FORM 10-Q SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 (Mark One) [X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended MARCH 31, 1998 OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from to Commission file number 0-9439 INTERNATIONAL BANCSHARES CORPORATION (Exact name of registrant as specified in its charter) TEXAS 74-2157138 (State or other jurisdiction of (I.R.S. Employer Identification No.) incorporation or organization) 1200 SAN BERNARDO AVENUE, LAREDO, TEXAS 78042-1359 (Address of principal executive offices) (Zip Code) (956) 722-7611 (Registrant's telephone number, including area code) NONE (Former name, former address and former fiscal year, if changed since last report) Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practicable date. CLASS SHARES ISSUED AND OUTSTANDING ----- ----------------------------- Common Stock, $1.00 par value 11,300,859 shares outstanding at May 5, 1998
PART 1 - FINANCIAL INFORMATION Item 1. FINANCIAL STATEMENTS INTERNATIONAL BANCSHARES CORPORATION AND SUBSIDIARIES Consolidated Statements of Condition (Unaudited) (Dollars in Thousands) March 31, December 31, ASSETS 1998 1997 ------ ---------- ----------- Cash and due from banks .......................... $ 161,236 $ 229,788 Federal funds sold ............................... 11,100 7,975 ----------- ----------- Total cash and cash equivalents ..... 172,336 237,763 Time deposits with banks ......................... 779 1,587 Investment securities: Held to maturity (Market value of $2,579 on March 31, 1998 and $2,705 on December 31, 1997) ............. 2,584 2,710 Available for sale (Amortized cost of $2,620,011 on March 31, 1998 and $2,547,545 on December 31, 1997) .... 2,650,283 2,580,748 ----------- ----------- Total investment securities ......... 2,652,867 2,583,458 Loans: Commercial, financial and agricultural ........ 782,427 800,964 Real estate - mortgage ........................ 193,229 188,122 Real estate - construction .................... 62,922 59,239 Consumer ...................................... 267,274 272,478 Foreign ....................................... 139,457 130,401 ----------- ----------- Total loans ......................... 1,445,309 1,451,204 Less unearned discounts ....................... (6,977) (6,508) ----------- ----------- Loans, net of unearned discounts .... 1,438,332 1,444,696 Less allowance for possible loan losses ....... (25,138) (24,516) ----------- ----------- Net loans ........................... 1,413,194 1,420,180 ----------- ----------- Bank premises and equipment, net ................. 132,050 129,621 Accrued interest receivable ...................... 30,188 31,271 Intangible assets ................................ 48,691 49,692 Other assets ..................................... 49,970 64,274 ----------- ----------- Total assets ........................ $ 4,500,075 $ 4,517,846 ----------- ----------- (Continued) 2
INTERNATIONAL BANCSHARES CORPORATION AND SUBSIDIARIES Consolidated Statements of Condition, continued (Dollars in Thousands) March 31, December 31, 1998 1997 ---------- ----------- LIABILITIES AND SHAREHOLDERS' EQUITY ------------------------------------ Liabilities: Deposits: Demand - non-interest bearing ............. $ 447,536 $ 450,537 Savings and interest bearing demand ....... 859,570 819,759 Time ...................................... 1,982,646 1,905,264 ----------- ----------- Total deposits .................... 3,289,752 3,175,560 Federal funds purchased and securities sold under repurchase agreements .......... 349,799 478,409 Other borrowed funds ........................ 466,000 490,000 Other liabilities ........................... 40,832 32,633 ----------- ----------- Total liabilities ................. 4,146,383 4,176,602 ----------- ----------- Shareholders' equity: Common stock of $1.00 par value ............. Authorized 15,000,000 shares; issued 13,351,760 shares in 1998 and 13,196,469 shares in 1997 ............. 13,352 13,196 Surplus ..................................... 20,148 19,012 Retained earnings ........................... 315,586 301,988 Accumulated other comprehensive income ...... 19,677 21,582 ----------- ----------- 368,763 355,778 Less cost of shares in treasury, 2,086,135 shares in 1998 and 2,079,126 shares in 1997 .................. (15,071) (14,534) ----------- ----------- Total shareholders' equity ........ 353,692 341,244 ----------- ----------- Total liabilities and shareholders' equity ........... $ 4,500,075 $ 4,517,846 =========== ----------- See accompanying notes to interim condensed consolidated financial statements. 3
INTERNATIONAL BANCSHARES CORPORATION AND SUBSIDIARIES Consolidated Statements of Income (Unaudited) (Dollars in Thousands, except per share data) Three Months Ended MARCH 31, ------------------ 1998 1997 ---- ---- Interest income: Loans, including fees ............................. $34,976 $30,046 Time deposits with banks .......................... 28 3 Federal funds sold ................................ 498 420 Investment securities: Taxable ......................................... 42,788 31,413 Tax-exempt ...................................... 19 25 Other interest income ............................. 120 76 ------- ------- Total interest income ...................... 78,429 61,983 ------- ------- Interest expense: Savings deposits .................................. 6,567 5,132 Time deposits ..................................... 25,134 20,618 Federal funds purchased and securities sold under repurchase agreements ................. 6,192 1,706 Other borrowings .................................. 4,866 3,336 ------- ------- Total interest expense .................. 42,759 30,792 ------- ------- Net interest income ..................... 35,670 31,191 Provision for possible loan losses ................... 2,126 1,998 ------- ------- Net interest income after provision for possible loan losses .......................... 33,544 29,193 ------- ------- Non-interest income: Service charges on deposit accounts ............... 4,874 4,188 Other service charges, commissions and fees ........................................ 2,397 2,023 Investment securities transactions ................ 403 161 Net profit of operations for other real estate owned ............................... 110 4 Other income ...................................... 2,784 2,253 ------- ------- Total non-interest income ............... 10,568 8,629 ------- ------- 4
INTERNATIONAL BANCSHARES CORPORATION AND SUBSIDIARIES Consolidated Statements of Income - continued (Dollars in Thousands, except per share data) Three Months Ended MARCH 31, -------------------------- 1998 1997 ----------- ----------- Non-interest expense: Employee compensation and benefits ............ 9,709 7,826 Occupancy ..................................... 1,617 1,136 Depreciation of premises and equipment ........ 2,401 1,885 Professional fees ............................. 880 841 Stationary and supplies ....................... 909 592 Amortization of intangible assets ............. 993 657 Other ......................................... 7,508 5,876 ----------- ----------- Total non-interest expense .......... 24,017 18,813 ----------- ----------- Income before income taxes .......... 20,095 19,009 Income taxes ..................................... 6,497 6,341 ----------- ----------- Net Income .......................... $ 13,598 $ 12,668 =========== =========== Basic earnings per common share: Net Income .................................... $ 1.21 $ 1.16 Weighted average number of shares outstanding ................................. 11,231,041 10,952,694 Diluted earnings per common share: Net Income .................................... $ 1.18 $ 1.13 Weighted average number of shares outstanding ................................. 11,568,765 11,202,256 See accompanying notes to interim condensed consolidated financial statements. 5
INTERNATIONAL BANCSHARES CORPORATION AND SUBSIDIARIES Consolidated Statement of Comprehensive Income (Unaudited) (Dollars in Thousands) Three Months Ended MARCH 31, -------------------- 1998 1997 ---- ---- Net Income $ 13,598 $ 12,668 ------ ------ Other comprehensive income, net of tax: Unrealized holding gains on securities arising during period, net of reclassification adjustment for gains included in net income (1,905) (7,875) ----- ----- Comprehensive income $ 11,693 $ 4,793 ====== ===== See accompanying notes to interim condensed consolidated financial statements. 6
INTERNATIONAL BANCSHARES CORPORATION AND SUBSIDIARIES Consolidated Statements of Cash Flows (Unaudited) (Dollars in Thousands) Three Months Ended MARCH 31, ------------------ 1998 1997 ---- ---- Operating activities: Net Income ........................................... $ 13,598 $ 12,668 Adjustments to reconcile net income to net cash provided by operating activities: Provision for possible loan losses ............... 2,126 1,998 Recoveries on charged-off loans .................. 439 296 Net profit of operations for other real estate owned ................................... (110) (4) Depreciation of bank premises and equipment ...... 2,401 1,885 Accretion of investment securities discounts ..... (960) (252) Amortization of investment securities premiums ... 3,436 2,117 Realized gain on investment securities transactions, net .............................. (403) (161) Gain on sale of bank premises and equipment ...... (35) -- Decrease (increase) in accrued interest receivable ..................................... 1,083 (902) Increase in other liabilities .................... 8,199 7,223 --------- --------- Net cash provided by operating activities ... 29,774 24,868 --------- --------- Investing activities: Cash acquired in purchase transaction ................ -- 80,501 Proceeds from maturities of securities ............... 425 660 Proceeds from sales of available for sale securities ................................ 169,859 80,441 Purchases of available for sale securities ........... (447,960) (256,843) Principal collected on mortgage-backed securities .... 192,668 68,403 Proceeds from matured time deposits with banks ....... 993 -- Purchases of time deposits with banks ................ (185) -- Net decrease in loans ................................ 4,421 14,708 Net decrease in other assets ......................... 27,036 10,984 Purchase of bank premises and equipment .............. (4,877) (7,370) Proceeds from sale of bank premises and equipment .... 82 -- --------- --------- Net cash used in investing activities ....... (57,538) (8,516) --------- --------- 7
INTERNATIONAL BANCSHARES CORPORATION AND SUBSIDIARIES Consolidated Statements of Cash Flows, continued (Dollars in Thousands) Three Months Ended MARCH 31, ----------------- 1998 1997 ---- ---- Financing activities: Net (decrease) increase in non-interest bearing demand deposits .................................. (3,001) 11,342 Net increase (decrease) in savings and interest bearing demand deposits .......................... 39,811 (3,767) Net increase (decrease) in time deposits ........... 77,382 (1,001) Net decrease in federal funds purchased and securities sold under repurchase agreements ...... (128,610) (12,294) Proceeds from issuance of other borrowed funds ..... 406,000 251,333 Principal payments on other borrowed funds ......... (430,000) (287,000) Purchase of treasury stock ......................... (537) (205) Proceeds from stock transactions ................... 1,292 403 --------- --------- Net cash used in financing activities ..... (37,663) (41,189) --------- --------- Decrease in cash and cash equivalents ..... (65,427) (24,837) Cash and cash equivalents at beginning of year ............................. 237,763 171,992 --------- --------- Cash and cash equivalents at end of period ................................. $ 172,336 $ 147,155 ========= ========= Supplemental cash flow information: Interest paid .................................... $ 44,654 $ 32,573 Income taxes paid ................................ -- 250 Supplemental schedule of noncash investing and financing activities relating to the purchase transaction: Loans acquired ................................. $ -- $ 381 Other assets acquired .......................... -- 4,298 Deposits and other liabilities assumed ......... -- 85,180 See accompanying notes to interim condensed consolidated financial statements. 8
INTERNATIONAL BANCSHARES CORPORATION AND SUBSIDIARIES Notes to Consolidated Financial Statements (Unaudited) Note 1 - Basis of Presentation The accounting and reporting policies of International Bancshares Corporation ("Corporation") and Subsidiaries (the Corporation and Subsidiaries collectively referred to herein as the "Company") conform to generally accepted accounting principles and to general practice within the banking industry. The consolidated financial statements include the accounts of the Company and its wholly-owned subsidiaries, International Bank of Commerce, Laredo ("IBC"), Commerce Bank, International Bank of Commerce, Zapata, International Bank of Commerce, Brownsville and the Corporation's wholly-owned non-bank subsidiaries, IBC Subsidiary Corporation, IBC Life Insurance Company, IBC Trading Company and IBC Capital Corporation. All significant intercompany balances and transactions have been eliminated in consolidation. The consolidated financial statements are unaudited, but include all adjustments which, in the opinion of management, are necessary for a fair presentation of the results of the periods presented. All such adjustments were of a normal and recurring nature. It is suggested that these financial statements be read in conjunction with the financial statements and the notes thereto in the Company's latest Annual Report on Form 10K. In June 1997, the Financial Accounting Standards Board issued SFAS No. 130, "Reporting Comprehensive Income." SFAS No. 130 establishes standards for reporting and display of comprehensive income and its components (revenues, expenses, gains, and losses) in a full set of general-purpose financial statements. SFAS No. 130 requires that an enterprise (a) classify items of other comprehensive income by their nature in a financial statement and (b) display the accumulated balance of other comprehensive income separately from retained earnings and additional paid-in capital in the equity section of a statement of financial position. SFAS No. 130 which is effective for fiscal years beginning after December 15, 1997 has been adopted in the financial statements for the quarter ended March 31, 1998. In June 1997, the Financial Accounting Standards Board issued SFAS No. 131, "Disclosures about Segments of an Enterprise and Related Information." SFAS No. No.131 establishes standards for the way that public business enterprises report information about operation segments in annual financial statements and requires that those enterprises report selected information about operation segments in interim financial reports issued to shareholders. SFAS No. 131 also establishes standards for related disclosures about products and services, geographic areas, and major customers. SFAS No. 131 is effective for financial statements for periods beginning after December 15, 1997 and need not be applied to interim financial statements in the initial year of its application. Thus, SFAS No. 131 will be effective for the Company's 1998 annual financial statements. Note 2 - Investment Securities The Company classifies debt and equity securities into one of these categories: held-to maturity, available-for-sale, or trading. Such classifications are reassessed for appropriate classification at each reporting date. Securities classified as "held-to-maturity" are carried at amortized cost for financial statement reporting, while securities classified as "available-for-sale" and "trading" are carried at their fair value. Unrealized holding gains and losses are included in net income for those securities classified as "trading", while unrealized holding gains and losses related 9
to those securities classified as "available-for-sale" are excluded from net income and reported at a net amount as a separate component of shareholders' equity until realized. A summary of the investment securities held for investment and securities available for sale as reflected on the books of the Company is as follows: March 31, March 31, 1998 1997 -------- ------ (Dollars in Thousands) U. S. Treasury and federal agencies Held to maturity $ - $ - Available for sale ...................... 2,565,585 1,828,736 States and political subdivisions Held to maturity ........................ 569 698 Available for sale ...................... 552 541 Other Held to maturity ........................ 2,015 1,990 Available for sale ...................... 84,146 19,230 ---------- ---------- Total investment securities ............. $2,652,867 $1,851,195 ========== ========== Note 3 - Allowance for Possible Loan Losses A summary of the transactions in the allowance for possible loan losses is as follows: March 31, March 31, 1998 1997 -------- -------- (Dollars in Thousands) Balance at January 1 ............................. $ 24,516 $ 21,036 Losses charged to allowance ............... (1,943) (895) Recoveries credited to allowance .......... 439 296 -------- -------- Net losses charged to allowance ........... (1,504) (599) Provisions charged to operations .......... 2,126 1,998 -------- -------- Balance at March 31 .............................. $ 25,138 $ 22,435 ======== ======== On January 1, 1995, the Company adopted SFAS 114 as amended by SFAS 118. The Company classifies as impaired those loans where it is probable that all amounts due according to contractual terms of the loan agreement will not be collected. The Company has identified these loans through its normal loan review procedures. Impaired loans included 1) all non-accrual loans, 2) loans which are 90 days or over past due unless they are well secured (the collateral value is sufficient to cover principal and accrued interest) and are in the process of collection, and 3) other loans which management believes are impaired. Substantially all of the Company's impaired loans are measured at the fair value of the collateral. In limited cases the Company may use other methods to determine the level of impairment of a loan if such loan is not collateral dependent. Amounts received on non-accruals are applied, for financial accounting purposes, first to principal and then to interest after all principal has been collected. Management of the Company recognizes the risks associated with impaired loans. However, management's decision to place loans in this category does not necessarily 10
mean that the Company expects losses to occur. The Company's impaired loan balances at the end of the three month period of both 1998 and 1997 was not material to the Company's consolidated financial position. The Company had previously measured the allowance for loan losses using methods similar to the prescribed method in SFAS 114. As a result, no additional provision was required by the adoption of SFAS 114. The subsidiary banks charge off that portion of any loan which management considers to represent a loss as well as that portion of any other loan which is classified as a "loss" by bank examiners. Commercial and industrial or real estate loans are generally considered by management to represent a loss, in whole or part, when an exposure beyond any collateral coverage is apparent and when no further collection of the loss portion is anticipated based on the borrower's financial condition and general economic conditions in the borrower's industry. Generally, unsecured consumer loans are charged-off when 90 days past due. While management of the Company considers that it is generally able to identify borrowers with financial problems reasonably early and to monitor credit extended to such borrowers carefully, there is no precise method of predicting loan losses. The determination that a loan is likely to be uncollectible and that it should be wholly or partially charged-off as a loss, is an exercise of judgment. Similarly, the determination of the adequacy of the allowance for possible loan losses, can be made only on a subjective basis. It is the judgment of the Company's management that the allowance for possible loan losses at March 31, 1998, was adequate to absorb possible losses from loans in the portfolio at that date. Note 4 - Stock and Cash Dividends All per share data presented has been restated to reflect the stock split effected through a stock dividend which became effective May 15, 1997 which resulted in the issuance of 2,601,071 shares of Common Stock. A special cash dividend of a $.50 per share was paid to holders of record of Common Stock on April 15, 1997. A special cash dividend of $.50 per share and a 25% stock split effected through a stock dividend was declared on April 2, 1998 for all holders of Common Stock of record on April 2, 1998 and May 22, 1998, respectively, and said dividends to be made payable on April 20, 1998 and June 12, 1998, respectively. However, the stock dividend is subject to the approval by the shareholders at the Annual Meeting to be held on May 21, 1998 of a proposal to increase the authorized shares of common stock of the Company. The Company does not have a formal stock repurchase program; however, the Company occasionally repurchases shares of Common Stock, including repurchases related to the exercise of stock options through the surrender of other shares of Common Stock of the Company owned by the option holders. Stock repurchases are presented quarterly at the Company's Board of Director meetings and the Board of Directors has stated that they will not permit purchases of more than a total of $16,000,000 of stock. In the past, the board has increased previous caps once they were met, but there are no assurances that an increase of the $16,000,000 cap will occur in the future. As of March 31, 1998, the Company had repurchased shares in the cumulative total amount of $15,071,000. On April 3, 1996, the Board of Directors adopted the 1996 International Bancshares Corporation Stock Option Plan. The Plan replaced the 1987 International Bancshares Corporation Key Contributor Stock Option Plan. Subject to certain adjustments, the maximum number of shares of common stock which may be made subject to options granted under the new Plan is 468,750 with 127,217 shares remaining available for the issuance of options under the new Plan. The 279,035 shares of common stock remaining available under the 1987 Plan will be treated as authorized for issuance upon exercise of options granted under the 1987 Plan only. As of March 31, 1998, options to acquire 279,035 and 341,533 shares of common stock remain outstanding under the 1987 Plan and the new Plan, respectively. 11
Note 5 - Legal Proceedings The Company and its bank subsidiaries are involved in certain legal proceedings that are in various stages of litigation. Some of these actions allege "lender liability" claims on a variety of theories and claim substantial actual and punitive damages. The Company and its subsidiaries have determined, based on discussions with their counsel, that any material loss in such actions, individually or in the aggregate, is remote or the damages sought, even if fully recovered, would not be considered material to the financial condition or results of operations of the Company and its subsidiaries. However, many of these matters are in various stages of proceedings and further developments could cause management to revise its assessment of these matters. Item 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Net income for the first quarter of 1998 was $13,598,000 or $1.21 per share basic ($1.18 per share - diluted) compared to $12,668,000 or $1.16 per share - basic ($1.13 per share - diluted) in the corresponding 1997 period. Total assets at March 31, 1998, were $4,500,075,000 which represents a 32% increase over total assets of $3,407,238,000 at March 31, 1997 and a .39% decrease from total assets of $4,517,846,000 as of December 31, 1997. Deposits at March 31, 1998 were $3,289,752,000 which represents an increase of 19% over the $2,753,561,000 amount reported at March 31, 1997, and an increase of 4% over the $3,175,560,000 reported at December 31, 1997. Total loans at March 31, 1998 increased 18% to $1,445,309,000 from $1,224,165,000 reported at March 31, 1997, and decreased .41% from the $1,451,204,000 reported at December 31, 1997. The slight decrease in total loans in the first quarter of 1998 is primarily attributable to heightened competition for loans in the Company's market area resulting in loan pricing by certain competitors which management believes is not commensurate with the risk associated with making such loans. The result of which has been a minor reduction of the Company's market penetration for loans. The slight decrease in total assets during the first quarter of 1998 can be attributed in part to the contraction of the Company's earning asset base caused by a decline in the Company's wholesale liabilities, repurchase agreements and short term fixed borrowings. The aggregate amount of repurchase agreements, short term fixed borrowings and certificates of indebtedness with the Federal Home Bank of Dallas ("FHLB"), Federal National Mortgage Association ("FNMA") and Federal Home Loan Mortgage Corporation ("FHLMC") decreased to $661,000,000 at March 31, 1998, from the $855,000,000 at December 31, 1997. As part of its strategy to manage interest rate risk, the Company strives to manage both assets and liabilities so that interest sensitivities match. In this way both earning assets and funding sources of the Company respond to changes in a similar time frame. Net interest income for the first quarter of 1998 increased $4,479,000 (14%) over the same period in 1997. Investment securities increased 43% to $2,652,867,000 at March 31, 1998, from $1,851,195,000 at March 31, 1997. Unrealized gains and losses created by changes in the market values of available for sale securities are recognized as an adjustment to stockholders' equity, net of tax. Time deposits with other banks at March 31, 1998 increased 293% to $779,000 from $198,000 at March 31, 1997. Total federal funds sold decreased 45% to $11,100,000 for the first quarter of 1998 as compared to $20,000,000 for the first quarter of 1997. Interest and fees on loans for the three month period in 1998 increased $4,930,000 (16%) compared to the same period in 1997. Interest income on taxable and tax exempt investment securities for the first quarter in 1998 increased $11,369,000 12
(36%) over the same quarter in 1997. Interest income on time deposits with banks for the first quarter in 1998 increased $25,000 (833%) from the same quarter in 1997. Interest income on federal funds sold for the first quarter in 1998 increased $78,000 (19%) over the same quarter in 1997. Overall, total interest income from loans, time deposits, federal funds sold, investment securities and other interest income for the first quarter in 1998 increased $16,446,000 (27%) from the same quarter in 1997. The increase in total interest income was primarily due to income derived from the investment securities portfolio. Total interest expense for savings deposits, time deposits and other borrowings increased $11,967,000 (39%) for the first quarter of 1998 from the same quarter in 1997. The increase in total interest expense was primarily due to higher interest rates and larger volume partially attributable to acquisitions. As a result, net interest income for the first quarter of 1998 increased $4,479,000 or 14% over the same period in 1997. This increase is attributed to the Company's efforts to maintain an adequate interest rate spread between the cost of funds and the investment of those funds. Non-interest income increased $1,939,000 (22%) to $10,568,000 in the first quarter of 1998 as compared to $8,629,000 for the quarter ended March 31, 1997. The increases in non-interest income were primarily due to the increase in service charges. The increase in service charges is attributable to the amount of account transaction fees received as a result of deposit growth and increased collection efforts. Non-interest expense increased $5,204,000 (28%) to $24,017,000 for the first quarter of 1998 as compared to $18,813,000 for the quarter ended March 31, 1997. The increase in non-interest expense was largely due to the increased operations at certain of the bank subsidiaries as a result of acquisitions. The allowance for possible loan losses increased 12% to $25,138,000 at the end of the first quarter of 1998 from $22,435,000 for the corresponding date in 1997. The provision for possible loan losses charged to expense increased 6% to $2,126,000 for the quarter ended March 31, 1998 from $1,998,000 from the same quarter in 1997. Increases in the allowance for possible loan losses were largely due to Management's belief that conservative allowance allocations should be maintained in a period when the business cycle is deemed to be mature. The allowance for possible loan losses was 1.75% of March 31, 1998 loans, net of unearned income, compared to 1.84% at March 31, 1997 and 1.70% at December 31, 1997. At March 31, 1998, the Company had $4,500,075,000 of consolidated assets of which approximately $141,337,000 or 3% were related to loans outstanding to borrowers domiciled in Mexico. Of the $141,337,000, 80% is directly or indirectly secured by U.S. assets, principally certificates of deposits and real estate; 17% is secured by Mexican real estate; 1% is unsecured; 1% consists of direct unsecured Mexican sovereign debt (principally former FICORCA debt) and 1% represents accrued interest receivable on the portfolio. LIQUIDITY AND CAPITAL RESOURCES The maintenance of adequate liquidity provides the Company's bank subsidiaries with the ability to meet potential depositor withdrawals, provide for customer credit needs, maintain adequate statutory reserve levels and take full advantage of high-yield investment opportunities as they arise. Liquidity is afforded by access to financial markets and by holding appropriate amounts of liquid assets. The bank subsidiaries of the Company derive their liquidity largely from deposits of individuals and business entities. In recent years, deposit growth has largely been attributable to 13
acquisitions. Historically, the Mexico based deposits of the Company's bank subsidiaries have been a stable source of funding. Deposits from persons and entities domiciled in Mexico comprise a significant although a declining portion of the deposit base of the Company's bank subsidiaries. Other important funding sources for the Company's bank subsidiaries during 1998 and 1997 have been wholesale liabilities with, FHLB, FNMA, FHLMC and large certificates of deposit, requiring management to closely monitor its asset/liability mix in terms of both rate sensitivity and maturity distribution. Primary liquidity of the Company and its subsidiaries has been maintained by means of increased investment in shorter-term securities, certificates of deposit and loans. As in the past, the Company will continue to monitor the volatility and cost of funds in an attempt to match maturities of rate-sensitive assets and liabilities, and respond accordingly to anticipated fluctuations in interest rates over reasonable periods of time. During the first quarter of 1998, there were no material changes in market risk exposures that affected the quantitative and qualitative disclosures regarding market risk presented in the Company's Form 10-K for the year ended December 31, 1997. Principal sources of liquidity and funding for the Company are dividends from subsidiaries and borrowed funds, with such funds being used to finance the Company's cash flow requirements. The Company has a number of available alternatives to finance the growth of its existing banks as well as future growth and expansion. Among the activities and commitments the Company funded during the first quarter in 1998 and expects to continue to fund during 1998 is a continuous effort to modernize and improve our existing facilities and expand our bank branch network. The Company maintains an adequate level of capital as a margin of safety for its depositors and shareholders. At March 31, 1998, shareholders' equity was $353,692,000 compared to $288,758,000 at March 31, 1997, an increase of $64,934,000 or 22%. This increase in capital resulted primarily from the retention of earnings. The Company had a leverage ratio of 6.60% and 6.41%, risk-weighted Tier 1 capital ratio of 14.39% and 13.95% and risk-weighted total capital ratio of 15.64% and 15.20% at March 31, 1998 and December 31, 1997, respectively. The core deposit intangibles and goodwill of $46,899,000 at March 31, 1998, booked in connection with financial institution acquisitions of the Company, are deducted from the sum of core capital elements when determining the capital ratios of the Company. As in the past, the Company will continue to monitor the volatility and cost of funds in an attempt to match maturities of rate-sensitive assets and liabilities, and respond accordingly to anticipated fluctuations in interest rates by adjusting the balance between sources and uses of funds as deemed appropriate. The net-interest rate sensitivity as of March 31, 1998 is illustrated in the table on page 15. This information reflects the balances of assets and liabilities for which rates are subject to change. A mix of assets and liabilities that are roughly equal in volume and repricing characteristics represents a matched interest rate sensitivity position. Any excess of assets or liabilities results in an interest rate sensitivity gap. The Company undertakes the interest rate sensitivity analysis to monitor the potential risk on future earnings resulting from the impact of possible future changes in interest rates on currently existing net asset or net liability positions. However, this type of analysis is as of a point-in-time position, when in fact that position can quickly change as market conditions, customer needs, and management strategies change. Thus, interest rate changes do not affect all categories of asset and liabilities equally or at the same time. As indicated in the table, the Company is liability sensitive during the early time periods and asset sensitive in the longer periods. The Company's Asset and Liability Committee semi-annually reviews the consolidated position along with simulation and duration models, and makes adjustments as needed to control 14
the Company's interest rate risk position. The Company uses modeling of future events as a primary tool for monitoring interest rate risk. INTEREST RATE SENSITIVITY (Dollars in Thousands) <TABLE> <CAPTION> RATE/MATURITY RATE/MATURITY RATE/MATURITY RATE/MATURITY March 31, 1998 3 MONTHS OVER 3 MONTHS OVER 1 YEAR TOTAL (Dollars in Thousands) OR LESS TO 1 YEAR TO 5 YEARS OVER 5 YEARS =========================================================================================================== SECTION A ----------------------------------------------------------------------------------------------------------- <S> <C> <C> <C> <C> <C> RATE SENSITIVE ASSETS FED FUNDS SOLD 11,100 - - - 11,100 DUE FROM BANK INT EARNING 339 341 99 - 779 INVESTMENT SECURITIES 149,070 297,040 1,707,684 499,073 2,652,867 LOANS, NET OF NON-ACCRUALS 1,024,614 126,640 186,339 100,907 1,438,500 ---------------------------------------------------------------------------------------------------------- TOTAL EARNING ASSETS 1,185,123 424,021 1,894,122 599,980 4,103,246 ----------------------------------------------------------------------------------------------------------- CUMULATIVE EARNING ASSETS 1,185,123 1,609,144 3,503,266 4,103,246 =========================================================================================================== SECTION B ----------------------------------------------------------------------------------------------------------- RATE SENSITIVE LIABILITIES TIME DEPOSITS 898,711 997,843 85,831 261 1,982,646 OTHER INT BEARING DEPOSITS 859,570 - - - 859,570 FED FUNDS PURCHASED & REPOS 332,024 17,775 - - 349,799 OTHER BORROWINGS 466,000 - - - 466,000 ----------------------------------------------------------------------------------------------------------- TOTAL INTEREST BEARING LIABILITIES 2,556,305 1,015,618 85,831 261 3,658,015 ----------------------------------------------------------------------------------------------------------- CUMULATIVE SENSITIVE LIABILITIES 2,556,305 3,571,923 3,657,754 3,658,015 =========================================================================================================== SECTION C ----------------------------------------------------------------------------------------------------------- REPRICING GAP (1,371,182) (591,597) 1,808,291 599,719 445,231 CUMULATIVE REPRICING GAP (1,371,182) (1,962,779) (154,488) 445,231 RATIO OF INTEREST-SENSITIVE .46 .42 22.07 - 1.12 ASSETS TO LIABILITIES RATIO OF CUMULATIVE, INTEREST- .46 .45 .96 1.12 SENSITIVE ASSETS TO LIABILITIES =========================================================================================================== </TABLE> YEAR 2000 Many existing computer programs use only two digits to identify a year. These programs were designed and developed without considering the impact of the upcoming change in the century. If uncorrected, many computer applications could fail or create erroneous results by or at the Year 2000. The Year 2000 issue affects virtually all companies and organizations. The Company has developed and implemented a plan to deal with the Year 2000 problem. The plan provides for addressing critical and noncritical issues, with the assignment of responsibility and target dates for completion. Testing of core applications, such as mainframe software and hardware and some platform software, is largely complete and reflects that they will be Year 2000 compliant. The Company is expensing applicable costs incurred as a result of addressing the Year 2000 issue. The Company does not expect that the cost of addressing the Year 2000 issue will be a material event or uncertainty that would cause its reported financial information not to be indicative of future operating results or future financial condition, or that 15
the costs or consequences of incomplete or untimely resolution of any Year 2000 issue represent a known material event or uncertainty that is reasonably likely to affect its future financial results, or cause its reported financial information not to be indicative of future operating results or future financial condition. Additionally, the federal bank regulators have enforcement powers with respect to Year 2000 compliance. Failure to institute an acceptable Year 2000 readiness plan could result in the disapproval of expansion applications filed with bank regulatory agencies or the imposition of cease and desist orders or civil money penalties. FORWARD LOOKING INFORMATION Certain matters discussed in this report, excluding historical information, include forward-looking statements. Although the Company believes such forward-looking statements are based on reasonable assumptions, no assurance can be given that every objective will be reached. The words "estimate," "expect," "intend" and project," as well as other words or expressions of similar meaning are intended to identify forward-looking statements. Readers are cautioned not to place undue reliance on forward-looking statements, which speak only as of the date of this quarterly report. Such statements are based on current expectations, are inherently uncertain, are subject to risks and should be viewed with caution. Actual results and experience may differ materially from the forward-looking statements as a result of many factors. Factors that could cause actual results to differ materially from any results that are projected, forecasted, estimated or budgeted by the Company in forward-looking statements include, among others, the following possibilities: (I) changes in local, state, national and international economic conditions, (II) changes in the capital markets utilized by the Company and its subsidiaries, including changes in the interest rate environment that may reduce margins, (III) changes in state and/or federal laws and regulations to which the Company and its subsidiaries, as well as their customers, competitors and potential competitors, are subject, including, without limitation, banking, tax, securities, insurance and employment laws and regulations, and (IV) increased competition from both within and without the banking industry. It is not possible to foresee or identify all such factors. The Company makes no commitment to update any forward-looking statement, or to disclose any facts, events or circumstances after the date hereof that may affect the accuracy of any forward-looking statement. PART II - OTHER INFORMATION Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS The Annual Meeting of Shareholders of the Company will be held May 21, 1998 for the following purposes: 1) To elect eleven (11) directors of the Company until the next Annual Meeting of Shareholders and until their successors are elected and qualified; 2) To approve the appointment of independent auditors for the 1998 fiscal year; 3) To consider and vote upon a proposal to amend the Certificate of Incorporation of the Company to increase the number of authorized shares of Common Stock of the Company; and 4) To transact such other business as may lawfully come before the meeting or any adjournment thereof. Proxies have been solicited pursuant to Regulation 14A under the Securities Exchange Act of 1934. Item 6. EXHIBITS AND REPORTS ON FORM 8-K (a) EXHIBITS Exhibit 27. International Bancshares Corporation Financial Data Schedule for the Period ended March 31, 1998. 16
(b) Registrant filed a current report on Form 8-K dated April 23, 1998, covering Item 5 - Other Events and Item 7 - Financial Statements and Exhibits in connection with the announcement of a cash dividend and a stock dividend by the Company. 17
SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. INTERNATIONAL BANCSHARES CORPORATION Date: MAY 13, 1998 /s/ DENNIS E. NIXON ------------- -------------------- Dennis E. Nixon President Date: MAY 13, 1998 /s/ ARNOLDO CISNEROS ------------- -------------------- Arnoldo Cisneros Secretary-Treasurer (Chief Accounting Officer) 18