311 shares in 1996 and 1,229,332 shares in 1995 ................. (9,798) (7,782) ----------- ---------- Total shareholders' equity ....... 261,250 245,761 ----------- ---------- Total liabilities and shareholders' equity .......... $ 2,998,401 2,935,606 =========== ========== See accompanying notes to consolidated financial statements. 3
INTERNATIONAL BANCSHARES CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF INCOME (Unaudited) (Dollars in Thousands, except per share data) <TABLE> <CAPTION> Three Months Ended Nine Months Ended September 30, September 30, -------------------------- ------------------------- 1996 1995 1996 1995 -------- ------- ------- -------- <S> <C> <C> <C> <C> Interest income: Loans, including fees .................................. $ 29,850 31,487 88,873 92,779 Time deposits with banks ............................... 3 6 52 22 Federal funds sold ..................................... 312 214 904 574 Investment securities: Taxable .............................................. 25,445 24,399 72,000 67,302 Tax-exempt ........................................... 390 459 1,204 1,391 Other interest income .................................. 53 104 253 314 -------- ------- ------- -------- Total interest income ........................... 56,053 56,669 163,286 162,382 -------- ------- ------- -------- Interest expense: Savings deposits ....................................... 4,660 4,077 13,407 12,428 Time deposits .......................................... 17,911 16,033 50,398 45,880 Federal funds purchased and securities sold under repurchase agreements ...................... 1,517 7,329 10,355 19,362 Other borrowings ....................................... 3,433 2,472 5,193 6,262 -------- ------- ------- -------- Total interest expense ....................... 27,521 29,991 79,353 83,932 -------- ------- ------- -------- Net interest income .......................... 28,532 26,758 83,933 78,450 Provision for possible loan losses ........................ 1,427 1,278 4,699 3,735 -------- ------- ------- -------- Net interest income after provision for possible loan losses ............................... 27,105 25,480 79,234 74,715 -------- ------- ------- -------- Non-interest income: Service charges on deposit accounts .................... 4,091 3,386 11,219 9,976 Other service charges, commissions and fees ............................................. 1,692 1,286 4,963 4,354 Insurance premiums earned .............................. 196 152 591 435 Investment securities transactions ..................... (97) (127) 293 (109) Net profit of operations for other real estate owned .................................... -- -- -- -- Other income ........................................... 1,326 1,737 5,702 4,895 Total non-interest income .................... 7,208 6,434 22,768 19,551 -------- ------- ------- -------- </TABLE> 4
INTERNATIONAL BANCSHARES CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF INCOME - continued (Dollars in Thousands, except per share data) <TABLE> <CAPTION> Three Months Ended Nine Months Ended September 30, September 30, ---------------------------- --------------------------- 1996 1995 1996 1995 ---------- --------- --------- -------- <S> <C> <C> <C> <C> Non-interest expense: Employee compensation and benefits ..................... 7,354 6,367 21,139 18,828 Occupancy .............................................. 1,540 1,698 3,950 3,291 Depreciation of premises and equipment ................. 1,712 1,640 4,900 4,967 Professional fees ...................................... 1,712 1,889 4,957 5,458 Net cost of operations for other real estate owned ......................................... 140 53 237 121 Other .................................................. 6,374 4,984 17,550 15,808 ---------- --------- --------- --------- Total non-interest expense ................... 18,832 16,631 53,431 48,689 ---------- --------- --------- --------- Income before income taxes ................... 15,481 15,283 48,571 45,577 Income taxes .............................................. 4,883 4,914 15,363 14,829 ---------- --------- --------- --------- Net Income ................................... $ 10,598 10,369 33,208 30,748 ---------- --------- --------- --------- Net income per share (Note 5) .......................... $ 1.17 1.15 3.66 3.40 Weighted average number of shares outstanding .......................................... 9,067,024 9,039,444 9,067,024 9,039,444 </TABLE> See accompanying notes to consolidated financial statements. 5
INTERNATIONAL BANCSHARES CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited) (Dollars in Thousands) Nine Months Ended September 30, --------------------- 1996 1995 --------- -------- Operating activities: Net Income .......................................... $ 33,208 30,748 Adjustments to reconcile net income to net cash provided by operating activities: Provision for possible loan losses .............. 4,699 3,735 Recoveries on charged-off loans ................. 501 487 Net cost of operations for other real estate owned ......................................... 237 121 Depreciation of bank premises and equipment ..... 4,900 4,967 Accretion of investment securities discounts .... (1,278) (1,349) Amortization of investment securities premiums .. 5,213 8,773 Realized (gain) loss on investment securities transactions, net ............................. (293) 109 Gain on sale of bank premises and equipment ..... (112) (46) Increase in accrued interest receivable .................................... (66) (1,843) Increase in other liabilities ................... 8,048 7,747 --------- -------- Net cash provided by operating activities .. 55,057 53,449 --------- -------- Investing activities: Cash acquired in purchase transaction ............... 99,747 7,123 Proceeds from maturities of securities .............. 82 25,588 Proceeds from sales of available for sale securities ............................... 338,503 84,117 Purchases of available for sale securities .......... (634,220) (371,902) Principal collected on mortgage-backed securities ... 226,135 144,080 Proceeds from matured time deposits with banks ...... 2,295 297 Purchases of time deposits with banks ............... (495) (491) Net decrease (increase) in loans .................... 37,186 (47,178) Net increase in other assets ........................ (5,380) (2,142) Purchase of bank premises and equipment ............. (10,107) (8,546) Proceeds from sale of bank premises and equipment ... 500 79 --------- -------- Net cash provided by (used in) investing activities ..................... 54,246 (168,975) --------- -------- 6
INTERNATIONAL BANCSHARES CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS, continued (Dollars in Thousands) Nine Months Ended September 30, --------------------- 1996 1995 --------- -------- Financing activities: Net increase (decrease)in non-interest bearing demand deposits ............................ $ 25,444 (16,321) Net increase (decrease) in savings and interest bearing demand deposits ............................ 1,079 (57,283) Net increase (decrease) in time deposits ............. 61,727 (13,809) Net (decrease) increase in federal funds purchased and securities sold under repurchase agreements .... (347,490) 166,038 Proceeds from issuance of other borrowed funds ....... 806,000 94,500 Principal payments on other borrowed funds ........... (638,500) (36,750) Purchase of treasury stock ........................... (2,016) (467) Proceeds from exercise of stock options .............. 865 419 Payments of cash dividends ........................... (3,490) (2,762) Payments of cash dividends in lieu of fractional shares ............................................. (18) (9) --------- -------- Net cash (used in) provided by financing activities ...................... (96,399) 133,556 --------- -------- Increase in cash and cash equivalents ............................... 12,904 18,030 Cash and cash equivalents at beginning of year ............................... 123,827 90,200 --------- -------- Cash and cash equivalents at end of period ................................... $ 136,731 108,230 ========= ======== Supplemental cash flow information: Interest paid ...................................... $ 79,606 88,609 Income taxes paid .................................. 15,401 14,046 Supplemental schedule of noncash investing and financing activities relating to the purchase transaction: Loans acquired ................................... 21,408 37,043 Investment securities acquired ................... -- 42,686 Other assets acquired ............................ 11,009 11,401 Deposits and other liabilities assumed ........... 132,164 132,164 See accompanying notes to consolidated financial statements. 7
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 ("Company") and Subsidiaries 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 ("IBC"), Commerce Bank, International Bank of Commerce, Zapata, International Bank of Commerce, Brownsville and its wholly-owned non-bank subsidiaries, IBC Subsidiary Corporation, IBC Life Insurance Company and IBC Trading Company. All significant intercompany balances and transactions have been eliminated. 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 Company adopted Statement of Financial Accounting Standards No.114, "Accounting by Creditors for Impairment of a Loan" ("SFAS 114"), and SFAS No. 118, "Accounting by Creditors for Impairment of a Loan - Income Recognition and Disclosure" effective January 1, 1995. These Statements are applicable to all creditors and to all loans, uncollateralized as well as collateralized, except consumer loans. These Statements require that impaired loans be measured based on (1) the present value of expected future cash flows discounted at the loan's effective interest rate; (2) the loan's observable market price; or, (3) the fair value of the collateral if the loan is collateral dependent. The adoption of this accounting standard did not have a material effect on the Company's financial position or results of operations since the Company's previous recognition and measurement policies regarding non-performing loans were consistent with the accounting requirements for impaired loans. On January 1, 1996, the Company adopted SFAS No. 122, "Accounting for Mortgage Servicing Rights". This Statement requires that a mortgage banking enterprise assess its capitalized mortgage servicing rights for impairment based on the fair value of those rights that are capitalized after the adoption of this Statement based on one or more of the predominant risk characteristics of the underlying loans. Impairment should be recognized through a valuation allowance for each impaired stratum. The adoption of this accounting standard did not have a material effect on the Company's financial position or results of operations. Note 2 - Acquisitions On October 1, 1996, the Company entered into a purchase of assets and liability assumption agreement whereby IBC will purchase certain assets and will assume certain liabilities of Bank of America Texas, N. A., Irving Texas. This agreement is subject to regulatory approval. IBC will purchase loans of approximately $678,000 and assume deposits of approximately $99,616,000 and will receive cash or other assets in the amount of approximately $95,282,000. On July 30, 1996, the Company entered into a purchase of assets and liability assumption agreement whereby IBC will purchase certain assets and will assume certain liabilities of Home Savings of America F.S.B., Irwindale, California, ("Savings of America"). This agreement received regulatory approval and will be closed on November 22, 1996. IBC will purchase loans of approximately $625,000 and assume deposits of 8
approximately $216,000,000 and will receive cash or other assets in the amount of approximately $203,000,000. Effective June 27, 1996, the Company purchased certain assets and assumed certain liabilities of River Valley Bank, F.S.B., in Weslaco, Texas, ("RVB"), a federal savings bank organized under the laws of the United States. At the date of closing, total loans acquired were approximately $21,408,000, deposits assumed were approximately $132,133,000 and cash and other assets received were in the amount of approximately $110,756,000. The acquisition was accounted for as a purchase transaction. IBC recorded intangible assets, goodwill and core deposit premium totaling $6,599,000. These assets are being amortized on a straight line basis over a fifteen year period. Effective September 8, 1995, Stone Oak National Bank, in San Antonio, Texas, ("SONB") a national banking association organized under the laws of the United States, was merged with and into IBC. At the date of closing, total assets acquired were approximately $18,000,000. The acquisition was accounted for as a purchase transaction. IBC recorded intangible assets, goodwill and core deposit premium totaling $1,387,000. These assets are being amortized on a straight line basis over a fifteen year period. Effective February 1, 1995, The Bank of Corpus Christi, Corpus Christi, Texas ("BCC") a state bank organized under the laws of the state of Texas, was merged with and into IBC. At the date of closing, total assets acquired were approximately $80,000,000. The acquisition was accounted for as a purchase transaction. IBC recorded intangible assets, goodwill and core deposit premium totaling $4,042,000. These assets are being amortized on a straight line basis over a fifteen year period. Note 3 - Investment Securities The Financial Accounting Standard Board's ("FASB") Statement of Financial Accounting Standards ("SFAS") No. 115, "Accounting for Certain Investments in Debt and Equity Securities", requires that an enterprise classify debt and equity securities into one of these categories: held-to-maturity, available-for-sale, or trading. SFAS No. 115 also states that these classifications need to be reassessed for appropriate classification at each reporting date. Securities classified as "held-to-maturity" are to be carried at amortized cost for financial statement reporting, while securities classified as "available for sale" and "trading" are to be 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 at a net amount as a separate component of shareholders' equity until realized. The Company adopted SFAS No. 115 on January 1, 1994. A summary of the investment securities held for investment and securities available for sale is as follows: September 30, September 30, 1996 1995 ---------- --------- (Dollars in Thousands) U. S. Treasury and federal agencies Held to maturity .................... $ -- 561,651 Available for sale .................. 1,470,221 866,826 States and political subdivisions Held to maturity .................... 859 8,635 Available for sale .................. 19,654 25,273 Other Held to maturity .................... 2,308 3,793 Available for sale .................. 15,884 14,771 ---------- --------- Total investment securities ......... $1,508,926 1,480,949 ========== ========= 9
The Company may invest in collateralized mortgage obligations and structured notes. However, at September 30, 1996 the Company did not have outstanding investments in these type of securities. At September 30, 1995 such investments in the portfolio were not significant to the financial position of the Company. Note 4 - Allowance for Possible Loan Losses A summary of the allowance for possible loan losses follows: September 30, September 30, 1996 1995 -------- ------- (Dollars in Thousands) Balance at January 1 ............................ $ 18,455 17,025 Losses charged to allowance ............ (3,352) (2,014) Recoveries credited to allowance .......... 501 487 -------- ------- Net losses charged to allowance ........ (2,851) (1,527) Provisions charged to operations ....... 4,699 3,735 -------- ------- Allowances acquired in purchase transactions ........................ -- 435 -------- ------- Balance at September 30 ......................... $ 20,303 19,668 ======== ======= 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 mean that the Company expects losses to occur. The Company's impaired loan balances at the end of the nine month period of both 1996 and 1995 was not material to the Company's consolidated financial position. The Company had previously measured the allowance for credit 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 10
economic conditions in the borrower's industry. Generally, unsecured consumer loans are charged-off when 90 days past due. While management of the Company considers that it is generally able to identify borrowers with financial problems reasonably early and to monitor credit extended to such borrowers carefully, there is no precise method of predicting loan losses. The determination that a loan is likely to be uncollectible and that it should be wholly or partially charged-off as a loss, is an exercise of judgment. Similarly, the determination of the adequacy of the allowance for possible loan losses, can be made only on a subjective basis. It is the judgment of the Company's management that the allowance for possible loan losses at September 30, 1996, was adequate to absorb possible losses from loans in the portfolio at that date. 5 - Stock and Cash Dividends Per share data for 1995 has been restated to reflect the stock split-up effected through a stock dividend which became effective May 19, 1995 which resulted in the issuance of 1,625,716 shares of Common Stock. A special cash dividend of a $.50 per share was paid to holders of record of Common Stock on April 3, 1995. A special cash dividend of $.50 per share and a 25% stock split-up effected through a stock dividend was declared on March 28, 1996 for all holders of Common Stock of record on April 3, 1996 and May 17, 1996, respectively, and said dividends were paid on April 15, 1996 and June 7, 1996, respectively. The Company does not have a formal stock repurchase program; however, the Company occasionally repurchases shares of Common Stock, which repurchases are usually 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 $10,000,000 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 $10,000,000 cap will occur in the future. 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 375,000. The 598,522 shares of common stock remaining available under the 1987 Plan will be treated as authorized for issuance upon exercise of options granted under the 1987 Plan only. As of September 30, 1996 options to acquire 526,668 shares of common stock remain outstanding, all of which options were granted under the 1987 Plan, except options to acquire 1,000 shares granted under the plan. The options did not have a material dilutive effect upon the calculations of earnings per share and were, therefore, not included in such calculation. Note 6 - Legal Proceedings The Company is involved in various legal proceedings that are in various stages of litigation by the Company and its legal counsel. Some of these actions allege "lender liability" claims on a variety of theories and claim substantial actual and punitive damages. The Company has determined, based on discussions with its 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. However, many of these matters are in various stages of proceedings and further developments could cause Management to revise its assessment of these matters. 11
Item 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Net income for the third quarter of 1996 was $10,598,000 or $1.17 per share -primary ($1.17 per share - fully diluted) compared to $10,369,000 or $1.15 per share - primary ($1.15 per share - fully diluted) in the corresponding 1995 period. Total assets at September 30, 1996 were $2,998,401 which represents a 2% increase over total assets of $2,954,197 at September 30, 1995 and a 2% increase over total assets of $2,935,606,000 as of December 31, 1995. Deposits at September 30, 1996 were $2,363,729,000 an increase of 15% over the $2,062,545,000 amount reported at September 30, 1995, and an increase of 10% over the $2,143,346,000 amount reported at December 31, 1995. Total loans at September 30, 1996 decreased 3% to $1,189,180,000 from $1,228,847,000 reported at September 30, 1995 and decreased 2% from the $1,208,390,000 amount reported at December 31, 1995. The decrease in total loans is primarily attributable to the slow down of the local economy caused by the Mexican peso devaluation. The increase in assets and deposits during the first nine months of 1996, can be partially attributed to the acquisition of RVB, (see note 2 of notes to consolidated financial statements). 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") of $232,000,000 at September 30, 1996 decreased from the $359,500,000 reflected at December 31, 1995. The decrease in wholesale liabilities, repurchase agreements, short term fixed borrowings and certificates of indebtedness is related to the Company's contraction of its earning asset base in connection with the acquisition of RVB and Savings of America. In order to achieve a net yield that is relatively immune to major swings in market rates, the Company strives to manage both assets and liabilities so that interest sensitivities match. In this way both earning assets and funding sources of the Company respond to changes in a similar time frame. Net interest income for the third quarter of 1996 increased $1,774,000 (7%) over the same period in 1995. The Company's average balances of domestic and foreign loans increased for the nine month period of 1996 to $1,202,396 compared to $1,184,288 for the same period in 1995. Interest and fees on loans for the nine month period in 1996 decreased $3,906,000 (4%) compared to the same period in 1995. Investment securities increased 2% to $1,508,926,000 at September, 30, 1996 from $1,480,949,000 at September 30, 1995. Time deposits with other banks at September 30, 1996, reflected a zero balance representing a 100% decrease from $689,000 at September 30, 1995. Total federal funds sold increased to $27,000,000 for the third quarter of 1996 as compared to $21,000,000 for the third quarter of 1995. 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. Interest income on taxable and tax exempt investment securities for the third quarter in 1996 increased $977,000 (4%) over the same quarter in 1995 and increased $4,511,000 (7%) for the nine month period ended September 30, 1996 as compared to the same period in 1995. Interest income on time deposits with banks and federal funds sold for the third quarter in 1996 increased $95,000 (43%) from the same quarter in 1995 and increased $360,000 (60%) for the nine month period ended September 30, 1996 as compared to the same period in 1995. Overall, total interest income from loans, time deposits, federal funds sold, investment securities and other interest income for the third quarter in 1996 decreased $616,000 (1%) from the same quarter in 1995. The decrease in total interest income was primarily due to the decrease in the loan portfolio. Total interest expense for savings deposit, time deposits and other borrowings decreased $2,390,000 (8%) for the third quarter of 1996 from the same quarter in 1995 and decreased $4,579,000 (5%) for the nine month period ended September 30, 1996 over the same period in 1995. The decrease in total interest expense was largely due to a decline in the 12
use of wholesale liabilities, repurchase agreements and short term fixed borrowings. As a result, net interest income for the third quarter of 1996 increased $5,483,000 or 7% over the same period in 1995 and increased $1,774,000 (7%) for the nine month period ended September 30, 1996 over the corresponding period in 1995. 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 $774,000 to $7,208,000 in the third quarter of 1996 as compared to $6,434,000 for the quarter ended September 30, 1995 and increased $3,217,000 (16%) to $22,768,000 for the nine month period ended September 30, 1996 as compared to $19,551,000 for the nine months ended September 30, 1995. The overall increase is due to the Company's efforts to improve non-interest income. Non-interest expense increased $2,201,000 (13%) to $18,832,000 for the third quarter of 1996 as compared to $16,631,000 for the quarter ended September 30, 1995 and increased $4,742,000 (10%) to $53,431,000 for the nine month period ended September 30, 1996 as compared to $48,689,000 for the nine months ended September 30, 1995. The increase is largely due to the increased operations at the subsidiary banks. The allowance for possible loan losses increased $550,000 in the third quarter of 1996 as compared to the $899,000 increase in the third quarter of 1995. For the first nine months of 1996, the provision for possible loan losses was $4,699,000 compared to $3,735,000 for the first nine months of 1995. The Company continues to maintain an aggressive loan loss provision due to an uncertain economy. The Company charged off $1,098,000 against the allowance for possible loan losses during the third quarter of 1996 compared to $660,000 in the third quarter for the prior year. For the nine month period ending September 30, 1996 net losses charged against the allowance for possible loan losses amounted to $877,000 compared to net losses charged against the allowance for possible loan losses of $482,000 for the nine months ended September 30, 1995. The allowance for possible loan losses was 1.71% of September 30, 1996 loans, net of unearned income, compared to 1.61% of the corresponding period in 1995 and 1.53% at December 31, 1995. On September 30 1996, the Company had $2,998,401,000 of consolidated assets of which approximately $125,698,000 or 4% were related to loans outstanding to borrowers from Mexico. Of the $125,698,000, $100,743,000 or 80% is directly or indirectly secured by U. S. assets, principally certificates of deposits and real estate; 15% is secured by Mexican real estate, 1% is Mexican sovereign debt extended to Mexican banks; 2% is unsecured; 1% consists of direct unsecured Mexican sovereign debt (principally former FICORCA debt) and 1% represents accrued interest receivable on the portfolio. To date, the Company has not experienced a material adverse impact related to the recent devaluation of the peso in Mexico. The Company will continue to monitor the effects of the peso devaluation. LIQUIDITY AND CAPITAL RESOURCES Liquidity is the Company's 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. The subsidiary banks of the Company derive their liquidity largely from deposits of individuals and business entities; however, the deposits (excluding those from the acquisitions) are not growing at as high a percentage rate as they did in the past. Consequently, the Company is relying more on other funding sources. Other important funding sources for the Company's bank subsidiaries during 1995 and 1996 have been securities sold under agreement to repurchase, FHLB certificates of indebtedness and large time certificates of deposit requiring management to closely monitor its asset/liability mix in terms of both rate sensitivity and maturity distributions. Primary liquidity of the Company has been maintained by means of increased investment in shorter-term securities, certificates of deposit and loans. The Company had a leverage ratio of 8.51% and 7.46%, risk-weighted Tier 1 capital ratio of 16.69% and 14.78% and risk-weighted total capital ratio of 17.94% and 15.93% for 13
September 30, 1996 and December 31, 1995, respectively, which ratios reflect the deduction of the goodwill and core deposit intangible booked of approximately $19,790,000 in connection with the acquisition transactions. The amounts are well above the minimum regulatory requirements. As in the past, the Company will continue to monitor the volatility and cost of funds in an attempt to match maturities of rate-sensitive assets and liabilities, and respond accordingly to anticipated fluctuations in interest rates by adjusting the balance between sources and uses of funds as deemed appropriate. The net-interest rate sensitivity as of September 30, 1996 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 purpose of this analysis is to be aware of the potential risk to future earnings resulting from the impact of possible future changes in interest rates on currently existing net asset or net liability positions. The Company undertakes this 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. The Federal banking agencies issued a final rule on the interest rate component of risk based capital, which requires the banking agencies to take into account the effect interest rates can have on a bank's capital. On July 12, 1996, the federal banking agencies adopted an interagency policy statement which establishes a uniform framework for evaluating the adequacy and effectiveness of a bank's interest rate risk management. Adjustments to the Company's interest rate risk management will be considered in conjunction with the new policy statement. The Company will depend upon earnings of subsidiaries, in addition to borrowed funds, to finance its future cash flow requirements. The Company has a number of available alternatives to finance the growth of its existing banks as well as future growth and expansion. Among the activities and commitments the Company funded during the first nine months of 1996 and expects to continue to fund during 1996 is a continuous effort to modernize and improve our existing facilities and expand our bank branch network. 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. These forward-looking statements involve certain risks and uncertainties. Such statements are made in reliance on the "safe harbor" protection provided under the Private Securities Litigation Reform Act of 1995. Factors that could cause actual results to differ materially from any results 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 14
company and its subsidiaries, as well as customers, competitors and potential competitors, are subject, including banking, tax, securities, insurance and employment laws and regulations, and (IV) increased competition from both within and without the banking industry. PART II - OTHER INFORMATION Item 6. EXHIBITS AND REPORTS ON FORM 8-K (a) EXHIBITS Exhibit (10k) - Purchase of asset and liability agreement dated as of July 30, 1996, by and between International Bank of Commerce and Home Savings of America F.S.B.. Exhibit 27. International Bancshares Corporation Financial Data Schedule for the Period ended September 30, 1996.b). (B) FORM 8K Registrant filed a current report on Form 8-K dated October 9, 1996, covering Item 5 - Other Events and Item 7 - Financial Statements and Exhibits in connection with the pending acquisition of five branches of Bank of America, Texas. 15
INTERNATIONAL BANCSHARES CORPORATION AND SUBSIDIARIES INTEREST RATE SENSITIVITY (Dollars in Thousands) <TABLE> <CAPTION> RATE/MATURITY RATE/MATURITY RATE/MATURITY RATE/MATURITY September 30,1996 3 MNTHS OVER 3 MNTHS OVER 1 YR TOTAL (Dollars in Thousands) OR LESS TO 1 YR TO 5 YRS OVER 5 YRS <S> <C> <C> <C> <C> <C> ========================================================================================================== SECTION A - ---------------------------------------------------------------------------------------------------------- RATE SENSITIVE ASSETS FED FUNDS SOLD 27,000 - - - 27,000 DUE FROM BANK INT EARNING - - - - - INVESTMENT SECURITIES 119,352 268,121 1,119,998 1,455 1,508,926 LOANS, NET OF NON-ACCRUALS 920,398 94,725 94,455 74,598 1,184,176 - ---------------------------------------------------------------------------------------------------------- TOTAL EARNING ASSETS 1,066,750 362,846 1,214,453 76,053 2,720,102 - ---------------------------------------------------------------------------------------------------------- CUMULATIVE EARNING ASSETS 1,066,750 1,429,596 2,644,049 2,720,102 ========================================================================================================== SECTION B - ---------------------------------------------------------------------------------------------------------- RATE SENSITIVE LIABILITIES TIME DEPOSITS 637,140 619,051 166,362 486 1,423,039 OTHER INT BEARING DEPOSITS 618,991 - - - 618,991 FED FUNDS PURCHASED & REPOS 85,658 20,074 9,380 - 115,112 OTHER BORROWINGS 234,000 - - - 234,000 - ---------------------------------------------------------------------------------------------------------- TOTAL INTEREST BEARING LIABILITIES 1,575,789 639,125 175,742 486 2,391,142 - ---------------------------------------------------------------------------------------------------------- CUMULATIVE SENSITIVE LIABILITIES 1,575,789 2,214,914 2,390,656 2,391,142 ========================================================================================================== SECTION C - ---------------------------------------------------------------------------------------------------------- REPRICING GAP (509,039) (276,279) 1,038,711 75,567 328,960 CUMULATIVE REPRICING GAP (509,039) (785,318) 253,393 328,960 RATIO OF INTEREST-SENSITIVE .68 .57 6.91 - 1.14 ASSETS TO LIABILITIES RATIO OF CUMULATIVE, INTEREST- .68 .65 1.11 1.14 SENSITIVE ASSETS TO LIABILITIES ========================================================================================================== </TABLE> 16
SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. INTERNATIONAL BANCSHARES CORPORATION Date: NOVEMBER 11, 1996 /S/ DENNIS E. NIXON Dennis E. Nixon President Date: NOVEMBER 11, 1996 /S/ ARNOLDO CISNEROS Arnoldo Cisneros Secretary-Treasurer (Chief Accounting Officer) 17