SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended Commission file number
December 31, 1998 0-9439
INTERNATIONAL BANCSHARES CORPORATION
(Exact Name of Registrant as Specified in its Charter)
TEXAS 74-2157138
(State of Incorporation) (I.R.S. Employer Identification No.)
1200 San Bernardo Avenue
Laredo, Texas 78042-1359 Area Code (956) 722-7611
(Address of principal executive (Registrant's telephone number)
office and Zip Code)
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Securities registered pursuant to Section 12(b) of the Act:
Name of Each Exchange On
Title of Each Class Which Registered
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None None
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Securities Registered Pursuant to Section 12(g) of the Act:
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 [ ] No [X].
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of Registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [X]
The aggregate market value of the voting stock held by non-affiliates of the Registrant as of March 19, 1999 was $399,370,664 based on the closing sales price of the stock on such date.
As of March 19, 1999, there were 14,118,158 shares of the Registrant's Common Stock outstanding.
Portions of the following documents are incorporated by reference into the designated parts of this Form 10-K: (a) Annual Report to security holders for the fiscal year ended December 31, 1998 (in Parts I and II) and (b) Proxy Statement dated April 15, 1999 (in Part III).
CONTENTS
PART I
PAGE
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Item 1. Business.......................................................... 3
Item 2. Properties........................................................ 26
Item 3. Legal Proceedings................................................. 27
Item 4. Submission of Matters to a Vote of Security Holders............... 27
Item 4A. Executive Officers of the Registrant.............................. 27
PART II
Item 5. Market for the Registrant's Common Stock
and Related Security Holder Matters............................. 28
Item 6. Selected Financial Data........................................... 28
Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations............................. 28
Item 7A. Quantitative and Qualitative Disclosure about Market Risk......... 28
Item 8. Financial Statements and Supplementary Data....................... 28
Item 9. Changes In and Disagreements with Accountants on
Accounting and Financial Disclosure............................. 28
PART III
Item 10. Directors and Executive Officers of the Registrant................ 28
Item 11. Executive Compensation............................................ 28
Item 12. Security Ownership of Certain Beneficial Owners and Management.... 29
Item 13. Certain Relationships and Related Transactions.................... 29
PART IV
Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K... 29
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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 annual 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.
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 1. BUSINESS
GENERAL
International Bancshares Corporation (the "Company") is a bank holding company with four bank subsidiaries providing commercial and retail banking services through 93 main banking and branch facilities located in 28 communities in South and Southeast Texas. The Company was incorporated under the General Corporation Law of the State of Delaware in 1979 and has its principal corporate offices in Laredo, Texas. Effective June 7, 1995, the Company's state of incorporation was changed from Delaware to Texas. The Company was organized for the purpose of operating as a bank holding company within the meaning of the Bank Holding Company Act of 1956, as amended, and as such, is subject to supervision and regulation by the Board of Governors of the Federal Reserve System (the "FRB"). As a registered bank holding company, the Company may own one or more banks and may engage directly, or through subsidiary corporations, in those activities closely related to banking which are specifically permitted under the Bank Holding Company Act and by the FRB. The Company's principal assets at December 31, 1998 consisted of all the outstanding capital stock of four Texas state banking associations (the "Banks" or "bank subsidiaries"). All of the Company's bank subsidiaries are members of the Federal Deposit Insurance Corporation.
The bank subsidiaries are in the business of gathering funds from various sources and investing these funds in order to earn a return. Funds gathering primarily takes the form of accepting demand and time deposits from individuals, partnerships, corporations and public entities. Investments principally are made in loans to various individuals and entities as well as in debt securities of the U.S. Government and various other entities whose payments are guaranteed by the U.S. Government. Historically, the bank subsidiaries have primarily focused on providing commercial banking services to small and medium sized businesses located in its trade area and international banking services. In recent years, the bank subsidiaries have also emphasized consumer and retail banking, including mortgage lending and credit card services, as well as branches situated in retail locations and grocery stores.
The Company's philosophy focuses on customer service as represented by its motto, "We Do More." The Banks maintain a strong commitment to their local communities by, among other things, appointing selected members of the communities in which the Banks' branches are located to local advisory boards (the "local boards"). The local boards direct the operations of the branches, with the supervision of the lead Bank's board of directors, and assist in introducing prospective customers to the Banks as well as developing or modifying products and services to meet customer needs. The Banks function largely on a delegated basis, and the Company believes that such decentralized structure enhances the commitment of the Banks to the communities in which their branches are located. In contrast to many of its principal competitors, the credit decisions of the Banks are made locally and promptly. The Company believes that the knowledge and expertise afforded by the local boards are key components to sound credit decisions.
Expense control is an essential element in the Company's profitability. The Company has centralized virtually all of the Banks' back office support and investment functions in order to achieve consistency and cost efficiencies in the delivery of products and services. The Company's efficiency ratio (other operating expenses
divided by net interest income and other operating income) for the year ended December 31, 1998 stands at 53% and has been under 53% for each of the last five years, which the Company believes is well below national peer group ratios. One of the benefits derived from such operating efficiencies is that the Company is not subjected to undue pressure to generate interest income from high-risk loans. Accordingly, the Company believes it is able to be more selective and conservative with respect to its credit decisions. Despite this lack of economic pressure, the Banks aggressively pursue, with the help of the local boards, quality credits with an emphasis on loans to small and medium sized businesses.
During the last eight years, IBC, as defined below, has been an active acquiror of financial institutions and banking assets in its trade area. The community focus of IBC and the involvement of the local boards has resulted in IBC becoming aware of acquisition possibilities in the ordinary course of its business and in many instances before other potential purchasers. IBC's decision to pursue an acquisition is based on a multitude of factors, including the ability to efficiently assimilate the operations and assets of the acquired entity, the cost efficiencies to be attained and the growth potential of the market.
On July 28, 1980, the Company acquired all of the outstanding shares of its predecessor, International Bank of Commerce ("IBC"), which is today the flagship bank of the Company, representing 85% of the Company's banking assets. IBC was chartered under the banking laws of Texas in 1966 and has its principal place of business at 1200 San Bernardo Avenue, Laredo, Webb County, Texas. It is a wholly-owned subsidiary of the Company. Since the acquisition of the flagship bank in 1980, the Company formed three banks and acquired $1,846,435,000 in assets and assumed $1,762,577,000 of deposits in numerous acquisition transactions, which totals are as of the acquisition date and do not take into account any runoff or other subsequent events. In addition to the acquisitions, IBC has also focused on deposit growth from its traditional banking activities.
Effective February 19, 1999, IBC purchased certain assets and assumed certain liabilities of the Laredo branch of Pacific Southwest Bank, Corpus Christi, Texas. IBC purchased loans of approximately $4,590,000 and assumed deposits of approximately $28,399,000 and received cash and other assets in the amount of approximately $23,809,000. The acquisition was accounted for as a purchase transaction. IBC recorded intangible assets, goodwill and core deposit premium totaling $2,525,000 which are being amortized on a straight line basis over a fifteen year period.
Effective November 5, 1997, University Bank, Houston, Texas 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 $250,978,000. The acquisition was accounted for as a purchase transaction. IBC recorded intangible assets, goodwill and core deposit premium of totaling $17,613,000 which are being amortized on a straight line basis over a fifteen year period.
Effective March 7, 1997, IBC purchased certain assets and assumed certain liabilities of five branches of Bank of America Texas, N. A., Irving, Texas. IBC purchased loans of approximately $381,000 and assumed deposits of approximately $84,834,000 and received cash and other assets in the amount of approximately $84,799,000. The acquisition was accounted for as a purchase transaction. IBC
recorded intangible assets, goodwill and core deposit premium totaling $3,705,000 which are being amortized on a straight line basis over a fifteen year period.
For more information regarding the acquisition transactions of the Company during the last three years, see note 2 of notes to Consolidated Financial Statements of the Company located on page 23 of the 1998 Annual Report which is incorporated herein by reference.
In addition to IBC, the Company has three other bank subsidiaries. The
three additional banks are (i) Commerce Bank, a Texas state banking association
which commenced operations in 1982, located in Laredo, Texas ("Commerce Bank");
(ii) International Bank of Commerce, a Texas state banking association which
commenced operations in 1984, located in Brownsville, Texas ("IBC-Brownsville");
and (iii) International Bank of Commerce, a Texas state banking association
which commenced operations in 1984, located in Zapata, Texas ("IBC-Zapata").
The Company also has four non-banking subsidiaries. They are (i) IBC Life Insurance Company, a Texas chartered subsidiary which reinsures a small percentage of credit life and accident and health risks related to loans made by bank subsidiaries, (ii) IBC Trading Company, an export trading company which is currently inactive, (iii) IBC Subsidiary Corporation, a second-tier bank holding company incorporated in the State of Delaware, and (iv) IBC Capital Corporation, a company incorporated in the State of Delaware for the purpose of holding certain investments of the Company.
SERVICES AND EMPLOYEES
The Company, through its bank subsidiaries, IBC, Commerce Bank, IBC Zapata and IBC Brownsville, is engaged in the business of banking, including the acceptance of checking and savings deposits and the making of commercial, real estate, personal, home improvement, automobile and other installment and term loans. Certain of the bank subsidiaries are very active in facilitating international trade along the United States border with Mexico and elsewhere. The international banking business of the Company includes providing letters of credit, making commercial and industrial loans, and a nominal amount of currency exchange. As part of its international strategy the Company also aims to provide a full array of banking services to "maquiladoras," including, account and payroll services. A "maquiladora" is a type of assembly or manufacturing plant under Mexican law which is typically owned by a United States company and located on Mexico's northern border for the purpose of temporarily importing materials to be assembled in Mexico and re-exported to the United States. Each bank subsidiary also offers other related services, such as credit cards, travelers' checks, safety deposit, collection, notary public, escrow, drive-up and walk-up facilities and other customary banking services. Additionally, each bank subsidiary makes available certain securities products through third party providers. The bank subsidiaries also make banking services available during traditional and nontraditional banking hours through their network of 168 automated teller machines, and through their branches situated in retail locations and grocery stores. To date, as part of the Company's expansion of its retail banking services, 33 grocery store branches have been opened.
The Company owns U.S. service mark registrations for "INTERNATIONAL BANK
OF COMMERCE," "WALL STREET INTERNATIONAL," "INTERNATIONAL BANK OF COMMERCE
CENTRE," and
"IT'S A BRIGHTER CHRISTMAS" as well as the design marks depicting the United States and Mexico and the design mark depicting "WALL STREET INTERNATIONAL." In addition, the Company owns Texas service mark registrations for "CHECK'N SAVE," "WALL STREET INTERNATIONAL," "INTERNATIONAL BANK OF COMMERCE" and the design marks depicting "CHECK'N SAVE" and "WALL STREET INTERNATIONAL," as well as the design marks depicting the United States and Mexico. Also, IBC owns certain pending applications for federal registrations of other proprietary service marks and is regularly investigating the availability of service mark registrations related to certain proprietary products.
No material portion of the business of the Company may be deemed seasonal and the deposit and loan base of the Company's bank subsidiaries are diverse in nature. There has been no material effect upon the Company's capital expenditures, earnings or competitive position as a result of Federal, State or local environmental regulation.
As of December 31, 1998 the Company and its subsidiaries employed approximately 1,235 persons full-time and 192 persons part-time.
COMPETITION
The Company is the largest minority-owned bank holding company in the United States, with more than a majority of its common stock being held by Hispanic shareholders. The Company is the second largest independent Texas bank holding company. The primary market area of the Company is South and Southeast Texas, an area bordered on the east by the Houston area, to the northwest by San Antonio, to the southwest by Laredo and to the southeast by Brownsville. The Company has increased its market share in its primary market area over the last seven years through strategic acquisitions. The Company, through its bank subsidiaries, competes for deposits and loans with other commercial banks, savings and loan associations, credit unions and nonbank entities, which nonbank entities serve as an alternative to traditional financial institutions and are considered to be formidable competitors.
The Company and its bank subsidiaries do a significant amount of business for customers domiciled in Mexico, with an emphasis in Northern Mexico. Deposits from persons and entities domiciled in Mexico comprise a significant portion of the deposit base of the Company's bank subsidiaries. Such deposits comprised approximately 38%, 35% and 39% of the Company's bank subsidiaries' total deposits as of December 31, 1998, 1997 and 1996, respectively.
SUPERVISION AND REGULATION
GENERAL - THE COMPANY. In addition to the generally applicable state and Federal laws governing businesses and employers, the Company and its bank subsidiaries are further extensively regulated by special Federal and state laws governing financial institutions. These laws comprehensively regulate the operations of the Company's bank subsidiaries and include, among other matters, requirements to maintain reserves against deposits; restrictions on the nature and amount of loans that may be made and the interest that may be charged thereon; restrictions on the amounts, terms and conditions of loans to directors, officers, large shareholders and their affiliates; restrictions related to investments in activities other than banking; and minimum capital requirements. With few exceptions, state and Federal banking laws have as their principal objective either the maintenance of the safety and soundness of the Federal
deposit insurance system or the protection of consumers, rather than the specific protection of shareholders of the Company. Further, the earnings of the Company are affected by the fiscal and monetary policies of the Federal Reserve System, which regulates the national money supply in order to mitigate recessionary and inflationary pressures. These monetary policies influence to a significant extent the overall growth of bank loans, investments and deposits and the interest rates charged on loans or paid on time and savings deposits. The nature of future monetary policies and the effect of such policies on the future earnings and business of the Company cannot be predicted.
FRB APPROVALS. The Company is a registered bank holding company within the meaning of the Bank Holding Company Act of 1956, as amended ("BHCA"), and is subject to supervision by the FRB and to a certain extent the Texas Department of Banking (the "DOB"). The Company is required to file with the FRB annual reports and other information regarding the business operations of itself and its subsidiaries. It is also subject to examination by the FRB. Under the BHCA, a bank holding company is, with limited exceptions, prohibited from acquiring direct or indirect ownership or control of any voting stock of any company which is not a bank or bank holding company, and must engage only in the business of banking, managing, controlling banks, and furnishing services to or performing services for its subsidiary banks. One of the exceptions to this prohibition is the ownership of shares of any company provided such shares do not constitute more than 5% of the outstanding voting shares of the company and so long as the FRB does not disapprove such ownership. Another exception to this prohibition is the ownership of shares of a company the activities of which the FRB has specifically determined to be so closely related to banking, managing or controlling banks as to be a proper incident thereto.
The restrictions on the activities of bank holding companies could change significantly if the Glass-Steagall Act of 1935 is reformed. Current congressional debate over reforming the Glass-Steagall Act is centered around whether enhanced bank powers should be conducted within a holding company or through bank subsidiaries. It is impossible to predict at this time whether any of the reform proposals will pass, or what effect the proposals would have on the Company or its subsidiaries.
The BHCA and the Change in Bank Control Act of 1978 require that, depending on the circumstances, either FRB approval must be obtained or notice must be furnished to the FRB and not disapproved prior to any person or company acquiring "control" of a bank holding company, such as the Company, subject to certain exceptions for certain transactions. Control is conclusively presumed to exist if an individual or company acquires 25% or more of any class of voting securities of the bank holding company. Control is rebuttably presumed to exist if a person acquires 10% or more but less than 25% of any class of voting securities where the bank holding company, such as the Company, has registered Securities under Section 12 of the Securities Exchange Act of 1934 (the "Exchange Act").
As a bank holding company, the Company is required to obtain approval prior to merging or consolidating with any other bank holding company, acquiring all or substantially all of the assets of any bank or acquiring ownership or control of shares of a bank or bank holding company if, after the acquisition, the Company would directly or indirectly own or control 5% or more of the voting shares of such bank or bank holding company.
INTERSTATE BANKING. In 1994, Congress enacted the Riegle-Neal Interstate Banking and Branching Efficiency Act of 1994 ("Interstate Banking Act"), which rewrote federal law governing the interstate expansion of banks in the United States. Effective as of September 29, 1995, adequately capitalized, well managed bank holding companies with FRB approval may acquire banks located in any State in the United States, provided that the target bank meets the minimum age (up to a maximum of five years, which is the maximum Texas has adopted) established by the host State. Under the Interstate Banking Act, an anti-concentration limit will bar interstate acquisitions that would give a bank holding company control of more than ten percent (10%) of all deposits nationwide or thirty percent (30%) of any one State's deposits, or such higher or lower percentage established by the host State. The anti-concentration limit in Texas has been set at twenty percent (20%) of all federally insured deposits in Texas. As of December 31, 1998, many of Texas' largest bank holding companies had either merged with or been acquired by out-of-state banking concerns.
In addition to providing for interstate acquisitions of banks by bank holding companies, the Interstate Banking Act provides for interstate branching by permitting mergers between banks domiciled in different States beginning June 1, 1997. The Interstate Banking Act provides that States may opt out of interstate branching by enacting non-discriminatory legislation prohibiting interstate bank mergers before June 1, 1997. In 1995, Texas passed legislation opting out of the interstate branching provisions of The Interstate Banking Act until September 1999. In May 1998, the Texas DOB determined that the Texas opt-out statute was not effective and the Texas DOB began accepting applications for interstate branching transactions. Currently, legislation implementing interstate branching is pending in the Texas legislature. No accurate prediction can be made at this time as to how this legislation will affect the Company and/or its bank subsidiaries.
FRB ENFORCEMENT POWERS. The FRB has certain cease-and-desist and divestiture powers over bank holding companies and non-banking subsidiaries where their actions would constitute a serious threat to the safety, soundness or stability of a subsidiary bank. These powers may be exercised through the issuance of cease-and-desist orders or other actions. In the event a bank subsidiary experiences either a significant loan loss or rapid growth of loans or deposits, the Company may be compelled by the FRB to invest additional capital in the bank subsidiary. Further, the Company would be required to guaranty performance of the capital restoration plan of any undercapitalized bank subsidiary. The FRB is also empowered to assess civil money penalties against companies or individuals who violate the BHCA in amounts up to $1,000,000 per day, to order termination of non-banking activities of non-banking subsidiaries of bank holding companies and to order termination of ownership and control of a non-banking subsidiary. Under certain circumstances the Texas Banking Commissioner may bring enforcement proceedings against a bank holding company in Texas.
COMPANY DIVIDENDS. The FRB's policy discourages the payment of dividends from borrowed funds and discourages payments that would affect capital adequacy. The FRB has issued policy statements which generally state that bank holding companies should serve as a source of financial and managerial strength to their bank subsidiaries, and generally should not pay dividends except out of current earnings, and should not borrow to pay dividends if the bank holding company is experiencing capital or other financial problems.
CROSS-GUARANTEE PROVISIONS. The Financial Institutions Reform Recovery and Enforcement Act of 1989 ("FIRREA") contains a "cross-guarantee" provision which generally makes commonly controlled insured depository institutions liable to the FDIC for any losses incurred in connection with the failure of a commonly controlled depository institution.
AUDIT REPORTS. Insured institutions with total assets of $500 million or more must submit annual audit reports prepared by independent auditors to federal and state regulators. In some instances, the audit report of the institution's holding company can be used to satisfy this requirement. Auditors must receive examination reports and examination related correspondence. In addition, financial statements prepared in accordance with generally accepted accounting principles, management's certifications concerning responsibility for the financial statements, internal controls and compliance with legal requirements designated by the FDIC, and an attestation by the auditor regarding the statements of management relating to the internal controls must be submitted. For institutions with total assets of more than $3 billion, independent auditors may be required to review quarterly financial statements. The Federal Deposit Insurance Corporation Improvement Act of 1991 ("FDICIA") requires that independent audit committees be formed, consisting of outside directors only. The committees of such institutions must include members with experience in banking or financial management, must have access to outside counsel, and must not include representatives of large customers.
GENERAL - BANK SUBSIDIARIES. All of the bank subsidiaries of the Company are state banks subject to regulation by, and supervision of, the Texas DOB and the FDIC. All of the bank subsidiaries of the Company are members of the FDIC, which currently insures the deposits of each member bank to a maximum of $100,000 per depositor. For this protection, each member bank pays a statutory assessment and is subject to the rules and regulations of the FDIC. The premiums increase incrementally based on the rating of the member bank.
DEPOSIT INSURANCE. The deposits of the Bank are insured by the FDIC through the Bank Insurance Fund ("BIF") to the extent provided by law. Under the FDIC's risk-based insurance system, BIF-insured institutions are currently assessed premiums of between zero and twenty seven cents per $100 of eligible deposits, depending upon the institution's capital position and other supervisory factors. During 1996, Congress enacted legislation that, among other things, provides for assessments against BIF-insured institutions that will be used to pay certain Financing Corporation ("FICO") obligations. In addition to any BIF insurance assessments, BIF-insured banks are expected to make payments for the FICO obligations equal to $0.01296 per $100 of eligible deposits each year during 1997 through 1999. Thereafter, BIF and Savings Association Insurance Fund payers will be assessed pro rata for the FICO bond obligations.
CAPITAL ADEQUACY. The Company and its bank subsidiaries are currently required to meet certain minimum regulatory capital guidelines utilizing total capital-to-risk-weighted assets and Tier 1 Capital elements. At December 31, 1998 the Company's ratio of total capital-to-risk-weighted assets was 14.45%. The guidelines make regulatory capital requirements more sensitive to differences in risk profiles among banking organizations, take off-balance sheet exposure into account in assessing capital adequacy, and encourage the holding of liquid, low-risk assets. At least one-half of
the minimum total capital must be comprised of Tier 1 Capital elements. Tier 1 Capital of the Company is comprised of common shareholders' equity. The core deposit intangibles and goodwill of $43,692,000 booked in connection with all the financial institution acquisitions of the Company are deducted from the sum of core capital elements when determining the capital ratios of the Company.
In addition, the FRB has established minimum leverage ratio guidelines for bank holding companies. These guidelines provide for a minimum leverage ratio of Tier 1 capital to adjusted average quarterly assets ("leverage ratio") equal to three percent for bank holding companies that meet certain specified criteria, including having the highest regulatory rating. All other bank holding companies will generally be required to maintain a leverage ratio of at least four to five percent. The Company's leverage ratio at December 31, 1998 was 6.50 percent. The guidelines also provide that bank holding companies experiencing internal growth or making acquisitions will be expected to maintain strong capital positions substantially above the minimum supervisory levels without significant reliance on intangible assets. Furthermore, the guidelines indicate that the FRB will continue to consider a "tangible tier 1 leverage ratio" (deducting all intangibles) in evaluating proposals for expansion or new activity. The FRB has not advised the Company of any specific minimum leverage ratio or tangible tier 1 leverage ratio applicable to it.
Each of the Company's bank subsidiaries is subject to similar capital requirements adopted by the FDIC. Each of the Company's bank subsidiaries had a leverage ratio in excess of five percent as of December 31, 1998. As of that date, the federal banking agencies had not advised any of the bank subsidiaries of any specific minimum leverage ratio applicable to it.
Effective December 19, 1992, the federal bank regulatory agencies adopted regulations which mandate a five-tier scheme of capital requirements and corresponding supervisory actions to implement the prompt corrective action provisions of FDICIA. The regulations include requirements for the capital categories that will serve as benchmarks for mandatory supervisory actions. Under the regulations, the highest of the five categories would be a well capitalized institution with a total risk-based capital ratio of 10%, a Tier 1 risk-based capital ratio of 6% and a Tier 1 leverage ratio of 5%. An institution would be prohibited from declaring any dividends, making any other capital distribution or paying a management fee if the capital ratios drop below the levels for an adequately capitalized institution, which are 8%, 4% and 4%, respectively. The corresponding provisions of FDICIA mandate corrective actions be taken if a bank is undercapitalized. Based on the Company and each of the bank subsidiaries capital ratios as of December 31, 1998, the Company and each of the bank subsidiaries were classified as "well capitalized" under the applicable regulations.
In 1995, in accordance with FDICIA, the FDIC modified its risk-based capital adequacy guidelines to explicitly include a bank's exposure to declines in the economic value of its capital due to changes in interest rates as a factor that it will consider in evaluating a bank's capital adequacy. In 1996 the bank regulatory agencies introduced risk-based examination procedures. Effective January 1, 1997, the federal banking agencies jointly adopted regulations that amend the risk-based capital standards to incorporate measures for market risk. Applicable banking institutions will be required to adjust their risk-based capital ratio to reflect market risk. On December 19, 1996, the FFIEC revised the Uniform Financial Institutions Rating System
commonly referred to as the CAMEL rating system. A sixth component addressing sensitivity to market risk was added. Sensitivity to market risk reflects the degree to which changes in interest rates, foreign exchange rates, commodity prices or equity prices can adversely affect a financial institution's earnings or economic capital.
STATE ENFORCEMENT POWERS. The Banking Commissioner of Texas may determine to close a Texas state bank when she finds that the interests of depositors and creditors of a state bank are jeopardized through its insolvency or imminent insolvency and that it is in the best interest of such depositors and creditors that the bank be closed. The Texas DOB also has broad enforcement powers over the Bank, including the power to impose orders, remove officers and directors, impose fines and appoint supervisors and conservators.
DEPOSITOR PREFERENCE. Because the Company is a legal entity separate and distinct from its bank subsidiaries, its right to participate in the distribution of assets of any subsidiary upon the subsidiary's liquidation or reorganization will be subject to the prior claims of the subsidiary's creditors. In the event of a liquidation or other resolution of a subsidiary bank, the claims of depositors and other general or subordinated creditors of the bank are entitled to a priority of payment over the claims of holders of any obligation of the institution to its shareholders, including any depository institution holding company (such as the Company) or any shareholder or creditor thereof.
TEXAS LAW. Effective September 1, 1995, the new Texas Banking Act ("Act") became effective and the Texas Banking Code of 1943 was repealed. The purpose of the Act was to modernize and streamline the Texas banking laws. One of the many significant provisions of the Act adopts by reference the Texas Business Corporation Act, subject to modification by the Banking Commissioner. Among other matters, these corporate provisions will permit Texas state banks to merge with non-banking business entities, while national banks are only permitted to merge with banking entities. During 1997, the Texas Constitution was amended to permit home equity lending in Texas effective January 1, 1998 and the Company's bank subsidiaries are currently offering home equity loans.
CRA. Under the Community Reinvestment Act ("CRA"), the FDIC is required to assess the record of each bank subsidiary to determine if the bank meets the credit needs of its entire community, including low and moderate-income neighborhoods served by the institution, and to take that record into account in its evaluation of any application made by the bank for, among other things, approval of the acquisition or establishment of a branch or other deposit facility, an office relocation, a merger, or the acquisition of shares of capital stock of another financial institution. The FDIC prepares a written evaluation of an institution's record of meeting the credit needs of its entire community and assigns a rating. FIRREA requires federal banking agencies to make public a rating of a bank's performance under the CRA. Each bank subsidiary received either an "outstanding" or "satisfactory" CRA rating in its most recently completed examination. Further, there are fair lending laws which prohibit discrimination in connection with lending decisions.
CONSUMER LAWS. In addition to the laws and regulations discussed herein, the Bank is also subject to certain consumer laws and regulations that are designed to protect consumers in transactions with banks. While the list set forth herein is not
exhaustive, these laws and regulations include the Truth in Lending Act, the Truth in Savings Act, the Electronic Funds Transfer Act, the Expedited Funds Availability Act, the Equal Credit Opportunity Act, and the Fair Housing Act, among others. These laws and regulations mandate certain disclosure requirements and regulate the manner in which financial institutions must deal with customers when taking deposits or making loans to such customers. The Bank must comply with the applicable provisions of these consumer protection laws and regulations as part of their ongoing customer relations.
AFFILIATE TRANSACTIONS. The Company, IBC and the other bank subsidiaries of the Company are "affiliates" within the meaning of Section 23A of the Federal Reserve Act which sets forth certain restrictions on loans and extensions of credit between a bank subsidiary and affiliates, on investments in an affiliate's stock or other securities, and on acceptance of such stock or other securities as collateral for loans. Such restrictions prevent a bank holding company from borrowing from any of its bank subsidiaries unless the loans are secured by specific obligations. Further, such secured loans and investments by a bank subsidiary are limited in amount, as to a bank holding company or any other affiliate, to 10% of such bank subsidiary's capital and surplus and, as to the bank holding company and its affiliates, to an aggregate of 20% of such bank subsidiary's capital and surplus. Certain restrictions do not apply to 80% or more owned sister banks of bank holding companies. Each bank subsidiary of the Company is wholly-owned by the Company. Section 23B of the Federal Reserve Act requires that the terms of affiliate transactions be comparable to terms of similar non-affiliate transactions.
INSIDER LOANS. The restrictions on loans to directors, executive officers, principal shareholders and their related interests (collectively referred to herein as "insiders") contained in the Federal Reserve Act and Regulation O apply to all insured institutions and their subsidiaries and holding companies. These restrictions include limits on loans to one borrower and conditions that must be met before such a loan can be made. There is also an aggregate limitation on all loans to insiders and their related interests. These loans cannot exceed the institution's total unimpaired capital and surplus, and the FDIC may determine that a lesser amount is appropriate. Insiders are subject to enforcement actions for knowingly accepting loans in violation of applicable restrictions.
LENDING RESTRICTIONS. The operations of the Banks are also subject to lending limit restrictions pertaining to the extension of credit and making of loans to one borrower. The scope and requirements of such laws and regulations have been expanded significantly in recent years. Further, under the BHCA and the regulations of the FRB thereunder, the Company and its subsidiaries are prohibited from engaging in certain tie-in arrangements with respect to any extension of credit or provision of property or services; however, recently the FRB adopted a rule relaxing tying restrictions by permitting a bank holding company to offer a discount on products or services if a customer obtains other products or services from such company.
DIVIDENDS. The ability of the Company to pay dividends is largely dependent on the amount of cash derived from dividends declared by its bank subsidiaries. The payment of dividends by any bank or bank holding company is affected by the requirement to maintain adequate capital as discussed above. At December 31, 1998 there was an aggregate of approximately $38,208,000 available for the payment of dividends to the Company, by IBC, Commerce Bank, IBC Zapata and IBC Brownsville under the applicable
restrictions, assuming that each of such banks continues to be classified as "well capitalized". Further, the Company could expend the entire $38,208,000 and continue to be classified as "well capitalized". Note 17 of notes to Consolidated Financial Statements of the Company located on page 35 of the 1998 Annual Report is incorporated herein by reference.
POWERS. As a result of FDICIA, the authority of the FDIC over state-chartered banks was expanded. FDICIA limits state-chartered banks to only those principal activities permissible for national banks, except for other activities specifically approved by the FDIC. The new Texas Banking Act includes a parity provision which establishes procedures for state banks to notify the Banking Commissioner if the bank intends to conduct any activity permitted for a national bank that is otherwise denied to a state bank. The Banking Commissioner has thirty (30) days to prohibit the activity.
During 1996, the Office of the Comptroller of the Currency (the "OCC") adopted a major overhaul of its rules governing corporate applications, practices, and notices. The new rule incorporates a risk-based approach to corporate applications and activities of national banks. The new rule includes authority for operating subsidiaries to conduct for the first time activities beyond those permitted for national banks directly. Under the new rule, an operating subsidiary engaged in activities not permissible for the parent bank must observe certain separateness requirements. National banks must file applications for prior OCC approval to establish, or acquire, operating subsidiaries engaged in activities that are not permissible for the parent bank and the OCC may grant such approval on a case by case basis. Pursuant to the Texas parity provision, a Texas state bank may be permitted to engage in such activities permitted for national banks if notice is provided to the Banking Commissioner and the Banking Commissioner does not prohibit the activity.
SUBCHAPTER S. As part of the Small Business Job Protection Act of 1996, financial institutions are now eligible to make an S election for federal income tax purposes. To qualify as an S corporation, a financial institution must (i) not use the reserve method of accounting for bad debts, (ii) have only one class of stock, (iii) have no more than seventy-five shareholders, and (iv) have no foreign shareholders. The Company currently does not qualify for the S election.
INSTABILITY OF REGULATORY STRUCTURE. Various legislation, including proposals to overhaul the bank regulatory system, expand the powers of banking institutions and bank holding companies and limit the investments that a depository institution may make with insured funds, is from time to time introduced in Congress. Such legislation may change banking statutes and the operating environment of the Company and the bank subsidiaries in substantial and unpredictable ways. The Company cannot determine the ultimate effect that potential legislation, if enacted, or implementing regulations with respect thereto, would have upon the financial condition or results of operations of the Company or its subsidiaries.
YEAR 2000
This section contains forward-looking statements that have been prepared on the basis of the Company's best judgments and currently available information. These forward-looking statements are inherently subject to significant business, third party,
and regulatory uncertainties and other contingencies, many of which are beyond the control of the Company. In addition, these forward-looking statements are based upon the Company's current internal assessments and remediation plans, incorporating certain representations of third-party servicers, and are subject to change. Accordingly, there can be no assurance that the Company's results of operations will not be adversely affected by difficulties or delays in the Company's or third parties' Year 2000 readiness efforts.
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 consists of a five-phase program ("Action Plan") recommended by the Federal Financial Institutions Examination Council. This Action Plan consists of awareness, assessment, renovation, validation and implementation processes. The Action Plan provides for addressing critical and noncritical issues, with the assignment of responsibility and target dates for completion, and as of December 31, 1998, the Company was principally involved in the validation and implementation phases of the Action Plan. Testing of core applications, such as mainframe software, hardware, and network applications were substantially complete by December 31, 1998.
Currently, the Company estimates that the dollar amount to remediate its Year 2000 issue will be less than one million dollars. The data processing system which the Company purchased in 1990 was substantially Year 2000 compliant. The cost of remediating the remaining Year 2000 issues are based on management's best estimates which were derived utilizing assumptions of future events including the continued availability of certain resources, third party vendor remediation plans and other factors. The related costs totaled approximately $620,000 for the year 1998. The eligible costs are being expensed as incurred.
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 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. However, the Year 2000 issue is pervasive and complex and can potentially affect any computer process. Accordingly, no assurance can be given that Year 2000 compliance can be achieved without additional unanticipated expenditures and uncertainties that might affect future financial results.
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.
Regardless of the Year 2000 compliance of the Company's systems, there is no complete assurance that the Company will not be adversely affected to the extent other entities not affiliated with the Company are unsuccessful in properly addressing this issue. In an effort to minimize this possibility, active communication has been ongoing between the Company and its external service providers and intermediaries. In addition, a risk reduction program was initiated in 1998 that addresses potential Year 2000 exposure in the loan portfolio. Correspondence has been sent by the Company to customers and suppliers during 1998 urging them to adequately address their Year 2000 issues, and such communication is planned to continue throughout 1999. However, there can be no guarantee that customers and suppliers will become Year 2000 compliant on a timely basis or in a manner that is compatible with the Company's systems. Significant business interruptions or failures by key business customers, suppliers, trading partners or governmental agencies resulting from the effects of the Year 2000 issue could have a material adverse effect on the Company.
The Company currently has in place a remediation and contingency plan in the event an application has unresolved Year 2000 issues as well as a disaster recovery plan in the event of an unforeseen interruption in the Company's data processing capabilities. These plans focus on an application-by-application strategy that would be implemented in the event of Year 2000 related problems in particular applications, which strategies include, among others, the replacement of the faulty application as well as strategies to be employed should the Company suffer an area wide interruption of data processing capabilities due to loss of power or communications or a similar failure, which strategies would include, among others, alternate processing facilities.
While the Company will have contingency plans in place to address a temporary disruption in these services, there can be no assurance that any disruption or failure will be only temporary, that the Company's contingency plans will function as anticipated, or that the results of operations, financial condition, or liquidity of the Company will not be adversely affected in the event of a prolonged disruption or failure.
Additionally, there can be no assurance that the banking or other federal regulators will not issue new regulatory requirements that require additional work by the Company and, if issued, that new regulatory requirements will not increase the cost or delay the completion of the Company's Action Plan.
DISTRIBUTION OF ASSETS, LIABILITIES AND SHAREHOLDERS' EQUITY
The main areas in which the Company has directed its lendable assets are
(i) commercial, financial and industrial loans; (ii) real estate loans; and
(iii) loans to individuals for household, family and other consumer
expenditures. The relationship that these three categories of loans bear to the
total assets of the Company and other detailed statistical information about the
business of the Company are presented on the following pages.
DISTRIBUTION OF ASSETS, LIABILITIES AND SHAREHOLDERS' EQUITY
The following table sets forth a comparative summary of average interest earning assets and average interest bearing liabilities and related interest yields for the years ended December 31, 1998, 1997 and 1996 (Dollars in Thousands) (Note 1). Nonaccrual loans have been included in assets for the purpose of this analysis:
YEARS ENDED DECEMBER 31,
--------------------------------------------------------------------------------
1998 1997
--------------------------------------- -------------------------------------
AVERAGE AVERAGE AVERAGE AVERAGE
BALANCE INTEREST RATE/COST BALANCE INTEREST RATE/COST
------- -------- --------- ------- -------- ---------
ASSETS
Interest earning assets:
Loans, net of unearned discounts:
Domestic ...................... $ 1,351,796 $ 133,221 9.86% $ 1,152,566 $ 115,527 10.02%
Foreign ....................... 141,869 11,795 8.31 128,923 11,821 9.17
Investment securities:
Taxable ....................... 2,771,927 179,030 6.46 2,121,927 146,820 6.92
Tax-exempt .................... 4,824 241 5.00 1,348 90 6.68
Time deposits with banks ........ 1,005 89 8.86 404 47 11.63
Federal funds sold .............. 22,738 1,462 6.43 14,906 1,120 7.51
Other ........................... 2,686 336 12.51 2,565 307 11.97
----------- ----------- ----------- ----------
Total interest-earning assets . $ 4,296,845 $ 326,174 7.59 $ 3,422,639 $ 275,732 8.06
Non-interest earning assets:
Cash and due from banks ......... $ 131,539 $ 144,573
Bank premises and equipment, net 134,152 105,800
Other assets .................... 132,620 117,381
Less allowance for possible
loan losses ................... (25,837) (23,075)
----------- -----------
Total ......................... $ 4,669,319 $ 3,767,318
=========== ===========
LIABILITIES AND
SHAREHOLDERS' EQUITY
Interest bearing liabilities:
Savings and interest bearing
demand deposits ............... $ 867,594 $ 26,419 3.05% $ 722,559 $ 22,152 3.07%
Time deposits:
Domestic ...................... 1,009,000 53,230 5.28 905,157 46,456 5.13
Foreign ....................... 964,459 48,593 5.04 821,214 42,957 5.23
Securities sold under
repurchase agreements and
federal funds purchased ....... 257,589 13,396 5.20 301,511 15,754 5.23
Other borrowings ................ 751,628 39,969 5.32 331,308 18,052 5.45
Other ........................... 2,664 302 11.34 -- -- --
----------- ----------- ----------- ----------
Total interest bearing
liabilities ................. $ 3,852,934 $ 181,909 4.72 $ 3,081,749 $ 145,371 4.72
Non-interest bearing liabilities:
Demand deposits ................. 433,863 361,379
Other liabilities ............... 35,532 26,261
Shareholders' equity ............... 346,990 297,929
----------- -----------
Total ......................... $ 4,669,319 $ 3,767,318
=========== ===========
Net interest income ...... $ 144,265 $ 130,361
=========== ==========
Net yield on interest
earning assets ......... 3.36% 3.81%
===== =====
YEARS ENDED DECEMBER 31,
--------------------------------------
1996
-------------------------------------
AVERAGE AVERAGE
BALANCE INTEREST RATE/COST
ASSETS
Interest earning assets:
Loans, net of unearned discounts:
Domestic ...................... $ 1,073,524 $ 108,852 10.14%
Foreign ....................... 126,067 10,331 8.19
Investment securities:
Taxable ....................... 1,449,211 99,411 6.86
Tax-exempt .................... 23,916 1,292 5.40
Time deposits with banks ........ 708 53 7.49
Federal funds sold .............. 32,369 1,540 4.76
Other ........................... 2,576 300 11.65
----------- ---------
Total interest-earning assets . $ 2,708,371 $ 221,779 8.19
Non-interest earning assets:
Cash and due from banks ......... $ 94,972
Bank premises and equipment, net 85,584
Other assets .................... 89,450
Less allowance for possible
loan losses ................... (19,866)
-----------
Total ......................... $ 2,958,511
===========
LIABILITIES AND
SHAREHOLDERS' EQUITY
Interest bearing liabilities:
Savings and interest bearing
demand deposits ............... $ 617,090 $ 18,390 2.98%
Time deposits:
Domestic ...................... 645,782 32,065 4.97
Foreign ....................... 748,343 37,652 5.03
Securities sold under
repurchase agreements and
federal funds purchased ....... 236,223 12,151 5.14
Other borrowings ................ 137,404 7,114 5.18
Other ........................... -- -- --
----------- ---------
Total interest bearing
liabilities ................. $ 2,384,842 $ 107,372 4.50
Non-interest bearing liabilities:
Demand deposits ................. 297,539
Other liabilities ............... 21,927
Shareholders' equity ............... 254,203
-----------
Total ......................... $ 2,958,511
===========
Net interest income ...... $ 114,407
=========
Net yield on interest
earning assets ......... 4.22%
=====
|
(Note 1) The average balances for purposes of the above table are calculated on the basis of month-end balances.
INTEREST RATES AND INTEREST DIFFERENTIAL
The following table analyzes the changes in net interest income during 1998 and 1997 and the relative effect of changes in interest rates and volumes for each major classification of interest earning assets and interest-bearing liabilities. Nonaccrual loans have been included in assets for the purpose of this analysis, which reduces the resulting yields (Note 1):
1998 COMPARED TO 1997 1997 COMPARED TO 1996
-------------------------------- --------------------------------
NET INCREASE (DECREASE) NET INCREASE (DECREASE)
DUE TO DUE TO
-------------------------------- --------------------------------
VOLUME RATE TOTAL VOLUME RATE TOTAL
-------- --------- -------- -------- --------- --------
(Dollars in Thousands) (Dollars in Thousands)
Interest earned on:
Loans, net of unearned discounts:
Domestic ...................... $ 19,574 $ (1,880) $ 17,694 $ 7,970 $ (1,295) $ 6,675
Foreign ....................... 1,133 (1,159) (26) 237 1,253 1,490
Investment securities:
Taxable ....................... 42,507 (10,297) 32,210 46,532 877 47,409
Tax-exempt .................... 179 (28) 151 (1,450) 248 (1,202)
Time deposits with banks ........ 55 (13) 42 (28) 22 (6)
Federal funds sold .............. 521 (179) 342 (1,062) 642 (420)
Other ........................... 15 14 29 (1) 8 7
-------- -------- -------- -------- -------- --------
Total interest income ........... $ 63,984 $(13,542) $ 50,442 $ 52,198 $ 1,755 $ 53,953
-------- -------- -------- -------- -------- --------
Interest incurred on:
Savings and interest
bearing demand deposits ....... $ 4,413 $ (146) $ 4,267 $ 3,197 $ 565 $ 3,762
Time deposits:
Domestic ...................... 5,398 1,376 6,774 13,323 1,068 14,391
Foreign ....................... 7,247 (1,611) 5,636 3,767 1,538 5,305
Securities sold under
repurchase agreements and
federal funds purchased ....... (2,269) (89) (2,358) 3,388 215 3,603
Other borrowings ................ 22,358 (441) 21,917 10,548 390 10,938
Other ........................... 302 -- 302 -- -- --
-------- -------- -------- -------- -------- --------
Total interest expense .......... $ 37,449 $ (911) $ 36,538 $ 34,223 $ 3,776 $ 37,999
-------- -------- -------- -------- -------- --------
Net interest income ............... $ 26,535 $(12,631) $ 13,904 $ 17,975 $ (2,021) $ 15,954
======== ======== ======== ======== ======== ========
|
(Note 1) The change in interest due to both rate and volume has been allocated to volume and rate changes in proportion to the relationship of the absolute dollar amounts of the change in each.
INTEREST RATE SENSITIVITY
The net interest rate sensitivity as of December 31, 1998 is illustrated in the following table. This information reflects the balances of assets and liabilities whose rates are subject to change. As indicated in the table, the Company is liability sensitive during the early time periods and is asset sensitive in the longer periods. The table shows the sensitivity of the balance sheet at one point in time and is not necessarily indicative of the position at future dates.
RATE/MATURITY RATE/MATURITY RATE/MATURITY RATE/MATURITY
DECEMBER 31, 1998 3 MONTHS OVER 3 MONTHS OVER 1 YEAR OVER
(DOLLARS IN THOUSANDS) OR LESS TO 1 YEAR TO 5 YEARS 5 YEARS TOTAL
================================================================================================================================
SECTION A
--------------------------------------------------------------------------------------------------------------------------------
RATE SENSITIVE ASSETS
FEDERAL FUNDS SOLD ............... $ 26,000 -- -- -- $ 26,000
DUE FROM BANK INTEREST EARNING ... 284 1,089 -- -- 1,373
INVESTMENT SECURITIES ............ 375,673 499,617 1,609,580 523,007 3,007,877
LOANS, NET OF NON-ACCRUALS ....... 1,165,399 114,420 232,097 105,910 1,617,826
--------------------------------------------------------------------------------------------------------------------------------
TOTAL EARNING ASSETS ............. $ 1,567,356 $ 615,126 $ 1,841,677 $ 628,917 $ 4,653,076
--------------------------------------------------------------------------------------------------------------------------------
CUMULATIVE EARNING ASSETS ........ $ 1,567,356 $ 2,182,482 $ 4,024,159 $ 4,653,076
================================================================================================================================
SECTION B
--------------------------------------------------------------------------------------------------------------------------------
RATE SENSITIVE LIABILITIES
TIME DEPOSITS .................... $ 922,423 $ 825,529 $ 259,556 $ 309 $ 2,007,817
OTHER INTEREST BEARING DEPOSITS .. 1,112,382 -- -- -- 1,112,382
FED FUNDS PURCHASED AND REPOS .... 63,988 60,911 10,801 -- 135,700
OTHER BORROWINGS ................. 1,074,000 -- -- -- 1,074,000
--------------------------------------------------------------------------------------------------------------------------------
TOTAL INTEREST BEARING LIABILITIES $ 3,172,793 $ 886,440 $ 270,357 $ 309 $ 4,329,899
--------------------------------------------------------------------------------------------------------------------------------
CUMULATIVE SENSITIVE LIABILITIES . $ 3,172,793 $ 4,059,233 $ 4,329,590 $ 4,329,899
================================================================================================================================
SECTION C
--------------------------------------------------------------------------------------------------------------------------------
REPRICING GAP .................... $(1,605,437) $ (271,314) $ 1,571,320 $ 628,608 $ 323,177
CUMULATIVE REPRICING GAP ......... (1,605,437) (1,876,751) (305,431) 323,177 323,177
RATIO OF INTEREST-SENSITIVE
ASSETS TO LIABILITIES ......... .49 .69 6.81 -- 1.08
RATIO OF CUMULATIVE, INTEREST-
SENSITIVE ASSETS TO LIABILITIES .49 .54 .93 1.08
================================================================================================================================
|
INVESTMENT SECURITIES
The following table sets forth the carrying value of investment securities as of December 31, 1998, 1997 and 1996:
1998 1997 1996
---------- ----------- -----------
(Dollars in Thousands)
U.S. Treasury securities
Available for sale ......... $ 207,688 $ 202,123 $ 5,020
Mortgage-backed securities
Available for sale ......... 2,551,395 2,347,722 1,734,484
Obligations of states and
political subdivisions
Held to maturity ........... 518 695 858
Available for sale ......... 28,200 520 1,014
Equity securities
Available for sale ......... 62,995 30,383 16,201
Other securities
Held to maturity ........... 1,990 2,015 1,990
Available for sale ......... 155,091 -- --
---------- ---------- ----------
Total .................. $3,007,877 $2,583,458 $1,759,567
========== ========== ==========
|
The following tables set forth the contractual maturities of investment securities at December 31, 1998 and the average yields of such securities, except for the totals which reflect the weighted average yields. Actual maturities will differ from contractual maturities because borrowers may have the right to prepay obligations with or without prepayment penalties.
AVAILABLE FOR SALE
MATURING
=========================================================================================================
AFTER ONE AFTER FIVE
WITHIN BUT WITHIN BUT WITHIN AFTER
ONE YEAR FIVE YEARS TEN YEARS TEN YEARS
---------------------- ----------------------- --------------------------- ----------------------
ADJUSTED ADJUSTED ADJUSTED ADJUSTED
COST YIELD COST YIELD COST YIELD COST YIELD
---------- --------- ---------- ---------- ---------- ----------- ----------- --------
(Dollars in Thousands)
U.S. Treasury and
obligations of
other U.S. Govern-
agencies .......... $ 1,490 5.69% $ -- -% $ 12,500 7.30% $ 193,553 6.72%
Mortgage-backed
securities ........ 22,642 6.52 269,442 7.22 320,268 7.56 1,922,515 6.99
Obligations of states
and political
subdivisions ...... -- -- 538 5.81 479 7.70 27,217 5.15
Other securities .... -- -- -- -- 158,916 6.00
Equity securities ... 62,276 5.75 -- -- -- -- -- --
---------- ----------- ---------- ----------
Total ..... $ 86,408 5.95% $ 269,980 7.22% $ 333,247 7.55% $2,302,201 6.88%
========== ========== ========== ==========
|
HELD TO MATURITY
MATURING
-----------------------------------------------------------------------------
AFTER ONE AFTER FIVE
WITHIN BUT WITHIN BUT WITHIN AFTER
ONE YEAR FIVE YEARS TEN YEARS TEN YEARS
----------------- ----------------- ----------------- ---------------
ADJUSTED ADJUSTED ADJUSTED ADJUSTED
COST YIELD COST YIELD COST YIELD COST YIELD
------- ------ -------- ------- ------- ------- ------ -------
(Dollars in Thousands)
Obligations of states
and political
subdivisions ...... $ 140 8.50% $ 378 8.93% $ -- -% $ -- -%
Other securities .... 5 6.75 1,825 8.10 160 6.76 -- --
------ ------ ------ ----
Total ...... $ 145 8.44% $2,203 8.24% $ 160 6.76% $ -- -%
====== ====== ====== ====
|
Mortgage-backed securities are primarily securities issued by the Federal Home Loan Mortgage Corporation ("Freddie Mac") and Federal National Mortgage Association ("Fannie Mae").
LOAN PORTFOLIO
The amounts of loans outstanding, by classification, at December 31, 1998, 1997, 1996, 1995 and 1994 are shown in the following table:
YEARS ENDED DECEMBER 31,
-----------------------------------------------------------------------
1998 1997 1996 1995 1994
----------- ----------- ----------- ----------- -----------
(Dollars in Thousands)
Commercial, financial
and agricultural ..... $ 896,060 $ 800,964 $ 723,061 $ 722,274 $ 668,359
Real estate-mortgage ... 215,689 188,122 193,101 200,998 201,998
Real estate-construction 94,374 59,239 32,610 39,527 46,584
Consumer ............... 250,917 272,478 161,594 124,843 122,751
Foreign ................ 166,324 130,401 128,932 120,748 106,707
----------- ----------- ----------- ----------- -----------
Total loans ....... 1,623,364 1,451,204 1,239,298 1,208,390 1,146,399
Unearned discount ...... (8,025) (6,508) (3,303) (3,479) (3,885)
----------- ----------- ----------- ----------- -----------
Loans, net of
unearned discount ...... $ 1,615,339 $ 1,444,696 $ 1,235,995 $ 1,204,911 $ 1,142,514
=========== =========== =========== =========== ===========
|
The table on the following page shows the amounts of loans (excluding real estate mortgages and consumer loans) outstanding as of December 31, 1998 which, based on remaining scheduled repayments of principal, are due in the years indicated. Also, the amounts due after one year are classified according to the sensitivity to changes in interest rates:
MATURING
-------------------------------------------------
AFTER ONE
WITHIN BUT WITHIN AFTER
ONE YEAR FIVE YEARS FIVE YEARS TOTAL
---------- ---------- ---------- ----------
(Dollars in Thousands)
Commercial, financial and
agricultural ........... $ 321,101 $ 460,414 $ 114,545 $ 896,060
Real estate - construction 50,977 40,205 3,192 94,374
Foreign .................. 79,784 75,370 11,170 166,324
---------- ---------- ---------- ----------
Total .......... $ 451,862 $ 575,989 $ 128,907 $1,156,758
========== ========== ========== ==========
INTEREST SENSITIVITY
-----------------------
FIXED VARIABLE
RATE RATE
-------- ---------
(Dollars in Thousands)
Due after one but within five years ..... $116,601 $459,388
Due after five years .................... 41,213 87,694
-------- --------
Total ......................... $157,814 $547,082
======== ========
|
The following table presents information concerning the aggregate amount of non-accrual, past due and restructured domestic loans; certain loans may be classified in one or more category:
1998 1997 1996 1995 1994
------ ------ ------ ------ -------
(Dollars in Thousands)
Loans accounted for on
a non-accrual basis .......... $4,868 $5,014 $3,363 $5,291 $2,895
Loans contractually past
due ninety days or more
as to interest or prin-
cipal payments ............... 8,543 9,700 5,075 7,954 5,605
Loans accounted for as
"troubled debt restruc-
turings" ..................... 592 363 1,462 2,742 1,990
|
The following table presents information concerning the aggregate amount of non-accrual and past due foreign loans extended to persons or entities in Mexico or to the Mexican Government, certain loans may be classified in one or more category:
1998 1997 1996 1995 1994
------- ------- ------ ------- ------
(Dollars in Thousands)
Loans accounted for on
a non-accrual basis ......... $ 670 $ 728 $1,062 $ 942 $ 732
Loans contractually past
due ninety days or more
as to interest or prin-
cipal payments .............. 242 2,096 1,321 944 1,086
|
The gross income that would have been recorded during 1998 on non-accrual and restructured loans in accordance with their original contract terms was $632,000 on domestic loans and $76,000 on foreign loans. The amount of interest income on such loans that was recognized in 1998 was $6,000 on domestic loans and none for foreign loans.
The non-accrual loan policy of the bank subsidiaries is to discontinue the accrual of interest on loans when management determines that it is probable that future interest accruals will be uncollectible. Interest income on non-accrual loans is recognized only to the extent payments are received or when, in management's opinion, the creditor's financial condition warrants reestablishment of interest accruals. Under special circumstances, a loan may be more than 90 days delinquent as to interest or principal and not be placed on non-accrual status. When any of the above occurs, loan officers are required to recommend placing a loan on non-accrual status by sending a memo to the senior loan officer who gives instructions to the commercial note teller that the loan is on non-accrual status. When a loan is placed on non-accrual status, any interest accrued but not paid is reversed and charged to operations against interest income.
The preceding tables indicate that there are certain loans technically past due 90 days or more on performing status. This situation generally results when a bank subsidiary has a borrower who is experiencing financial difficulties but not to the extent that requires a restructuring of indebtedness. The majority of this category is composed of loans that are considered to be adequately secured and/or for which there has been a recent payment.
The Company believes, after reviewing each bank subsidiary's loan portfolio, that the majority of the loans with a loss potential have been included under the categories of past due and non-accrual. Adjustments to the loan loss allowance have been made for other credits that may have characteristics indicating a potential for future non-performing status and some possible loss.
The following table presents certain information about cross-border outstanding loans, acceptances, and accrued interest thereon, related to Mexico:
1998 1997 1996
--------- --------- ---------
(Dollars in Thousands)
Loans:
Commercial, financial, industrial
and agricultural .................... $ 135,328 $ 91,945 $ 86,861
Real estate-mortgage .................. 8,133 18,416 20,591
Consumer .............................. 22,863 20,040 21,480
--------- --------- ---------
166,324 130,401 128,932
Less allowance for possible
loan losses ......................... (1,124) (1,184) (1,101)
--------- --------- ---------
Net loans .................... $ 165,200 $ 129,217 $ 127,831
========= ========= =========
Accrued interest receivable ............. $ 1,327 $ 1,198 $ 1,317
========= ========= =========
|
SUMMARY OF LOAN LOSS EXPERIENCE
The following table summarizes loan balances at the end of each year and average loans outstanding during the year; changes in the allowance for possible loan losses arising from loans charged-off and recoveries on loans previously charged-off by loan category; and additions to the allowance which have been charged to expense:
AT YEARS ENDED DECEMBER 31,
---------------------------------------------------------------------------
1998 1997 1996 1995 1994
----------- ----------- ----------- ----------- -----------
(Dollars in Thousands)
Loans, net of unearned discounts,
outstanding at December 31, ... $ 1,615,339 $ 1,444,696 $ 1,235,995 $ 1,204,911 $ 1,142,514
=========== =========== =========== =========== ===========
Average loans outstanding during
the year (Note 1) ............. $ 1,493,664 $ 1,281,489 $ 1,199,591 $ 1,202,136 $ 1,055,246
=========== =========== =========== =========== ===========
Balance of allowance
at January 1, ................. $ 24,516 $ 21,036 $ 18,455 $ 17,025 $ 13,831
Provision charged to expense .... 8,571 7,740 6,630 5,150 3,804
----------- ----------- ----------- ----------- -----------
Loans charged-off:
Domestic:
Commercial, financial
and agricultural ............. (2,180) (1,503) (1,518) (2,248) (1,073)
Real estate-mortgage .......... (157) (279) (261) (619) (685)
Consumer ...................... (6,483) (4,552) (3,363) (1,849) (816)
Foreign ....................... (65) (2) (23) (48) (148)
----------- ----------- ----------- ----------- -----------
Total loans charged-off ......... (8,885) (6,336) (5,165) (4,764) (2,722)
----------- ----------- ----------- ----------- -----------
Recoveries credited to allowance:
Domestic:
Commercial, financial
and agricultural ............ 795 270 305 190 236
Real estate mortgage .......... 18 382 51 80 968
Consumer ...................... 531 250 755 229 237
Foreign ....................... 5 95 5 110 227
----------- ----------- ----------- ----------- -----------
Total recoveries ................ 1,349 997 1,116 609 1,668
----------- ----------- ----------- ----------- -----------
Net loans charged-off: .......... (7,536) (5,339) (4,049) (4,155) (1,054)
----------- ----------- ----------- ----------- -----------
Allowance acquired in purchase
transactions .................. -- 1,079 -- 435 444
----------- ----------- ----------- ----------- -----------
Balance of allowance
at December 31, ............... $ 25,551 $ 24,516 $ 21,036 $ 18,455 $ 17,025
=========== ----------- ----------- ----------- -----------
Ratio of net loans charged-off
during the year to average
loans outstanding during
the year (Note 1) ............. .50% .42% .34% .35% .10%
=========== =========== =========== =========== ===========
Ratio of allowance to loans, net
of unearned discounts, out-
standing at December 31, ...... 1.58% 1.70% 1.70% 1.53% 1.49%
=========== =========== =========== =========== ===========
|
(Note 1) The average balances for purposes of the above table are calculated on the basis of month-end balances.
Each bank subsidiary has always provided an amount for possible loan losses sufficient both to cover net loan losses sustained and to maintain an appropriate balance in the allowance for possible loan losses that considers the element of risk which is estimated to be present in outstanding loans. The aggregate allowance for possible loan losses of all bank subsidiaries approximated 1.58% and 1.70% of total loans of bank subsidiaries, net of unearned income, for December 31, 1998 and 1997, respectively.
The amount charged against 1998 earnings and the other years presented as a provision for possible loan losses was the sum required to bring the allowance to the point which management of each bank subsidiary considers adequate to cover potential loan losses. Such a determination is based on a continual and conservative review process of the loan portfolio performed by senior officers of each bank subsidiary who consider certain factors, including but not limited to, previous loss experience in portfolio segments and assessment of current economic conditions.
The allowance for possible loan losses has been allocated based on the amount management has deemed to be reasonably necessary to provide for the possibility of losses being incurred within the following categories of loans at the dates indicated and the percentage of loans to total loans in each category:
AT DECEMBER 31,
------------------------------------------------------------------------------------------------------------------
1998 1997 1996 1995 1994
--------------------- --------------------- -------------------- ---------------------- --------------------
PERCENT PERCENT PERCENT PERCENT PERCENT
ALLOWANCE OF LOANS ALLOWANCE OF LOANS ALLOWANCE OF LOANS ALLOWANCE OF LOANS ALLOWANCE OF LOANS
--------- -------- --------- -------- --------- -------- --------- -------- --------- --------
(Dollars in Thousands)
Commercial,
financial and
agricultural $15,022 55.2% $14,149 55.2% $12,981 58.3% $11,569 59.7% $10,335 58.3%
Real estate
mortgage ... 3,616 13.3 3,323 12.9 3,467 15.6 3,219 16.6 3,123 17.6
Real estate
construction 1,582 5.8 1,047 4.1 586 2.6 633 3.3 720 4.1
Consumer ..... 4,207 15.5 4,813 18.8 2,901 13.1 1,999 10.4 1,898 10.7
Foreign ...... 1,124 10.2 1,184 9.0 1,101 10.4 1,035 10.0 949 9.3
------- ----- ------- ----- ------- ----- ------- ----- ------- -----
$25,551 100.0% $24,516 100.0% $21,036 100.0% $18,455 100.0% $17,025 100.0%
======= ===== ======= ===== ======= ===== ======= ===== ======= =====
|
DEPOSITS
The average amount of deposits, based on month-end balances and interest expense is summarized for the years indicated in the following table:
For the Years ended December 31,
------------------------------------
1998 1997 1996
---------- ---------- ----------
(Dollars in Thousands)
Deposits:
Demand - non-interest bearing
Domestic ...................... $ 377,084 $ 317,759 $ 256,186
Foreign ....................... 56,779 43,620 41,353
---------- ---------- ----------
Total demand non-interest
bearing ..................... 433,863 361,379 297,539
---------- ---------- ----------
Savings and interest bearing demand
Domestic ...................... 660,870 560,956 459,451
Foreign ....................... 206,724 161,603 157,639
---------- ---------- ----------
Total savings and interest
bearing demand .............. 867,594 722,559 617,090
---------- ---------- ----------
Time certificates of deposit
$100,000 or more:
Domestic ...................... 465,789 363,471 280,550
Foreign ....................... 713,060 602,170 546,643
Less than $100,000:
Domestic ...................... 543,211 541,686 365,232
Foreign ....................... 251,399 219,044 201,700
---------- ---------- ----------
Total time, certificates of
deposit .......................... 1,973,459 1,726,371 1,394,125
---------- ---------- ----------
Total deposits ....................... $3,274,916 $2,810,309 $2,308,754
========== ========== ==========
Interest Expense:
Savings and interest bearing demand
Domestic ...................... $ 21,580 $ 17,559 $ 14,079
Foreign ....................... 4,839 4,593 4,311
---------- ---------- ----------
Total savings and interest
bearing demand ..................... 26,419 22,152 18,390
---------- ---------- ----------
Time, certificates of deposit
$100,000 or more
Domestic ...................... 24,484 19,256 14,193
Foreign ....................... 36,865 32,532 28,561
Less than $100,000
Domestic ...................... 28,746 27,200 17,872
Foreign ....................... 11,728 10,425 9,091
---------- ---------- ----------
Total time, certificates
of deposit ......................... 101,823 89,413 69,717
---------- ---------- ----------
Total interest expense on deposits ... $ 128,242 $ 111,565 $ 88,107
========== ========== ==========
|
Maturities of time certificates of deposit of $100,000 or more outstanding at December 31, 1998 are summarized as follows:
(Dollars in Thousands)
3 months or less........................... $ 575,516
Over 3 but through 12 months............... 491,583
Over 12 months............................. 140,841
----------
Total................................. $1,207,940
==========
|
RETURN ON EQUITY AND ASSETS
Certain key ratios for the Company for the years ended December 31, 1998, 1997 and 1996 follows (Note 1):
1998 1997 1996
------- ------ -------
Percentage of net income to:
Average shareholders' equity ........... 15.48% 16.41% 17.45%
Average total assets ................... 1.15 1.30 1.50
Percentage of average shareholders'
equity to average total assets ......... 7.43 7.91 8.59
Percentage of cash dividends per share
to net income per share ................ 23.65 11.37 9.87
|
(Note 1) The average balances for purposes of the above table are calculated on the basis of month-end balances.
FOREIGN ACTIVITIES
Information regarding foreign activities has been provided in the preceding sections and Note 11 of notes to consolidated financial statements located on page 36 of the 1998 Annual Report to Shareholders which is incorporated herein by reference.
Item 2. PROPERTIES
The principal offices of the Company and IBC are located at 1200 San Bernardo Avenue, Laredo, Texas in a modern building owned and completely occupied by the Company and IBC and containing approximately 97,000 square feet. The bank subsidiaries of IBC have a total of 93 main banking and branch facilities. All the facilities are customary to the banking industry. Most of the bank subsidiaries own their banking facilities and the remainder are leased. The facilities are located in Laredo, San Antonio, Houston, Zapata, the Rio Grande Valley of Texas and the Coastal Bend area of Texas.
As Texas state-chartered banks, no bank subsidiary of the Company may, without the prior written consent of the Banking Commissioner, invest an amount in excess of its capital and certified surplus in bank facilities, furniture, fixtures and equipment. None of the Company's bank subsidiaries exceed such limitation.
Item 3. LEGAL PROCEEDINGS
The Company and its bank subsidiaries are involved in various 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 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Since the 1998 Annual Meeting of Shareholders of the Company held on May 21, 1998, no matter was submitted to a vote of Registrant's security holders through the solicitation of proxies or otherwise.
Item 4A. EXECUTIVE OFFICERS OF THE REGISTRANT
Certain information is set forth in the following table concerning the executive officers of the Company, each of whom has been elected to serve until the 1999 Annual Meeting of shareholders and until his successor is duly elected and qualified.
OFFICER OF
THE COMPANY
NAME AGE POSITION OF OFFICE OR IBC SINCE
------- ----- ------------------ --------------
Dennis E. Nixon 56 Chairman of the Board and 1979
President of the Company,
Chief Executive Officer of IBC
Leonardo Salinas 65 Vice President of the Company 1982
and Senior Executive Vice
President of IBC
R. David Guerra 46 Vice President of the Company 1986
and President of IBC McAllen
Branch
Imelda Navarro 41 Treasurer of the Company 1982
and Senior Executive Vice
President of IBC
|
There are no family relationships among any of the named persons. Each executive officer has held the same position or another executive position with the Company or IBC during the past five years.
PART II
Item 5. MARKET FOR THE REGISTRANT'S COMMON STOCK AND RELATED SECURITY HOLDER MATTERS
The information set forth under the caption "Common Stock and Dividends" located on page 11 and 12 of Registrant's 1998 Annual Report is incorporated herein by reference.
Item 6. SELECTED FINANCIAL DATA
The information set forth under the caption "Selected Financial Data" located on page 1 of Registrant's 1998 Annual Report is incorporated herein by reference.
Item 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The information set forth under the caption "Management's Discussion and Analysis of Financial Condition and Results of Operations" located on pages 2 through 12 of Registrant's 1998 Annual Report is incorporated herein by reference.
Item 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
The information set forth under the caption "Liquidity and Capital Resources" located on pages 5 and 6 of the Registrant's 1998 Annual Report is incorporated herein by reference.
Item 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The consolidated financial statements located on pages 14 through 18 of Registrant's 1998 Annual Report are incorporated herein by reference.
Item 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
None.
PART III
Item 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
There is incorporated in this Item 10 by reference (i) that portion of the Company's definitive proxy statement dated April 15, 1999 entitled "Election of Directors" and (ii) Item 4A of this report entitled "Executive Officers of the Registrant."
Item 11. EXECUTIVE COMPENSATION
There are incorporated in this Item 11 by reference those portions of the Company's definitive proxy statement dated April 15, 1999 entitled "Executive Compensation"; provided, however, that such incorporation by reference shall not include the information referred to in item 402(a) (8) of Securities and Exchange Commission Regulation S-K.
Item 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
There are incorporated in this Item 12 by reference those portions of the Company's definitive proxy statement dated April 15, 1999 entitled "Principal Shareholders" and "Security Ownership of Management."
Item 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
There is incorporated in this Item 13 by reference that portion of the Company's definitive proxy statement dated April 15, 1999 entitled "Interest of Management in Certain Transactions."
PART IV
Item 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a) DOCUMENTS
1. The consolidated financial statements of the Company and subsidiaries are incorporated into Item 8 of this report by reference from the 1998 Annual Report to Shareholders filed as an exhibit hereto and they include:
Independent Auditors' Report
Consolidated:
Statements of Condition as of December 31, 1998 and 1997
Statements of Income for the years ended December 31, 1998, 1997 and
1996
Statements of Comprehensive Income for the years ended December 31,
1998, 1997 and 1996
Statements of Shareholders' Equity for the years ended December 31,
1998, 1997 and 1996
Statements of Cash Flows for the years ended December 31, 1998, 1997
and 1996
Notes to Financial Statements
2. All Financial Statement Schedules are omitted as the required information is inapplicable or the information is presented in the financial statements or related notes.
3. The following exhibits are filed as a part of this Report:
(3)(a)*-Articles of Incorporation of International Bancshares Corporation incorporated herein as an exhibit by reference to the Current Report, Exhibit 3.1 therein, under the Securities Exchange Act of 1934, filed by Registrant on Form 8-K with the Securities and Exchange Commission on June 20, 1995, SEC File No. 09439.
(3)(b)*-By-Laws of International Bancshares Corporation incorporated herein as an exhibit by reference to the Current Report, Exhibit 3.2 therein, under the Securities Exchange Act of 1934, filed by Registrant on Form 8-K with the Securities and Exchange Commission on June 20, 1995, SEC File No. 0-9439.
(3)(c) -Articles of Amendment to the Articles of Incorporation of International Bancshares Corporation dated May 22, 1998.
(10)*-Sublease between Commerce Bank and Americity Federal Savings Bank incorporated herein as an exhibit by reference to the Annual Report, Exhibit 11(b) therein, under the Securities Exchange Act of 1934, filed by Registrant on Form 10-K with the Securities and Exchange Commission on March 23, 1982, SEC File No. 0-9439.
(10a)*-Purchase and Assumption Agreement dated June 29, 1990 by and between the Resolution Trust Corporation, receiver of Valley Federal Savings Association and New Valley Federal Savings Association incorporated herein as an exhibit by reference to the Annual Report, Exhibit 10(a) therein, under the Securities Exchange Act of 1934, filed by Registrant on Form 10-K with the Securities and Exchange Commission on March 30, 1992, SEC File No. 0-9439.
(10b)*-Purchase and Assumption Agreement for Oakar transaction dated June 29, 1990 between New Valley Federal Savings Association, International Bancshares Corporation and International Bank of Commerce incorporated herein as an exhibit by reference to the Annual Report, Exhibit 10(b) therein, under the Securities Exchange Act of 1934, filed by Registrant on Form 10-K with the Securities and Exchange Commission on March 30, 1991, SEC File No. 0-9439.
(10c)*-Purchase and Assumption Agreement dated June 21, 1991 by and between the Resolution Trust Corporation, receiver of Travis Federal Savings and Loan Association and New Travis Federal Savings Association incorporated herein as an exhibit by reference to the Annual Report, Exhibit 10(c) therein, under the Securities Exchange Act of 1934, filed by Registrant on Form 10-K with the Securities and Exchange Commission on March 30, 1992, SEC File No. 0-9439.
(10d)*-Oakar Agreement dated June 21, 1991 between New Travis Federal Savings Association and International Bank of Commerce incorporated herein as an exhibit by reference to the Annual Report, Exhibit 10(d) therein, under the Securities Exchange Act of 1934, filed by Registrant on Form 10-K with the Securities and Exchange Commission on March 30, 1992, SEC File No. 0-9439.
(10e)*+-The 1987 International Bancshares Corporation Key Contributor Stock Option Plan as amended and restated (formerly the International Bancshares Corporation 1981 Incentive Stock Option Plan) incorporated herein as an exhibit by reference to Exhibit 28 to the Registration Statement on Form S-8 filed with the Securities and Exchange Commission on July 13, 1987, SEC File No. 33-15655.
(10f)*-Merger Agreement by and between International Bank of Commerce, Michigan National Corporation and First State Bank and Trust Company, dated May 5, 1994 incorporated herein by reference to Exhibit 10(f) of the Form 10Q filed with the Securities and Exchange Commission on August 15, 1994, SEC File No. 0-9439.
(10g)*-Merger Agreement by and between International Bank of Commerce, and The Bank of Corpus Christi, dated August 19, 1994 incorporated herein by reference to Exhibit 10(g) of Form 10-Q filed with the Securities and Exchange Commission on November 14, 1994, SEC File No. 0-9439.
(10h)*-Merger Agreement by and between International Bank of Commerce, and Stone Oak National Bank, dated February 28, 1995, incorporated by reference to Exhibit 10(h) of the Registrant's Quarterly Report on Form 10Q for the period ended March 31, 1995, filed with the Securities and Exchange Commission on May 15, 1995, SEC File No. 0-9439.
(10i)*-Agreement and Plan of Merger dated as of June 7, 1995, by and between International Bancshares Corporation, a Delaware corporation, and International Bancshares Corporation, a Texas corporation, incorporated herein by reference to Exhibit 2 of the Current Report on Form 8-K filed with the Securities and Exchange Commission on June 20, 1995, SEC File No. 0-9439.
(10j)*-Purchase and Assumption Agreement dated as of February 27, 1996, by and between International Bank of Commerce, River Valley Bank, F.S.B. and Western Capital Holdings, Inc. incorporated herein, by reference to Exhibit 10(j) of the Registrant's Annual Report on Form 10-K filed with the Securities and Exchange Commission on April 1, 1996, SEC File No. 09439.
(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. incorporated herein by reference to Exhibit 10(k) of the Registrant's Quarterly Report on Form 10-Q filed with the Securities and Exchange Commission on November 13, 1996.
(10l)*+-The 1996 International Bancshares Corporation Stock Option Plan incorporated herein by reference to Exhibit 99.1 to the Post Effective Amendment No. 1 to Form S-8 filed with the Securities and Exchange Commission on March 21, 1997, SEC File No. 33-15655.
(10m)*+-Executive Incentive Compensation Plan of the Registrant incorporated herein by reference to exhibit "A" of the Registrant's Proxy Statement filed with the Securities Exchange Commission on April 15, 1997, SEC File No. 09439.
(10n)*- Agreement and Plan of Merger by and among International Bancshares Corporation, University Bancshares, Inc., Joe L. Allbritton and Robert L. Allbritton, dated as of August 15, 1997.
(13)**-International Bancshares Corporation 1998 Annual Report
(21) -List of Subsidiaries of International Bancshares Corporation as of March 19, 1999
(23) -Accountants' Consent
(27) -Financial Data Schedule
(b) REPORTS ON FORM 8-K
None
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
(Registrant)
By: /s/ DENNIS E. NIXON
Dennis E. Nixon
President
Date: MARCH 29, 1999
|
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed by the following persons on behalf of the Registrant and in the capacities and on the date indicated.
SIGNATURES TITLE DATE
------------- -------- ------
/s/ DENNIS E. NIXON President and Director MARCH 29, 1999
Dennis E. Nixon (Principal Executive Officer)
/s/ IMELDA NAVARRO Treasurer MARCH 29, 1999
Imelda Navarro (Principal Financial Officer)
/s/ LEONARDO SALINAS Vice President and MARCH 29, 1999
Leonardo Salinas Director
/s/ LESTER AVIGAEL Director MARCH 29, 1999
Lester Avigael
/s/ IRVING GREENBLUM Director MARCH 29, 1999
Irving Greenblum
/s/ R. DAVID GUERRA Director MARCH 29, 1999
R. David Guerra
/s/ RICHARD E. HAYNES Director MARCH 29, 1999
Richard E. Haynes
/s/ ROY JENNINGS, JR. Director MARCH 29, 1999
Roy Jennings, Jr.
___________________________ Director ______________
Sioma Neiman
/s/ ANTONIO R. SANCHEZ JR. Director MARCH 29, 1999
Antonio R. Sanchez Jr.
/s/ PEGGY J. NEWMAN Director MARCH 29, 1999
Peggy J. Newman
|
EXHIBIT INDEX
Exhibit (3)(c) - Articles of Amendment to the Articles of Incorporation of
International Bancshares Corporation dated May 22, 1998, page
35
Exhibit 13 - International Bancshares Corporation 1998 Annual Report,
Exhibit 13, page 1
Exhibit 21 - List of Subsidiaries of International Bancshares Corporation
as of March 19, 1999, page 130
Exhibit 23 - Accountants' Consent, page 131
Exhibit 27 - Financial Data Schedule, page 132
|
"EXHIBIT (3)(C)"
ARTICLES OF AMENDMENT
TO
THE ARTICLES OF INCORPORATION
OF
INTERNATIONAL BANCSHARES CORPORATION
Pursuant to the provisions of Article 4.04 of the Texas Business Corporation Act, International Bancshares Corporation (the "Corporation") hereby adopts the following Articles of Amendment to its Articles of Incorporation:
ARTICLE ONE
The name of the corporation is International Bancshares Corporation.
ARTICLE TWO
The following amendment to the Articles of Incorporation of the Corporation was adopted by the shareholders of the Corporation on May 21, 1998 in conformity with the provisions of the Texas Business Corporation Act.
Article IV of the Articles of Incorporation of the Corporation is hereby amended to read in its entirety as follows:
ARTICLE IV
The aggregate number of shares which the corporation shall have the authority to issue is Forty Million (40,000,000) shares of Common Stock of the par value of One Dollar ($1.00) per share.
ARTICLE THREE
The number of shares of the capital stock of the Corporation outstanding and entitled to vote on the amendment was 11,260,197 shares of Common Stock, par value $1.00 per share.
ARTICLE FOUR
The number of shares of Common Stock, par value $1.00 per share, of the Corporation voted for (representing at least a majority of the shares entitled to vote on such matter as required by the Articles of Incorporation of the Corporation) and against the amendment, respectively, are as follows:
For: 9,025,257 Against: 84,607
ARTICLE FIVE
The amendment will have no effect on the stated capital of the Corporation.
EXECUTED this 22nd day of May, 1998.
INTERNATIONAL BANCSHARES CORPORATION
By: /s/ DENNIS E. NIXON
Dennis E. Nixon, President
|
EXHIBIT 13
INTERNATIONAL BANCSHARES CORPORATION AND SUBSIDIARIES
(CONSOLIDATED)
SELECTED FINANCIAL DATA
AT OR FOR THE YEARS ENDED DECEMBER 31,
--------------------------------------------------------------------
1998 1997 1996 1995 1994
------------ ------------ ------------ ------------ ------------
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
BALANCE SHEET
Assets.......................... $ 4,987,877 $ 4,517,846 $ 3,351,231 $ 2,935,606 $ 2,659,392
Net loans....................... 1,589,788 1,420,180 1,214,959 1,186,456 1,125,489
Deposits........................ 3,369,637 3,175,560 2,662,153 2,143,346 2,061,638
Other borrowed funds............ 1,074,000 490,000 239,000 66,500 123,500
Shareholders' equity............ 370,283 341,244 283,767 245,761 178,536
INCOME STATEMENT
Interest income................. $ 326,174 $ 275,732 $ 221,779 $ 218,867 $ 159,260
Interest expense................ 181,909 145,371 107,372 112,361 66,754
------------ ------------ ------------ ------------ ------------
Net interest income............. 144,265 130,361 114,407 106,506 92,506
Provision for possible loan
losses........................ 8,571 7,740 6,630 5,150 3,804
Non-interest income............. 41,698 36,776 30,194 26,009 20,945
Non-interest expense............ 99,047 85,745 73,457 68,989 58,355
------------ ------------ ------------ ------------ ------------
Income before income taxes...... 78,345 73,652 64,514 58,376 51,292
Income taxes.................... 24,620 24,771 20,164 18,315 13,402
------------ ------------ ------------ ------------ ------------
Net income...................... $ 53,725 $ 48,881 $ 44,350 $ 40,061 $ 37,890
============ ============ ============ ============ ============
Per common share:
Basic...................... $ 4.12 $ 3.84 $ 3.52 $ 3.22 $ 3.07
Diluted.................... $ 4.02 $ 3.70 $ 3.41 $ 3.08 $ 2.92
Cash dividend per share......... $ .90 $ .50 $ 0.50 $ .50 $ 1.10
|
Note 1: See note 2 of notes to the consolidated financial statements
regarding the acquisitions made by International Bancshares Corporation and its
subsidiaries in 1997 and 1996.
Note 2: See note 8 of notes to the consolidated financial statements
regarding the other borrowed funds of the Company and its subsidiaries.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Management's discussion and analysis represents an explanation of significant changes in the financial position and results of operations of International Bancshares Corporation (the "Company") on a consolidated basis for the three year period ended December 31, 1998. The Company is a bank holding company with four bank subsidiaries operating in 93 main banking and branch facilities in South and Southeast Texas and four non-bank subsidiaries. The following discussion should be read in conjunction with the Company's Annual Report on Form 10-K for the year ended December 31, 1998, and the Selected Financial Data and Consolidated Financial Statements included elsewhere herein.
RESULTS OF OPERATIONS
Net income for 1998 was $53,725,000 or $4.12 per share -- basic ($4.02 per share -- diluted) compared with $48,881,000 or $3.84 per share -- basic ($3.70 per share -- diluted) in 1997 and $44,350,000 or $3.52 per share -- basic ($3.41 per share -- diluted) in 1997.
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. "Cash" earnings reflect 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 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 following table reconciles reported earnings to net income excluding intangible amortization ("cash" earnings) to help facilitate peer group comparisons:
YEARS ENDED DECEMBER 31,
-------------------------------
1998 1997 1996
--------- --------- ---------
(DOLLARS IN THOUSANDS, EXCEPT
PER SHARE DATA)
Reported net income.................. $ 53,725 $ 48,881 $ 44,350
Amortization of intangible assets.... 3,936 2,949 1,802
Income tax adjustment................ (322) (645) (349)
--------- --------- ---------
Cash earnings........................ $ 57,339 $ 51,185 $ 45,803
========= ========= =========
Cash earnings per common share:
Basic........................... $ 4.40 $ 4.02 $ 3.63
Diluted......................... 4.29 3.87 3.52
|
Total assets at December 31, 1998 grew 10% to $4,987,877,000 from $4,517,846,000 at December 31, 1997 while net loans increased 12% to $1,589,788,000 at December 31, 1998 from $1,420,180,000 at December 31, 1997. Deposits at December 31, 1998 were $3,369,637,000, an increase of 6% over the $3,175,560,000 at December 31, 1997. Deposits at December 31, 1997 were $3,175,560,000, an increase of 19% over the $2,662,153,000 at December 31, 1996. Total assets at December 31, 1997 grew 35% to $4,517,846,000 from $3,351,231,000 at December 31, 1996 while net loans increased 17% to $1,420,180,000 at December 31, 1997 from $1,214,959,000 at December 31, 1996. The increase in assets and deposits during 1998 was partially the result in growth in the Company's branch system. The aggregate amount of repurchase agreements, short term fixed borrowings and certificates of indebtedness with the Federal Home Loan Bank of Dallas ("FHLB"), Federal National Mortgage Association ("FNMA") and Federal Home Loan Mortgage Corporation ("FHLMC") increased to $1,074,000,000 at December 31, 1998 from the $855,000,000 at December 31, 1997. Such funds were used to expand the earning asset base of the Company.
Net interest income in 1998 increased by $13,904,000, or 11%, over that in 1997 despite the slight decrease in the net yield on average interest earning assets of .45% from 3.81% in 1997 to 3.36% in 1998.
The net yield on average interest earning assets decreased by .41% in 1997 from 4.22% to 3.81% in 1996 while net interest income increased by $15,954,000 or 14% over 1996. A 25.5% increase in average interest earning assets from $3,422,639,000 in 1997 to $4,296,845,000 in 1998 and a 26.4% increase from $2,708,371,000 in 1996 to $3,422,639,000 in 1997 contributed to the continued increase in net interest income for 1998 and 1997, respectively. The Company experienced a .47% decrease in the yield on average interest earning assets to 7.59% in 1998 from 8.06% in 1997. In 1997 a .13% decrease was reflected in the yield on average interest earning assets to 8.06% from 8.19% in 1996 and an increase was reflected on the rates paid on average interest bearing liabilities to 4.72% in 1997 from 4.50% in 1996.
Net interest income is the spread between income on interest earning assets, such as loans and securities, and the interest expense on liabilities used to fund those assets, such as deposits, repurchase agreements and funds borrowed. Net interest income is affected by both changes in the level of interest rates and changes in the amount and composition of interest earning assets and interest bearing liabilities.
As part of its strategy to manage interest rate risk, the Company strives to manage both assets and liabilities so that interest sensitivities match. One method of calculating interest rate sensitivity is through gap analysis. A gap is the difference between the amount of interest rate sensitive assets and interest rate sensitive liabilities that reprice or mature in a given time period. Positive gaps occur when interest rate sensitive assets exceed interest rate sensitive liabilities, and negative gaps occur when interest rate sensitive liabilities exceed interest rate sensitive assets. A positive gap position in a period of rising interest rates should have a positive effect on net interest income as assets will reprice faster than liabilities. Conversely, net interest income should contract somewhat in a period of falling interest rates. Management can quickly change the Company's interest rate position at any given point in time as market conditions dictate. Additionally, interest rate changes do not affect all categories of assets and liabilities equally or at the same time. Analytical techniques employed by the Company to supplement gap analysis include simulation analysis to quantify interest rate risk exposure. The gap analysis prepared by management is reviewed by the Investment Committee of the Company twice a year. Management currently believes that the Company is properly positioned for interest rate changes; however if management determines at any time that the Company is not properly positioned, it will strive to adjust the interest rate sensitive assets and liabilities in order to minimize the effect of interest rate changes.
Non-interest income increased 13% in 1998 to $41,698,000 over $36,776,000 in 1997 and increased 22% over $30,194,000 in 1996. The 1998 and 1997 increases in non-interest income were primarily due to the increases in service charge income. The increases in service charges were attributable to the amount of account transaction fees received as a result of the deposit growth and increased collection efforts. Investment securities gains of $3,893,000 was recorded in 1998 compared to $484,000 in 1997.
Expense control is an essential element in the Company's profitability. This is achieved through maintaining optimum staffing levels, an effective budgeting process, and internal consolidation of bank functions. The Company's efficiency ratio (other operating expenses divided by net interest income and other operating income) has been under 53% for each of the last five years, which the Company believes is below national peer group ratios. Non-interest expense includes such items as salaries and wages and employee benefits, net occupancy expenses, equipment expenses and other operating expenses such as FDIC insurance. Non-interest expense increased 16% in 1998 to $99,047,000 from $85,745,000 in 1997 and increased 17% from $73,457,000 in 1996. The 1998 and 1997 increases in non-interest expense were primarily due to the increased operations at certain of the bank subsidiaries as a result of acquisitions, and expanded branch operations.
Most of the Company's lending activities involve commercial (domestic and foreign), consumer and real estate mortgage financing. In 1998, the Company's efforts to increase its loan volume resulted in an increase of 17% in average domestic loans and an increase of 10% in average foreign loans for an increase in total average loans of 17% over 1997. The average yield for these loans decreased .16% for domestic loans and decreased by .86% for foreign loans in 1998 as compared to 1997. The Company experienced an increase of 7% in average domestic loans and a 2% increase in average foreign loans in 1997 as compared
to 1996. The yield for these loans decreased .12% for domestic loans and increased by .98% for foreign loans in 1997 as compared to 1996.
The Company experienced an increase of 31% in average balances of taxable investment securities from $2,121,927,000 for 1997 to $2,771,927,000 for 1998 and an increase of 46% from $1,449,211,000 for 1996 to $2,121,927,000 for 1997. These trends were the results of continued increases in deposits, repurchase agreements and borrowings during 1998 and 1997 providing the Company with available funds for investments.
The allowance for possible loan losses increased 4% from $24,516,000 at December 31, 1997 to $25,551,000 at December 31, 1998 and increased 17% from $21,036,000 at December 31, 1996 to $24,516,000 at December 31, 1997. The provision for possible loan losses charged to expense increased 11% from $7,740,000 in 1997 to $8,571,000 in 1998 and increased 17% from $6,630,000 in 1996 to $7,740,000 in 1997. Increases in the allowance for possible loan losses were largely due to the increase in the size of the loan portfolio. The allowance for possible loan losses was 1.57% of total loans at December 31, 1998 compared to 1.69% at 1997 and 1.70% at 1996. Non-performing assets as a percentage of total loans and total assets were .92% and .30%, respectively, at December 31, 1998, and 1.23% and .40% at December 31, 1997, respectively. Loans accounted for on a non-accrual basis decreased 4% from $5,742,000 at December 31, 1997 to $5,538,000 at December 31, 1998. As loans are placed on non-accrual status, interest previously accrued and recorded is reversed unless the loans are well secured and in the process of collection. Foreclosed assets decreased 43% from $5,510,000 at December 31, 1997 to $3,129,000 at December 31, 1998. The decreases in the non-performing loans and foreclosed assets were primarily due to improving conditions in the Company's loan portfolio as well as the sale of foreclosed assets. In 1997, non-accruals increased 30% from $4,425,000 at December 31, 1996 to $5,742,000 at December 31, 1997 and foreclosed assets increased 13% from $4,874,000 at December 31, 1996 to $5,510,000 at December 31, 1997.
The allowance for possible loan losses consists of the aggregate loan loss allowances of the bank subsidiaries. The allowances are established through charges to operations in the form of provisions for possible loan losses. Loan losses (or recoveries) are charged (or credited) directly to the allowances. The provision for possible loan losses of each bank subsidiary is determined by management of each bank upon consideration of several factors such as loss experience in relation to outstanding loans and the existing level of its allowance; independent appraisals for significant properties; a continuing review and appraisal of its loan portfolio with particular emphasis on problem loans by management and the credit department staff of International Bank of Commerce, Laredo, Texas ("IBC"), the Company's largest bank subsidiary; results of examinations by bank examiners and continuous review of current and anticipated economic conditions in the market area served by the bank subsidiaries. Management of each of the bank subsidiaries, along with management of the Company, continually review the allowances to determine whether additional provisions should be made after considering the preceding factors.
The bank subsidiaries 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 portion of the loan so exposed 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 December 31, 1998 was adequate to absorb possible losses from loans in the portfolio at that date.
On December 31, 1998, the Company had $4,987,877,000 of consolidated assets of which approximately $166,324,000 or 3% were related to loans outstanding to borrowers domiciled in Mexico. The loan policies of the Company's bank subsidiaries generally require that loans to borrowers domiciled in Mexico be primarily secured by assets located in the United States or have credit enhancements, in the form of guarantees, from significant United States corporations. The composition of such loans and the related amounts of allocated allowance for possible loan losses as of December 31, 1998 were as follows:
RELATED
AMOUNT OF ALLOWANCE FOR
LOANS POSSIBLE LOSSES
--------- ---------------
(DOLLARS IN THOUSANDS)
Secured by certificates of deposit in
United States banks................ $ 72,548 $ 35
Secured by United States real
estate............................. 30,964 314
Secured by other United States
collateral (securities, gold,
silver, etc.)...................... 9,416 142
Direct unsecured Mexican sovereign
debt (principally former FICORCA
debt).............................. 1,585 59
Other................................ 51,811 574
--------- ---------------
$ 166,324 $ 1,124
========= ===============
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The transactions for the year ended December 31, 1998 in that portion of the allowance for possible loan losses related to Mexican debt were as follows:
(DOLLARS IN THOUSANDS)
Balance at January 1, 1998........... $1,184
Charge-offs..................... (65)
Recoveries...................... 5
--------
Net charge-offs...................... (60)
--------
Balance at December 31, 1998......... $1,124
========
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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 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 and stable portion of the deposit base of the Company's bank subsidiaries. Such deposits comprised approximately 38%, 35% and 39% of the Company's bank subsidiaries' total deposits as of December 31, 1998, 1997 and 1996, respectively. 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.
The Company's funds management policy's primary focus is to measure and manage the earnings to interest rate risk. The earliest and most simplistic concept of interest rate risk and its measurement is the gap report, which is used to generate a rough estimate of the vulnerability of net interest income to changes in
market rates as implied by the relative repricings of assets and liabilities. The gap report calculates the difference between the amounts of assets and liabilities repricing across a series of intervals in time, with emphasis typically placed on the one-year period. This difference, or gap, is usually expressed as a percentage of total assets.
If an excess of liabilities over assets matures or reprices within the one-year period, the balance sheet is said to be negatively gapped. This condition is sometimes interpreted to suggest that an institution is liability-sensitive, indicating that earnings would suffer from rising rates and benefit from falling rates. If a surplus of assets over liabilities occurs in the one-year time frame, the balance sheet is said to be positively gapped, suggesting a condition of asset sensitivity in which earnings would benefit from rising rates and suffer from falling rates.
The gap report thus consists of an inventory of dollar amounts of assets and liabilities that have the potential to mature or reprice within a particular period. The flaw in drawing conclusions about interest rate risk from the gap report is that it takes no account of the probability that potential maturities or repricings of interest-rate-sensitive accounts will occur, or at what relative magnitudes. Because simplicity, rather than utility, is the only virtue of gap analysis, financial institutions increasingly have either abandoned gap analysis or accorded it a distinctly secondary role in managing their interest-rate risk exposure. See page 18 of the Company's Form 10-K for the table that summarizes interest rate sensitive assets and liabilities by their repricing dates at December 31, 1998.
The detailed inventory of balance sheet items contained in gap reports is the starting point of income simulation analysis. Income simulation analysis also focuses on the variability of net interest income and net income, but without the limitations of gap analysis. In particular, gone is the fundamental, but often unstated, assumption of the gap approach that every balance sheet item that can reprice will do so to the full extent of any movement in market interest rates.
Accordingly, income simulation analysis captures not only the potential of assets and liabilities to mature or reprice but also the probability that they will do so. Moreover, income simulation analysis focuses on the relative sensitivities of these balance sheet items and projects their behavior over an extended period of time in a motion picture rather than snapshot fashion. Finally, income simulation analysis permits management to assess the probable effects on balance sheet items not only of changes in market interest rates but also of proposed strategies for responding to such changes. The Company and many other institutions rely primarily upon income simulation analysis in measuring and managing exposure to interest rate risk.
At December 31, 1998, based on these simulations, a rate shift of 200 basis points in earnings either up or down will not vary earnings by more than 8 percent of projected 1999 after-tax net income. A 200 basis point shift in interest rates is a hypothetical rate scenario used to calibrate risk, and does not necessarily represent management's current view of future market developments.
All the measurements of risk described above are made based upon the Company's business mix and interest rate exposures at the particular point in time. The exposure changes continuously as a result of the Company's ongoing business and its risk management initiatives. While management believes these measures provide a meaningful representation of the Company's interest rate sensitivity, they do not necessarily take into account all business developments that have an affect on net income, such as changes in credit quality or the size and composition of the balance sheet.
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 closely monitors the dividend restrictions and availability from the bank subsidiaries as disclosed in Note 17 to the Consolidated Financial Statements. At December 31, 1998, the aggregate amount legally available to be distributed to the Company from bank subsidiaries as dividends was approximately $38,208,000, assuming that each bank subsidiary continues to be classified as "well capitalized" under the applicable regulations. The restricted capital of the bank subsidiaries was approximately $292,574,000 as of
December 31, 1998. The undivided profits of the bank subsidiaries were approximately $140,653,000 as of December 31, 1998.
As of December 31, 1998, the Company has outstanding $1,074,000,000 in short-term and long-term borrowed funds. In addition to borrowed funds and dividends, the Company has a number of other available alternatives to finance the growth of its existing banks as well as future growth and expansion.
The Company maintains an adequate level of capital as a margin of safety for its depositors and shareholders. At December 31, 1998, shareholders' equity was $370,283,000 compared to $341,244,000 at December 31, 1997, an increase of $29,039,000 or 9%. This increase in capital resulted primarily from the retention of earnings.
During 1990, the Federal Reserve Board ("FRB") adopted a minimum leverage ratio of 3% for the most highly-rated bank holding companies and at least 4% to 5% for all other bank holding companies. The Company's leverage ratio (defined as stockholders' equity less goodwill and certain other intangibles divided by average quarterly assets) was 6.50% at December 31, 1998 and 6.41% at December 31, 1997. The core deposit intangibles and goodwill of $43,692,000 as of December 31, 1998, recorded 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.
The FRB has adopted risk-based capital guidelines which assign risk weightings to assets and off-balance sheet items. The guidelines also define and set minimum capital requirements (risk-based capital ratios). Under the final 1992 rules, all banks are required to have core capital (Tier 1) of at least 4.0% of risk-weighted assets and total capital of 8.0% of risk-weighted assets. Tier 1 capital consists principally of shareholders' equity less goodwill and certain other intangibles, while total capital consists of core capital, certain debt instruments and a portion of the reserve for credit losses. In order to be deemed well capitalized pursuant to the regulations, an institution must have a total risk-weighted capital ratio of 10%, a Tier 1 risk-weighted ratio of 6% and a Tier 1 leverage ratio of 5%. The Company had risk-weighted Tier 1 capital ratios of 13.36% and 13.95% and risk weighted total capital ratios of 14.45% and 15.20% for December 31, 1998 and 1997, respectively, which are well above the minimum regulatory requirements and exceed the well capitalized ratios (see note 17 to notes to Consolidated Financial Statements).
The Company had 2,689,513 treasury shares as of March 19, 1999. 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. As of December 31, 1998, the Company had repurchased shares in the cumulative total amount of $18,580,000. The Board of Directors has stated that it will not approve repurchases of more than a total of $21,000,000. While the Board has increased previous caps related to treasury shares once they were met, there are no assurances that an increase of the $21,000,000 cap will occur in the future. The Company has no definite plans for the treasury shares; however, the treasury shares may be used to fulfill option exercises under the Company's Stock Option Plan.
During the past few years the Company has expanded its banking facilities. Among the activities and commitments the Company funded during 1998 and 1997 were certain capital expenditures relating to the modernization and improvement of several existing bank facilities and the expansion of the bank branch network.
YEAR 2000
This section contains forward-looking statements that have been prepared on the basis of the Company's best judgments and currently available information. These forward-looking statements are inherently subject to significant business, third party, and regulatory uncertainties and other contingencies, many of which are beyond the control of the Company. In addition, these forward-looking statements are based upon the Company's current internal assessments and remediation plans, incorporating certain representations of third-party servicers, and are subject to change. Accordingly, there can be no assurance
that the Company's results of operations will not be adversely affected by difficulties or delays in the Company's or third parties' Year 2000 readiness efforts.
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 consists of a five-phase program ("Action Plan") recommended by the Federal Financial Institutions Examination Council. This Action Plan consists of awareness, assessment, renovation, validation and implementation processes. The Action Plan provides for addressing critical and noncritical issues, with the assignment of responsibility and target dates for completion, and as of December 31, 1998, the Company was principally involved in the validation and implementation phases of the Action Plan. Testing of core applications, such as mainframe software, hardware, and network applications were substantially complete by December 31, 1998.
Currently, the Company estimates that the total dollar amount to remediate its Year 2000 issue will be less than one million dollars. The data processing system which the Company purchased in 1990 was substantially Year 2000 compliant. The cost of remediating the remaining Year 2000 issues are based on management's best estimates which were derived utilizing assumptions of future events including the continued availability of certain resources, third party vendor remediation plans and other factors. The related costs totaled approximately $620,000 for the year 1998. The eligible costs are being expensed as incurred.
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 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. However, the Year 2000 issue is pervasive and complex and can potentially affect any computer process. Accordingly, no assurance can be given that Year 2000 compliance can be achieved without additional unanticipated expenditures and uncertainties that might affect future financial results.
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.
Regardless of the Year 2000 compliance of the Company's systems, there is no complete assurance that the Company will not be adversely affected to the extent other entities not affiliated with the Company are unsuccessful in properly addressing this issue. In an effort to minimize this possibility, active communication has been ongoing between the Company and its external service providers and intermediaries. In addition, a risk reduction program was initiated in 1998 that addresses potential Year 2000 exposure in the loan portfolio. Correspondence has been sent by the Company to customers and suppliers during 1998 urging them to adequately address their Year 2000 issues, and such communication is planned to continue throughout 1999. However, there can be no guarantee that customers and suppliers will become Year 2000 compliant on a timely basis or in a manner that is compatible with the Company's systems. Significant business interruptions or failures by key business customers, suppliers, trading partners or governmental agencies resulting from the effects of the Year 2000 issue could have a material adverse effect on the Company.
The Company currently has in place a remediation and contingency plan in the event an application has unresolved Year 2000 issues as well as a disaster recovery plan in the event of an unforeseen interruption in the Company's data processing capabilities. These plans focus on an application-by-
application strategy that would be implemented in the event of Year 2000 related problems in particular applications, which strategies include, among others, the replacement of the faulty application as well as strategies to be employed should the Company suffer an area wide interruption of data processing capabilities due to loss of power or communications or a similar failure, which strategies would include, among others, alternate processing facilities.
While the Company will have contingency plans in place to address a temporary disruption in these services, there can be no assurance that any disruption or failure will be only temporary, that the Company's contingency plans will function as anticipated, or that the results of operations, financial condition, or liquidity of the Company will not be adversely affected in the event of a prolonged disruption or failure.
Additionally, there can be no assurance that the banking or other federal regulators will not issue new regulatory requirements that require additional work by the Company and, if issued, that new regulatory requirements will not increase the cost or delay the completion of the Company's Action Plan.
EFFECTS OF INFLATION
The principal component of earnings is net interest income, which is affected by changes in the level of interest rates. Changes in rates of inflation affect interest rates. It is difficult to precisely measure the impact of inflation on net interest income because it is not possible to accurately differentiate between increases in net interest income resulting from inflation and increases resulting from increased business activity. Inflation also raises costs of operation, primarily those of employment and services.
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 annual 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, (V) the Company's inability to
complete its Year 2000 action plan on a timely basis, and (VI) 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.
ADOPTION OF NEW ACCOUNTING STANDARDS
The Company adopted SFAS No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of", effective January 1, 1996. This Statement established accounting standards for the impairment of long-lived assets, certain identifiable intangibles, and goodwill related to those assets to be held and used and for long-lived assets and certain identifiable intangibles which must be disposed. Long-lived assets and certain identifiable intangibles to be disposed of must be reported at the lower of carrying amount or fair value less cost to sell, except for assets that are covered by APB Opinion
No. 30. The adoption of this Statement did not have a material impact on the Company's consolidated financial position, results of operations, or liquidity.
The Company adopted SFAS No. 122, "Accounting for Mortgage Servicing Rights" effective January 1, 1996. 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 Statement did not have a material impact on the Company's consolidated financial position, results of operation, or liquidity.
In 1996, the Company adopted SFAS No. 123, "Accounting for Stock-Based Compensation." SFAS No. 123 permits companies to recognize as expense over the vesting period the fair value of all stock-based awards on the date of grant. In management's opinion, the existing stock option valuation models do not necessarily provide a reliable single measure of stock option fair value. Therefore, as permitted, the Company will continue to apply the existing accounting rules under APB No. 25 and provide pro forma net income and pro forma earnings per share disclosures for employee stock option grants made in 1995 and subsequent years as if the fair-value-based method defined in SFAS No. 123 had been applied.
Effective January 1, 1996, the Company adopted the American Institute of Certified Public Accountants Statement Of Position ("SOP") 96-1, "Environmental Remediation Liabilities." SOP 96-1 requires, among other things, environmental remediation liabilities to be accrued when the criteria of SFAS No. 5, "Accounting for Contingencies," have been met and also provides guidance with respect to the measurement of remediation liabilities. Such accounting is consistent with the Company's previous method of accounting for environmental remediation costs and therefore, adoption of this Statement did not have a material impact on the Company's consolidated financial position, results of operations, or liquidity.
In June 1996, the Financial Accounting Standards Board issued SFAS No. 125, "Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities." SFAS No. 127, "Deferral of the Effective Date of Certain Provisions of FASB Statement No. 125" was issued in December 1996. SFAS No. 127 defers portions of SFAS No. 125 to be effective for transfers and servicing of financial assets and extinguishments of liabilities occurring after December 31, 1997. These Statements are to be applied prospectively. SFAS No. 125 provides accounting and reporting standards for transfers and servicing of financial assets and extinguishments of liabilities based on consistent application of a financial-components approach that focuses on control. It distinguishes transfers of financial assets that are sales from transfers that are secured borrowings. The adoption of this Statement did not have a material impact on the Company's consolidated financial position, results of operations, or liquidity.
In February 1997, the Financial Accounting Standards Board issued SFAS No. 128, "Earnings per Share." SFAS No. 128 specifies the computation, presentation, and disclosure requirements for earnings per share (EPS) for entities with publicly held common stock or potential common stock. SFAS No. 128 replaces primary EPS and fully diluted EPS on the face of the income statement for all entities with complex capital structures and requires a reconciliation of the basic EPS computation to the diluted EPS. Basic EPS is calculated by dividing net income available to common shareholders, by the weighted average number of common shares outstanding. The computation of diluted EPS assumes the issuance of common shares for all dilutive potential common shares outstanding during the reporting period. The dilutive effect of stock options are considered in earnings per share calculations if dilutive, using the treasury stock method. SFAS No. 128 is effective for financial statements issued for periods ending after December 15, 1997, including interim periods. The Company adopted SFAS No. 128 in 1997, accordingly, all prior-period earnings per share data presented in the accompanying consolidated financial statements has been restated to conform to the requirements of SFAS No. 128.
In February 1997, the Financial Accounting Standards Board issued SFAS No. 129, "Disclosure of Information about Capital Structure." SFAS No. 129 lists required disclosures about capital structure that had been included in a number of previously existing separate statements and opinions. It applies to all entities, public and nonpublic. SFAS No. 129 is effective for financial statements issued for periods ending
after December 15, 1997. The adoption of this Statement did not have a material impact on the Company's consolidated financial statements.
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 is effective for fiscal years beginning after December 15, 1997. The adoption of this Statement did not have a material impact on the Company's consolidated financial position, results of operations, or liquidity.
In June 1997, the Financial Accounting Standards Board issued SFAS No. 131, "Disclosures about Segments of an Enterprise and Related Information." SFAS 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. Management of the Company believes that it does not have separate reportable operating segments under the provision of SFAS No. 131. The provisions of SFAS No. 131 are effective for financial statements for periods beginning after December 15, 1997.
ACCOUNTING STANDARDS ISSUED BUT NOT YET EFFECTIVE
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, 1999. Management of the Company does not expect that the adoption of SFAS No. 133 will have a material impact on the Company's financial position, results of operation, or liquidity.
In October 1998, the Financial Accounting Standards Board issued SFAS No. 134, "Accounting for Mortgage-Backed Securities Retained after the Securitization of Mortgage Loans Held for Sale by a Mortgage Banking Enterprise." SFAS No. 134 further amends Statement 65, "Accounting for Certain Mortgage Banking Activities, as amended by SFAS No. 115, "Accounting for Certain Investments in Debt and Equity Securities," and SFAS No. 125, "Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities," requires that after securitization of mortgage loans held for sale, an entity engaged in mortgage banking activities classify the resulting mortgage-backed securities or other retained interests based on its ability and intent to sell or hold those investments. SFAS No. 134 is effective for the first fiscal quarter beginning after December 15, 1998. Management of the Company does not expect that the adoption of SFAS No. 134 will have a material impact on the Company's financial position, results of operation, or liquidity.
COMMON STOCK AND DIVIDENDS
The Company had issued and outstanding 14,118,158 shares of $1.00 par value Common Stock held by approximately 1,813 holders of record at March 19, 1999. The book value of the stock at December 31, 1998 was $28.03 per share compared with $26.32 per share, adjusted for stock dividends, one year ago.
On August 28, 1995, the Common Stock began to trade on the OTC Bulletin Board under the trading symbol IBNC; however, trading in the Common Stock of the Company was not extensive and such trades could not be characterized as amounting to an active trading market. As of March 4, 1998, the Common Stock was listed on the Nasdaq National Market under the trading symbol IBOC.
The following table sets forth the approximate high and low bid prices in the Company's Common Stock, adjusted for stock dividends during 1997 and 1998, as quoted on the OTC Bulletin Board and as recorded by local brokerage firms or from information in the Company's records for the periods prior to March 4, 1998 and as quoted on the Nasdaq National Market for the periods after March 4, 1998 for each of the quarters in the two year period ended December 31, 1998 and 1997. Some of the quotations reflect interdealer prices, without retail mark-up, mark-down or commission and may not necessarily represent actual transactions.
HIGH LOW
------ ------
1998:
First quarter...................... $64.00 $62.00
Second quarter..................... 67.80 63.60
Third quarter...................... 62.69 56.50
Fourth quarter..................... 54.88 50.63
HIGH LOW
------ ------
1997:
First quarter...................... $44.30 $38.40
Second quarter..................... 42.80 35.84
Third quarter...................... 51.20 40.40
Fourth quarter..................... 62.80 49.50
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The closing sales price of the Company's Common Stock was $46.75 per share at March 19, 1999. The Company's Common Stock prices, because of the limited market, do not necessarily represent the actual fair market value during the above periods and, in the opinion of the Board of Directors, should not be relied upon as representative of such market value.
The Company in 1998 paid a $5,683,000 and $5,655,000 or $0.50 and $0.40 per share respectively, and in 1997 paid a $4,426,000, or $0.50 per share, special cash dividends to the shareholders. In addition, the Company has issued stock dividends during the last five year period as follows:
STOCK
DATE DIVIDEND
------------------------------------- --------
May 19, 1994......................... 25%
May 19, 1995......................... 25
May 17, 1996......................... 25
May 16, 1997......................... 25
May 22, 1998......................... 25
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The Company's principal source of funds to pay cash dividends on its Common Stock is cash dividends from the bank subsidiaries. There are certain statutory limitations on the payment of dividends from the subsidiary banks. For a discussion of the limitations, please see Note 17 of notes to consolidated financial statements.
RECENT SALES OF UNREGISTERED SECURITIES
No securities were sold by the Company during the fiscal year ended December 31, 1998 that were not registered under the Securities Act of 1933.
On December 19, 1997, the Company issued 65,772 shares of Common Stock to Federal National Mortgage Association for $76.02 per share for a total of $5,000,000 in cash. The transaction was exempt from the registration requirements of the Securities Act of 1933 pursuant to Section 4(2) of the Act.
INDEPENDENT AUDITORS' REPORT
The Board of Directors and Shareholders
International Bancshares Corporation:
We have audited the consolidated statements of condition of International Bancshares Corporation and subsidiaries as of December 31, 1998 and 1997, and the related consolidated statements of income, comprehensive income, shareholders' equity, and cash flows for each of the years in the three-year period ended December 31, 1998. These consolidated financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of International Bancshares Corporation and subsidiaries as of December 31, 1998 and 1997, and the results of their operations and their cash flows for each of the years in the three-year period ended December 31, 1998, in conformity with generally accepted accounting principles.
/s/ KPMG LLP
San Antonio, Texas
March 5, 1999
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INTERNATIONAL BANCSHARES CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CONDITION
DECEMBER 31, 1998 AND 1997
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
1998 1997
----------- -----------
ASSETS
Cash and due from banks.............. $ 94,594 $ 229,788
Federal funds sold................... 26,000 7,975
----------- -----------
Total cash and cash
equivalents............... 120,594 237,763
Time deposits with banks............. 1,373 1,587
Investment securities:
Held to maturity (Market value of
$2,505 on December 31, 1998 and
$2,705 on December 31, 1997)..... 2,508 2,710
Available for sale (Amortized cost
of $2,991,836 on December 31,
1998 and $2,547,545 on December
31, 1997)........................ 3,005,369 2,580,748
----------- -----------
Total investment
securities................ 3,007,877 2,583,458
Loans:
Commercial, financial and
agricultural.................... 896,060 800,964
Real estate -- mortgage.......... 215,689 188,122
Real estate -- construction...... 94,374 59,239
Consumer......................... 250,917 272,478
Foreign.......................... 166,324 130,401
----------- -----------
Total loans................. 1,623,364 1,451,204
Less unearned discounts.......... (8,025) (6,508)
----------- -----------
Loans, net of unearned
discounts................. 1,615,339 1,444,696
Less allowance for possible loan
losses.......................... (25,551) (24,516)
----------- -----------
Net loans................... 1,589,788 1,420,180
----------- -----------
Bank premises and equipment, net..... 137,568 129,621
Accrued interest receivable.......... 31,542 31,271
Intangible assets.................... 44,971 49,692
Other assets......................... 54,164 64,274
----------- -----------
Total assets................ $ 4,987,877 $ 4,517,846
=========== ===========
LIABILITIES AND SHAREHOLDERS' EQUITY
Liabilities:
Deposits:
Demand -- non-interest bearing... $ 414,412 $ 450,537
Savings and interest bearing
demand.......................... 947,408 819,759
Time............................. 2,007,817 1,905,264
----------- -----------
Total deposits.............. 3,369,637 3,175,560
Securities sold under repurchase
agreements...................... 135,700 478,409
Other borrowed funds............. 1,074,000 490,000
Other liabilities................ 38,257 32,633
----------- -----------
Total liabilities........... 4,617,594 4,176,602
----------- -----------
Shareholders' equity:
Common stock of $1.00 par value.
Authorized 40,000,000 shares;
issued 16,790,999 shares in 1998
and 13,196,469 shares in 1997... 16,791 13,196
Surplus.......................... 22,250 19,012
Retained earnings................ 341,025 301,988
Accumulated other comprehensive
income.......................... 8,797 21,582
----------- -----------
388,863 355,778
Less cost of shares in treasury,
2,670,927 shares in 1998 and
2,079,126 shares in 1997........... (18,580) (14,534)
----------- -----------
Total shareholders'
equity.................... 370,283 341,244
----------- -----------
Total liabilities and
shareholders' equity...... $ 4,987,877 $ 4,517,846
=========== ===========
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See accompanying notes to consolidated financial statements.
INTERNATIONAL BANCSHARES CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
1998 1997 1996
-------------- -------------- --------------
Interest income:
Loans, including fees........... $ 145,016 $ 127,348 $ 119,183
Time deposits with banks........ 89 47 53
Federal funds sold.............. 1,462 1,120 1,540
Investment securities:
Taxable.................... 179,030 146,820 99,411
Tax-exempt................. 241 90 1,292
Other........................... 336 307 300
-------------- -------------- --------------
Total interest
income............. 326,174 275,732 221,779
Interest expense:
Savings and interest bearing
demand deposits............... 26,419 22,152 18,390
Time deposits................... 101,823 89,413 69,717
Federal funds purchased and
securities sold under
repurchase agreements......... 13,396 15,754 12,151
Other borrowings................ 39,969 18,052 7,114
Other........................... 302 -- --
-------------- -------------- --------------
Total interest
expense............ 181,909 145,371 107,372
-------------- -------------- --------------
Net interest income... 144,265 130,361 114,407
Provision for possible loan losses... 8,571 7,740 6,630
-------------- -------------- --------------
Net interest income
after provision for
possible loan
losses............. 135,694 122,621 107,777
-------------- -------------- --------------
Non-interest income:
Service charges on deposit
accounts...................... 21,679 18,511 15,642
Other service charges,
commissions and fees.......... 9,352 8,295 6,780
Investment securities
transactions, net............. 3,893 484 31
Other income.................... 6,774 9,486 7,741
-------------- -------------- --------------
Total non-interest
income............. 41,698 36,776 30,194
-------------- -------------- --------------
Non-interest expense:
Employee compensation and
benefits...................... 39,733 33,431 28,882
Occupancy....................... 7,675 6,258 5,336
Depreciation of bank premises
and equipment................. 10,388 8,256 7,024
Regulatory and deposit insurance
fees.......................... 2,073 1,803 3,813
Legal expense including
settlements................... 1,388 2,036 2,043
Stationery and supplies......... 3,186 3,026 2,479
Amortization of intangible
assets........................ 3,936 2,949 1,802
Other........................... 30,668 27,986 22,078
-------------- -------------- --------------
Total non-interest
expense............ 99,047 85,745 73,457
-------------- -------------- --------------
Income before income
taxes.............. 78,345 73,652 64,514
Income taxes......................... 24,620 24,771 20,164
-------------- -------------- --------------
Net income............ $ 53,725 $ 48,881 $ 44,350
============== ============== ==============
Basic earnings per common share:
Net Income...................... $ 4.12 $ 3.84 $ 3.52
============== ============== ==============
Weighted average number of
shares outstanding............ 13,028,929 12,743,638 12,608,599
Diluted earnings per common share:
Net Income...................... $ 4.02 $ 3.70 $ 3.41
============== ============== ==============
Weighted average number of
shares outstanding............ 13,365,218 13,212,488 13,022,862
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See accompanying notes to consolidated financial statements.
INTERNATIONAL BANCSHARES CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
YEARS ENDED DECEMBER 31, 1998, 1997, AND 1996
(DOLLARS IN THOUSANDS)
1998 1997 1996
--------- --------- ---------
Net Income........................... $ 53,725 $ 48,881 $ 44,350
--------- --------- ---------
Other comprehensive income, net of
tax:
Unrealized holding gains
(losses) on securities
available for sale arising
during the year............... (9,021) 10,346 (1,759)
Reclassification adjustment for
(gains) losses on securities
available for sale included in
net income.................... (3,764) (152) (249)
--------- --------- ---------
Comprehensive income................. $ 40,940 $ 59,075 $ 42,342
========= ========= =========
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INTERNATIONAL BANCSHARES CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996
(DOLLARS IN THOUSANDS)
ACCUMULATED
OTHER
NUMBER COMMON RETAINED COMPREHENSIVE TREASURY
OF SHARES STOCK SURPLUS EARNINGS INCOME STOCK TOTAL
--------- ------- ------- --------- ---------------- -------- --------
Balances at January 1, 1996.......... 8,160 $8,160 $10,637 $ 221,350 $ 13,396 $ (7,782) $245,761
Net income....................... -- -- -- 44,350 -- -- 44,350
Stock dividends:
Shares issued............... 2,059 2,059 -- (2,059) -- -- --
Cash dividends.............. -- -- -- (3,507) -- -- (3,507)
Purchase of treasury stock....... -- -- -- -- -- (2,261) (2,261)
Exercise of stock options........ 134 134 831 -- -- -- 965
Tax effect of non-qualified stock
options exercised.............. -- -- 467 -- -- -- 467
Other comprehensive income, net
of tax:
Net change in unrealized gains
(losses) on available for
sale securities, net of
reclassification adjustment.. -- -- -- -- (2,008) -- (2,008)
--------- ------- ------- --------- ---------------- -------- --------
Balances at December 31, 1996........ 10,353 $10,353 $11,935 $ 260,134 $ 11,388 $(10,043) $283,767
========= ======= ======= ========= ================ ======== ========
Net income....................... -- -- -- 48,881 -- -- 48,881
Stock dividends:
Shares issued............... 2,601 2,601 -- (2,601) -- -- --
Cash dividends.............. -- -- -- (4,426) -- -- (4,426)
Purchase of treasury stock....... -- -- -- -- -- (4,491) (4,491)
Exercise of stock options........ 176 176 1,602 -- -- -- 1,778
Sale of stock.................... 66 66 4,934 -- -- -- 5,000
Tax effect of non-qualified stock
options exercised.............. -- -- 541 -- -- -- 541
Other comprehensive income, net
of tax:
Net change in unrealized gains
(losses) on available for
sale securities, net of
reclassification adjustment.. -- -- -- -- 10,194 -- 10,194
--------- ------- ------- --------- ---------------- -------- --------
Balances at December 31, 1997........ 13,196 $13,196 $19,012 $ 301,988 $ 21,582 $(14,534) $341,244
========= ======= ======= ========= ================ ======== ========
Net income....................... -- -- -- 53,725 -- -- 53,725
Stock dividends:
Shares issued............... 3,350 3,350 -- (3,350) -- -- --
Cash dividends.............. -- -- -- (11,338) -- -- (11,338)
Purchase of treasury stock....... -- -- -- -- -- (4,046) (4,046)
Exercise of stock options........ 245 245 2,520 -- -- -- 2,765
Tax effect of non-qualified stock
options exercised.............. -- -- 718 -- -- -- 718
Other comprehensive income, net
of tax:
Net change in unrealized gains
(losses) on available for
sale securities, net of
reclassification adjustment.. -- -- -- -- (12,785) -- (12,785)
--------- ------- ------- --------- ---------------- -------- --------
Balances at December 31, 1998........ 16,791 $16,791 $22,250 $ 341,025 $ 8,797 $(18,580) $370,283
========= ======= ======= ========= ================ ======== ========
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See accompanying notes to consolidated financial statements.
INTERNATIONAL BANCSHARES CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996
(DOLLARS IN THOUSANDS)
1998 1997 1996
------------ ------------ ------------
Operating activities:
Net income.......................... $ 53,725 $ 48,881 $ 44,350
Adjustments to reconcile net income
to net cash provided by operating
activities:
Provision for possible loan
losses....................... 8,571 7,740 6,630
Recoveries on charged-off
loans........................ 1,349 997 1,116
Net cost of operations for
other real estate owned...... 106 161 308
Lease asset expenses........... 948 931 931
Depreciation of bank premises
and equipment................ 10,388 8,256 7,024
Accretion of investment
securities discounts......... (10,708) (1,445) (1,382)
Amortization of investment
securities premiums.......... 14,260 10,017 6,762
Realized gain on investment
securities transactions,
net.......................... (3,893) (484) (31)
Gain on sale of bank premises
and equipment................ (1,715) (51) (115)
Increase in accrued interest
receivable................... (271) (7,145) (709)
Increase in other
liabilities.................. 13,953 12,676 1,996
------------ ------------ ------------
Net cash provided by
operating activities..... 86,713 80,534 66,880
------------ ------------ ------------
Investing activities:
Cash acquired in purchase
transactions...................... -- 102,664 284,395
Proceeds from maturities of
securities........................ 975 2,660 582
Proceeds from sales of available for
sale securities................... 541,362 229,287 441,151
Purchases of available for sale
securities........................ (1,967,527) (1,366,791) (1,038,351)
Principal collected on
mortgage-backed securities........ 976,706 355,675 285,822
Proceeds from matured time deposits
with banks........................ 1,290 198 2,295
Purchases of time deposits with
banks............................. (1,076) (603) (693)
Net increase in loans............... (179,528) (74,777) (15,003)
Net decrease (increase) in other
assets............................ 17,787 2,743 (6,829)
Purchases of bank premises and
equipment......................... (19,193) (24,626) (16,068)
Proceeds from sale of bank premise
and equipment..................... 2,573 101 545
------------ ------------ ------------
Net cash used in investing
activities............... (626,631) (773,469) (62,154)
------------ ------------ ------------
Financing activities:
Net (decrease) increase in
non-interest bearing demand
deposits.......................... $ (36,125) $ 57,137 $ 27,831
Net increase in savings and interest
bearing demand deposits........... 127,649 23,996 58,604
Net increase in time deposits....... 102,553 141,511 103,426
Net (decrease) increase in federal
funds purchased and securities
sold under repurchase
agreements........................ (342,709) 287,201 (314,119)
Proceeds from issuance of other
borrowed funds.................... 2,440,000 997,347 1,181,000
Principal payments on other borrowed
funds............................. (1,856,000) (746,347) (1,008,500)
Purchase of treasury stock.......... (4,046) (4,491) (2,261)
Proceeds from stock transactions.... 2,765 6,778 965
Payment of cash dividends........... (11,297) (4,400) (3,489)
Payments of cash dividends in lieu
of fractional shares.............. (41) (26) (18)
------------ ------------ ------------
Net cash provided by
financing activities..... 422,749 758,706 43,439
------------ ------------ ------------
(Decrease) increase in cash
and cash equivalents..... (117,169) 65,771 48,165
Cash and cash equivalents at beginning
of year............................... 237,763 171,992 123,827
------------ ------------ ------------
Cash and cash equivalents at end of
year.................................. $ 120,594 $ 237,763 $ 171,992
============ ============ ============
Supplemental cash flow information:
Interest paid....................... $ 185,402 $ 148,825 $ 107,187
Income taxes paid................... 21,691 23,815 19,059
Supplemental schedule of noncash
investing and financing activities
relating to various purchase
transactions:
Loans acquired...................... -- $ 140,112 $ 22,177
Investment securities and other
assets acquired................... -- 93,382 22,442
Deposit and other liabilities
assumed........................... -- 336,158 329,014
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See accompanying notes to consolidated financial statements.
INTERNATIONAL BANCSHARES CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
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 following is a description of the more significant of those policies.
CONSOLIDATION AND BASIS OF PRESENTATION
The consolidated financial statements include the accounts of the Corporation and its wholly-owned bank 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 Company, through its bank subsidiaries, is engaged in the business of banking, including the acceptance of checking and savings deposits and the making of commercial, real estate, personal, home improvement, automobile and other installment and term loans. The primary markets of the Company are South and Southeast Texas. Each bank subsidiary is very active in facilitating international trade along the United States border with Mexico and elsewhere. Although the Company's loan portfolio is diversified, the ability of the Company's debtors to honor their contracts is primarily dependent upon the economic conditions in the Company's trade area. In addition, the investment portfolio is directly impacted by fluctuations in market interest rates. The Company and its bank subsidiaries are subject to the regulations of certain Federal agencies as well as the Texas Department of Banking and undergo periodic examinations by those regulatory authorities. Such agencies may require certain standards or impose certain limitations based on their judgements or changes in law and regulations.
The financial statements have been prepared in accordance with generally accepted accounting principles. In preparing the financial statements, management is required to make estimates and assumptions that affect the reported amounts of assets and liabilities as of the dates of the balance sheets and income and expenses for the periods. Actual results could differ significantly from those estimates. Material estimates that are particularly susceptible to significant changes in the near-term relate to the determination of the allowance for possible loan losses.
PER SHARE DATA
All share and per share information has been restated giving retroactive effect to stock dividends distributed.
INVESTMENT SECURITIES
The Company classifies debt and equity securities into one of these categories: held-to-maturity, available-for-sale, or trading. Such classifications are reassessed for appropriate classification at each reporting date. Securities classified as "held-to-maturity" are carried at amortized cost for financial statement reporting, while securities classified as "available-for-sale" and "trading" are carried at their fair value. Unrealized holding gains and losses are included in net income for those securities classified as "trading", while unrealized holding gains and losses related to those securities classified as "available-for-sale" are excluded from net income and reported net of tax as other comprehensive income and as a separate component of shareholders' equity until realized.
Mortgage-backed securities held at December 31, 1998 and 1997 represent participating interests in pools of long-term first mortgage loans originated and serviced by the issuers of the securities. Premiums and discounts are amortized using the straight-line method over the contractual maturity of the loans
INTERNATIONAL BANCSHARES CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
adjusted for anticipated prepayments. Income recognized under the straight line method is not materially different from income that would be recognized under the level yield or "interest method". Mortgage-backed securities are either issued or guaranteed by the U.S. Government or its agencies. Market interest rate fluctuations can affect the prepayment speed of principal and the yield on the security.
UNEARNED DISCOUNTS
Consumer loans are frequently made on a discount basis. The amount of the discount is subsequently included in interest income ratably over the term of the related loans under the sum-of-the-digits (Rule of 78's) method. Income recognized under the sum-of-the-digits method is not materially different than income that would be recognized under the level yield or "interest method".
PROVISION AND ALLOWANCE FOR POSSIBLE LOAN LOSSES
The allowance for possible loan losses is maintained at a level considered adequate by management to provide for potential loan losses. The allowance is increased by provisions charged to operating expense and reduced by net charge-offs. The provision for possible loan losses is the amount which, in the judgement of management, is necessary to establish the allowance for possible loan losses at a level that is adequate to absorb known and inherent risks in the loan portfolio.
Management believes that the allowance for possible loan losses is adequate. While management uses available information to recognize losses on loans, future additions to the allowance may be necessary based on changes in economic conditions. In addition, various regulatory agencies, as an integral part of their examination process, periodically review the Corporation's bank subsidiaries allowances for possible loan losses. Such agencies may require the Corporation's bank subsidiaries' to recognize additions or reductions to their allowances based on their judgments of information available to them at the time of their examination.
Impaired loans are 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.
NON-ACCRUAL LOANS
The non-accrual loan policy of the Corporation's bank subsidiaries is to discontinue the accrual of interest on loans when management determines that it is probable that future interest accruals will be uncollectible. Interest income on non-accrual loans is recognized only to the extent payments are received or when, in management's opinion, the creditor's financial condition warrants reestablishment of interest accruals.
OTHER REAL ESTATE OWNED
Other real estate owned is comprised of real estate acquired by foreclosure and deeds in lieu of foreclosure. Other real estate is carried at the lower of the recorded investment in the property or its fair value less estimated costs to sell such property (as determined by independent appraisal). Prior to foreclosure, the value of the underlying loan is written down to the fair value of the real estate to be acquired by a charge to the allowance for loan losses if necessary. Any subsequent write-downs are charged against other non-interest expenses. Operating expenses of such properties and gains and losses on their disposition are included in other non-interest expenses.
BANK PREMISES AND EQUIPMENT
Bank premises and equipment are stated at cost less accumulated depreciation. Depreciation is computed on straight-line and accelerated methods over the estimated useful lives of the assets. Repairs and
INTERNATIONAL BANCSHARES CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
maintenance are charged to operations as incurred and expenditures for renewals and betterments are capitalized.
INCOME TAXES
The Company recognizes certain income and expenses in different time periods for financial reporting and income tax purposes. The provision for deferred income taxes is based on the asset and liability method and represents the change in the deferred income tax accounts during the year, including the effect of enacted tax rate changes.
STOCK OPTIONS
Prior to January 1, 1996, the Company accounted for its stock option plan in accordance with the provisions of Accounting Principles Board ("APB") Opinion No. 25, "Accounting for Stock Issued to Employees," and related interpretations. As such, compensation expense would be recorded on the date of grant only if the current market price of the underlying stock exceeded the exercise price. In October 1995, the Financial Accounting Standards Board issued SFAS No. 123, "Accounting for Stock-Based Compensation," which permits entities to recognize as expense over the vesting period the fair value of all stock-based awards on the date of grant. Alternatively, SFAS No. 123 also allows entities to continue to apply the provisions of APB Opinion No. 25 and provide pro forma net income and pro forma earnings per share disclosures for employee stock option grants made in 1995 and future years as if the fair-value-based method defined in SFAS No. 123 had been applied. The Company has elected to continue to apply the provisions of APB Opinion No. 25 and provide the pro forma disclosure provisions of SFAS No. 123.
NET INCOME PER SHARE
In February 1997, the Financial Accounting Standards Board issued SFAS No. 128, "Earnings per Share." SFAS No. 128 specifies the computation, presentation, and disclosure requirements for earnings per share (EPS) for entities with publicly held common stock or potential common stock. SFAS No. 128 replaces primary EPS and fully diluted EPS on the face of the income statement for all entities with complex capital structures and requires a reconciliation of basic EPS to diluted EPS. Basic EPS is calculated by dividing net income available to common shareholders, by the weighted average number of common shares outstanding. The computation of diluted EPS assumes the issuance of common shares for all dilutive potential common shares outstanding during the reporting period. The dilutive effect of stock options is considered in earnings per share calculations if dilutive, using the treasury stock method. SFAS No. 128 is effective for financial statements issued for periods ending after December 15, 1997, including interim periods. The Company adopted SFAS No. 128 in 1997, accordingly, all prior-period earnings per share data presented in the accompanying consolidated financial statements has been restated to conform to the requirements of SFAS No. 128.
CAPITAL STRUCTURE
In February 1997, the Financial Accounting Standards Board issued SFAS No. 129, "Disclosure of Information about Capital Structure." SFAS No. 129 lists required disclosures about capital structure that had been included in a number of previously existing separate statements and opinions. It applies to all entities, public and nonpublic. SFAS No. 129 is effective for financial statements issued for periods ending after December 15, 1997. The adoption of this Statement did not have a material impact or significantly alter the Company's consolidated financial statements.
ACQUISITIONS AND AMORTIZATION OF INTANGIBLES
Operations of companies acquired in purchase transactions are included in the consolidated statements of income from the respective dates of acquisition. The excess of the purchase price over net identifiable
INTERNATIONAL BANCSHARES CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
assets acquired (goodwill) and core deposit intangibles are included in other assets and are being amortized over varying remaining lives not exceeding 15 years.
IMPAIRMENT OF LONG-LIVED ASSETS AND LONG-LIVED ASSETS TO BE DISPOSED OF
The Company adopted SFAS No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of", effective January 1, 1996. This Statement established accounting standards for the impairment of long-lived assets, certain identifiable intangibles, and goodwill related to those assets to be held and used and for long-lived assets and certain identifiable intangibles which must be disposed. Long-lived assets and certain identifiable intangibles to be disposed of must be reported at the lower of carrying amount or fair value less cost to sell, except for assets that are covered by APB Opinion No. 30. The adoption of this Statement did not have a material impact on the Company's consolidated financial position, results of operations, or liquidity.
CONSOLIDATED STATEMENT OF CASH FLOWS
For purposes of the statement of cash flows, the Company considers all short-term investments with a maturity at date of purchase of three months or less to be cash equivalents. Also, the Company reports transactions related to deposits with other financial institutions, customer time deposits and loans to customers on a net basis.
ENVIRONMENTAL REMEDIATION
Effective January 1, 1996, the Company adopted the American Institute of Certified Public Accountants Statement Of Position ("SOP") 96-1, "Environmental Remediation Liabilities." SOP 96-1 requires, among other things, environmental remediation liabilities to be accrued when the criteria of SFAS No. 5, "Accounting for Contingencies," have been met and also provides guidance with respect to the measurement of remediation liabilities. Such accounting is consistent with the Company's previous method of accounting for environmental remediation costs and therefore, adoption of this Statement did not have a material impact on the Company's consolidated financial position, results of operations, or liquidity.
ACCOUNTING FOR TRANSFERS AND SERVICING OF FINANCIAL ASSETS
In June 1996, the Financial Accounting Standards Board issued SFAS No. 125, "Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities". SFAS No. 127, "Deferral of the Effective Date of Certain Provisions of FASB Statement No. 125" was issued in December 1996. SFAS No. 127 defers portions of SFAS No. 125 to be effective for transfers and servicing of financial assets and extinguishments of liabilities occurring after December 31, 1997. These Statements are to be applied prospectively. SFAS No. 125 provides accounting and reporting standards for transfers and servicing of financial assets and extinguishments of liabilities based on consistent application of a financial-components approach that focuses on control. It distinguishes transfers of financial assets that are sales from transfers that are secured borrowings. The adoption of this Statement did not have a material impact on the Company's consolidated financial position, results of operations, or liquidity.
COMPREHENSIVE INCOME
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 is effective for fiscal years beginning after December 15, 1997. The
INTERNATIONAL BANCSHARES CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
adoption of this Statement did not have a material impact on the Company's consolidated financial position, results of operation, or liquidity.
SEGMENTS OF AN ENTERPRISE AND RELATED INFORMATION
In June 1997, the Financial Accounting Standards Board issued SFAS No. 131, "Disclosures about Segments of an Enterprise and Related Information." SFAS 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. Management of the Company believes that it does not have separate reportable operating segments under the provision of SFAS No. 131. The provisions of SFAS No. 131 are effective for financial statements for periods beginning after December 15, 1997.
(2) ACQUISITIONS
Effective February 19, 1999, IBC purchased certain assets and assumed certain liabilities of the Laredo branch of Pacific Southwest Bank, Corpus Christi, Texas. IBC purchased loans of approximately $4,590,000 and assumed deposits of approximately $28,399,000 and received cash and other assets in the amount of approximately $23,809,000. The acquisition was accounted for as a purchase transaction. IBC recorded intangible assets, goodwill and core deposit premium totaling $2,525,000 which are being amortized on a straight line basis over a fifteen year period.
Effective November 5, 1997, University Bank, Houston, Texas 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 $250,978,000. The acquisition was accounted for as a purchase transaction. IBC recorded intangible assets, goodwill and core deposit premium totaling $17,613,000 which are being amortized on a straight line basis over a fifteen year period.
Effective March 7, 1997, IBC purchased certain assets and assumed certain liabilities of five branches of Bank of America Texas, N. A., Irving, Texas. IBC purchased loans of approximately $381,000 and assumed deposits of approximately $84,834,000 and received cash or other assets in the amount of approximately $84,799,000. The acquisition was accounted for as a purchase transaction. IBC recorded intangible assets, goodwill and core deposit premium totaling $3,705,000 which are being amortized on a straight line basis over a fifteen year period.
Effective November 21, 1996, IBC purchased certain assets and assumed certain liabilities of three branches of Home Savings of America F.S.B., Irwindale, California. IBC purchased loans of approximately $769,000 and assumed deposits of approximately $196,813,000 and received cash and other assets in the amount of approximately $196,081,000. The acquisition was accounted for as a purchase transaction. IBC recorded intangible assets, goodwill and core deposit premium totaling $9,670,000 which are being amortized on a straight line basis over a fifteen year period.
Effective June 27, 1996, IBC purchased certain assets and assumed certain liabilities of River Valley Bank, F.S.B., in Weslaco, Texas, 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 which are being amortized on a straight line basis over a fifteen year period.
INTERNATIONAL BANCSHARES CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(3) INVESTMENT SECURITIES
The amortized cost and estimated market value by type of investment security at December 31, 1998 are as follows:
HELD TO MATURITY
-------------------------------------------------------------------
GROSS GROSS ESTIMATED
AMORTIZED UNREALIZED UNREALIZED MARKET CARRYING
COST GAINS LOSSES VALUE VALUE
---------- ----------- ----------- ---------- ---------
(DOLLARS IN THOUSANDS)
Obligations of states and political
subdivisions....................... $ 518 $-- $ (3) $ 515 $ 518
Other securities..................... 1,990 -- -- 1,990 1,990
---------- ----------- ----------- ---------- ---------
Total investment securities..... $2,508 $-- $ (3) $2,505 $ 2,508
========== =========== =========== ========== =========
|
AVAILABLE FOR SALE
--------------------------------------------------------------------
GROSS GROSS ESTIMATED
AMORTIZED UNREALIZED UNREALIZED MARKET CARRYING
COST GAINS LOSSES VALUE VALUE
---------- ----------- ----------- ---------- ----------
(DOLLARS IN THOUSANDS)
U.S. Treasury securities............. $ 207,543 $ 145 $-- $ 207,688 $ 207,688
Mortgage-backed securities........... 2,534,867 19,747 (3,219) 2,551,395 2,551,395
Obligations of states and political
subdivisions....................... 28,234 -- (34) 28,200 28,200
Other securities..................... 158,916 628 (4,453) 155,091 155,091
Equity securities.................... 62,276 719 -- 62,995 62,995
---------- ----------- ----------- ---------- ----------
Total investment securities..... $2,991,836 $21,239 $(7,706) $3,005,369 $3,005,369
========== =========== =========== ========== ==========
|
The amortized cost and estimated market value of investment securities at December 31, 1998, by contractual maturity, are shown below. Expected maturities will differ from contractual maturities because borrowers may have the right to prepay obligations with or without prepayment penalties.
HELD TO MATURITY AVAILABLE FOR SALE
-------------------------- --------------------------
ESTIMATED ESTIMATED
AMORTIZED MARKET AMORTIZED MARKET
COST VALUE COST VALUE
---------- ---------- ---------- ----------
(DOLLARS IN THOUSANDS)
Due in one year or less.............. $-- $-- $ 1,490 $ 1,500
Due after one year through five
years.............................. 2,348 2,345 538 537
Due after five years through ten
years.............................. 160 160 5,479 5,490
Due after ten years.................. -- -- 387,186 383,452
Mortgage-backed securities........... -- -- 2,534,867 2,551,395
Equity securities.................... -- -- 62,276 62,995
---------- ---------- ---------- ----------
Total investment securities..... $2,508 $2,505 $2,991,836 $3,005,369
========== ========== ========== ==========
|
INTERNATIONAL BANCSHARES CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The amortized cost and estimated market value by type of investment security at December 31, 1997 are as follows:
HELD TO MATURITY
--------------------------------------------------------------
GROSS GROSS ESTIMATED
AMORTIZED UNREALIZED UNREALIZED MARKET CARRYING
COST GAINS LOSSES VALUE VALUE
--------- ---------- ---------- --------- --------
(DOLLARS IN THOUSANDS)
Obligations of states and political
subdivisions....................... $ 695 $-- $ (5) $ 690 $ 695
Other securities..................... 2,015 -- -- 2,015 2,015
--------- ---------- ---------- --------- --------
Total investment securities..... $ 2,710 $-- $ (5) $ 2,705 $2,710
========= ========== ========== ========= ========
|
AVAILABLE FOR SALE
--------------------------------------------------------------------
GROSS GROSS ESTIMATED
AMORTIZED UNREALIZED UNREALIZED MARKET CARRYING
COST GAINS LOSSES VALUE VALUE
---------- ----------- ----------- ---------- ----------
(DOLLARS IN THOUSANDS)
U.S. Treasury securities............. $ 201,906 $ 218 $ (1) $ 202,123 $ 202,123
Mortgage-backed securities........... 2,315,455 32,367 (100) 2,347,722 2,347,722
Obligations of states and political
subdivisions....................... 555 5 (40) 520 520
Equity securities.................... 29,629 754 -- 30,383 30,383
---------- ----------- ----------- ---------- ----------
Total investment securities..... $2,547,545 $33,344 $ (141) $2,580,748 $2,580,748
========== =========== =========== ========== ==========
|
Mortgage-backed securities are primarily securities issued by the Federal Home Loan Mortgage Corporation ("Freddie Mac") and the Federal National Mortgage Association ("Fannie Mae").
The amortized cost and fair market value of investment securities pledged to qualify for fiduciary powers and to secure public monies as required by law and for repurchase agreements was $1,740,976,000 and $1,753,435,000, respectively, at December 31, 1998.
Proceeds from the sale of securities available-for-sale were $541,362,000, $229,287,000 and $441,151,000 during 1998, 1997 and 1996, respectively. Gross gains of $4,374,000 and gross losses of $481,000 were realized in 1998 primarily from the sale of available-for-sale mortgage-backed securities. Gross gains and losses of $619,000 and $135,000 and $1,953,000 and $1,922,000 were realized in 1997 and 1996, respectively.
The Company maintains the required level of stock at the Federal Home Loan Bank of Dallas, Texas (the "FHLB"). The FHLB stock is included in equity securities and is recorded at cost and totaled $60,848,000 at December 31, 1998.
(4) ALLOWANCE FOR POSSIBLE LOAN LOSSES
A summary of the transactions in the allowance for possible loan losses for the years ended December 31, 1998, 1997 and 1996 is as follows:
1998 1997 1996
--------- --------- ---------
(DOLLARS IN THOUSANDS)
Balance at January 1................. $ 24,516 $ 21,036 $ 18,455
--------- --------- ---------
Losses charged to allowance..... (8,885) (6,336) (5,165)
Recoveries credited to
allowance..................... 1,349 997 1,116
--------- --------- ---------
Net losses charged to
allowance..................... (7,536) (5,339) (4,049)
Provision charged to
operations.................... 8,571 7,740 6,630
--------- --------- ---------
Allowances acquired in purchase
transactions.................. -- 1,079 --
--------- --------- ---------
Balance at December 31............... $ 25,551 $ 24,516 $ 21,036
========= ========= =========
|
Loans accounted for on a non-accrual basis at December 31, 1998, 1997 and 1996 amounted to $5,538,000, $5,742,000 and $4,425,000, respectively. The effect of such non-accrual loans reduced interest
INTERNATIONAL BANCSHARES CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
income by $708,000, $602,000 and $644,000 for the years ended December 31, 1998, 1997 and 1996, respectively. Amounts received on non-accruals are applied, for financial accounting purposes, first to principal and then to interest after all principal has been collected.
Impaired loans are 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 more past due, unless they are well secured (i.e. 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.
Impaired loans were $8,440,000 at December 31, 1998, $12,854,000 at December 31, 1997 and $10,927,000 at December 31, 1996. The average recorded investment in impaired loans during 1998, 1997, and 1996 was $8,962,000, $12,507,000 and $10,940,000, respectively. The total allowance for possible loan losses related to these loans was $1,384,000, $1,144,000 and $972,000 at December 31, 1998, 1997 and 1996, respectively. Interest income on impaired loans of $443,000, $777,000 and $566,000 was recognized for cash payments received in 1998, 1997 and 1996, respectively.
Management of the Company recognizes the risks associated with these impaired loans. However, management's decision to place loans in this category does not necessarily mean that the Company expects losses to occur.
The bank subsidiaries 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 December 31, 1998 was adequate to absorb possible losses from loans in the portfolio at that date.
INTERNATIONAL BANCSHARES CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(5) BANK PREMISES AND EQUIPMENT
A summary of bank premises and equipment, by asset classification, at December 31, 1998 and 1997 follows:
ESTIMATED
USEFUL LIVES 1998 1997
------------ ---------- ----------
(DOLLARS IN THOUSANDS)
Bank buildings and improvements...... 5 - 40 years $ 98,986 $ 91,971
Less: accumulated depreciation....... (17,174) (14,336)
---------- ----------
81,812 77,635
---------- ----------
Furniture, equipment and vehicles.... 1 - 20 years 67,691 60,408
Less: accumulated depreciation....... (39,119) (32,693)
---------- ----------
28,572 27,715
---------- ----------
Land................................. 25,908 22,944
---------- ----------
Real estate held for future
expansion:
Land, building, furniture, fixture
and equipment...................... 7 - 27 years 2,215 2,215
Less: accumulated depreciation....... (939) (888)
---------- ----------
1,276 1,327
---------- ----------
Bank premises and equipment, net.......... $ 137,568 $ 129,621
========== ==========
|
(6) DEPOSITS
Deposits as of December 31, 1998 and 1997 and related interest expense for the years ended December 31, 1998, 1997 and 1996 were as follows:
1998 1997
------------ ------------
(DOLLARS IN THOUSANDS)
Deposits:
Demand -- non-interest bearing
Domestic........................ $ 364,954 $ 388,851
Foreign......................... 49,458 61,686
------------ ------------
Total demand non-interest
bearing......................... 414,412 450,537
------------ ------------
Savings and interest bearing demand
Domestic........................ 729,275 650,806
Foreign......................... 218,133 168,953
------------ ------------
Total savings and interest bearing
demand.......................... 947,408 819,759
------------ ------------
Time, certificates of deposit
$100,000 or more
Domestic........................ 460,946 446,038
Foreign......................... 746,994 655,957
Less than $100,000
Domestic........................ 530,732 567,853
Foreign......................... 269,145 235,416
------------ ------------
Total time, certificates of
deposit......................... 2,007,817 1,905,264
============ ============
Total deposits..................... $ 3,369,637 $ 3,175,560
============ ============
|
INTERNATIONAL BANCSHARES CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
1998 1997 1996
----------- --------- ---------
(DOLLARS IN THOUSANDS)
Interest Expense:
Savings and interest bearing demand
Domestic........................ $ 21,580 $ 17,559 $ 14,079
Foreign......................... 4,839 4,593 4,311
----------- --------- ---------
Total savings and interest bearing
demand.......................... $ 26,419 $ 22,152 $ 18,390
=========== ========= =========
Time, certificates of deposit
$100,000 or more
Domestic........................ $ 24,484 $ 19,256 $ 14,193
Foreign......................... 36,865 32,532 28,561
Less than $100,000
Domestic........................ 28,746 27,200 17,872
Foreign......................... 11,728 10,425 9,091
----------- --------- ---------
Total time, certificates of
deposit......................... $ 101,823 $ 89,413 $ 69,717
=========== ========= =========
|
(7) SECURITIES SOLD UNDER REPURCHASE AGREEMENTS
The Company's bank subsidiaries have entered into repurchase agreements with the FHLB, FNMA, FHLMC and individual customers of the bank subsidiaries. The purchasers have agreed to resell to the bank subsidiaries identical securities upon the maturities of the agreements. Securities sold under repurchase agreements were mortgage-backed book entry securities and averaged $257,589,000, $301,511,000 and $236,223,000 during 1998, 1997 and 1996, respectively, and the maximum amount outstanding at any month end during 1998, 1997 and 1996 was $518,450,000, $540,370,000 and $477,874,000, respectively.
Further information related to repurchase agreements (securities sold under agreements to repurchase) at December 31, 1998 and 1997 is set forth in the following table:
COLLATERAL SECURITIES REPURCHASE BORROWING
--------------------------------- -----------------------------
BOOK VALUE OF MARKET VALUE OF BALANCE OF WEIGHTED AVERAGE
SECURITIES SOLD SECURITIES SOLD LIABILITY INTEREST RATE
--------------- --------------- ---------- ----------------
(DOLLARS IN THOUSANDS)
December 31, 1998 Term:
Overnight agreements............... $ 56,172 $ 58,802 $ 41,130 4.60%
1 to 29 days....................... 15,416 15,634 6,128 5.11%
30 to 90 days...................... 37,867 38,330 28,211 5.22%
Over 90 days....................... 89,162 90,412 60,231 4.61%
--------------- --------------- ---------- -----
Total......................... $ 198,617 $ 203,178 $ 135,700 4.76%
=============== =============== ========== =====
December 31, 1997 Term:
Overnight agreements............... $ 54,648 $ 55,769 $ 30,355 5.28%
1 to 29 days....................... 399,737 403,951 378,988 5.88%
30 to 90 days...................... 24,878 25,552 16,325 5.41%
Over 90 days....................... 64,738 66,271 52,741 5.39%
--------------- --------------- ---------- -----
Total......................... $ 544,001 $ 551,543 $ 478,409 5.77%
=============== =============== ========== =====
|
The book value and market value of securities sold includes the entire book value and market value of securities partially or fully pledged under repurchase agreements.
INTERNATIONAL BANCSHARES CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(8) OTHER BORROWED FUNDS
Other borrowed funds at December 31, 1998 and 1997 are $974,000,000 and $390,000,000, respectively, of short-term fixed borrowings with the Federal Home Loan Bank of Dallas at the market price offered at the time of funding. The weighted average interest rate on the short-term fixed borrowings outstanding at December 31, 1998 and 1997 was 5.03% and 5.91%, respectively, and the weighted average interest rate for the year 1998 and 1997 was 5.48% and 5.72%, respectively. The average daily balance on short-term fixed borrowings was $34,705,000 and $241,407,000 during 1998 and 1997, respectively, and the maximum amount outstanding at any month end during 1998 and 1997 was $1,004,000,000 and $390,000,000, respectively.
At December 31, 1998, the Company had two long-term fixed rate certificates of indebtedness outstanding each in the amounts of $50,000,000 payable to the FHLB at a ten year Treasury rate minus forty-five basis points and mature on June 9, 2008 and July 7, 2008. At December 31, 1997, the Company had two long-term certificates of indebtedness outstanding each in the amounts of $50,000,000 payable to the FHLB at a three month Libor floating rate minus fifteen basis points that mature on June 7, 1998 and July 3, 1998. These borrowings are secured by a blanket lien of $133,000,000 of 1-4 family first lien mortgage loans at both December 31, 1998 and 1997.
(9) EARNINGS PER SHARE
Basic EPS is calculated by dividing net income available to common shareholders, by the weighted average number of common shares outstanding. The computation of diluted EPS assumes the issuance of common shares for all dilutive potential common shares outstanding during the reporting period. The calculation of the basic EPS and the diluted EPS at December 31, 1998, 1997, and 1996 is set forth in the following table:
INCOME SHARES PER-SHARE
(NUMERATOR) (DENOMINATOR) AMOUNT
----------- ------------- ---------
(DOLLARS IN THOUSANDS, EXCEPT
PER SHARE AMOUNTS)
December 31, 1998:
Basic EPS
Income available to common
stockholders.................. $53,725 13,028,929 $4.12
Potential dilutive common
shares........................ 336,289
----------- -------------
Diluted EPS.......................... $53,725 13,365,218 $4.02
=========== =============
December 31, 1997:
Basic EPS
Income available to common
stockholders.................. $48,881 12,743,638 $3.84
Potential dilutive common
shares........................ 468,850
----------- -------------
Diluted EPS.......................... $48,881 13,212,488 $3.70
=========== =============
December 31, 1996:
Basic EPS
Income available to common
stockholders.................. $44,350 12,608,599 $3.52
Potential dilutive common
shares........................ 414,263
----------- -------------
Diluted EPS.......................... $44,350 13,022,862 $3.41
=========== =============
|
(10) EMPLOYEES' PROFIT SHARING PLAN
The Company has a deferred profit sharing plan for full-time employees with one year of continuous employment. The Company's annual contribution to the plan is based on a percentage, as determined by the Board of Directors, of income before income taxes, as defined, for the year. Allocation of the contribution
INTERNATIONAL BANCSHARES CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
among officers' and employees' accounts is based on length of service and amount of salary earned. Profit sharing costs of $1,546,700, $1,161,000 and $939,000 were charged to income for the years ended December 31, 1998, 1997, and 1996, respectively.
(11) INTERNATIONAL OPERATIONS
The Corporation provides international banking services for its customers through its bank subsidiaries. Neither the Corporation nor its bank subsidiaries have facilities located outside the United States. International operations are distinguished from domestic operations on the basis of the domicile of the customer.
Because the resources employed by the Company are common to both international and domestic operations, it is not practical to determine net income generated exclusively from international activities.
A summary of assets attributable to international operations at December 31, 1998 and 1997 are as follows:
1998 1997
---------- ----------
(DOLLARS IN THOUSANDS)
Loans:
Commercial...................... $ 135,328 $ 91,945
Others.......................... 30,996 38,456
---------- ----------
166,324 130,401
Less allowance for possible loan
losses........................ (1,124) (1,184)
---------- ----------
Net loans.................. $ 165,200 $ 129,217
========== ==========
Accrued interest receivable.......... $ 1,327 $ 1,198
========== ==========
|
At December 31, 1998, the Company had $6,999,000 in outstanding international commercial letters of credit to facilitate trade activities. The letters of credit are issued primarily in conjunction with credit facilities which are available to various Mexican banks doing business with the Company.
Income directly attributable to international operations was $11,795,000, $11,821,000 and $10,331,000 for the years ended December 31, 1998, 1997 and 1996, respectively.
(12) INCOME TAXES
The Company files a consolidated U.S. Federal income tax return. The current and deferred portions of income tax expense (benefit) included in the consolidated statements of income are presented below for the years ended December 31:
1998 1997 1996
--------- --------- ---------
(DOLLARS IN THOUSANDS)
Current
U.S............................. $ 22,443 $ 23,565 $ 19,643
Foreign......................... 55 67 80
--------- --------- ---------
Total current taxes........ 22,498 23,632 19,723
Deferred............................. 2,122 1,139 441
--------- --------- ---------
Total income taxes......... $ 24,620 $ 24,771 $ 20,164
========= ========= =========
|
INTERNATIONAL BANCSHARES CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Total income tax expense differs from the amount computed by applying the U.S. Federal income tax rate of 35% for 1998, 1997 and 1996 to income before income taxes. The reasons for the differences for the years ended December 31 are as follows:
1998 1997 1996
--------- --------- ---------
(DOLLARS IN THOUSANDS)
Computed expected tax expense........ $ 27,416 $ 25,846 $ 22,580
Change in taxes resulting from:
Tax-exempt interest income...... (151) (111) (481)
Lease financing................. (2,309) (1,397) (1,792)
Other........................... (336) 433 (143)
--------- --------- ---------
Actual tax expense......... $ 24,620 $ 24,771 $ 20,164
========= ========= =========
|
The tax effects of temporary differences that give rise to significant portions of the deferred tax assets and deferred tax liabilities at December 31, 1998 and 1997 are reflected below:
1998 1997
---------- ----------
(DOLLARS IN THOUSANDS)
Deferred tax assets:
Loans receivable, principally
due to the allowance for
possible loan losses.......... $ 8,042 $ 8,147
Other real estate owned......... 516 512
Accrued expenses................ 1,286 1,181
Other........................... 523 475
---------- ----------
Total deferred tax assets....... 10,367 10,315
---------- ----------
Deferred tax liabilities:
Lease financing receivable...... (4,964) (2,423)
Bank premises and equipment,
principally due to differences
in depreciation............... (2,175) (2,078)
Net unrealized gains on
available for sale investment
securities.................... (4,733) (11,614)
Purchase accounting
adjustment.................... -- (460)
Other........................... (1,347) (1,351)
---------- ----------
Total deferred tax
liabilities................... (13,219) (17,926)
---------- ----------
Net deferred tax
liability............... $ (2,852) $ (7,611)
========== ==========
|
The Company did not record a valuation allowance against deferred tax assets at December 31, 1998 and 1997 because management has concluded it is more likely than not the Company will have future taxable earnings in excess of the future tax deductions.
INTERNATIONAL BANCSHARES CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(13) STOCK OPTIONS
On April 3, 1996, the Board of Directors adopted the 1996 International Bancshares Corporation Stock Option Plan (the "1996 Plan"). The 1996 Plan replaced the 1987 International Bancshares Corporation Key Contributor Stock Option Plan (the "1987 Plan"). Under the 1987 Plan and the 1996 Plan both qualified incentive stock options ("ISOs") and nonqualified stock options ("NQSOs") may be granted. Options granted may be exercisable for a period of up to 10 years from the date of grant, excluding ISOs granted to 10% shareholders, which may be exercisable for a period of up to only five years. The following schedule summarizes the pertinent information (adjusted for stock distributions) with regard to stock options from January 1, 1996 through December 31, 1998 which were granted by the Company under the 1987 Plan or the 1996 Plan.
OPTION PRICE OPTIONS
PER SHARE OUTSTANDING
--------------- -----------
Balance at January 1, 1996.............. 885,706
Terminated......................... $8.54 - 26.18 (25,676)
Granted............................ 24.32 - 29.76 2,812
Exercised.......................... 4.28 - 24.58 (134,013)
-----------
Balance at December 31, 1996............ 728,829
Terminated......................... $6.01 - 24.60 (13,897)
Granted............................ 37.12 - 52.00 399,193
Exercised.......................... 6.01 - 24.60 (176,424)
-----------
Balance at December 31, 1997............ 937,701
Terminated......................... $6.83 - 37.82 (40,445)
Granted............................ 48.00 - 49.75 14,750
Exercised.......................... 6.83 - 37.82 (244,753)
-----------
Balance at December 31, 1998............ 667,253
===========
|
At December 31, 1998 and 1997, 201,419 and 274,861 options were exercisable, respectively, and as of December 31, 1998, 153,784 shares were available for future grants under the 1996 Plan. All options granted under the 1987 Plan and the 1996 Plan had an option price of not less than the fair market value of the Company's common stock at the date of grant and a vesting period of five years.
The following table summarizes information about stock options outstanding at December 31, 1998:
OPTIONS OUTSTANDING
--------------------------------------- OPTIONS EXERCISABLE
WEIGHTED- -------------------------
AVERAGE WEIGHTED- WEIGHTED-
NUMBER REMAINING AVERAGE NUMBER AVERAGE
RANGE OF OUTSTANDING CONTRACTUAL EXERCISE EXERCISABLE EXERCISE
EXERCISE PRICES AT 12/31/98 LIFE PRICE AT 12/31/98 PRICE
-------------------- ----------- ----------- --------- ------------ ---------
$10.24 - 13.47...... 8,083 .9 years $ 12.25 8,083 $ 12.25
20.90............... 5,858 1.1 years 20.90 4,392 20.90
19.67............... 236,557 2.5 years 19.67 111,081 19.67
24.32 - 29.76....... 2,812 2.8 years 27.37 936 27.04
37.12 - 52.00....... 399,193 4.5 years 38.11 76,927 38.08
48.00 - 49.75....... 14,750 5.8 years 48.30 -- 48.30
----------- ------------
$10.24 - 52.00...... 667,253 201,419
=========== ============
|
Prior to January 1, 1996, the Company accounted for its stock option plan in accordance with the provisions of Accounting Principles Board ("APB") Opinion No. 25, "Accounting for Stock Issued to
INTERNATIONAL BANCSHARES CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Employees," and related interpretations. As such, compensation expense would be recorded on the date of grant only if the current market price of the underlying stock exceeded the exercise price. In October 1995, the Financial Accounting Standards Board issued SFAS No. 123, "Accounting for Stock-Based Compensation," which permits entities to recognize as expense over the vesting period the fair value of all stock-based awards on the date of grant. Alternatively, SFAS No. 123 also allows entities to continue to apply the provisions of APB Opinion No. 25 and provide pro forma net income and pro forma earnings per share disclosures for employee stock option grants made in 1995 and future years as if the fair-value-based method defined in SFAS No. 123 had been applied. The Company has elected to continue to apply the provisions of APB Opinion No. 25 and provide the pro forma disclosure provisions of SFAS No. 123.
The fair values of options at date of grant was estimated using the Black-Scholes option pricing model with the following weighted-average assumptions:
1998 1997 1996
--------- --------- ---------
Expected life (years)................ 6 6 6
Interest rate........................ 4.46% 6.62% 6.53%
Volatility........................... 36.40% 30.08% 41.00%
|
The following schedule shows total net income as reported and the pro forma results:
1998 1997 1996
--------- --------- ---------
Net income........................... As reported $ 53,725 $ 48,881 $ 44,350
Pro forma 52,123 47,667 43,782
Basic earnings....................... As reported $ 4.12 $ 3.84 $ 3.52
Pro forma 4.00 3.74 3.47
Diluted earnings..................... As reported $ 4.02 $ 3.70 $ 3.41
Pro forma 3.90 3.61 3.36
|
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 $21,000,000 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 $21,000,000 cap will occur in the future.
(14) COMMITMENTS AND CONTINGENT LIABILITIES
The Company is involved in various 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 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.
The Company leases portions of its banking premises and equipment under operating leases. Total rental expense for the years ended December 31, 1998, 1997 and 1996 and noncancellable lease commitments at December 31, 1998 were not significant.
Cash of approximately $25,434,000 and $58,710,000 at December 31, 1998 and 1997, respectively, was maintained to satisfy regulatory reserve requirements.
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
INTERNATIONAL BANCSHARES CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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 one of the transactions and the affected partnership has submitted a Protest contesting the adjustments. The Company has been advised that the IRS intends to issue a Notice of Proposed Adjustments to Affected Items of a Partnership for the other transaction and that the partnership intends to file a Protest contesting the proposed 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.
(15) TRANSACTIONS WITH RELATED PARTIES
In the ordinary course of business, the Corporation and its subsidiaries make loans to directors and executive officers of the Corporation, including their affiliates, families and companies in which they are principal owners. In the opinion of management, these loans are made on substantially the same terms, including interest rates and collateral, as those prevailing at the time for comparable transactions with other persons and do not involve more than normal risk of collectibility or present other unfavorable features. The aggregate amounts receivable from such related parties amounted to approximately $42,782,000 and $36,913,000 at December 31, 1998 and 1997, respectively. During 1998, $23,136,000 of new loans were made and repayments totaled $17,267,000.
(16) FINANCIAL INSTRUMENTS WITH OFF-BALANCE SHEET RISK AND CONCENTRATIONS OF CREDIT RISK
In the normal course of business, the bank subsidiaries are party to financial instruments with off-balance sheet risk to meet the financing needs of their customers. These financial instruments include commitments to their customers. These financial instruments involve, to varying degrees, elements of credit risk in excess of the amounts recognized in the balance sheet. The contract amounts of these instruments reflect the extent of involvement the bank subsidiaries have in particular classes of financial instruments. At December 31, 1998, the following financial instruments, whose contract amounts represent credit risks, were outstanding:
Commitments to extend credit......... $ 415,854,000 Credit card lines.................... 540,437,000 Letters of credit.................... 41,859,000 |
The bank subsidiaries' exposure to credit loss in the event of nonperformance by the other party to the above financial instruments is represented by the contractual amounts of the instruments. The bank subsidiaries use the same credit policies in making commitments and conditional obligations as they do for on-balance sheet instruments. The bank subsidiaries control the credit risk of these transactions through credit approvals, limits and monitoring procedures. Commitments to extend credit are agreements to lend to a customer as long as there is no violation of any condition established in the contract. Commitments generally have fixed expiration dates normally less than one year or other termination clauses and may require the payment of a fee. Since many of the commitments are expected to expire without being drawn upon, the total commitment amounts do not necessarily represent future cash requirements. The bank subsidiaries evaluate each customer's credit-worthiness on a case-by-case basis. The amount of collateral obtained, if deemed necessary by the subsidiary banks upon extension of credit, is based on management's credit evaluation of the customer. Collateral held varies, but may include residential and commercial real estate, bank certificates of deposit, accounts receivable and inventory.
Letters of credit are written conditional commitments issued by the bank subsidiaries to guarantee the performance of a customer to a third party. The credit risk involved in issuing letters of credit is essentially the same as that involved in extending loan facilities to customers.
INTERNATIONAL BANCSHARES CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The bank subsidiaries make commercial, real estate and consumer loans to customers principally located in Webb, Bexar, Hidalgo, Cameron, Starr and Zapata counties in South Texas as well as Matagorda, Brazoria, Galveston, Fort Bend, Calhoun, and Harris counties in Southeast Texas. Although the loan portfolio is diversified, a substantial portion of its debtors' ability to honor their contracts is dependent upon the economic conditions in these areas, especially in the real estate and commercial business sectors.
To date, the Company has not experienced a material adverse impact related to the 1994 devaluation of the peso in Mexico. Although the economic conditions have improved in Mexico, the Company will continue to monitor Mexico's economic progress.
(17) DIVIDEND RESTRICTIONS AND CAPITAL REQUIREMENTS
Bank regulatory agencies limit the amount of dividends which the bank subsidiaries can pay the Corporation, through IBC Subsidiary Corporation, without obtaining prior approval from such agencies. At December 31, 1998, the aggregate amount legally available to be distributed to the Corporation from bank subsidiaries as dividends was approximately $38,208,000, assuming that each subsidiary bank continues to be classified as "well capitalized" pursuant to the applicable regulations. The restricted capital of the bank subsidiaries was approximately $292,574,000. The undivided profits of the bank subsidiaries was $140,653,000. In addition to legal requirements, regulatory authorities also consider the adequacy of the bank subsidiaries' total capital in relation to their deposits and other factors. These capital adequacy considerations also limit amounts available for payment of dividends. The Corporation historically has not allowed any subsidiary bank to pay dividends in such a manner as to impair its capital adequacy.
The Corporation and the bank subsidiaries are subject to various regulatory capital requirements administered by the federal banking agencies. Failure to meet minimum capital requirements can initiate certain mandatory and possibly additional discretionary actions by regulators that, if undertaken, could have a direct material effect on the Company's financial statements. Under capital adequacy guidelines and the regulatory framework for prompt corrective action, the Company must meet specific capital guidelines that involve quantitative measures of the Company's assets, liabilities, and certain off-balance sheet items as calculated under regulatory accounting practices. The Company's capital amounts and classification are also subject to qualitative judgments by the regulators about components, risk weightings, and other factors.
Quantitative measures established by regulation to ensure capital adequacy require the Company to maintain minimum amounts and ratios (set forth in the table on the following page) of total and Tier 1 capital to risk-weighted assets and of Tier 1 capital to average assets. Management believes, as of December 31, 1998, that the Corporation and the bank subsidiaries met all capital adequacy requirements to which it is subject.
As of December 31, 1998, the most recent notification from the Federal Deposit Insurance Corporation categorized all the bank subsidiaries as well capitalized under the regulatory framework for prompt corrective action. To be categorized as "well capitalized" the Corporation and the bank subsidiaries must maintain minimum total risk-based, Tier 1 risk-based, and Tier 1 leverage ratios as set forth in the table. There are no conditions or events since that notification that management believes have changed the categorization of the Corporation or any of the bank subsidiaries as well capitalized.
INTERNATIONAL BANCSHARES CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The Corporation's and the bank subsidiaries' actual capital amounts and ratios for 1998 are also presented in the table.
TO BE WELL
CAPITALIZED UNDER
FOR CAPITAL PROMPT CORRECTIVE
ACTUAL ADEQUACY PURPOSES ACTION PROVISIONS
--------------------- ---------------------- ----------------------
AMOUNT RATIO AMOUNT RATIO AMOUNT RATIO
---------- --------- --------- --------- --------- ---------
(GREATER (GREATER (GREATER (GREATER
THAN OR THAN OR THAN OR THAN OR
EQUAL TO) EQUAL TO) EQUAL TO) EQUAL TO)
(DOLLARS IN THOUSANDS)
As of December 31, 1998:
Total Capital (to Risk Weighted Assets):
Consolidated....................... $ 343,669 14.45% $ 190,239 8.00% $ 237,798 10.00%
International Bank of Commerce,
Laredo........................... 248,814 12.03 165,426 8.00 206,783 10.00
International Bank of Commerce,
Brownsville...................... 30,436 18.20 13,375 8.00 16,719 10.00
International Bank of Commerce,
Zapata........................... 14,404 28.18 4,089 8.00 5,112 10.00
Commerce Bank...................... 18,768 24.18 6,208 8.00 7,760 10.00
Tier 1 Capital (to Risk Weighted
Assets):
Consolidated....................... $ 317,794 13.36% $ 95,119 4.00% $ 142,679 6.00%
International Bank of Commerce,
Laredo........................... 226,595 10.96 82,713 4.00 124,070 6.00
International Bank of Commerce,
Brownsville...................... 28,806 17.23 6,688 4.00 10,031 6.00
International Bank of Commerce,
Zapata........................... 13,893 27.18 2,045 4.00 3,067 6.00
Commerce Bank...................... 17,795 22.93 3,104 4.00 4,656 6.00
Tier 1 Capital (to Average Assets):
Consolidated....................... $ 317,794 6.50% $ 195,546 4.00% $ 244,433 5.00%
International Bank of Commerce,
Laredo........................... 226,595 5.46 166,115 4.00 207,644 5.00
International Bank of Commerce,
Brownsville...................... 28,806 6.98 16,508 4.00 20,634 5.00
International Bank of Commerce,
Zapata........................... 13,893 9.38 5,924 4.00 7,404 5.00
Commerce Bank...................... 17,795 10.12 7,037 4.00 8,796 5.00
|
INTERNATIONAL BANCSHARES CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The Corporation's and the bank subsidiaries' actual capital amounts and ratios for 1997 are also presented in the table.
TO BE WELL
CAPITALIZED UNDER
FOR CAPITAL PROMPT CORRECTIVE
ACTUAL ADEQUACY PURPOSES ACTION PROVISIONS
--------------------- ---------------------- ----------------------
AMOUNT RATIO AMOUNT RATIO AMOUNT RATIO
---------- --------- --------- --------- --------- ---------
(GREATER (GREATER (GREATER (GREATER
THAN OR THAN OR THAN OR THAN OR
EQUAL TO) EQUAL TO) EQUAL TO) EQUAL TO)
(DOLLARS IN THOUSANDS)
As of December 31, 1997:
Total Capital (to Risk Weighted Assets):
Consolidated....................... $ 296,235 15.20% $ 155,898 8.00% $ 194,872 10.00%
International Bank of Commerce,
Laredo........................... 201,776 12.10 133,378 8.00 166,722 10.00
International Bank of Commerce,
Brownsville...................... 25,305 17.07 11,862 8.00 14,827 10.00
International Bank of Commerce,
Zapata........................... 12,548 32.62 3,077 8.00 3,847 10.00
Commerce Bank...................... 15,949 24.09 5,296 8.00 6,620 10.00
Tier 1 Capital (to Risk Weighted
Assets):
Consolidated....................... $ 271,874 13.95% $ 77,949 4.00% $ 116,923 6.00%
International Bank of Commerce,
Laredo........................... 180,926 10.85 66,689 4.00 100,033 6.00
International Bank of Commerce,
Brownsville...................... 23,946 16.15 5,931 4.00 8,896 6.00
International Bank of Commerce,
Zapata........................... 12,067 31.37 1,539 4.00 2,308 6.00
Commerce Bank...................... 15,119 22.84 2,648 4.00 3,972 6.00
Tier 1 Capital (to Average Assets):
Consolidated....................... $ 271,874 6.41% $ 169,560 4.00% $ 211,950 5.00%
International Bank of Commerce,
Laredo........................... 180,926 5.15 140,431 4.00 175,539 5.00
International Bank of Commerce,
Brownsville...................... 23,946 6.17 15,523 4.00 19,404 5.00
International Bank of Commerce,
Zapata........................... 12,067 10.06 4,798 4.00 5,997 5.00
Commerce Bank...................... 15,119 10.19 5,933 4.00 7,417 5.00
|
(18) FAIR VALUE OF FINANCIAL INSTRUMENTS
The fair value estimates, methods, and assumptions for the Company's financial instruments at December 31, 1998 and 1997 are outlined below.
CASH, DUE FROM BANKS AND FEDERAL FUNDS SOLD
For these short-term instruments, the carrying amount is a reasonable estimate of fair value.
INTERNATIONAL BANCSHARES CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
TIME DEPOSITS WITH BANKS
As the contract interest rates are comparable to current market rates, the carrying amount approximates fair market value.
INVESTMENT SECURITIES
For investment securities, which include U. S. Treasury securities, obligations of other U. S. government agencies, obligations of states and political subdivisions and mortgage pass through and related securities, fair values are based on quoted market prices or dealer quotes. Fair values are based on the value of one unit without regard to any premium or discount that may result from concentrations of ownership of a financial instrument, possible tax ramifications, or estimated transaction costs. See disclosures of fair value of investment securities in Note 3.
LOANS
Fair values are estimated for portfolios of loans with similar financial characteristics. Loans are segregated by type such as commercial, real estate and consumer loans as outlined by regulatory reporting guidelines. Each category is segmented into fixed and variable interest rate terms and by performing and non-performing categories.
For variable rate performing loans, the carrying amount approximates the fair value. For fixed rate performing loans, except residential mortgage loans, the fair value is calculated by discounting scheduled cash flows through the estimated maturity using estimated market discount rates that reflect the credit and interest rate risk inherent in the loan. For performing residential mortgage loans, fair value is estimated by discounting contractual cash flows adjusted for prepayment estimates using discount rates based on secondary market sources or the primary origination market.
Fair value for significant non-performing loans is based on recent external appraisals. If appraisals are not available, estimated cash flows are discounted using a rate commensurate with the risk associated with the estimated cash flows. Assumptions regarding credit risk, cash flows and discount rates are judgementally determined using available market and specific borrower information. As of December 31, 1998 and 1997, the carrying amount of net loans was a reasonable estimate of the fair value.
DEPOSITS
The fair value of deposits with no stated maturity, such as non-interest bearing demand deposit accounts, savings accounts and interest bearing demand deposit accounts, was equal to the amount payable on demand as of December 31, 1998 and 1997. The fair value of time deposits is based on the discounted value of contractual cash flows. The discount rate is based on currently offered rates. As of December 31, 1998 and 1997, the carrying amount of time deposits was a reasonable estimate of the fair value.
FEDERAL FUNDS PURCHASED AND SECURITIES SOLD UNDER REPURCHASE AGREEMENTS, OTHER
BORROWED FUNDS AND SUBORDINATED DEBT
Due to the contractual terms of these financial instruments, the carrying amounts approximated fair value at December 31, 1998 and 1997.
COMMITMENTS TO EXTEND CREDIT AND LETTERS OF CREDIT
For commitments to extend credit and letters of credit, the carrying amount is based on the notional amount of the agreements and fair value is based on the discounted value of fees charged.
Fair value estimates are made at a point in time, based on relevant market information and information about the financial instrument. These estimates do not reflect any premium or discount that could result from offering for sale at one time the Company's entire holdings of a particular financial instrument. Because no market exists for a significant portion of the Company's financial instruments, fair value
INTERNATIONAL BANCSHARES CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
estimates are based on judgments regarding future expected loss experience, current economic conditions, risk characteristics of various financial instruments and other factors. These estimates are subjective in nature and involve uncertainties and matters of significant judgment and therefore cannot be determined with precision. Changes in assumptions could significantly affect the estimates.
Fair value estimates are based on existing on-and off-balance sheet financial instruments without attempting to estimate the value of anticipated future business and the value of assets and liabilities that are not considered financial instruments. Other significant assets and liabilities that are not considered financial assets or liabilities include the bank premises and equipment and core deposit value. In addition, the tax ramifications related to the effect of fair value estimates have not been considered in the above estimates.
(19) INTERNATIONAL BANCSHARES CORPORATION (PARENT COMPANY ONLY) FINANCIAL INFORMATION
STATEMENTS OF CONDITION
(PARENT COMPANY ONLY)
DECEMBER 31, 1998 AND 1997
(DOLLARS IN THOUSANDS)
1998 1997
---------- ----------
ASSETS
Cash................................. $ 97 $ 350
Repurchase agreements................ 1,600 7,500
Other investments.................... 10,708 2,021
Notes receivable..................... 49,925 57,209
Investment in subsidiaries........... 296,422 251,002
Other assets......................... 12,244 23,393
---------- ----------
Total assets............... 370,996 341,475
========== ==========
LIABILITIES AND SHAREHOLDERS' EQUITY
Liabilities:
Other liabilities............... 713 231
---------- ----------
Total liabilities.......... 713 231
---------- ----------
Shareholders' equity:
Common stock.................... 16,791 13,196
Surplus......................... 22,250 19,012
Retained earnings............... 341,025 301,988
Net unrealized holding gains on
available for sale securities,
net of deferred income taxes... 8,797 21,582
---------- ----------
388,863 355,778
Less cost of shares in treasury...... (18,580) (14,534)
---------- ----------
Total shareholders'
equity.................. 370,283 341,244
---------- ----------
Total liabilities and
shareholders' equity.... $ 370,996 $ 341,475
========== ==========
|
INTERNATIONAL BANCSHARES CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
STATEMENTS OF INCOME
(PARENT COMPANY ONLY)
YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996
(DOLLARS IN THOUSANDS)
1998 1997 1996
--------- --------- ---------
Income:
Dividends from subsidiaries..... $ 3,455 $ 17,035 $ 7,250
Interest income on notes
receivable.................... 5,202 6,134 6,944
Interest income on
investments................... 745 36 15
Other interest income........... 289 307 299
Other........................... (1,377) 4,517 4,603
--------- --------- ---------
Total income............... 8,314 28,029 19,111
--------- --------- ---------
Expenses:
Interest expense on notes
payable....................... -- 142 158
Other........................... 695 380 338
--------- --------- ---------
Total expenses............. 695 522 496
--------- --------- ---------
Income before federal
income taxes and equity
in undistributed net
income of
subsidiaries............ 7,619 27,507 18,615
Federal income tax expense........... (277) 1,785 1,847
--------- --------- ---------
Income before equity in
undistributed net income
of subsidiaries......... 7,896 25,722 16,768
Equity in undistributed net income of
subsidiaries....................... 45,829 23,159 27,582
--------- --------- ---------
Net income................. $ 53,725 $ 48,881 $ 44,350
========= ========= =========
|
INTERNATIONAL BANCSHARES CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
STATEMENTS OF CASH FLOWS
(PARENT COMPANY ONLY)
YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996
(DOLLARS IN THOUSANDS)
1998 1997 1996
---------- ---------- ----------
Operating activities:
Net income................................ $ 53,725 $ 48,881 $ 44,350
Adjustments to reconcile net income to net
cash provided by operating activities:
Gain on sale of other real estate.... -- (113) --
Increase (decrease) in other
liabilities....................... 482 197 (340)
Equity in undistributed net income of
subsidiaries...................... (45,829) (23,159) (27,582)
---------- ---------- ----------
Net cash provided by operating
activities................... 8,378 25,806 16,428
---------- ---------- ----------
Investing activities:
Contributions to subsidiaries............. (11,648) (18,656) (15,625)
Repayment from subsidiaries............... -- 166 --
Purchase of time deposits with banks...... -- (2,900) --
Proceeds from time deposits with banks.... -- 2,900 --
Purchase of repurchase agreement with
banks.................................. (3,550) (7,500) --
Proceeds from repurchase agreement with
banks.................................. 9,450 -- --
Purchase of available for sale other
securities............................. (10,036) (1,156) (375)
Principal collected on mortgage-backed
securities............................. 1,339 -- --
Net decrease in notes receivable.......... 7,284 10,192 8,677
Decrease (increase) in other assets....... 11,149 (5,364) (3,617)
Proceeds from sale of other real estate... -- 665 --
---------- ---------- ----------
Net cash provided (used) in
investing activities......... 3,988 (21,653) (10,940)
---------- ---------- ----------
Financing activities:
Proceeds from issuance of other borrowed
funds.................................. -- 6,333 --
Principal payments on notes payable....... -- (8,333) (500)
Proceeds from stock transactions.......... 2,765 6,778 965
Payments of cash dividends................ (11,297) (4,400) (3,489)
Payments of cash dividends in lieu of
fractional shares...................... (41) (26) (18)
Purchase of treasury stock................ (4,046) (4,491) (2,261)
---------- ---------- ----------
Net cash used in financing
activities................... (12,619) (4,139) (5,303)
---------- ---------- ----------
(Decrease) increase in cash and
cash equivalents............. (253) 14 185
Cash at beginning of year................... 350 336 151
---------- ---------- ----------
Cash at end of year......................... $ 97 $ 350 $ 336
========== ========== ==========
Supplemental cash flow information:
Interest paid............................. $ -- $ 131 $ 117
|
INTERNATIONAL BANCSHARES CORPORATION
OFFICERS AND DIRECTORS
OFFICERS
DENNIS E. NIXON
Chairman of the Board and President
ROY JENNINGS, JR.
Vice Chairman of the Board
R. DAVID GUERRA
Vice President
LEONARDO SALINAS
Vice President
RICHARD CAPPS
Vice President
EDUARDO J. FARIAS
Vice President
ARNOLDO CISNEROS
Vice President
IMELDA NAVARRO
Treasurer
WILLIAM CUELLAR
Auditor
LUISA D. BENAVIDES
Secretary
MARISA V. SANTOS
Assistant Secretary
DIRECTORS
DENNIS E. NIXON
President
International Bank of Commerce
ROY JENNINGS, JR.
Investments
LESTER AVIGAEL
Retail Merchant
Chairman of the Board
International Bank of Commerce
LEONARDO SALINAS
Senior Executive Vice President
International Bank of Commerce
IRVING GREENBLUM
Retail Merchant
RICHARD E. HAYNES
Attorney at Law; Real
Estate Investments
SIOMA NEIMAN
An International Entrepreneur
R. DAVID GUERRA
President
International Bank of Commerce
Branch in McAllen, Texas
ANTONIO R. SANCHEZ, JR.
Chairman of the Board of Sanchez
O'Brien Oil & Gas Corporation;
Investments
PEGGY J. NEWMAN
Investments
"EXHIBIT 21"
LIST OF SUBSIDIARIES
Subsidiaries of International Bancshares Corporation
NAME BUSINESS % OF OWNERSHIP
-------- -------- --------------
IBC Subsidiary Corporation Bank Holding Company 100%
IBC Life Insurance Company Credit Life Insurance 100%
IBC Trading Company Export Trading 100%
IBC Capital Corporation Investments 100%
|
Subsidiaries of IBC Subsidiary Corporation
NAME BUSINESS % OF OWNERSHIP
-------- -------- --------------
International Bank of Commerce State Bank 100%
Commerce Bank State Bank 100%
International Bank of Commerce,
Zapata State Bank 100%
International Bank of Commerce,
Brownsville State Bank 100%
|
"EXHIBIT 23"
ACCOUNTANTS' CONSENT
The Board of Directors
International Bancshares Corporation:
We consent to incorporation by reference in Registration Statement No. 33-15655 on Form S-8 of International Bancshares Corporation of our report dated March 5, 1999 relating to the consolidated statements of condition of International Bancshares Corporation and subsidiaries as of December 31, 1998 and 1997, and the related consolidated statements of income, comprehensive income, shareholders' equity and cash flows for each of the years in the three-year period ended December 31, 1998, which report is incorporated by reference in the December 31, 1998 annual report on Form 10-K of International Bancshares Corporation.
/s/ KPMG LLP San Antonio, Texas March 5, 1999 |
| ARTICLE 9 |
| PERIOD TYPE | 12 MOS |
| FISCAL YEAR END | DEC 31 1998 |
| PERIOD END | DEC 31 1998 |
| CASH | 94,594 |
| INT BEARING DEPOSITS | 1,373 |
| FED FUNDS SOLD | 26,000 |
| TRADING ASSETS | 0 |
| INVESTMENTS HELD FOR SALE | 3,005,369 |
| INVESTMENTS CARRYING | 2,508 |
| INVESTMENTS MARKET | 2,505 |
| LOANS | 1,623,364 |
| ALLOWANCE | 25,551 |
| TOTAL ASSETS | 4,987,877 |
| DEPOSITS | 3,369,637 |
| SHORT TERM | 974,000 |
| LIABILITIES OTHER | 38,257 |
| LONG TERM | 100,000 |
| PREFERRED MANDATORY | 0 |
| PREFERRED | 0 |
| COMMON | 16,791 |
| OTHER SE | 353,492 |
| TOTAL LIABILITIES AND EQUITY | 4,987,877 |
| INTEREST LOAN | 145,016 |
| INTEREST INVEST | 180,822 |
| INTEREST OTHER | 336 |
| INTEREST TOTAL | 326,174 |
| INTEREST DEPOSIT | 128,242 |
| INTEREST EXPENSE | 181,909 |
| INTEREST INCOME NET | 144,265 |
| LOAN LOSSES | 8,571 |
| SECURITIES GAINS | 3,893 |
| EXPENSE OTHER | 99,047 |
| INCOME PRETAX | 78,345 |
| INCOME PRE EXTRAORDINARY | 78,345 |
| EXTRAORDINARY | 0 |
| CHANGES | 0 |
| NET INCOME | 53,725 |
| EPS PRIMARY | 4.12 |
| EPS DILUTED | 4.02 |
| YIELD ACTUAL | 0 |
| LOANS NON | 5,538 |
| LOANS PAST | 8,785 |
| LOANS TROUBLED | 592 |
| LOANS PROBLEM | 0 |
| ALLOWANCE OPEN | 24,516 |
| CHARGE OFFS | 8,885 |
| RECOVERIES | 1,349 |
| ALLOWANCE CLOSE | 25,551 |
| ALLOWANCE DOMESTIC | 24,427 |
| ALLOWANCE FOREIGN | 1,124 |
| ALLOWANCE UNALLOCATED | 0 |