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, 1995 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 (210) 722-7611
(Address of principal executive (Registrant's telephone number)
office and Zip Code)
Securities registered pursuant to Section 12(b) of the Act:
NAME OF EACH EXCHANGE ON
TITLE OF EACH CLASS WHICH REGISTERED
None None
Securities Registered Pursuant to Section 12(g) of the Act:
COMMON STOCK ($1.00 PAR VALUE)
(Title of Class)
Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the Registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes X No .
Indicate 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 28, 1996 was $164,159,408.
As of March 28, 1996, there were 6,960,888 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, 1995 (in Part I and II) and (b) proxy
statement dated April 15, 1996 (in Part III).
<PAGE>
CONTENTS
PART I
PAGE
Item 1. Business........................................... 3
Item 2. Properties......................................... 21
Item 3. Legal Proceedings.................................. 21
Item 4. Submission of Matters to a Vote of
Security Holders................................. 21
Executive Officers of the Registrant............... 21
PART II
Item 5. Market for the Registrant's Common Stock
and Related Security Holder Matters.............. 22
Item 6. Selected Financial Data............................ 22
Item 7. Management's Discussion and Analysis of
Financial Condition and Results of
Operations....................................... 22
Item 8. Financial Statements and Supplementary Data........ 22
Item 9. Changes In and Disagreements with Accountants on
Accounting and Financial Disclosure.............. 22
PART III
Item 10. Directors and Executive Officers of the Registrant. 22
Item 11. Executive Compensation............................. 22
Item 12. Security Ownership of Certain Beneficial
Owners and Management............................ 23
Item 13. Certain Relationships and Related Transactions..... 23
PART IV
Item 14. Exhibits, Financial Statement Schedules
and Reports on Form 8-K.......................... 23
Signatures................................................... 25
2
<PAGE>
Item 1. BUSINESS
GENERAL
International Bancshares Corporation (the "Company") was incorporated under
the General Corporation Law of the State of Delaware in 1979 with 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 "Federal Reserve Board"). 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 Federal
Reserve Board. The Company's principal assets at December 31, 1995 consisted of
all the outstanding capital stock of four state banking associations. All of the
Company's subsidiary banks are members of the Federal Deposit Insurance
Corporation.
The subsidiary banks are in the business of gathering funds from various
sources and investing these funds in order to earn a return on the "margin", or
the difference between the rate on invested assets and the cost of such funds.
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.
The active existence of the Company began on July 28, 1980, when 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 83% 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 de novo banks and acquired certain assets and assumed certain
liabilities of two failed savings and loan associations, one failed national
bank, two existing national banks and two Texas State chartered banks. The
Company also organized three non-banking entities.
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; (ii) International
Bank of Commerce, Brownsville, a Texas state banking association which commenced
operations in 1984 and (iii) International Bank of Commerce, Zapata, a Texas
state banking association which commenced operations in 1984.
The Company has three non-banking subsidiaries. They are (i) IBC Life
Insurance Company, a Texas chartered subsidiary which reinsures credit life and
accident and health insurance; (ii) IBC Trading Company, an export trading
company which is currently inactive and (iii) IBC Subsidiary Corporation, a
second-tier bank holding company incorporated in the State of Delaware.
Effective as of February 1, 1995, The Bank of Corpus Christi, Corpus
Christi, Texas ("BCC"), a state bank organized under the laws of the State of
Texas, was merged with and into IBC. At the date of closing, total assets
acquired were approximately $80,000,000. The acquisition was accounted for as a
purchase.
Effective September 8, 1995, Stone Oak National Bank, San Antonio, Texas
("SONB") a national banking association organized under the laws of the United
States, was merged with and into IBC. At the date of closing, total assets
acquired were approximately $18,000,000. The acquisition was accounted for as a
purchase.
3
On February 27, 1996, the Company entered into a purchase and assumption
agreement whereby IBC will purchase certain assets and will assume certain
liabilities of River Valley Bank, F.S.B., headquartered in Weslaco, Texas. This
agreement is subject to regulatory approval. IBC will purchase loans of
approximately $22,915,000 and assume deposits of approximately $137,780,000 and
will receive cash or other assets in the amount of approximately $114,865,000.
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, the making of commercial, real
estate, personal, home improvement, automobile and other installment and term
loans. Each bank subsidiary is very active in facilitating international trade
along the United States border with Mexico and elsewhere. The issuance of
commercial letters of credit forms a substantial part of this business. Each
bank subsidiary also offers other related services, such as traveler's checks,
safety deposit, collection, notary public, escrow, drive-up and walk-up
facilities and other customary banking services.
The Company owns U.S. and Texas service mark registrations for "Rite
Check", "IBC Centre", "INTERNATIONAL BANK OF COMMERCE" and the United States and
Mexico design. In addition, the Company owns a Texas service mark registration
for "CHECK 'N SAVE".
No material portion of the business of the Company may be deemed seasonal
and the deposit and loan base of the Company's 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, 1995, the Company and its subsidiaries employed
approximately 822 persons full-time and 74 persons part-time.
COMPETITION
The Company, through its bank subsidiaries, competes for deposits and loans
principally with other commercial banks, savings and loan associations and
credit unions in Laredo, San Antonio, Zapata, the Coastal Bend area of Texas,
and the entire Rio Grande Valley of Texas. In Laredo and Webb County, there are
currently a total of seven commercial banks (including the Company's
subsidiaries, IBC and Commerce Bank) and one savings and loan association. IBC
is the largest financial institution in Laredo. In Zapata and Zapata County,
there are currently a total of two commercial banks (including IBC Zapata). In
San Antonio and Bexar County, and in the Coastal Bend area of Texas as well as
the Rio Grande Valley of Texas, there are a large number of banks and savings
and loan associations which provide strong competition to the bank subsidiaries.
The Company's primary domestic marketing area is South Texas with
principal emphasis in Laredo, Webb County, San Antonio, Bexar County, Zapata,
Zapata County, and the lower Rio Grande Valley, including Brownsville, McAllen,
Hidalgo County, Starr County and Cameron County as well as in the Texas Coastal
Bend area, including Corpus Christi, Nueces County and Rockport, Aransas County,
Port Lavaca, Calhoun County and Bay City, Matagorda County. The Company does a
significant amount of business for Mexican customers, with an emphasis in
Northern Mexico. To date, the Company has not experienced a material adverse
impact related to the recent devaluation of the peso in Mexico. Although the
Company does not currently operate any banks in Mexico, during the third quarter
of 1994, IBC submitted an application to the Mexican authorities to organize
International Bank of Commerce de Mexico, S. A. as a Mexican bank subsidiary of
International Bank of Commerce; however, to date the application has not been
approved by the Mexican authorities.
4
SUPERVISION AND REGULATION
In addition to the generally applicable state and Federal laws governing
businesses and employers, the Company and its subsidiary banks are further
extensively regulated by special Federal and state laws governing financial
institutions. These laws comprehensively regulate the operations of the
Company's subsidiary banks 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
Bank 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 Bank cannot be predicted.
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 Federal Reserve Board (the "FRB") and to a certain extent the
Texas Department of Banking. 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 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 affiliates. 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.
The BHCA and the Change in Bank Control Act require that, depending on the
circumstances, either Federal Reserve Board approval must be obtained or notice
must be furnished to the Federal Reserve Board 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 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.
5
In 1994, Congress enacted the Riegle-Neal Interstate Banking and
Branching Efficiency Act of 1994 ("Interstate Banking Act"), which rewrites
current federal law governing the interstate expansion of banks in the United
States. Commencing on September 29, 1995, adequately capitalized, well managed
bank holding companies with FRB approval may acquire banks located in any State,
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.
Until September 29, 1995, when the holding company acquisition provisions
of the Interstate Banking Act became effective, a bank holding company and its
subsidiaries were also prohibited from acquiring any bank located outside of the
state in which the operations of the bank holding company's banking subsidiaries
are located, unless the acquisition is specifically authorized by the statutes
of the state in which the target bank is located. During 1986, new banking laws
were enacted in Texas which removed the barriers for interstate banking. Under
certain conditions, out of state financial institutions may own Texas financial
institutions. As of December 31, 1995, 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. If a State opts-out, no bank in any
other state may establish a branch in that State either through merger or de
novo. A bank whose home State opts-out of interstate branching may not
participate in any interstate merger transaction. In 1995, Texas passed
legislation opting-out of the interstate branching provisions of The Interstate
Banking Act until September 1999. No accurate prediction can be made at this
time as to how this legislation will affect the Company and/or its subsidiary
banks.
The Federal Reserve Board 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 subsidiary bank
experiences either a significant loan loss or rapid growth of loans or deposits,
the Company may be compelled by the Federal Reserve Board to invest additional
capital in the subsidiary bank. Further, the Company would be required to
guaranty performance of the capital restoration plan of any undercapitalized
subsidiary bank. The Federal Reserve Board is also empowered to assess civil
penalties against companies or individuals who violate the Bank Holding Company
Act 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 Commissions may bring enforcement proceedings
against a bank holding company in Texas.
The Federal Reserve Board's policy discourages the payment of dividends from
borrowed funds and discourages payments that would affect capital adequacy. The
Federal Reserve Board has issued policy statements which generally state that
bank holding companies should serve as a source of financial and managerial
strength to their subsidiary banks, and generally should not pay dividends
except out of current earnings, and should not borrow to pay dividends if it is
experiencing capital or other financial problems.
6
SUPERVISION AND REGULATION OF BANKS
All of the subsidiary banks of the Company are state banks subject to
regulation by, and supervision of, the Texas Department of Banking and the FDIC.
All of the subsidiary banks 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. A new FDIC insurance
premium schedule went into effect January 1, 1993. The premiums increase
incrementally based on the rating of the bank.
Until June 1, 1995, there was an eight basis point spread between the
highest and lowest assessment rates, with banks classified in the highest
capital and supervisory evaluation categories by the FDIC being subject to a
rate of $0.23 per $100 of deposits and banks classified in the lowest capital
and supervisory evaluation categories being subject to a rate of $0.31 per $100
of deposits. These assessment rates reflected, in substantial part, the amount
the FDIC had determined necessary to increase the reserve ratio of the Bank
Insurance Fund ("BIF") to 1.25% of total insured bank deposits. On August 8,
1995, having determined that the BIF had attained the required 1.25% reserve
ratio during May 1995, the FDIC amended its regulations to adopt a new
assessment rate schedule for BIF deposits, effective retroactively on June 1,
1995. This new schedule established a 27 basis point spread between the highest
and the lowest assessment rates, with banks classified in the highest capital
and supervisory evaluation categories being subject to an annual assessment rate
of $0.04 per $100 of deposits and banks classified in the lowest capital and
supervisory categories being subject to an annual assessment rate of $0.31 per
$100 of deposits. The new regulations also authorized the FDIC to increase or
reduce annual assessment rates by up to 5 basis points from those set forth in
the new assessment rate schedule, without formal rulemaking, based on the amount
of assessment revenue necessary to maintain the required 1.25% reserve ratio.
On December 11, 1995, based on these factors, the FDIC made such an
adjustment, reducing the BIF assessment rates by 4 basis points for the
semi-annual assessment period beginning January 1, 1996. For this six-month
period, the annual assessment rate thus will range from $0.00 per $100 of
deposits for banks classified in the highest capital and supervisory evaluation
categories to $0.27 per $100 of deposits for banks classified in the lowest
capital and supervisory evaluation categories. There can be no assurance,
however, that this adjustment will continue in effect for subsequent assessment
periods, or that the FDIC will not make further adjustments, up or down, in
assessment rates. Based on the risk category applicable to the subsidiary banks,
the premium paid by the subsidiary banks is presently a minimum assessment of
$1,000 per semi-annual period, except for the deposits which are insured by the
Savings Association Insurance Fund and assessed a rate of $0.23 per $100 of
deposits.
During 1995, Congress considered various proposals for a one-time
special assessment to be charged on all SAIF deposits to fully capitalize the
SAIF at 1.25 percent of insured deposits. The proposed amount of the special
assessment has been as high as $0.85 per $100 of SAIF deposits; however, SAIF
deposits held by OAKAR banks (such as IBC) may be assessed a lower amount.
7
The Company and its subsidiary banks are currently required to meet
certain minimum regulatory capital guidelines utilizing total capital-to-risk
weighted assets and Tier 1 (core) Capital elements. At December 31, 1995, the
Company's ratio of total capital-to-risk-weighted assets was 15.93%. The
guidelines make regulatory capital requirements more sensitive to differences in
risk profiles among banking organizations, taking 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 (core) Capital elements. Tier 1 Capital of the Company is
comprised of common stockholders' equity. The core deposit intangibles and
goodwill of $16,560,000 booked in connection with the financial institution
acquisitions of the Company are deducted from the sum of core capital elements
when determining the capital ratios of the Company.
Effective December 31, 1990, the OCC and the Federal Reserve Board and,
effective April 10, 1991, the FDIC revised their respective capital requirements
to require a minimum 3 percent Tier 1 leverage capital ratio which will
complement the risk-based capital standards. The 3 percent ratio will apply only
to the most highly-rated banks or bank holding companies that are not
anticipating or experiencing any significant growth. All other banks and bank
holding companies will need to meet a minimum leverage ratio that is at least
100 to 200 basis points above this minimum. As of December 31, 1995, the
Company's Tier 1 leverage capital ratio was 7.46%.
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 the Federal Deposit and Insurance Corporation Improvement Act of
1991 (FDICIA). The regulation includes requirements for the capital categories
that will serve as benchmarks for mandatory supervisory actions. Under the
regulation, 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 the Bank's capital ratios as of
December 31, 1995, both the Company and the Bank 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. The
federal bank regulatory agencies intend to gather data before establishing an
explicit threshold level above which additional capital may be required. This
rule and future changes to this rule may have the effect of requiring the Bank
to maintain increased capital. In early 1996, the FDIC also announced that the
agency is developing a set of analytical tools to aid examiners as they weigh
bank risk exposure in examinations focused more on risk evaluations than
procedures.
As of January 13, 1991, the Commissioner of Banking of the State of
Texas issued a policy statement setting forth the minimum leverage and
risk-based capital requirements for Texas state chartered banks wherein the
Department of Banking adopted the Minimum FDIC Leverage Capital Ratio and
Risk-Based Capital Ratio while at the same time establishing a presumption that
banks are "adequately capitalized" if they exceed a 6% Tier 1 leverage capital
ratio.
8
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.
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. At present, no accurate prediction can be made as
to how this legislation will affect the Company or its subsidiary banks.
Under the Community Reinvestment Act ("CRA"), the FDIC is required to
assess the record of each subsidiary bank 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. In 1995, the CRA regulations were rewritten and
the new regulations and examination procedures were designed to emphasize
performance over paperwork and process. Each subsidiary bank received either an
"outstanding" or "satisfactory" rating in its most recent CRA review. Further,
there are fair lending laws which prohibit discrimination in connection with
lending decisions. On September 23, 1994, President Clinton signed into law the
Riegle Community Development and Regulatory Improvements Act of 1994 which
provides funds for community development lending, provides bank paperwork
reduction and regulatory relief measures, promotes securitization of small
business loans, and addresses home equity loan fraud, among other matters.
The subsidiary banks are required to report certain deposit
transactions to the Treasury Department pursuant to the Bank Secrecy Act
("BSA"). During 1995, the currency transaction report form used to report such
deposit transactions was simplified. In 1996, the way the subsidiary banks are
examined for compliance with BSA will change. The banks will have to demonstrate
to examiners that they have an effective system of detecting and preventing
money laundering through the use of sound know-your-customer policies and
procedures. Also during 1996, the Treasury Department's new recordkeeping
requirements for wire transfers will become effective. The wire transfer
regulations were adopted to further banks compliance with the requirements of
BSA.
The Company, IBC and the other subsidiary banks 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
subsidiary bank 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 subsidiary banks unless the loans are secured by specific
obligations. Further, such secured loans and investments by a subsidiary bank
are limited in amount, as to a bank holding company or any other affiliate, to
10% of such subsidiary bank's capital and surplus and, as to the bank holding
company and its affiliates, to an aggregate of 20% of such subsidiary bank's
capital and surplus. Certain restrictions do not apply to 80% or more owned
sister banks of bank holding companies. Each subsidiary bank 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.
9
The operations of the Bank 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 Bank Holding Company
Act 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.
The ability of the Company to pay dividends is largely dependent on the
amount of cash derived from dividends declared by its subsidiary banks. 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,
1995, there was an aggregate of approximately $85,670,000 available for the
payment of dividends to the Company, by IBC, Commerce Bank, IBC Zapata and IBC
Brownsville under the applicable restrictions. Note 16 of notes to consolidated
financial statements of the Company located on page 32 of the 1995 Annual Report
is incorporated herein by reference.
In 1991, Congress enacted FDICIA. FDICIA emphasizes the regulatory focus of
protecting the Bank Insurance Fund. The FDIC was granted an expanded supervisory
role in connection with all federally insured financial institutions. FDICIA
firmly links supervision to bank capital. FDICIA provides for mandatory early
intervention procedures that are triggered by diminishing capital of a financial
institution. Specifically, FDICIA requires the FDIC to establish a system of
risk-based assessments for federal deposit insurance, by which banks that pose a
greater risk of loss to the FDIC (based on their capital levels and the FDIC's
level of supervisory concern) will pay a higher insurance assessment. FDICIA
contains numerous other provisions including new accounting, auditing and
reporting requirements, new regulatory standards in areas such as asset quality,
earnings and compensation, and revised regulatory standards for the powers of
state chartered banks, real estate lending, bank closures and capital adequacy.
FDICIA also bolsters the bank deposit fund and authorizes borrowing limits for
the FDIC. In addition, important regulations required by FDICIA have been
adopted by the bank regulators, including external auditing standards, state
bank investment powers and real estate lending standards.
FDICIA also requires the federal bank regulatory agencies to prescribe
safety and soundness standards relating to (i) internal controls, information
systems and internal audit systems, (ii) loan documentation, (iii) credit
underwriting, (iv) interest rate exposure, (v) asset growth and (vi)
compensation and benefit standards for officers, directors, employees, and
principal shareholders. The FDIC adopted such standards in 1995. The safety and
soundness standards contain general guidelines relating to the foregoing
operational, managerial, and compensation issues that banks are to follow to
ensure that they are operating in a safe and sound manner.
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 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.
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.
10
<PAGE>
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, 1995, 1994 and 1993 (Dollars in
Thousands) (Note 1):
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
------------------------------------------------------------------------------------------
1995 1994 1993
---------------------------- -------------------------- --------------------------
AVERAGE AVERAGE AVERAGE AVERAGE AVERAGE AVERAGE
BALANCE INTEREST RATE BALANCE INTEREST RATE BALANCE INTEREST RATE
----------- -------- ------- --------- -------- -------- ------- -------- ------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
ASSETS
Interest earning assets:
Loans, net of unearned discounts:
Domestic......................$ 1,086,515 115,064 10.59% $ 947,333 89,332 9.43% $ 832,470 70,613 8.48%
Foreign....................... 115,621 9,347 8.08 107,913 7,725 7.16 108,911 6,989 6.42
Investment securities:
Taxable....................... 1,381,781 91,178 6.60 1,016,871 58,983 5.80 825,864 52,410 6.35
Tax-exempt.................... 33,668 1,825 5.42 50,142 1,691 3.37 8,901 1,120 12.58
Time deposits with banks........ 917 43 4.69 952 38 3.99 1,053 40 3.80
Federal funds sold.............. 13,004 991 7.62 23,477 1,022 4.35 10,165 657 6.46
Other........................... 3,668 419 11.42 2,911 469 16.11 - - -
--------- ------ ------- ------ ------- ------
Total interest-earning
assets................ 2,635,174 218,867 8.31 2,149,599 159,260 7.41 1,787,364 131,829 7.38
Non-interest earning assets:
Cash and due from banks......... 84,277 71,521 57,131
Bank premises and equipment, net 76,065 66,693 53,799
Other assets.................... 74,451 54,856 50,888
Less allowance for possible
loan losses.................... (18,794) (15,979) (12,050)
--------- --------- -------
Total....................$ 2,851,173 $ 2,326,690 $ 1,937,132
========= ========= =========
LIABILITIES AND
SHAREHOLDERS' EQUITY
Interest bearing liabilities:
Savings and interest bearing
demand deposits............... 548,917 16,741 3.05 488,654 10,930 2.24 408,657 9,590 2.35
Time deposits:
Domestic...................... 555,446 28,028 5.05 471,597 18,290 3.88 414,624 14,530 3.50
Foreign....................... 678,908 34,050 5.02 641,507 24,829 3.87 624,764 21,937 3.51
Subordinated debt............... - - - 446 29 6.50 2,066 114 5.52
Securities sold under...........
repurchase agreements
and federal funds purchased... 444,379 25,594 5.76 248,817 10,311 4.14 139,391 4,685 3.36
Other borrowings................ 122,133 7,948 6.51 43,923 2,365 5.38 4,923 299 6.07
--------- ------ --------- ------ --------- ------
Total interest bearing
liabilities............ 2,349,783 112,361 4.78 1,894,944 66,754 3.52 1,594,425 51,155 3.21
Non-interest bearing liabilities:
Demand deposits................. 269,218 244,436 185,276
Other liabilities............... 17,269 12,074 9,866
Shareholders' equity............... 214,903 175,236 147,565
--------- --------- ---------
Total....................$ 2,851,173 $ 2,326,690 $ 1,937,132
========= ========= =========
Net interest income...... 106,506 92,506 80,674
======= ====== ======
Net yield on interest
earning assets......... 4.04% 4.30% 4.51%
==== ==== ====
</TABLE>
(Note 1) The average balances for purposes of the above table are calculated on
the basis of month-end balances.
11
<PAGE>
INTEREST RATES AND INTEREST DIFFERENTIAL
The following table analyzes the changes in net interest income during 1995
and 1994 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):
<TABLE>
<CAPTION>
1995 COMPARED TO 1994 1994 COMPARED TO 1993
------------------------------------ ----------------------------------
NET INCREASE (DECREASE) DUE TO NET INCREASE (DECREASE) DUE TO
------------------------------------ ----------------------------------
VOLUME RATE TOTAL VOLUME RATE TOTAL
-------- ------- ------- ------- ------ -------
(Dollars in Thousands) (Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C>
Interest earned on:
Loans, net of unearned discounts:
Domestic ................................... $ 14,006 11,726 25,732 10,331 8,388 18,719
Foreign .................................... 580 1,042 1,622 (63) 799 736
Investment securities:
Taxable .................................... 22,978 9,217 32,195 10,508 (3,935) 6,573
Tax-exempt ................................. (157) 291 134 678 (107) 571
Time deposits with banks ..................... 23 (18) 5 (2) -- (2)
Federal funds sold ........................... (31) -- (31) 268 97 365
Other ........................................ 122 (172) (50) -- 469 469
-------- ------- ------- ------- ------ -------
Total interest income ......................... 37,521 22,086 59,607 21,720 5,711 27,431
Interest incurred on:
Savings and interest
bearing demand deposits .................... 1,478 4,333 5,811 1,762 (422) 1,340
Time deposits:
Domestic ................................... 3,612 6,126 9,738 2,100 1,660 3,760
Foreign .................................... 1,512 7,709 9,221 599 2,293 2,892
Subordinated debt ............................ (14) (15) (29) (85) -- (85)
Securities sold under
repurchase agreements
and federal funds purchased ................ 15,277 6 15,283 7,333 (1,707) 5,626
Other borrowings ............................. 4,994 589 5,583 2,096 (30) 2,066
-------- ------- ------- ------- ------ -------
Total interest expense ................ 26,859 18,748 45,607 13,805 1,794 15,599
-------- ------- ------- ------- ------ -------
Net interest income ............................ $ 10,662 3,338 14,000 7,915 3,917 11,832
======== ======= ======= ======= ====== =======
</TABLE>
(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.
12
<PAGE>
INTEREST RATE SENSITIVITY
The net-interest rate sensitivity as of December 31, 1995 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 becomes 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 on
future dates.
<TABLE>
<CAPTION>
RATE/MATURITY RATE/MATURITY RATE/MATURITY RATE/MATURITY
December 31, 1995 3 MONTHS OVER 3 MONTHS OVER 1 YR OVER
(Dollars in Thousands) OR LESS TO 1 YR TO 5 YRS 5 YRS TOTAL
=========================================================================================================
<S> <C> <C> <C> <C> <C>
SECTION A
- ---------------------------------------------------------------------------------------------------------
RATE SENSITIVE ASSETS
FED FUNDS SOLD 37,000 - - - 37,000
DUE FROM BANK INTEREST EARNING 1,100 700 - - 1,800
INVESTMENT SECURITIES 159,397 191,650 1,111,286 1,008 1,463,341
LOANS, NET OF NON-ACCRUALS 934,922 95,603 87,628 84,004 1,202,157
- ---------------------------------------------------------------------------------------------------------
TOTAL EARNING ASSETS 1,132,419 287,953 1,198,914 85,012 2,704,298
- ---------------------------------------------------------------------------------------------------------
CUMULATIVE EARNING ASSETS 1,132,419 1,420,372 2,619,286 2,704,298
=========================================================================================================
SECTION B
- ---------------------------------------------------------------------------------------------------------
RATE SENSITIVE LIABILITIES
TIME DEPOSITS 617,677 505,661 147,651 178 1,271,167
OTHER INTEREST BEARING DEPOSITS 576,878 - - - 576,878
FED FUNDS PURCHASED AND REPOS 411,294 42,482 8,826 - 462,602
OTHER BORROWINGS 66,500 - - - 66,500
- ---------------------------------------------------------------------------------------------------------
TOTAL INTEREST BEARING LIABILITIES 1,672,349 548,143 156,477 178 2,377,147
- ---------------------------------------------------------------------------------------------------------
CUMULATIVE SENSITIVE LIABILITIES 1,672,349 2,220,492 2,376,969 2,377,147
=========================================================================================================
SECTION C
- ---------------------------------------------------------------------------------------------------------
REPRICING GAP (539,930) (260,190) 1,042,437 84,834 327,151
CUMULATIVE REPRICING GAP (539,930) (800,120) 242,317 327,151
RATIO OF INTEREST-SENSITIVE
ASSETS TO LIABILITIES .68 .53 7.66 - 1.14
RATIO OF CUMULATIVE, INTEREST-
SENSITIVE ASSETS TO LIABILITIES .68 .64 1.10 1.14
=========================================================================================================
</TABLE>
13
<PAGE>
INVESTMENT SECURITIES
The following table sets forth the carrying value of investment securities
as of December 31, 1995, 1994 and 1993:
DECEMBER 31,
--------------------------------------
1995 1994 1993
---------- --------- -------
(Dollars in Thousands)
U.S. Treasury securities
Held to maturity ................. $ -- 23,074 517
Available for sale ............... 7,058 5,828 --
Mortgage-backed securities
Held to maturity ................. 1,044 610,553 919,242
Available for sale ............... 1,408,705 605,197 --
Obligations of states and
political subdivisions
Held to maturity ................. -- 10,564 19,266
Available for sale ............... 29,975 23,013 --
Equity securities
Held to maturity ................. -- -- 10,312
Available for sale ............... 14,694 12,364 --
Other securities
Held to maturity ................. 1,865 3,641 1,715
---------- --------- -------
Total ........................ $1,463,341 1,294,234 951,052
---------- --------- -------
The following table sets forth the contractual maturities of investment
securities at December 31, 1995 and the average yields of such securities.
Actual maturities will differ from contractual maturities because borrowers may
have the right to prepay obligations with or without prepayment penalties.
<TABLE>
<CAPTION>
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)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
U.S. Treasury and obligations of
other U.S. Government agencies ............ $ 1,988 6.25% $ 4,889 5.80% $ -- -- % $ -- -- %
Mortgage-backed securities .................. 94 9.00 282,626 6.90 435,377 7.74 670,195 7.45
Obligations of states and political
subdivisions .............................. 532 .99 470 .00 11,780 4.59 17,178 4.27
Equity Securities ........................... 14,694 6.46 -- -- -- -- -- --
Total............................... $17,308 $287,985 $447,157 $687,373
------ ------- ------- -------
</TABLE>
14
<PAGE>
<TABLE>
<CAPTION>
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)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Obligations of states and political
subdivisions............................... $180 8.20% $800 8.24% $63 7.70% $ - - %
Other Securities............................. - - 56 7.46 1,810 8.12 - -
----- ----- ------ ------
Total............................... $180 $856 $ 1,873 $ -
----- ----- ------ ------
</TABLE>
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, 1995,
1994, 1993, 1992 and 1991 are shown in the following table:
<TABLE>
<CAPTION>
1995 1994 1993 1992 1991
----------- ---------- ---------- -------- --------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C>
Commercial, financial
and agricultural .......................... $ 718,364 664,449 611,612 515,559 394,016
Lease financing receivable, net ............. 3,910 3,910 4,323 4,288 3,819
Real estate-mortgage ........................ 200,998 201,998 180,777 185,788 183,680
Real estate-construction .................... 39,527 46,584 21,326 12,937 11,053
Consumer .................................... 124,843 122,751 88,452 70,488 67,873
Foreign ..................................... 120,748 106,707 107,771 108,285 102,317
----------- ---------- ---------- -------- --------
Total loans ............................ 1,208,390 1,146,399 1,014,261 897,345 762,758
Unearned discount ........................... (3,479) (3,885) (2,547) (2,437) (3,089)
----------- ---------- ---------- -------- --------
Loans, net of
unearned discount .................... $ 1,204,911 1,142,514 1,011,714 894,908 759,669
----------- ---------- ---------- -------- --------
</TABLE>
The table on the following page shows the amounts of loans (excluding lease
financing receivables, real estate mortgages and consumer loans) outstanding as
of December 31, 1995 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:
15
<PAGE>
MATURING
-----------------------------------------
AFTER ONE
WITHIN BUT WITHIN AFTER
ONE YEAR FIVE YEARS FIVE YEARS TOTAL
-------- ------- ------- -------
(Dollars in Thousands)
Commercial, financial and
agricultural .................... $231,730 378,690 107,944 718,364
Real estate - construction ........ 25,426 13,475 626 39,527
Foreign ........................... 71,924 38,279 10,545 120,748
-------- ------- ------- -------
Total ................... $329,080 430,444 119,115 878,639
-------- ------- ------- -------
INTEREST SENSITIVITY
----------------------
FIXED VARIABLE
RATE RATE
------- -------
(Dollars in Thousands)
Due after one but within five years .............. $40,909 389,534
Due after five years ............................. 47,405 71,711
------- -------
Total .................................. $88,314 461,245
------- -------
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:
<TABLE>
<CAPTION>
DECEMBER 31,
---------------------------------------------------------
1995 1994 1993 1992 1991
---- ---- ---- ---- ----
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C>
Loans accounted for on a non-accrual basis ...................... $5,291 2,895 5,371 7,375 10,032
Loans contractually past due ninety days
or more as to interest or principal payments .................. 7,954 5,605 3,777 3,217 5,378
Loans accounted for as "troubled debt restructurings" ........... 2,742 1,990 3,170 2,901 5,192
</TABLE>
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 the Mexican Government, certain loans may be classified in one or more
category:
<TABLE>
<CAPTION>
DECEMBER 31,
------------------------------------------------------
1995 1994 1993 1992 1991
---- ---- ---- ---- ----
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C>
Loans accounted for on a non-accrual basis .......................... $942 732 733 14 247
Loans contractually past due ninety days or more
as to interest or principal payments .............................. 944 1,086 759 738 333
</TABLE>
16
<PAGE>
The gross income that would have been recorded during 1995 on non-accrual
and restructured loans in accordance with their original contract terms was
$668,000 on domestic loans and $342,000 on foreign loans. The amount of interest
income on such loans that was recognized in 1995 was $6,000 on domestic loans
and none for foreign loans.
The non-accrual loan policy of the banking 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
the Company 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 its 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.
Pursuant to the Uniform Interagency Policy Statement on the allowance for
loan and lease losses announced December 21, 1993, bank examiners are generally
supposed to accept an institution's estimates of the adequacy of its allowance
for loan and lease losses if management has effective systems and controls in
place to identify, monitor and address asset quality problems in a timely
manner; however, examiners are now given a formula to use in further checking
the reasonableness of management's allowance methodology. The Policy Statement
tells examiners to compare the reported allowance (after the deduction of items
classified as "loss") against the sum of (i) fifty percent of the portfolio
classified as "doubtful", (ii) 15 percent of the portfolio classified as
"substandard" and (iii) estimated credit losses over the next twelve months on
the unclassified portion of the portfolio based on previous charge-off
experience. Examiners will view a shortfall relative to this amount as
indicating a need to more closely review management's analysis.
However, IBC analysis does not reflect such a shortfall.
The following table presents certain information about cross-border
outstanding (loans, accrued interest thereon, acceptances, interest-bearing
deposits with other banks, other interest bearing investments and other monetary
assets) related to Mexico:
DECEMBER 31,
-----------------------------------
1995 1994 1993
--------- -------- --------
(Dollars in Thousands)
Loans:
Commercial, financial, industrial
and agricultural ................... $ 90,541 86,949 90,618
Real estate-mortgage ................. 10,254 11,403 7,645
Consumer ............................. 19,953 8,355 9,508
--------- -------- --------
120,748 106,707 107,771
Less allowance for possible
loan losses ........................ (1,035) (949) (769)
--------- -------- --------
Net loans ................... $ 119,713 105,758 107,002
--------- -------- --------
Accrued interest receivable ............ $ 1,191 1,151 1,280
--------- -------- --------
17
<PAGE>
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:
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
--------------------------------------------------------------------------------
1995 1994 1993 1992 1991
----------- ---------- ---------- -------- --------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C>
Loans, net of unearned discounts,
outstanding at December 31, .............. $ 1,204,911 1,142,514 1,011,714 894,908 757,527
----------- ---------- ---------- -------- --------
Average loans outstanding during
the year (Note 1) ........................ $ 1,202,136 1,055,246 941,381 823,274 755,042
----------- ---------- ---------- -------- --------
Balance of allowance
at January 1 ............................. $ 17,025 13,831 10,055 8,519 7,951
----------- ---------- ---------- -------- --------
Provision charged to expense ............... 5,150 3,804 4,540 4,664 5,227
----------- ---------- ---------- -------- --------
Loans charged-off
Domestic:
Commercial, financial
and agricultural ........................ (2,248) (1,073) (1,299) (1,939) (1,931)
Real estate-mortgage ..................... (619) (685) (569) (1,209) (3,061)
Consumer ................................. (1,849) (816) (556) (549) (908)
Foreign .................................... (48) (148) (49) (54) (242)
----------- ---------- ---------- -------- --------
Total loans charged-off .................... (4,764) (2,722) (2,473) (3,751) (6,142)
----------- ---------- ---------- -------- --------
Recoveries credited to allowance:
Domestic:
Commercial, financial
and agricultural ........................ 190 236 663 167 513
Real estate mortgage ..................... 80 968 146 71 104
Consumer ................................. 229 237 136 91 70
Foreign .................................... 110 227 67 33 23
----------- ---------- ---------- -------- --------
Total recoveries ........................... 609 1,668 1,012 362 710
----------- ---------- ---------- -------- --------
Net loans charged-off ...................... (4,155) (1,054) (1,461) (3,389) (5,432)
----------- ---------- ---------- -------- --------
Allowance acquired in purchase
transactions ............................. 435 444 697 261 773
----------- ---------- ---------- -------- --------
Balance of allowance
at December 31 ........................... $ 18,455 17,025 13,831 10,055 8,519
----------- ---------- ---------- -------- --------
Ratio of net loans charged-off
during the year to average
loans outstanding during
the year (Note 1) ........................ .35% .10 .16 .41 .72
----------- ---------- ---------- -------- --------
Ratio of allowance to loans, net
of unearned discounts, out-
standing at December 31, ................. 1.53% 1.49 1.37 1.12 1.12
----------- ---------- ---------- -------- --------
</TABLE>
(Note 1) The average balances for purposes of the above table are calculated
on the basis of month-end balances.
18
<PAGE>
The Company 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
allowance for possible loan losses approximated 1.53% and 1.49% of total loans,
net of unearned income, at December 31, 1995 and 1994, respectively.
The amount charged against 1995 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 the Company 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 the Company 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 (Dollars in Thousands):
<TABLE>
<CAPTION>
DECEMBER 31, 1995 DECEMBER 31, 1994 DECEMBER 31, 1993 DECEMBER 31, 1992 DECEMBER 31, 1991
------------------- ------------------ ------------------ -------------------- ------------------
PERCENT OF PERCENT OF PERCENT OF PERCENT OF PERCENT OF
LOANS LOANS LOANS LOANS LOANS
IN EACH IN EACH IN EACH IN EACH IN EACH
CATEGORY CATEGORY CATEGORY CATEGORY CATEGORY
TO TOTAL TO TOTAL TO TOTAL TO TOTAL TO TOTAL
ALLOWANCE LOANS ALLOWANCE LOANS ALLOWANCE LOANS ALLOWANCE LOANS ALLOWANCE LOANS
------- ----- ------- ----- ------- ----- ------- ----- ------ -----
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Commercial, financial
and agricultural .......... $11,506 59.4% $10,274 58.0% $ 8,813 60.3% $ 6,177 57.5% $4,749 51.7%
Lease financing
receivables ............... 63 .3 61 .3 62 .4 51 .5 20 .5
Real estate
mortgage .................. 3,219 16.6 3,123 17.6 2,605 17.8 2,226 20.7 2,214 24.1
Real estate
construction .............. 633 3.3 720 4.1 307 2.1 155 1.4 133 1.4
Consumer .................... 1,999 10.4 1,898 10.7 1,275 8.8 845 7.9 818 8.9
Foreign ..................... 1,035 10.0 949 9.3 769 10.6 601 12.0 585 13.4
------- ----- ------- ----- ------- ----- ------ ----- ----- -----
$18,455 100.0% $17,025 100.0% $13,831 100.0% $10,055 100.0% $8,519 100.0%
======= ===== ======= ===== ======= ===== ======= ===== ====== =====
</TABLE>
DEPOSITS
The average amount of deposits, based on month-end balances and interest
expense is summarized for the years indicated in the following table:
YEARS ENDED DECEMBER 31,
1995 1994 1993
-------- ------- -------
(Dollars in Thousands)
Deposits:
Demand - non-interest bearing
Domestic ........................... $234,793 214,985 171,280
Foreign ............................ 34,425 29,451 13,996
-------- ------- -------
Total demand non-interest
bearing .......................... 269,218 244,436 185,276
-------- ------- -------
Savings and interest bearing demand
Domestic ........................... 382,028 301,738 232,898
Foreign ............................ 166,889 186,916 175,759
-------- ------- -------
Total savings and interest
bearing demand ................... 548,917 488,654 408,657
-------- ------- -------
19
<PAGE>
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
----------------------------------
1995 1994 1993
---------- --------- ---------
(Dollars in Thousands)
<S> <C> <C> <C>
Time, certificates of deposit $100,000 or more:
Domestic ................................... 250,103 210,186 170,883
Foreign .................................... 493,747 460,747 445,687
Less than $100,000:
Domestic ................................... 305,343 261,411 243,741
Foreign .................................... 185,161 180,760 179,077
---------- --------- ---------
Total time, certificates of
deposit ....................................... 1,234,354 1,113,104 1,039,388
---------- --------- ---------
Total deposits .................................... $2,052,489 1,846,194 1,633,321
========== ========= =========
Interest Expense:
Savings and interest bearing demand
Domestic ................................... $ 12,341 7,271 5,571
Foreign .................................... 4,400 3,659 4,019
---------- --------- ---------
Total savings and interest
bearing demand .................................. 16,741 10,930 9,590
---------- --------- ---------
Interest, certificates of deposit $100,000 or more:
Domestic ................................... 13,151 8,502 6,466
Foreign .................................... 25,713 18,692 16,407
Less than $100,000
Domestic ................................... 14,877 9,788 8,064
Foreign .................................... 8,337 6,137 5,530
---------- --------- ---------
Total interest, certificates
of deposit ..................................... 62,078 43,119 36,467
---------- --------- ---------
Total interest expense .......................... $ 78,819 54,049 46,057
---------- --------- ---------
</TABLE>
Maturities of time certificates of deposit of $100,000 or more outstanding
at December 31, 1995 are summarized as follows (Dollars in Thousands):
3 months or less .......................................... $385,376
Over 3 but through 12 months .............................. 304,941
Over 12 months ............................................ 79,058
--------
Total ................................................ $769,375
--------
RETURN ON EQUITY AND ASSETS
Certain key ratios for the Company for the years ended December 31, 1995,
1994 and 1993 follows (Note 1):
YEARS ENDED DECEMBER 31,
------------------------------
1995 1994 1993
(Dollars in Thousands)
Percentage of net income to:
Average shareholders' equity .......... 18.64% 21.62% 21.59%
Average total assets .................. 1.41 1.63 1.64
Percentage of average shareholders'
equity to average total assets ........ 7.54 7.53 7.62
Percentage of cash dividend per share
to net income per share ............... 8.61 16.54 --
(Note 1) The average balances for purposes of the above table are calculated on
the basis of month-end balances. Also, no cash dividend was issued in 1993.
20
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 29 of the 1995 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 subsidiary banks of IBC have a total of 42 main banking and branch
facilities. All the facilities are customary to the banking industry. Most of
the subsidiary banks own their banking facilities and the remainder are leased.
The facilities are located in Laredo, San Antonio, Zapata, the Rio Grande Valley
of Texas and the Coastal Bend area of Texas.
As Texas state-chartered banks, each subsidiary bank of the Company may
not, without the prior written consent of the Texas 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 subsidiary banks exceed
such limitation.
Item 3. LEGAL PROCEEDINGS
The Company is involved in various legal proceedings that are in various
stages of litigation by the Company and its legal counsel. Some of these actions
allege "lender Liability" claims on a variety of theories and claim substantial
actual and punitive damages. The Company has determined, based on discussions
with its counsel, that any material loss in such actions, individually or in the
aggregate, is remote or the damages sought, even if fully recovered, would not
be considered material. However, many of these matters are in various stages of
proceedings and further developments could cause Management to revise its
assessment of these matters.
Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Since the 1995 Annual Shareholders meeting on May 18, 1995, no matter was
submitted to a vote of Registrant's security holders through the solicitation of
proxies or otherwise.
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 1996 Annual Meeting of shareholders and until his successor is duly elected
and qualified.
OFFICER OF THE
NAME AGE POSITION OF OFFICE COMPANY SINCE
Dennis E. Nixon 53 Chairman of the Board and 1979
President of the Company,
Chief Executive Officer of IBC
Leonardo Salinas 62 Vice President of the Company 1982
and Senior Executive Vice
President of IBC
21
R. David Guerra 43 Vice President of the Company 1986
and President of IBC McAllen
Branch
Arnoldo Cisneros 44 Secretary-Treasurer of the 1982
Company and 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 pages 8 and 9 of Registrant's 1995 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 1995 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 9 of Registrant's 1995 Annual Report is incorporated herein by
reference.
Item 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The consolidated financial statements located on pages 11 through 17 of
Registrant's 1995 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, 1996, appearing on pages 2
and 3 under the caption "Election of Directors" and (ii) that portion of Part I
of this report entitled "Executive Officers of the Registrant" is incorporated
herein by reference.
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, 1996, on pages 5 through 7
appearing under the heading "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.
22
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, 1996, appearing on pages 4
and 5 under the captions "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, 1996, appearing on pages 8
and 9 under the caption "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 1995 Annual Report to shareholders filed as an
exhibit hereto and they include:
Independent Auditors' Report
Consolidated:
Statements of Condition as of December 31, 1995 and 1994 Statements
of Income for the years ended December 31, 1995, 1994 and 1993
Statements of Shareholders' Equity for the years ended December 31,
1995, 1994 and 1993 Statements of Cash Flows for the years ended
December 31, 1995, 1994 and 1993 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
(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
23
(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 #33-15655 as filed on July 13, 1987.
(10f)*-Merger Agreement by and between International Bank of
Commerce, Laredo, Texas, Michigan National Corporation and First
State Bank and Trust Company, Port Lavaca, Texas 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, Laredo, Texas and The Bank of Corpus Christi, Corpus
Christi, Texas 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, Laredo, Texas, and Stone Oak National Bank, San Antonio,
Texas, 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.
(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.
09439.
24
(10j)-Purchase and Assumption Agreement dated as of February 27,
1996, by and between International Bank of Commerce, Laredo, Texas,
River Valley Bank, F.S.B., Weslaco, Texas and Western Capital
Holdings, Inc.
(13)**-International Bancshares Corporation 1995 Annual Report to
security holders
(21)-List of Subsidiaries of International Bancshares Corporation
as of March 28, 1996
(23)-Accountants' Consent
* Previously filed
** Deemed filed only with respect to those portions thereof
incorporated
herein by reference
+ Executive Compensation Plans and Arrangements
(b) REPORTS ON FORM 8-K
A Current Report on Form 8-K relating to Registrant's earnings release
for the year ended December 31, 1995 was filed with the Securities and
Exchange Commission on March 14, 1996.
25
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 25, 1996
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 25, 1996
Dennis E. Nixon (Principal Executive
Officer)
/S/ ARNOLDO CISNEROS Secretary-Treasurer MARCH 25, 1996
Arnoldo Cisneros (Principal Financial
Officer)
/S/ LEONARDO SALINAS Vice President and MARCH 25, 1996
Leonardo Salinas Director
/S/ LESTER AVIGAEL Director MARCH 25, 1996
Lester Avigael
/S/ IRVING GREENBLUM Director MARCH 25, 1996
Irving Greenblum
/S/ R. DAVID GUERRA Director MARCH 25, 1996
R. David Guerra
/S/ RICHARD E. HAYNES Director MARCH 25, 1996
Richard E. Haynes
/S/ ROY JENNINGS, JR. Director MARCH 25, 1996
Roy Jennings, Jr.
Sioma Neiman Director
/S/ ALBERTO A. SANTOS Director MARCH 25, 1996
Alberto A. Santos
/S/ ANTONIO R. SANCHEZ JR. Director MARCH 25, 1996
Antonio R. Sanchez Jr.
Exhibit Index
Exhibit 10j - Purchase and Assumption Agreement dated as of February 27,
1996, by and between International Bank of Commerce,
Laredo, Texas, River Valley Bank, F.S.B., Weslaco, Texas
and Western Capital Holdings, Inc.
Exhibit 13 - International Bancshares Corporation 1995 Annual Report to
security holders
Exhibit 21 - List of Subsidiaries of International Bancshares
Corporation as of March 28, 1996
Exhibit 23 - Accountants' Consent
26
EXHIBIT (10j)
PURCHASE AND ASSUMPTION AGREEMENT
THIS PURCHASE AND ASSUMPTION AGREEMENT (the "Agreement") is made and
entered into this 27th day of February, 1996, by and between International Bank
of Commerce, a Texas state-chartered banking association with its principal
place of business in Laredo, Texas ("PURCHASER"), River Valley Bank, F.S.B., a
federal savings bank with its principal place of business in Weslaco, Texas and
which has branches in Brownsville, Harlingen and McAllen ("SELLER"), and which
is a wholly-owned subsidiary of Western Capital Holdings, Inc. ("HOLDING
COMPANY"), and HOLDING COMPANY.
RECITALS
WHEREAS, SELLER has determined to sell certain assets and
discontinue its banking operations; and
WHEREAS, PURCHASER is interested in acquiring certain assets and
assuming certain liabilities of SELLER in accordance with the terms and
conditions of this Agreement;
AGREEMENT
NOW, THEREFORE, in consideration of the foregoing premises, the mutual
promises herein set forth and other valuable consideration, SELLER and PURCHASER
hereby agree as follows:
ARTICLE I
DEFINITIONS
In addition to the definitions set forth elsewhere in this Agreement,
the following terms have the indicated meanings for the purposes of this
Agreement:
"ACCOUNT" means a deposit account relationship with a customer of
SELLER at the time of Closing;
"ACCRUED INTEREST" on any Deposits at any date means interest that is
accrued on such Deposits to and including such date and not yet credited to such
deposit Accounts;
"AFFILIATE" has the meaning set forth in Section 2 of the Bank
Holding Company Act of 1956, as amended, 12 U.S.C. Section 1841;
"ASSUMED DEPOSITS" as of the Closing Date, means all Deposits of SELLER
existing on the Closing Date which pursuant to law and the respective depositor
agreement may be transferred to PURCHASER, together with all Accrued Interest
thereon as of the Closing Date as set forth in the ASSUMED DEPOSITS SCHEDULE,
which Assumed Deposits Schedule shall be amended and updated as of Closing;
"ASSETS" has the meaning given in Section 2.1 hereof;
"BOOK VALUE", with respect to any Liabilities or any Asset or group of
Assets, means the accurate dollar amount reflected on the books and records of
SELLER as of the Closing Date, after adjustment for differences
1
or offsets in accounts, suspense items, unposted debits and credits,
depreciation, reserves and other similar adjustments or corrections all in
accordance with generally accepted accounting principles and regulatory
accounting principles; provided, however, the Book Value of the Loans, as
hereinafter defined, shall be deemed to be the market value established by
Sandler O'Neill, as hereinafter defined, pursuant to the pricing formulas set
forth in the "BOOK VALUE" SCHEDULE attached hereto;
"BUSINESS DAY" shall mean any day other than a Saturday or a Sunday
upon which general business is conducted by PURCHASER;
"CLOSING" refers to the meeting on the Closing Date whereat the
executed Closing Documents will be delivered to the respective parties;
"CLOSING DATE" refers to the second to the last Business Day of the
month during which the last of all necessary regulatory approvals are received,
including the expiration of any mandatory waiting periods, unless such approval
date, including the waiting period, is after the 25th day of a calendar month,
in which event the Closing Date refers to the second to the last Business Day of
the following month, unless otherwise mutually agreed by the parties hereto;
"CLOSING DOCUMENTS" has the meaning given in Article VI;
"CONTRACT" refers to any contracts, agreements and leases, including
automatic renewals thereof, (other than items which constitute Loans) (i)
entered into by SELLER, acceptable to PURCHASER and specified on the "CONTRACT"
SCHEDULE attached hereto or (ii) entered into by SELLER after the Review Date, a
copy of which has been delivered to PURCHASER on or before the fifteenth (15th)
day prior to Closing and accepted by PURCHASER;
"DEPOSIT" means a deposit, as defined in 12 U.S.C. Section 1813(1),
including, without limitation, all demand deposits, NOW accounts, time deposits,
savings deposits, money market accounts, special deposits, savings account
certificates, individual retirement accounts, checks deposited for collection
and uncollected items included in the depositors' balances and credited on the
books of SELLER;
"DEPOSIT PREMIUM" means an amount equal to five percent (5%) of the
amount of the Assumed Deposits transferred to PURCHASER upon the Closing to be
credited to SELLER in the manner set forth in Section 2.1;
"DUE FROM ACCOUNTS" means receivables from banks and any accrued
interest thereon computed to and including the Closing Date, including cash
items in the process of collection, approved by PURCHASER in its reasonable
discretion and included on THE DUE FROM ACCOUNTS SCHEDULE, which DUE FROM
ACCOUNTS SCHEDULE shall be amended and updated as of Closing;
"EMPLOYEE" means any employee employed by SELLER as of the Closing,
including, without limitation, those employees on medical leave, family leave,
military leave or personal leave;
"ENVIRONMENTAL LAWS" means the common law and all federal, state, local
and foreign laws or regulations, codes, orders, decrees, judgments or
injunctions issued, promulgated, approved or entered thereunder, now or
hereafter in effect, relating to pollution or protection of public or
2
employee health or safety or the environment, including, without limitation,
laws relating to (i) emissions, discharges, releases or threatened releases of
Hazardous Materials, into the environment (including, without limitation,
ambient air, indoor air, surface water, ground water, land surface or subsurface
strata), (ii) the manufacture, processing, distribution, use, generation,
treatment, storage, disposal, transport or handling of Hazardous Materials, and
(iii) underground and above ground storage tanks, and related piping, and
emissions, discharges, releases or threatened releases therefrom;
"ERISA" has the meaning given in Section 3.1M;
"EXECUTION DATE" means the date on which this Agreement is fully
executed by all parties;
"FACILITIES" means any premises of SELLER where banking operations are
conducted included in the "OWNED REAL PROPERTY" SCHEDULE attached hereto;
"FDIC" means the Federal Deposit Insurance Corporation;
"FEDERAL AGENCY" means the FDIC, the Board of Governors of the
Federal Reserve System or the Office of Thrift Supervision;
"FINAL CLOSING STATEMENT" means the actual balance sheet of SELLER as
of 12:01 a.m. Weslaco, Texas time, on the day following the Closing Date,
prepared by SELLER on or before the Reconciliation Date in accordance with
SELLER's normal practices and procedures (except that such normal practices and
procedures shall be modified as necessary to reflect amounts prorated
hereunder). The Final Closing Statement shall be in a form substantially similar
to that attached hereto as APPENDIX "A;"
"FINANCIAL STATEMENTS" has the meaning given in Section 3.1.U;
"FIXED ASSETS" means all Owned Real Property and Furniture, Fixtures
and Equipment described in those respective Schedules, unless PURCHASER rejects
said asset due to SELLER's inability to meet any condition or conditions set
forth herein related to said asset;
"FEDERAL FUNDS RATE" on any day means the per annum rate of interest
(rounded upward to the nearest 1/100 of 1%) that is the weighted mean of the
high and low rates quoted for Federal Funds in the Money Rates Column of the
Wall Street Journal, Southwestern Edition, in effect on the preceding day;
"FRB" means the Board of Governors of the Federal Reserve System and/or
the Federal Reserve Bank of Dallas, whichever is appropriate in the context or
pursuant to applicable law;
"FURNITURE, FIXTURES AND EQUIPMENT" or "PERSONAL PROPERTY" refers to
all furniture, fixtures and equipment owned or leased by SELLER as of the
Closing Date that are located in or necessary for the conduct of business in the
ordinary course at the offices of SELLER, including its branches, and also
includes all ATMs and security devices and systems on the premises of SELLER as
well as all signage, artwork and other personal
3
property owned by SELLER situated in, affixed to or used in connection with
SELLER's business, except for the two automobiles, artwork, furniture and the
equipment and software related to the Electronic-Mail, Phone System and Voice
Mail System at the administrative offices of SELLER located at 4316 N. 10th St.,
McAllen, Texas, which the parties agree SELLER shall retain, all as set forth in
the "FURNITURE, FIXTURES AND EQUIPMENT" SCHEDULE attached hereto;
"HAZARDOUS MATERIALS" shall mean any substance which is or contains (i)
any "hazardous substance" as now or hereafter defined in ss.101(14) of the
Comprehensive Environmental Response, Compensation, and Liability Act of 1980,
as amended (42 U.S.C. ss.9601 ET SEQ.) ("CERCLA"), or any regulations
promulgated under CERCLA; (ii) any "hazardous waste" as now or hereafter defined
in the Resource Conservation and Recovery Act as amended (42 U.S.C. ss.6901 ET
SEQ.) ("RCRA"), or any regulations promulgated under RCRA; (iii) any substance
regulated by the Toxic Substances Control Act as amended (15 U.S.C. ss.2601 ET
SEQ.) or any regulations promulgated thereunder; (iv) gasoline, diesel fuel, or
other petroleum hydrocarbons; (v) asbestos and asbestos containing materials, in
any form, whether friable or non-friable; (vi) polychlorinated biphenyls; (vii)
radon gas; and (viii) any additional substances or materials which are now or
hereafter classified or considered to be hazardous or toxic under any state or
federal environmental law or regulation or the common law, or any other
applicable laws relating to any real property, which comprises a portion of
Assets. Hazardous Materials shall include, without limitation, any substance,
the presence of which on any real property comprising a portion of the Assets
(A) requires reporting, investigation or remediation under any Environmental
Law; (B) causes or threatens to cause a nuisance on any real property comprising
a portion of the Assets, or any adjacent property, or poses or threatens to pose
a hazard to the health or safety of persons on any real property, comprising a
portion of the Assets, or any adjacent property; or (C) which, if it emanated or
migrated from any real property comprising a portion of the Assets, could
constitute a trespass;
"LEASED INTERESTS" refers to any and all leased interests held by
SELLER, as lessee or tenant in personal property that constitute a part of the
Contracts which PURCHASER has agreed to acquire and are set forth in the "LEASED
INTERESTS" SCHEDULE attached hereto;
"LIABILITIES" means only the following liabilities and obligations of
SELLER as of the Closing Date, and NONE OTHER:
(a) all Assumed Deposits of SELLER;
(b) the unperformed and unfulfilled obligations that are
required to be performed by SELLER under the terms of all Contracts;
however, the term "Liabilities" does not include any liabilities for
money damages or other damages or losses arising in connection with or
as the result of SELLER's performance, non-performance, incorrect
performance, or other acts or inaction of SELLER prior to Closing under
such Contracts or related to any Assumed Deposit; and
(c) any other liabilities of SELLER which PURCHASER agrees
to assume at the Closing;
4
"LIEN" means any lien, claim, security interest, charge, encumbrance,
option or adverse claim, except for (i) statutory liens securing payments of
taxes or other matters, not yet due, and (ii) obligations pursuant to Chapters
72 to 74 of the Texas Property Code relating to Deposits and safe deposit box
contents which become subject to escheat to the State of Texas under such law in
the year the Closing occurs;
"LOANS" means all loans and all lease financing receivables reflected
on the LOANS SCHEDULE attached hereto, which Loan Schedule shall exclude the
Arizona consumer loan portfolio with a current balance of approximately $4.1
million, as well as all charged-off loans or loans which are two or more
payments past due, unless otherwise agreed by IBC, and which Loan Schedule shall
be amended and updated as of the Closing pursuant to the provisions of Section
4.3 hereof, together with all accrued interest thereon computed to and including
the Closing Date and all collateral, liens, security interests and documentation
relating thereto;
"OTS" means Office of Thrift Supervision;
"OWN" means direct or indirect beneficial ownership and refers to
any and all ownership interests whether or not legal title is held;
"OWNED REAL PROPERTY" or "REAL ESTATE" means all real property owned by
SELLER and used in connection with the operation of SELLER's business and all
real property held for future expansion of SELLER's business as set forth on the
"OWNED REAL PROPERTY" SCHEDULE;
"OWNER'S POLICIES" has the meaning given in Section 5.5;
"PERMITTED EXCEPTIONS" has the meaning given in Section 5.3;
"PRELIMINARY CLOSING STATEMENT" means the balance sheet of the SELLER
prepared by SELLER as of 12:01 a.m. Weslaco, Texas time, on a date mutually
agreeable to PURCHASER and SELLER, which date shall not be more than ten (10)
calendar days prior to the Closing Date, in accordance with SELLER's normal
practices and procedures (except that such normal practices and procedures shall
be modified as necessary to reflect amounts prorated hereunder). The Preliminary
Closing Statement shall be in a form substantially similar to that attached
hereto as APPENDIX "A;"
"PREPAID EXPENSES" means the prepaid expense(s) approved by PURCHASER
in its reasonable discretion and appearing as an asset of SELLER on the
Preliminary Closing Statement or the Final Closing Statement, respectively, as
set forth in the PREPAID EXPENSE SCHEDULE, which PREPAID EXPENSE SCHEDULE shall
be amended and updated as of Closing;
"REAL ESTATE IMPROVEMENTS" means all improvements to the Real Estate,
if any, purchased, installed or constructed by or on behalf of SELLER and used
in connection with the operation or maintenance of SELLER's banking business,
including, without limitation, buildings, structures, parking facilities and
drive-in teller facilities;
"RECONCILIATION DATE" means the date on which SELLER delivers the
5
Final Closing Statement to PURCHASER, which date shall be as soon as practicable
after the Closing Date, but in no event later than the sixtieth (60th) day after
the Closing Date;
"RECORD" or "RECORDS" means all papers, microfiche, microfilm and
computer records (including but not limited to, magnetic tape, disc storage,
card forms and printed copy) of SELLER generated or maintained by SELLER that
are owned by SELLER or HOLDING COMPANY and relate to the Assets or the
Liabilities, including without limitation, records pertaining to Assumed
Deposits (such as signature cards, orders, deposit contracts, rules, regulations
and policies in effect for deposits, passbooks of depositors held by SELLER,
deposit slips, cancelled checks and withdrawal orders representing charges to
accounts of depositors), related policy statements and manuals, and any other
records pertaining to any of the Assets (such as records of deposit balances
carried with other financial intermediaries, loan and collateral records and
credit files, loan reviews, loan review reports, instruments or records of title
pertaining to real estate or real estate mortgages, licenses, deeds, mortgages,
title insurance policies, deeds of trust, abstracts and surveys, signature
cards, agreements and records pertaining to safe deposit boxes, and policy
statements and manuals relating thereto);
"REVIEW DATE" refers to November 30, 1995, unless another date shall be
specified in a written document, executed on behalf of both SELLER and
PURCHASER, as the Review Date;
"SAFE DEPOSIT BOXES" means the safe deposit boxes of SELLER, if any,
including the removable safe deposit boxes and safe deposit stacks in SELLER's
vault, all right and benefit accrued on or before the date hereof under rental
agreements with respect to such safe deposit boxes and all keys and combinations
thereto;
"SANDLER O'NEILL" means Sandler O'Neill Mortgage Finance Corp.;
"SELLER'S KNOWLEDGE", or "TO THE BEST OF SELLER'S KNOWLEDGE" or any
other similar phrase means that knowledge which SELLER or HOLDING COMPANY, or
any of their respective senior officers or directors actually has or reasonably
ought to have after due inquiry into any such matter;
"TBD" means the Texas Banking Department;
"TITLE COMPANY" means a title company in good standing, authorized
to do business in the State of Texas and acceptable to PURCHASER;
"TRANSACTION" means the transactions contemplated in this Agreement;
"TRANSFER INSTRUMENTS" has the meaning ascribed to it in Section 6.2
of this Agreement;
ARTICLE II
PURCHASE, SALE AND ASSUMPTION
2.1 ASSUMPTION OF LIABILITIES AND TRANSFER OF ASSETS. Pursuant to
6
this Agreement, on the Closing Date, (i) PURCHASER shall assume the Liabilities
and (ii) SELLER shall sell, convey, transfer, assign and deliver to PURCHASER,
and PURCHASER shall purchase from SELLER, the following assets of SELLER having
a Book Value equal to the dollar amount of the Liabilities less the Deposit
Premium, which assets shall be included in the assets transferred in the
following order:
(1) Due From Accounts;
(2) Prepaid Expenses;
(3) the Loans;
(4) the Fixed Assets;
(5) securities, if any, owned and offered by
SELLER and agreed to by PURCHASER in its sole
discretion; and
(6) cash (in the remaining amount).
SELLER shall also transfer to PURCHASER all intangible assets of SELLER,
SELLER's rights and benefits under any Contracts and the Records of SELLER
related to any Liability assumed or asset acquired by PURCHASER (all of said
tangible and intangible assets set forth above being herein referred to as the
"Assets").
2.2 PRELIMINARY CLOSING STATEMENT AND PRICE. On the Closing Date,
SELLER shall present PURCHASER with the Preliminary Closing Statement, and the
parties will use the amounts reflected on the Preliminary Closing Statement to
determine all amounts to be transferred to or from each other at the Closing.
2.3 ADJUSTMENTS. Subject to the provisions of ARTICLE IX, the
assignments, transfers, acceptances and assumptions of the Assets and the
Liabilities and the payment of the amounts due in respect thereof in accordance
with SECTION 2.1 shall be final and without recourse and not subject to any
claim for reimbursement, repayment, rescission or avoidance; PROVIDED, HOWEVER,
that
(a) On the Reconciliation Date, SELLER shall deliver the Final
Closing Statement to PURCHASER. Subject to PURCHASER's right of
indemnification pursuant to ARTICLE IX, the Final Closing Statement
shall become final and binding on PURCHASER and SELLER ten (10)
Business Days after its delivery to PURCHASER, unless PURCHASER gives
written notice to SELLER of its disagreement with respect to any item
included in such Final Closing Statement. SELLER and PURCHASER shall
use reasonable efforts to resolve any disagreement during the ten (10)
day period following receipt by SELLER of the notice. If the
disagreement is not resolved during such ten (10) day period, the
parties agree to submit such disagreement(s) to KPMG Peat Marwick (or,
if such accounting firm refuses or is otherwise unable to resolve such
disagreement(s), another national accounting firm mutually acceptable
to SELLER and PURCHASER) for resolution by such accounting firm. Such
accounting firm shall be instructed by
7
SELLER and PURCHASER to make its determination of the resolution of
such disagreement(s) within thirty (30) days after submission of such
disagreement(s) to such accounting firm. The determination by such
accounting firm shall be set forth in writing and shall be conclusive
and binding on the parties hereto. The Final Closing Statement shall be
thenceforth revised as appropriate to reflect the determination of such
accounting firm, whereupon the Final Closing Statement shall become
final and binding. When the Final Closing Statement becomes final and
binding, SELLER shall pay PURCHASER, or PURCHASER shall pay SELLER, as
appropriate, an amount in cash equal to the difference between the
amount paid at the Closing and the amount calculated in accordance with
SECTION 2.1 based on the figures on the Final Closing Statement, plus
interest accrued from the Closing Date to the date such payment is made
at the Federal Funds Rate (the "Net Settlement Amount"). The fees and
disbursements of the accounting firm selected to resolve any
disagreements shall be shared and paid equally by SELLER and PURCHASER.
To the extent SELLER is no longer in existence or is otherwise not able
to pay any post-Closing obligation hereunder, HOLDING COMPANY shall pay
such obligation of SELLER.
(b) If SELLER determines that any Asset is not assignable as
of the Closing Date for any reason, then SELLER shall use reasonable
efforts to assign such Asset to PURCHASER as soon as possible after the
Closing Date but in no event later than on the Reconciliation Date. In
the event SELLER is unable to assign any such Asset to PURCHASER on the
Reconciliation Date, then SELLER shall (i) no longer have any
obligation to assign such Asset to PURCHASER, and (ii) refund to
PURCHASER in cash the Book Value of such Asset together with interest
at the Federal Funds Rate from the Closing Date through the date of
such refund.
(c) All real and personal property taxes and current
installments of special assessments levied or assessed with respect to
the Fixed Assets shall be prorated between SELLER and PURCHASER on a
daily basis as of the Closing Date based upon the fiscal year of the
appropriate taxing authority. Utilities, rents and any other normal
maintenance and operating expenses relating to the Real Estate, Real
Estate Improvements, and Contracts shall be prorated between SELLER and
PURCHASER as of the Closing Date on a daily basis.
(d) With respect to the proration of deposit insurance
premiums, PURCHASER shall NOT reimburse SELLER for the amount of any
deposit insurance assessments that SELLER is required to pay for
periods in which the Assumed Deposits are included in SELLER's deposit
insurance assessment base.
(e) If either SELLER or PURCHASER is required to pay at any
time on or before June 30, 1997, whether prior to or after the Closing,
a special assessment related to the Assumed Deposits to the SAIF, as
defined below, or the FDIC in connection with the FDIC's efforts to
recapitalize the Savings Association Insurance Fund ("SAIF"), SELLER
and PURCHASER hereby agree to each pay one-half of said special
assessment at Closing and to the extent the payment is after the
Closing and SELLER is no longer in existence or does not have
sufficient funds, HOLDING COMPANY shall pay SELLER's share of
8
said special assessment. To the extent the special assessment is made
after the Closing, SELLER and HOLDING COMPANY shall be required to
provide financial assurances to PURCHASER, acceptable to PURCHASER in
its sole discretion, with respect to the payment of their share of the
special assessment.
2.4 CLOSING. The Closing shall occur in the McAllen, Texas offices of
International Bank of Commerce, One South Broadway, McAllen, Texas at 10:00 a.m.
(local time) on the Closing Date, or at such other place and time mutually
agreed upon by the parties hereto.
ARTICLE III
REPRESENTATIONS AND WARRANTIES
3.1 REPRESENTATIONS AND WARRANTIES OF HOLDING COMPANY AND SELLER. In
order to induce PURCHASER to enter into, execute, deliver and perform this
Agreement, SELLER and HOLDING COMPANY, jointly and severally, respectively,
hereby each represent and warrant to PURCHASER as follows:
A. SELLER is a federal savings bank duly organized, validly
existing and in good standing under the laws of the United States of
America and has all requisite power and authority to own, operate and
lease its assets, to carry on its business as now being conducted and
to enter into and perform its obligations under this Agreement. HOLDING
COMPANY is a corporation duly organized, validly existing and in good
standing pursuant to the laws of the State of Delaware, with full power
and authority to own its property and carry on its business as
presently conducted. HOLDING COMPANY owns beneficially and of record
all of the issued and outstanding capital stock of SELLER, which
consists of 1,000 shares of Common Stock, par value $1.00 per share,
and all of said shares of stock have been duly authorized, validly
issued, and are fully paid and nonassessable.
B. The execution, delivery and performance by SELLER and
HOLDING COMPANY of this Agreement, and by SELLER of the Transfer
Instruments and the Closing Documents (to the extent required to be
executed by SELLER), have been duly and effectively authorized by all
necessary corporate action. This Agreement has been duly executed by
SELLER and HOLDING COMPANY and is a legal, valid and binding obligation
of SELLER and HOLDING COMPANY enforceable in accordance with its terms.
The Transfer Instruments and the Closing Documents (to the extent
required to be executed by SELLER), when executed and delivered by
SELLER, will constitute legal, valid and binding obligations of SELLER,
enforceable in accordance with their respective terms.
C. Except for the approval of SELLER's sole shareholder,
HOLDING COMPANY, and the approval of HOLDING COMPANY's shareholders,
both of which have heretofore been obtained, and the approval of the
OTS of the Transaction, the execution, delivery and performance by
SELLER and HOLDING COMPANY of this Agreement, the Transfer Instruments
and the Closing Documents, and the consummation of the transactions
contemplated hereby and thereby, (i) do not and will not require SELLER
or HOLDING COMPANY to make any filing with or
9
obtain any consent, approval or authorization of any person or public
authority, (ii) will not violate, with or without the giving of notice
or the passage of time or both, any provisions of law applicable to
SELLER or HOLDING COMPANY and (iii) except for those Contracts the
assignment of which requires the consent of another party, do not and
will not conflict with or result in a breach, modification or
termination of any provisions of, or constitute a default under, or
result in the creation of any Lien, upon any of the Assets pursuant to
SELLER's or HOLDING COMPANY's respective charter documents (as amended)
or Bylaws (as amended) or any indenture, mortgage, deed of trust,
lease, contract, agreement or other instrument, or any order, judgment,
award, decree, statute, ordinance, regulation or any other restriction
of any kind or character, to which SELLER or HOLDING COMPANY is a party
or by which SELLER, HOLDING COMPANY or any of the Assets or Liabilities
may be bound.
D. SELLER has good, marketable and indefeasible title in fee
simple to all of the Real Estate, and good, marketable and indefeasible
title to all of the other Assets, in each instance free and clear of
all Liens, conditional sales agreements, leasehold rights, security
agreements or rights of third parties of any kind whatsoever except as
shown on SCHEDULE B of the Title Commitments heretofore delivered to
Purchaser.
E. SCHEDULE 3.L-E contains true and complete legal
descriptions of all of the Real Estate and Real Estate Improvements
together with the date of purchase or construction thereof, to the
extent said dates are known by SELLER, and the depreciation schedule
therefor. SELLER has delivered to PURCHASER true, correct and complete
copies of any and all appraisals of Real Estate included in SELLER's
records.
F. All leases and agreements relating to the Leased Interests,
including any options to purchase contained therein are fully
enforceable in accordance with their terms. All rents and charges due
and payable for current and prior periods under each such lease or
agreement have been paid.
G. The Furniture, Fixtures and Equipment are in good repair
and operating condition, reasonable wear and tear excepted, suitable
for the uses for which intended and free from any known defects.
H. To SELLER's best knowledge, with respect to all Real Estate
and the use thereof, (i) there is no defect or condition thereof in the
soil or geology thereof that will impair the current use thereof, (ii)
it is assessed separately from all adjacent property for purposes of
real property taxes; (iii) there is no plan, study or effort by any
party (governmental utility or other) that may, or the implementation
of which may, adversely affect the current use thereof; (iv) there is
no intended public improvement that may result in any assessments or
the creation of any Liens thereon; (v) there is no intended or proposed
statute, rule, ordinance, order or regulation (including, without
limitation, zoning changes) that may adversely affect the current use
thereof; (vi) there is no existing or proposed plan to modify or
realign any
10
street or highway or any existing, proposed or contemplated eminent
domain proceeding that would or could result in the taking of all or
any part thereof or adversely affect the current use thereof; and (vii)
there are no encroachments thereon of any improvements on any adjoining
property which materially impair the use of any parcel of Real Estate
as the same is currently used.
I. To SELLER's best knowledge, all Owned Real Property and the
use and/or occupancy thereof, comply with all applicable laws,
ordinances, regulations, orders or requirements, including without
limitation, building, zoning and other laws.
J. To SELLER's best knowledge, the ownership, location,
construction, use and operation of the Owned Real Property is, and has
at all times been, in full compliance with applicable Environmental
Laws. SELLER is the owner of, and has in its possession, all permits,
licenses and approvals under Environmental Laws that are necessary or
required to fully and completely conduct all of its business and
operations; including, without limitation, ownership, location,
construction, use and operation of the Facilities, and is in full
compliance with such permits, licenses, and approvals. There are no
pending or threatened, and, to SELLER's best knowledge there have been
no, administrative, regulatory or judicial actions, suits, demands,
demand letters, claims, liens, notices of noncompliance or violation,
investigations or proceedings relating in any way to any Environmental
Law relating to the Owned Real Property. To SELLER's best knowledge, no
asbestos was used in the construction of any portion of the Real Estate
Improvements or the fixtures thereof. No Owned Real Property has at any
time been used by SELLER, or, to SELLER's best knowledge, by any
person, as a landfill or for the storage or disposal, or as a site of
spilling, dumping, depositing or otherwise disposing of, any Hazardous
Material or toxic substances or waste. No Owned Real Property is or, to
SELLER's best knowledge, has been, an industrial site or landfill.
K. SELLER's FDIC insurance coverage with respect to the
Deposits is currently in full force and effect and, to SELLER's best
knowledge, all Deposits have been established and maintained in
compliance with applicable laws, rules, regulations and policies of the
OTS and/or any other Federal Agency having jurisdiction or authority
with respect thereto.
L. SELLER has not accepted any Deposits which were obtained
directly or indirectly (including by renewal or rollover), by or
through any deposit broker.
M. SCHEDULE 3.1-M sets forth a complete and correct list of
the names and current annual rates of compensation (including
anticipated bonuses, if any) of the full and part-time employees
employed by SELLER as of the date hereof. Except as disclosed in
SCHEDULE 3.1-M, (i) SELLER has not entered into any employment,
severance or termination contracts with any employee of SELLER which
PURCHASER shall assume pursuant to the Agreement and (ii) there are no
employee benefit plans, as defined in Section 3(3) of ERISA, of SELLER,
or any employee benefit plans of HOLDING COMPANY in which
11
the employees of SELLER participate. HOLDING COMPANY, each consolidated
subsidiary of HOLDING COMPANY and SELLER have complied with all
applicable minimum funding requirements and all other applicable and
material requirements of the Employee Retirement Income Security Act of
1974, as amended ("ERISA"), and the Internal Revenue Code of 1986, as
amended, and there are no existing conditions that would give rise to
liability thereunder. No Reportable Event (as defined in Section 4043
of ERISA) has occurred in connection with any employee benefit plan of
HOLDING COMPANY or SELLER that might constitute grounds for the
termination thereof by the Pension Benefit Guaranty Corporation or for
the appointment by the appropriate United States District Court of a
trustee to administer such plan. With respect to any employee benefit
plan listed on SCHEDULE 3.1-M, there has not been any failure of any
party to comply with any laws applicable to such employee benefit
plans, including, without limitation, any health care continuation
requirements. Except as disclosed in SCHEDULE 3.1-M, no litigation,
arbitration, or governmental administrative proceeding or investigation
is pending or threatened with respect to any such employee benefit
plan.
N. The books and records of SELLER relating to the Deposits
(i) are complete and correct, (ii) together with the Deposits
(including the forms of certificates and accounts), have been
maintained in accordance with generally accepted accounting principles,
consistently applied, except as adjusted by regulatory accounting
principles, (iii) are maintained in accordance with Regulation DD and
the Truth in Savings Act and (iv) have been reconciled and balanced as
of the date of the most recent Unaudited Financials, with all
exceptions more than 30 days old, or exceeding $1,000 in any individual
instance or exceeding $10,000 in the aggregate cleared.
O. SELLER has all necessary approvals, authorizations,
consents, permits, licenses and orders of each appropriate Federal
Agency for the business conducted by SELLER. Except as disclosed on
SCHEDULE 3.1-O hereto, there are no legal, administrative, arbitration
or other proceedings or governmental investigations pending or
threatened which might result in monetary damages payable by SELLER or
HOLDING COMPANY or which might result in a permanent or temporary
injunction against SELLER or HOLDING COMPANY. SELLER and HOLDING
COMPANY have complied with, and are not in default in any material
respect under, any laws, ordinances, requirements, regulations, or
orders applicable to their respective businesses. Neither SELLER nor
HOLDING COMPANY is a party to any agreement or instrument or subject to
any charter or other corporate restriction or any judgment, order,
writ, injunction, decree, rule, regulation, code or ordinance which
materially and adversely affects, or might reasonably be expected to
materially and adversely affect, the business operations, prospects,
properties, assets or condition, financial or otherwise, of either
SELLER or HOLDING COMPANY.
P. HOLDING COMPANY has filed all requisite federal, state,
local, foreign and other tax returns and amendments and tax reports
with respect to the business and operations of SELLER, which returns
and reports are, to SELLER's best knowledge, true, correct and complete
pursuant to the Internal Revenue Code of 1986, as amended,
12
and the regulations of the Internal Revenue Service. Neither HOLDING
COMPANY nor SELLER is delinquent in paying any taxes shown on such
returns or reports and no assessments for any such taxes have been
received. SELLER has properly certified all foreign deposit accounts
and has made all necessary tax withholdings on all of its deposit
accounts. Further SELLER has timely and properly filed and maintained
all requisite Currency Transaction Reports and other related forms,
including but not limited to, any requisite custom reports. There are
no claims against SELLER or HOLDING COMPANY for federal, state, city,
municipal, county, local, foreign or other taxes (including franchise,
excise, sales and/or real property), no tax deficiency has been
proposed or assessed against SELLER or HOLDING COMPANY, and neither
SELLER nor HOLDING COMPANY has waived any applicable statute of
limitation or extended the time for the assessment of any tax or
governmental charges or fees. Neither SELLER nor HOLDING COMPANY has
any knowledge of any unassessed tax deficiency proposed or threatened
against SELLER or HOLDING COMPANY. Since August 14, 1992, all of the
tax returns of SELLER and HOLDING COMPANY have been prepared on
substantially the same basis as those of previous years, and all
federal, state, city, county municipal and other local taxes due in
connection with their respective businesses have been fully paid.
Q. Each Loan was made in the ordinary course of SELLER's
business, and all Loans and renewals of Loans made after the Review
Date and prior to the Execution Date have been made in accordance with
reasonable and prudent banking practices, and priced consistently with
all other similar loans of SELLER. All Loans have been made
substantially in accordance with all applicable laws and regulations,
including without limitation, the Texas usury statutes as they are
currently interpreted, Regulation Z (12 C.F.R. ss.226 ET SEQ.) issued
by the Board of Governors of the Federal Reserve System, the Federal
Consumer Credit Protection Act as amended (15 U.S.C. 1601 ET SEQ.), the
Texas Consumer Credit Code as amended (Tex.Rev.Civ.Stat.Ann. art.
5069.10, ET SEQ.), and all statutes governing the operation of federal
savings banks located in Texas.
R. Except as set forth in SCHEDULE 3.1-R, SELLER has no
subsidiaries. Except for securities included in the Financial
Statements, as owned by SELLER or as may otherwise be set forth in
SCHEDULE 3.1-R, SELLER has no interest, direct or indirect, and has no
commitment to purchase any interest, direct or indirect, in, or to be
purchased in whole or in part by, any other bank or corporation or any
partnership, joint venture or other business enterprise or entity.
Except as set forth in SCHEDULE 3.1-R, the businesses carried on by
SELLER have not been conducted through any other direct or indirect
subsidiary or affiliate.
S. Neither SELLER nor HOLDING COMPANY has any reason to
believe that the approval of the OTS to be sought by SELLER in
connection with the Transaction will not be granted.
T. Except as otherwise described in SCHEDULE 3.1-T, since
September 30, 1995: (i) there have been no material adverse changes in
the assets, liabilities, financial condition, business, operations,
affairs or prospects of SELLER from those reflected in the Unaudited
Financials for the quarter ended September 30, 1995,
13
and (ii) neither the business, operations or affairs of SELLER nor any
of its assets or deposits have been materially adversely affected by
any occurrence or development, whether or not insured against.
U. PURCHASER has heretofore been furnished the following
financial statements including footnotes and schedules (hereinafter
collectively called the "Financial Statements"), which Financial
Statements are materially complete and correct and reflect all
exceptions, and all of which were prepared from the books and records
of SELLER or HOLDING COMPANY, as the case may be and, except with
respect to the Consolidated Reports of Condition and Income, are in
accordance with general accepted accounting principles applied
consistently with past periods, and, with respect to the Consolidated
Reports of Condition and Income, are in accordance with generally
accepted accounting principles, and fairly present the financial
condition of SELLER at their respective dates and the results of
SELLER's operations for the periods covered thereby:
(i) Consolidated Reports of Condition and Income for
SELLER as of December 31, 1992, and for the year then ended,
together with accompanying schedules;
(ii) Audited balance sheet and statement of
operations for SELLER as of December 31, 1992 and the year
then ended, together with accompanying schedules;
(iii) Consolidated Reports of Condition and Income
for SELLER as of December 31, 1993, and for the year then
ended, together with accompanying schedules;
(iv) Audited balance sheet and statement of
operations for SELLER as of December 3l, 1993 and the year
then ended, together with accompanying schedules;
(v) Consolidated Reports of Condition and Income for
SELLER as of December 31, 1994, and for the period then ended,
together with accompanying schedules;
(vi) Audited balance sheet and statement of
operations for SELLER as of December 3l, 1994 and the period
then ended, together with accompanying schedules;
(vii) Quarterly unaudited balance sheet and statement
of operations for each quarter ending on or after September
30, 1995 as of the end of the quarter and the period then
ended, together with accompanying schedules (the "Unaudited
Financials"); and
(viii) Audited consolidated balance sheet and
statement of operations of the HOLDING COMPANY as of December
31, 1994 and the period then ended, together with accompanying
schedules.
Except as may be expressly set forth in the Financial
14
Statements or in SCHEDULE 3.1-U, the Financial Statements do not
contain any material items of special or nonrecurring income or any
other income not earned in the ordinary course of business, and the
Unaudited Financials include all adjustments, which consist only of
normal recurring accruals, necessary for a fair presentation. SELLER
and HOLDING COMPANY have no material liabilities, absolute or
contingent, other than those disclosed upon their respective books of
account, except accrued and unpaid interest and taxes not yet due or
payable.
V. To the best of SELLER's knowledge, all Contracts are
binding and enforceable against the parties thereto. SELLER is not
in default under, nor has it breached, any Contract.
W. To SELLER's best knowledge, there is no action, proceeding
or investigation, pending or threatened at the present time, except as
described in SCHEDULE 3.1-W, that questions the validity of this
Agreement or of any action taken or to be taken in connection with the
Transaction.
X. SCHEDULE 3.1-X sets forth an accurate and complete list of
all lawsuits to which SELLER is a party and all claims which have been
asserted against SELLER and not resolved to the satisfaction of all
parties thereto (whether or not any such claim is the subject of a
lawsuit).
Y. SCHEDULE 3.1-Y contains an accurate and complete list of
all policies of fire and extended coverage, liability, property and
other forms of similar insurance or indemnity bonds held by SELLER, or
by HOLDING COMPANY for the benefit of SELLER, relating to its Assets.
SELLER has furnished PURCHASER a true and correct copy of all such
policies. SELLER is not in default with respect to any provisions of
any such policy or indemnity bond and has not failed to give any notice
or present any claim thereunder in due and timely fashion, which
failure or failures, individually or in the aggregate, would materially
adversely affect the condition (financial or other) of the Assets. All
such policies and bonds are (1) with insurance companies identified on
SCHEDULE 3.1--Y and (2) in full force and effect. Neither SELLER nor
HOLDING COMPANY has received, nor has other knowledge or information
of, any notice from any insurance company or board of fire underwriters
requesting the performance of any work or alteration with respect to
the Assets that has not been performed, or requiring an increase in the
insurance rates applicable to the Assets, and is not aware of any
defects or inadequacies in the Assets which, if not corrected, would
result in the termination, or increase the cost, of insurance coverage.
Z. Attached as SCHEDULE 3.1-Z is a brief description of
each of the credit card plans in which SELLER is involved.
AA. Attached as SCHEDULE 3.1-AA is a list of all automated
teller machines ("ATMs") operated by SELLER, including locations,
the number of ATM card holders, and the schedule of fees charged by
SELLER for the use of SELLER's ATMs in effect as of the date of this
Agreement. Attached to SCHEDULE 3.L-AA is a copy of all agreements
15
to which SELLER is a party relating to the servicing of ATMs.
BB. SCHEDULE 3.1-BB describes all transactions, services,
"give-aways" and other items currently offered or given by SELLER in
connection with any Deposits, including, without limitation, any gifts
and services provided for free or at discount.
CC. No broker, finder or similar agent has been employed by or
on behalf of SELLER or HOLDING COMPANY in connection with the
Transaction and no person or entity is entitled to receive from SELLER
or HOLDING COMPANY any brokerage commission, finder's fee or similar
compensation in connection with this Agreement or the Transaction.
DD. There are no facts known to SELLER or HOLDING COMPANY and
not generally known to the public that could reasonably be anticipated
by SELLER or HOLDING COMPANY to materially, adversely affect or involve
any substantial possibility of adversely affecting the financial
condition, results of operations or the operation of the Assets, or the
Liabilities, after the Closing Date, which have not been disclosed
herein or in the Schedules hereto.
EE. Attached as SCHEDULE 3.1-EE is a list of all branches of
SELLER, including the locations, fixed assets, and total liabilities of
each branch, together with a list of all agreements to which SELLER is
a party related to each branch location and a copy of all such material
agreements.
3.2 REPRESENTATIONS AND WARRANTIES OF PURCHASER. In order to induce
SELLER to enter into, execute, deliver and perform this Agreement, PURCHASER
represents and warrants to SELLER as follows:
A. PURCHASER is a bank duly organized, validly existing and in
good standing under the laws of the State of Texas, and has all
requisite corporate power and authority to own, operate and lease the
properties owned or leased by it, to carry on its business as now being
conducted and to enter into this Agreement and perform its obligations
pursuant to this Agreement.
B. The execution, delivery and performance by PURCHASER of
this Agreement, the Transfer Instruments and the Closing Documents (to
the extent required to be executed by PURCHASER), have been duly and
effectively authorized by all necessary corporate action. This
Agreement has been duly executed by PURCHASER and is a legal, valid and
binding obligation of PURCHASER enforceable in accordance with its
terms. The Transfer Instruments and the Closing Documents (to the
extent required to be executed by PURCHASER), when executed and
delivered by PURCHASER, will constitute legal, valid and binding
obligations of PURCHASER, enforceable in accordance with their
respective terms.
C. The execution, delivery and performance by PURCHASER of
this Agreement, the Transfer Instruments and the Closing Documents,
and, except for approvals from the TBD and the FDIC, the
consummation by PURCHASER of the transactions contemplated hereby
and thereby, (i) do not and will not require PURCHASER to make any
16
filing with or obtain any consent, approval or authorization of any
person or public authority, (ii) do not and will not violate, with or
without the giving of notice or the passage of time, or both, any
provision of law applicable to PURCHASER and (iii) do not and will not
conflict with or result in a breach, modification or termination of any
provision of, or constitute a default under, or result in the creation
of any Lien, upon any of the properties or assets of PURCHASER pursuant
to PURCHASER's Articles of Association (as amended), PURCHASER's
By-laws (as amended), or any indenture, mortgage, deed of trust, lease,
contract, agreement or other instrument or any order, judgment, award,
decree, statute, ordinance, regulation or any other restriction of any
kind or character to which PURCHASER is a party, or by which PURCHASER
or any of its assets and properties are bound, and there are no
contractual agreements that restrict or adversely impact PURCHASER's
authority to enter into this Agreement.
D. PURCHASER has all necessary approvals, authorizations,
consents, permits, licenses and orders of each appropriate Federal
Agency for the business conducted by PURCHASER. PURCHASER has complied
with, and is not in default in any material respect under, any laws,
ordinances, requirements, regulations, or orders applicable to its
business. PURCHASER is not a party to any agreement or instrument or
subject to any charter or other corporate restriction or any judgment,
order, writ, injunction, decree, rule, regulation, code or ordinance
which materially and adversely affects, or might reasonably be expected
to materially and adversely affect, the business operations, prospects,
properties, assets or condition, financial or otherwise, of PURCHASER.
E. To PURCHASER's best knowledge, there is no action,
proceeding or investigation, pending or threatened at the present time,
except as described in SCHEDULE 3.2-E, that questions the validity of
this Agreement or of any action taken or to be taken in connection with
the Transaction.
F. No broker, finder or similar agent has been employed by or
on behalf of PURCHASER in connection with the transaction contemplated
hereby and no person or entity is entitled to receive from PURCHASER
any brokerage commission, finder's fee or similar compensation in
connection with this Agreement or the Transaction.
G. PURCHASER has no reason to believe that the approvals of
the TBD and the FDIC to be sought by PURCHASER in connection with
the Transaction will not be granted.
ARTICLE IV
PRE-CLOSING COVENANTS
4.1 GENERAL PRE-CLOSING COVENANTS OF SELLER. In addition to performing
other covenants set forth in this Agreement, prior to the Closing Date HOLDING
COMPANY shall in its own right and HOLDING COMPANY shall use all commercially
reasonable efforts to ensure that SELLER does the following, and SELLER shall
and/or shall cause the officers and employees of SELLER to:
17
A. Deliver to PURCHASER, copies of the Unaudited Financials
for the quarter most recently ended within five (5) days after they
from time to time become available to SELLER;
B. Operate the business of SELLER only in a prudent,
conservative manner consistent with past practices, including using all
commercially reasonable efforts to collect Loans in accordance with
their terms and to minimize risks on new loans in a manner consistent
with safe and sound banking practices;
C. Maintain the Assets in good repair, order and condition,
consistent with past practices, reasonable wear and use and damage
by fire or casualty excepted;
D. Maintain the books, accounts and Records of SELLER in a
full and competent manner, consistent with past practices, and in a
manner that will accurately reflect the business and affairs of
SELLER;
E. Use all commercially reasonable efforts to comply with all
applicable laws, perform all of its obligations under agreements with
SELLER's customers and employees, maintain the goodwill and reputation
associated with SELLER through Closing, and generally perform all such
obligations without default;
F. Make or allow no amendment to its Articles of Association
or By-laws and enter or agree to enter into no merger or consolidation
with, nor sell all or substantially all of its assets to, any other
person or corporation nor change the character of its business in any
manner if the effect of such transaction would be to impair the ability
of SELLER to convey the Assets to PURCHASER at the Closing, and make or
allow no material amendment, termination or material modification of
any of SELLER's contracts or commitments, except as approved in advance
by PURCHASER;
G. Neither incur nor suffer to exist a Lien on any of the
Assets not disclosed in a schedule to this Agreement nor extend or
modify any Lien related to any of the Assets, nor agree to sell or
otherwise dispose of any of the Assets (except as set forth in this
Agreement and except portions of the Assets sold, used or disposed of
in the ordinary course of business of SELLER without having a material
adverse effect on the continuing business of SELLER);
H. Make no substantial renovation of any Real Estate or
Personal Property of SELLER and enter into no lease or agreement
involving any substantial obligation on the part of SELLER with
respect to any of the Assets;
I. Maintain insurance upon SELLER's assets in respect to
the kind and amount of risk currently insured against, in accordance
with its current practice;
J. Timely file all federal, state, city, municipal, county
and local tax returns and reports, including without limitation,
income, franchise, excise, ad valorem and other taxes with respect
18
to its business and properties and pay all taxes or assessments, except
for taxes being contested in good faith by appropriate proceedings for
which an adequate reserve has been made, as they become due;
K. Neither grant nor make an increase in the compensation
payable or to become payable to any of the persons employed by SELLER,
except for increases not to exceed five percent (5%) per annum, in the
ordinary course of business and consistent with past practices, in
compensation payable to any Employees other than those listed on
SCHEDULE 4.1-K, nor enter into any employment agreement or other
contract or arrangement with respect to the performance of personal
services by any Employee;
L. Join with PURCHASER and cooperate fully in filing, as
soon as possible, any necessary notice or applications to any
federal or state agency the delivery of notice to which or the
approval of which is required by applicable law with respect to the
transactions contemplated herein;
M. Promptly advise PURCHASER in writing of any material
adverse change to SELLER or any of the Assets;
N. Renew any of the Loans only in accordance with reasonable
and prudent banking practices and enter into new Loans of SELLER after
the execution hereof only in accordance with the past practices and
normal course of business of SELLER, and only if said new Loans are
priced in accordance with PURCHASER's pricing of similar loans,
provided, however, that SELLER shall not renew any Loan which is two or
more payments past due without the express consent of PURCHASER. On the
last business day of every month, SELLER shall provide PURCHASER with a
list of the new consumer loans made during the preceding month and with
respect to non-consumer loans, SELLER shall notify PURCHASER in advance
of any new (i) loan or renewal of an existing loan, (ii) loan
commitment, or (iii) advance under an existing loan commitment, in
excess of $25,000 made after the Execution Date, and provide to
PURCHASER copies of any documents and agreements relating thereto and
such other information regarding such item as PURCHASER may request;
O. Provide to PURCHASER a copy of SELLER's monthly problem
loan watch list as it relates to any of the Loans as soon as said
list is prepared.
4.2 INSPECTION. Beginning on the date of this Agreement, PURCHASER and
PURCHASER's counsel, accountants and other representatives shall have the right
to inspect and shall have access to SELLER's Facilities, Records, financial
statements, and officers and employees during normal business hours, after
reasonable advance notice and provided such access does not materially disrupt
SELLER's operations. A representative of PURCHASER shall be invited and entitled
to attend without compensation, but shall not be entitled to vote at or
participate in, each meeting of SELLER's loan committee(s) and will receive
reasonable prior notice of any such meeting. SELLER shall deliver to PURCHASER a
copy of each report, schedule, correspondence and other documents delivered to,
or filed with any regulatory agency by SELLER, or received
19
by SELLER from any regulatory agency, unless prohibited by law. SELLER shall
furnish to PURCHASER promptly all information requested by PURCHASER relating to
SELLER which PURCHASER deems necessary for inclusion in any filing with any
regulatory agency necessary to obtain approval for or to give notice of the
Transaction; all information so furnished shall be true and correct in all
material respects without omission of any material facts required to be stated
to make the information stated therein not misleading.
4.3 PURCHASER ACCEPTANCE OF NEW LOANS. Prior to the Closing Date,
PURCHASER shall inform SELLER regarding which of the new loans made after the
Execution Date, with respect to which PURCHASER received notice pursuant to
Section 4.1(N) hereof, it will acquire and include as an Asset hereunder;
provided, however, PURCHASER shall be required to accept each new consumer and
construction loan of SELLER unless such loan (i) does not conform to SELLER's
underwriting policies attached hereto as SCHEDULE 4.3 or PURCHASER's pricing
standards for similar loans or (ii) exceeds $50,000. PURCHASER shall purchase
accepted new loans on the following basis: (i) those accepted new loans made
after the Review Date and prior to the Execution Date shall be purchased in
accordance with the Sandler O'Neill pricing set forth in the Book Value Schedule
attached hereto; and (ii) each accepted new loan made after the Execution Date
shall be purchased by PURCHASER at its par value.
4.4 NOTIFICATION OF CHANGES. SELLER and PURCHASER will promptly notify
the other in writing of the existence or happening of any fact, event or
occurrence that may tend to alter the continuing accuracy or completeness of any
representation or warranty contained in this Agreement.
4.5 NO-SHOP. In consideration of the substantial time and expense to be
undertaken by PURCHASER in connection with seeking regulatory approval of the
transactions contemplated in this Agreement and complying with the other
conditions precedent of this Agreement, while this Agreement is in effect,
SELLER and HOLDING COMPANY, and any officer, director or shareholder of SELLER
or HOLDING COMPANY, collectively or separately, shall not, directly or
indirectly (i) solicit or encourage inquiries or proposals with respect to the
merger of HOLDING COMPANY or SELLER or the sale of any of the shares of capital
stock or Asset(s) of SELLER or HOLDING COMPANY from any party other than
PURCHASER or (ii) merge with any party other than PURCHASER or sell any of the
shares of capital stock or Asset(s) of SELLER or HOLDING COMPANY to any party
other than PURCHASER, unless SELLER and HOLDING COMPANY can establish, as
determined by PURCHASER in its reasonable discretion, that any such transaction
would not impair the ability of SELLER to convey the Assets to PURCHASER at the
Closing or otherwise impair SELLER's and HOLDING COMPANY's compliance with the
terms and conditions of this Agreement or their performance of this Agreement.
4.6 PUBLIC DISCLOSURE. Until the Closing, PURCHASER, SELLER and HOLDING
COMPANY will not make any press release or other public disclosure concerning
this Agreement or the Transaction without the prior written consent of the other
parties to this Agreement; provided, however, that notwithstanding the
foregoing, PURCHASER, SELLER and HOLDING COMPANY will be permitted to make any
public disclosures or governmental filings as legal counsel may deem necessary
to maintain compliance with or to prevent violations of applicable federal or
state laws or regulations or which may
20
be necessary to obtain regulatory approval for the transactions
contemplated herein.
4.7 APPLICATIONS. PURCHASER shall use all commercially reasonable
efforts to file, as soon as possible, any necessary notice or applications with
any federal or state agency the delivery of notice to which or the approval of
which is required by applicable law with respect to the Transaction.
4.8 DEPOSIT RATE. SELLER shall price all of its categories of
certificates of deposits no higher than the fifth highest interest rate posted
for said category by any of the fifteen financial institutions constituting
SELLER's peer group as set forth in SCHEDULE 4.8 hereof (the "Peer Group"), it
being specifically understood that posted rates of the same amount will be
counted as multiple rates for the purpose of determining the fifth highest
interest rate. The pricing shall be adjusted each Monday, or the next banking
day thereafter, based on the interest rates posted by the Peer Group for the
preceding Friday and SELLER shall not be permitted to exceed the interest rates
determined by this method for any reason unless specifically agreed to by
PURCHASER.
ARTICLE V
TITLE AND SURVEY; ENVIRONMENTAL MATTERS
5.1 TITLE AND SURVEY MATTERS; UCC SEARCHES.
(a) Within thirty (30) days from the date of this Agreement,
SELLER shall cause to be furnished to PURCHASER (and to the surveyor
selected to prepare the survey described in Section 5.2 below), a
current Commitment for Title Insurance (the "Title Commitment") for
each parcel of Owned Real Property, in each case for an Owner's Policy
of Title Insurance, in Texas standard form, in a face amount equal to
the Book Value of the respective parcel of Owned Real Property issued
by Title Company. Each Title Commitment, , shall set forth the state of
title to the parcel of Owned Real Property thereby covered, including a
list of title exceptions affecting the parcel that would appear in an
Owner's Policy, if one were issued. Each Title Commitment shall contain
the express commitment of the Title Company to issue the specified
Owner's Policy of Title Insurance to PURCHASER (in the face amount of
or in excess of the amount of Book Value of the subject parcel,
insuring indefeasible fee simple title to the parcel that is specified
in the Title Commitment with the standard printed exceptions amended or
deleted in accordance with SECTION 5.5.
(b) Along with each Title Commitment SELLER shall cause to be
furnished to PURCHASER true, correct, and, to the extent possible,
legible copies of all instruments that create or evidence title
exceptions affecting the parcels of Owned Real Property covered by a
Title Commitment including those described as exceptions to which the
conveyance or lien will be subject and which are required to be
released or cured at or prior to the Closing Date.
(c) Within thirty (30) days from the date of this Agreement,
21
unless furnished prior to the date hereof, SELLER shall cause to be
delivered to PURCHASER, at SELLER's sole cost and expense, a Uniform
Commercial Code ("UCC") Financing Statement search covering SELLER,
conducted within ten (10) days prior to the delivery thereof, from the
Secretary of State of Texas and the appropriate county officials
responsible for filing UCC financing statements for fixtures for each
county where SELLER's Assets are located, together with any and all
financing statements listed in the search (the "UCC Search").
5.2 SURVEYS. Within thirty (30) days after the date hereof, SELLER
shall cause to be delivered to PURCHASER one (1) print of a survey for each
parcel of Owned Real Property, prepared or updated within thirty (30) days of
the delivery of said surveys, each of said surveys shall bear a certificate, in
form and substance, satisfactory to PURCHASER, which is addressed to PURCHASER
and the Title Company, executed by the surveyor, and certifying to those matters
reasonably required by PURCHASER (the "Surveys"). The Surveys shall each (i)
bear a notation stating whether or not a portion of the property covered thereby
is located in a 100-year flood plain or a flood-prone area of special flood
hazard and shall show the specific location of any portions of the property that
may be located in any such flood area, and (ii) show the location and dimensions
of all improvements located on the property. In addition, SELLER shall furnish
any affidavits, certificates, assurances and resolutions required by the Title
Company to amend the survey exception so that the Title Policy will be
satisfactory to PURCHASER.
5.3 REVIEW OF TITLE COMMITMENTS, SURVEYS AND EXCEPTION DOCUMENTS. In
the event that the UCC Searches contain any exceptions to title, or the Surveys
or the Title Commitments contain any exceptions to title other than those
matters set forth in standard printed exceptions 2, 3, 4, 6, 7, and 8
promulgated by the Texas Board of Insurance contained in Schedule B of said
Title Commitments (the "Standard Exceptions"), then PURCHASER shall have a
period of twenty (20) business days (the "Title Review Period") commencing with
the day PURCHASER has received the last to be received of the Title Commitments,
the survey(s) and the UCC Search, and copies of the instruments required to be
delivered therewith, in which to give written notice to SELLER specifying
objections to one or more of those items (the "Objections"). All items listed in
any Schedule C of a Title Commitment are deemed to be Objections (without
limiting other Objections). Any such other exception to title contained in the
UCC Search, Surveys, and/or Title Commitments and not objected to in writing by
Purchaser as described above shall be deemed as accepted and approved by
Purchaser (all such matters not objected to by Purchaser together with the
Standard Exceptions being hereinafter referred to as the "Permitted
Exceptions").
5.4 SELLER'S RIGHT TO CURE OBJECTIONS; PURCHASER'S RIGHT TO TERMINATE.
If PURCHASER notifies SELLER of Objections in writing, prior to the expiration
of the Title Review Period, then SELLER shall, within ten (10) days after
SELLER's receipt of notice, either satisfy the Objections at SELLER's sole cost
and expense or promptly notify PURCHASER in writing of the Objections that
SELLER cannot or will not satisfy at SELLER's expense. Notwithstanding the
foregoing sentence, SELLER shall, in any event, be obligated to cure those
Objections that are liens or security interests or that have been voluntarily
placed against any of the Assets by SELLER after the date hereof. Any Objection
appearing in the Title Commitments that is objected to by PURCHASER will be
deemed to be
22
cured if the Title Company issues a revised commitment stating that such
exception will not appear in the Owner's Policy of Title Insurance to be issued
pursuant to the Title Commitment. If SELLER fails or refuses to satisfy any
Objection (other than objection(s) described in the preceding sentence), then
PURCHASER may either (i) waive the unsatisfied Objections by notice in writing
to SELLER (in which case such objection(s) shall become a Permitted Exception),
(ii) terminate this Agreement by giving written notice to SELLER pursuant to
Section 8.1(G) hereof, or (iii) notify SELLER in writing that it does not wish
to purchase the Asset to which such Objection relates and then such Asset shall
not constitute an "Asset" and shall not be conveyed to PURCHASER at Closing;
however, if less than fifteen percent (15%) of the Deposits are attributable to
the Asset to which such Objection relates, then PURCHASER may either pursue item
(i) or (iii) above, but PURCHASER shall not be entitled to pursue item (ii)
above.
5.5 OWNER'S POLICIES. At the Closing, SELLER, at SELLER's sole cost and
expense, shall cause Owner's Policies of Title Insurance in Texas standard form
(the "Owner's Policies") to be issued by the Title Company to PURCHASER, for
each parcel of Owned Real Property, in the amount of the Book Value thereof,
insuring that PURCHASER has indefeasible fee simple title to the Owned Real
Property, subject only to the Permitted Exceptions. The Owner's Policies shall
be in Texas standard form, specify under Schedule B as exceptions to the state
of the title of PURCHASER to each parcel only (a) the Standard Exceptions;
provided, however, that (i) the Standard Exception for "Restrictive covenants
affecting the real property described or referred to above" shall be endorsed
with a notation reading "None of record" (except the Permitted Exceptions) (ii)
the Standard Exception for "Any discrepancies, conflicts, or shortages in area
or boundary lines, or any encroachments, or any overlapping of improvements
which a current survey would show" shall be modified to read "Any shortages in
area," and (iii) the Standard Exception for "Standby fees, taxes and assessments
by any taxing authority for the year 1996 and subsequent years. . . ." shall be
completed to read "Standby fees, taxes, and assessments by any taxing authority
for the year 1996 and subsequent years, and subsequent taxes and assessments by
any taxing authority for prior years due to change in land usage or ownership,"
and (b) the Permitted Exceptions.
5.6 ENVIRONMENTAL MATTERS. SELLER shall arrange for and cause, at
SELLER's sole cost and expense, one or more independent contractors, acceptable
to PURCHASER, to conduct a "Phase I" environmental audit of each parcel of Owned
Real Property in order to identify any present or past release or threatened
release of any waste materials or any chemical substances, including, without
limitation, any Hazardous Materials. SELLER shall deliver to PURCHASER a report
prepared by said independent contractor(s) and addressed to PURCHASER detailing
the results of said "Phase I" environmental audit (the "Phase I Report") within
forty-five (45) days from the effective date of this Agreement, or as soon
thereafter as possible if PURCHASER agrees to said delay. SELLER expressly
agrees to supply PURCHASER with historical and operational information regarding
the Owned Real Property, to the extent SELLER or HOLDING COMPANY has such
information in its possession or control, and to cooperate with any reasonable
request of PURCHASER, related to site assessment or site review related to any
environmental matter or investigation, including the making available of such
Employees of SELLER as PURCHASER may reasonably request.
23
ARTICLE VI
CONDITIONS PRECEDENT
6.1 CONDITIONS TO OBLIGATIONS OF SELLER. The obligations of SELLER to
be performed at the Closing hereunder are subject to each of the conditions set
forth below. Any conditions to be satisfied by PURCHASER may be waived by
SELLER, but only in writing and only to the extent that such waiver specifically
identifies the conditions being waived.
A. CLOSING DOCUMENTS. PURCHASER shall have delivered to
SELLER at Closing the following (the "Closing Documents"):
(i) A copy of resolutions of PURCHASER's Board of
Directors and a copy of resolutions of the Board of Directors
of PURCHASER's sole shareholder, IBC Subsidiary Corporation,
and a copy of resolutions of the Board of Directors of IBC
Subsidiary Corporation's sole shareholder, International
Bancshares Corporation, each approving the Transaction, with
the adoption and continued force and effect thereof certified
by the Secretary or an Assistant Secretary of PURCHASER;
(ii) Evidence of the approval of the Transaction by
the regulatory authorities having jurisdiction over PURCHASER,
and a certificate executed by an executive officer of
PURCHASER stating that PURCHASER has complied with all
conditions of such approvals except for conditions to such
approvals which by their terms are to be satisfied after the
Closing;
(iii) A written instrument executed by PURCHASER
setting forth PURCHASER's assumption of the Liabilities, in
the form attached as EXHIBIT A (to which PURCHASER and SELLER
shall attach (i) a detailed list of all the Assumed Deposits
showing name, account type, account number, current balance,
and interest due but unpaid and (ii) an updated Contract
Schedule); and
(iv) A certificate, executed by an executive officer
of PURCHASER, attesting to the satisfaction of the conditions
contained in paragraphs B and C below, which certificate may
be combined with the certificate required in Section
6.1(A)(ii).
B. COMPLIANCE WITH TERMS. On the Closing Date, all the
terms, conditions and covenants of this Agreement to be complied
with and performed by PURCHASER on or before the Closing Date shall
have been complied with and performed in all respects.
C. ACCURACY OF REPRESENTATIONS AND WARRANTIES. The
representations and warranties made by PURCHASER in this Agreement
shall be true, correct and complete at and as of the Closing Date.
D. ACTUAL OR THREATENED ACTIONS. There shall not be any
actual or threatened actions or proceedings before any court or
other governmental body or agency seeking to restrain, prohibit or
invalidate the transactions contemplated by this Agreement or that
24
might affect the right of PURCHASER to own, operate or control the
Assets after the Closing Date.
6.2 CONDITIONS TO OBLIGATIONS OF PURCHASER. The obligations of
PURCHASER at the Closing hereunder are subject to each of the conditions set
forth below. Any such conditions may be waived by PURCHASER, but only in writing
and only to the extent that such waiver specifically identifies the conditions
being waived.
A. TRANSFER INSTRUMENTS. SELLER shall have delivered to
PURCHASER at Closing the following (the "Transfer Instruments"):
(i) A general conveyance instrument in the form
attached as EXHIBIT B, relating to all Assets; (ii) A general
warranty deed in the form attached hereto as EXHIBIT C for
each parcel of Owned Real Property subject only to the
Permitted Exceptions;
(ii) A limited power of attorney in the form attached
as EXHIBIT D; and
(iii)any other Transfer Instruments that SELLER or
PURCHASER determine to be necessary or helpful to consummating
the transactions contemplated by this Agreement.
B. OTHER CLOSING DOCUMENTS. SELLER shall have delivered to
PURCHASER at Closing all of the following (included in "Closing
Documents"):
(i) Copies of the resolutions of SELLER's Board of
Directors and a copy of the resolutions of the Board of
Directors and the shareholders of HOLDING COMPANY approving
the Transaction, with the adoption and continued force and
effect thereof certified by the respective Secretary or an
Assistant Secretary;
(ii) A computer or other listing of all of the
Deposits, showing the account numbers and up-to-date balances
and accrued interest as of the Closing Date;
(iii) The Title Policies;
(iv) All Records of SELLER;
(v) All blueprints, architectural drawings or
specifications in possession of SELLER or HOLDING COMPANY with
respect to the Owned Real Property;
(vi) Certificates, executed by an executive officer
of each of SELLER and HOLDING COMPANY, attesting to the
satisfaction of the conditions set forth in paragraphs C and D
below;
(vii) Evidence of any necessary approvals of the
Transaction by the regulatory authorities having jurisdiction
25
of SELLER or HOLDING COMPANY and certificates executed by an
executive officer of SELLER and HOLDING COMPANY, respectively,
stating that SELLER and HOLDING COMPANY, respectively, have
complied with all conditions of such approvals except for
conditions to such approvals which by their terms are to be
satisfied after the Closing, which certificate for each entity
may be combined with the certificate for said entity required
by Section 6.2(B)(vi) hereof; and
C. COMPLIANCE WITH TERMS. On the Closing Date, all the
terms, conditions and covenants of this Agreement to be complied
with and performed by SELLER and HOLDING COMPANY, respectively, on
or before the Closing Date shall have been complied with and
performed in all respects.
D. ACCURACY OF REPRESENTATIONS AND WARRANTIES. The
representations and warranties made by SELLER and HOLDING COMPANY,
respectively, in this Agreement shall be correct and complete at and
as of the Closing Date with the same force and effect as if made on
and as of the Closing Date.
E. CONSENTS AND AUTHORIZATIONS. PURCHASER and SELLER shall
have received any necessary governmental approvals, consents or permits
for the performance by PURCHASER or SELLER of their respective
obligations under this Agreement, including without limitation, the
consent or approval required of the OTS , the TBD, and the FDIC and
such approvals, consents or permits shall not be subject to any
conditions that are reasonably deemed to be unreasonable by the
affected party under the circumstances.
F. ACTUAL OR THREATENED ACTIONS. There shall not be any actual
or threatened actions or proceedings by or before any court or other
governmental body or agency seeking to restrain, prohibit or invalidate
the Transaction or that might affect the right of PURCHASER to own,
operate or control the Assets after the Closing Date.
G. POSSESSION; NO ENCUMBRANCES. All notes evidencing Loans
transferred to PURCHASER at Closing shall have been endorsed in the
following manner:
Pay to the order of International Bank of Commerce,
without recourse except with respect to representations
expressly set forth in that certain Purchase and Assumption
Agreement, by and among International Bank of Commerce, River
Valley Bank, F.S.B. and Western Capital Holdings, Inc., dated
February 27, 1996.
RIVER VALLEY BANK, F.S.B.
By:___________________________
Name:________________________
Title:_ (AUTHORIZED OFFICER)_______
26
SELLER shall have delivered to PURCHASER actual and physical possession
of the Assets to be conveyed to PURCHASER pursuant to this Agreement,
including all keys, combinations and other means of access to the
Assets and all portions thereof. PURCHASER will have attained good,
marketable and indefeasible fee simple title to all of the Owned Real
Property and interests in real properties included as part of the
Assets, and good, marketable and indefeasible title to all other Assets
to be transferred hereunder, free and clear of all liens, charges,
encumbrances, conditional sales agreements, lease rights, security
agreements or rights of third parties of any kind whatsoever, except
Permitted Exceptions and except as created by PURCHASER or as a result
of PURCHASER's actions or omissions.
H. TELEPHONES. SELLER shall have given its written notice
and consent to all applicable telephone companies to transfer to,
effective the Closing Date, PURCHASER the telephone numbers
currently assigned to all of the locations at which PURCHASER was
conducting business as of the Closing Date, and copies of such
notices and consents shall have been delivered to PURCHASER.
I. ROUTING NUMBER. To the extent permitted by applicable
law, regulations and Federal Agency policies, PURCHASER shall have
been granted the right to use SELLER's Federal Reserve routing
number.
J. ENVIRONMENTAL MATTERS. On or prior to the Closing Date,
PURCHASER shall have received a Phase I Report detailing the results
of an environmental assessment reasonably satisfactory to PURCHASER
with respect to each parcel of Owned Real Property as set forth in
Section 5.6 hereof.
K. EMPLOYEE MATTERS. As of the close of business on the
Closing Date, SELLER shall have terminated the employment of all
Employees of SELLER, and shall have terminated any and all employee
benefit plans maintained by SELLER, and SELLER hereby confirms that
PURCHASER shall not assume any liability, including, without
limitation, insurance or employee benefit plan obligations, with
respect to or arising out of the termination of any of SELLER's
Employees; provided, however, PURCHASER shall have the right, in its
sole discretion, to offer employment to and employ any Employees of
SELLER after the Closing Date and PURCHASER hereby agrees to waive
any pre-existing condition limitations related to health care
benefits for Employees who are hired by PURCHASER.
ARTICLE VII
POST-CLOSING COVENANTS
7.1 ADDITIONAL TITLE DOCUMENTS. At any time, and from time to time, on
the request of PURCHASER, SELLER shall execute and deliver further instruments
and documents of conveyance which are reasonably necessary or helpful to vest in
PURCHASER the full legal or equitable title in and to any and all of the Assets.
7.2 AGREEMENT NOT TO COMPETE. Upon consummation of the
Transaction, SELLER, HOLDING COMPANY, and the officers and directors of
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SELLER and HOLDING COMPANY shall take every action necessary to (i) to cease its
banking operations; and (ii) terminate the Federal Deposit Insurance Corporation
insurance of SELLER as soon as possible and in any event no later than six
months after the Closing Date, or such later date as agreed upon by PURCHASER in
its sole discretion. Other than the winding up of the affairs of SELLER, for a
period of three (3) years from and after the Closing, neither SELLER nor HOLDING
COMPANY, nor any Affiliate of SELLER or HOLDING COMPANY, shall conduct the
business of banking within the territory circumscribed by a fifty (50) mile
radius of any banking premise of SELLER in existence on the date hereof;
provided, however, that HOLDING COMPANY and its Affiliates may (a) make passive
investments in any enterprise conducting the business of banking (directly or
indirectly), so long as (i) the shares of such enterprise are publicly traded on
an exchange in the United States or on the NASDAQ National Market System and
(ii) such investments constitute in the aggregate less than five (5) percent of
the equity of such enterprise and (b) sell the charter of SELLER to PURCHASER at
the Closing, if the parties agree to a price or if PURCHASER does not purchase
the charter at the Closing, sell the charter to a third party as long as the
third party acknowledges in writing that it will be bound by the terms of this
agreement not to compete to the same extent as SELLER. Upon and after Closing,
neither SELLER nor HOLDING COMPANY, nor any Affiliate thereof shall have any
rights to any customer lists, trademarks or other intellectual property rights
of SELLER; however, PURCHASER shall permit SELLER the use of its name while
winding up its affairs. It is acknowledged that damages are difficult or
impossible to ascertain with respect to these matters, and PURCHASER shall have
the right to seek specific performance of the provisions of this paragraph,
which right shall not be exclusive of any of PURCHASER's other rights of law or
in equity, including, without limitation, the right to seek damages.
7.3 CONTROL OF SETTLEMENTS AND DISPUTES. SELLER shall notify PURCHASER
immediately of any claim presented to it and made with respect to any Liability
assumed or Asset acquired by PURCHASER, and PURCHASER may conduct and control
all negotiations and proceedings with respect thereto, provided, however, with
respect to any such claim for which SELLER or HOLDING COMPANY may be required to
indemnify PURCHASER pursuant to Section 9.2 hereof, the provisions of Section
9.4 hereof shall be followed.
7.4 PAYMENT OF CHECKS, DRAFTS AND ORDERS. PURCHASER shall pay all
properly drawn checks, drafts and withdrawal orders presented to it by mail,
over its counters or through clearing by depositors of SELLER, whether drawn on
the check or draft forms provided by SELLER, or by PURCHASER, to the extent that
the Deposit balances to the credit of respective makers or drawers assumed by
PURCHASER pursuant to SECTION 2.1 of this Agreement are sufficient to permit the
payment thereof, and in all other respects to discharge, in the usual course of
conducting a banking business, the duties and obligations of SELLER with respect
to the balances due and owing to the depositors of SELLER relating to the
Assumed Deposits.
7.5 DEPOSIT CONTRACTS. Subject to applicable provisions of law,
PURCHASER shall pay interest on all Assumed Deposits in accordance with the
terms of each written agreement relating to each such Deposit and honor all the
terms and conditions of these agreements; provided, however, PURCHASER shall
have the right to amend the agreements subject to the provisions of the
respective agreements and applicable law.
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7.6 NOTICE TO DEPOSITORS. PURCHASER shall give notice to depositors of
SELLER as promptly as practicable after the Closing Date of PURCHASER's
assumption of the Assumed Deposit balances of SELLER by mailing to each such
depositor a notice of PURCHASER's assumption and by advertising the assumption
in a newspaper of general circulation in the counties in which SELLER's main
office and branches were located. SELLER shall cooperate in providing any of
these notices.
7.7 CONFIDENTIALITY. PURCHASER shall hold in strict confidence and
shall not disclose to third parties any confidential information obtained from
SELLER or HOLDING COMPANY in connection with this Agreement or the Transaction
contemplated thereby except, (i) such disclosure to accountants, attorneys,
agents, and other representatives as appropriate to consummate the transactions
contemplated hereunder, (ii) as may be required by law or (iii) to the extent
such information is or shall otherwise become publicly available other than
through the actions of PURCHASER. PURCHASER shall return all such confidential
data and information to SELLER and HOLDING COMPANY in the event the Transaction
is not consummated. The receipt of confidential information from SELLER and
HOLDING COMPANY shall not prevent or restrict PURCHASER or any of its Affiliates
from doing business in any manner in the future.
7.8 INFORMATIONAL TAX REPORTING. SELLER shall perform all obligations
(including obligations with respect to forms 940, 941, 1098, 1099, W-2 and
back-up withholding) of SELLER with respect to Federal and State income tax
reporting related to all periods prior to the Closing Date.
7.9 DATA PROCESSING, CONTRACTS AND CONVERSION. SELLER shall not agree
to amend any data processing agreement or agree to any termination fee related
to a data processing agreement without the prior written approval of PURCHASER.
In connection with the data processing conversion, SELLER and PURCHASER shall
each pay their own costs and expenses, if any, associated with the data
processing conversion and shall bear equally the duties and responsibilities
relating to such conversion. SELLER shall provide any computer programming,
source code or changes in existing file layouts related to any of the Assets or
Liabilities that PURCHASER may reasonably request.
7.10 ALLOCATION OF CONSIDERATION. PURCHASER and SELLER shall
consistently allocate the consideration payable hereunder among the Assets,
tangible and intangible, on their respective IRS Form 8594 in accordance with
the allocation determined to be appropriate by PURCHASER in accordance with the
recommendation of PURCHASER's outside accountants after their consultation with
the outside accountants of SELLER.
7.11 ACCESS TO RECORDS. After the Closing, PURCHASER shall permit
SELLER and HOLDING COMPANY and their accountants or advisors to have access to
SELLER's Records in PURCHASER's possession at such times as may be reasonably
requested in writing by SELLER or HOLDING COMPANY for the purpose of preparing
and filing federal, state and local tax returns required to be filed by SELLER
or HOLDING COMPANY with respect to taxable periods ending on or before the
Closing and for the purpose of reviewing or auditing such tax returns and with
respect to any pending or threatened litigation. PURCHASER further agrees to
retain all such Records of SELLER or HOLDING COMPANY which are reasonably
necessary for the preparation,
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review, audit and filing of any such return for any taxes for five years from
the date of Closing; provided, however, that if SELLER or HOLDING COMPANY give
PURCHASER written notice of any proceeding related to such tax information, then
PURCHASER shall not dispose of and shall retain such tax information for a
period of one year after its receipt of written notice from SELLER or HOLDING
COMPANY of the final determination of such proceeding.
7.12 ADMINISTRATIVE OFFICES. After Closing, PURCHASER shall be
permitted to occupy the administrative offices of SELLER located at 4316 N. 10th
St., McAllen, Texas, as the same are more particularly described pursuant to the
terms and provisions of that certain Shopping Center Lease Agreement, executed
by and between McAllen Properties, Inc., as Landlord, and SELLER, as Tenant,
dated November 12, 1993 (the "Lease") provided that PURCHASER pays the monthly
Minimum Guaranteed Rental (as defined in the Lease) and the actual cost of the
utilities during such period for the greater of ninety (90) days or the period
of time during which PURCHASER actually occupies said premises. SELLER and
PURCHASER expressly acknowledge and agree that the rent and utilities will be
prorated for any partial months which Purchaser occupies said premises and that
PURCHASER shall have no other obligation to make any other payments arising
under the terms of the Lease other than those hereinabove described. In
addition, SELLER shall use its best efforts to obtain prior to Closing the
written consent of the Landlord under the Lease to Purchaser's occupancy of said
premises for such period of time following Closing.
7.13 ALTERNATECH, INC. CONSULTANT SERVICES CONTRACT. If PURCHASER
does not assume the Alternatech, Inc. Consultant Services Contract at
Closing, then the contract shall be terminated by SELLER as soon as
possible and PURCHASER and SELLER shall each pay one-half of the costs
associated with the contract from the Closing until the termination of
same; provided, however, that (i) none of the costs arising under the
contract for services rendered to SELLER prior to Closing shall be paid by
PURCHASER and (ii) if the contract is not assumed by PURCHASER, under no
circumstances shall PURCHASER be required to pay more than $7,500.00 in
connection with the Alternatech, Inc. Consultant Services Contract.
ARTICLE VIII
TERMINATION
8.1 TERMINATION. Anything herein or elsewhere to the contrary
notwithstanding, this Agreement may be terminated prior to Closing:
A. By mutual written consent of SELLER and PURCHASER;
B. By PURCHASER or SELLER upon written notice thereof to
the other at or upon either:
(i) receipt by PURCHASER or SELLER of
official notice of disapproval or rejection of any regulatory
application filed in connection with the transactions
contemplated by this Agreement; or
(ii) receipt by PURCHASER or SELLER of approval
of any regulatory application filed in connection with this
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Agreement, which approval is subject to a condition which is
not reasonably acceptable to the affected party; or
C. By written notice to SELLER from PURCHASER, if PURCHASER
determines that there has occurred a material adverse change in the
condition, financial or otherwise, of SELLER or the Assets.
D. By written notice to SELLER from PURCHASER, if PURCHASER
and SELLER fail to concur regarding which party will pay severance
or termination fees arising from contracts, agreements or leases of
SELLER in connection with the consummation of the Transaction;
E. By either SELLER or PURCHASER by written notice thereof to
the other if the Closing shall not have occurred by the later of (i)
July 31, 1996 or such other date as mutually agreed upon by SELLER and
PURCHASER; or (ii) the date on which the last necessary regulatory
approval has been received, including any applicable waiting period
required in connection with such regulatory approval, but in no event
later than October 31, 1996, unless such delay shall be due in material
part to the failure of the party seeking termination of this Agreement
to perform or otherwise observe its obligations and conditions set
forth herein to be performed or observed by such party at or before the
Closing Date;
F. By written notice to SELLER from PURCHASER, if the
Deposits in the aggregate on the Closing Date have decreased by
Fifteen Percent (15%) or more of the amount of Deposits of SELLER on
December 31, 1995, which amount is $138,778,032.40;
G. By written notice to SELLER from PURCHASER, if there are
Objections related to the Real Estate, as defined in Section 5.3
hereof, which SELLER has not cured within ten days after SELLER's
receipt of notice of the Objection pursuant to Section 5.4 hereof;
H. By written notice to SELLER from PURCHASER, if any of
the conditions to the obligations of PURCHASER set forth in Section
6.2 hereof are not met at or prior to Closing, except for the
conditions set forth in subparagraphs A(iii) through (v) thereof and
subparagraph B(iii) thereof, or;
I. By written notice to PURCHASER from SELLER if any of the
conditions to the obligations of SELLER set forth in Section 6.1
hereof are not met at or prior to Closing.
Upon termination for any reason, this Agreement shall be void and of no
further effect and there shall be no other liability by reason of this Agreement
or the termination thereof on the part of PURCHASER, SELLER or HOLDING COMPANY,
or the directors, officers, employees, agents, or shareholders of any of them.
ARTICLE IX
SURVIVAL; INDEMNIFICATION
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9.1 SURVIVAL. Except as otherwise expressly provided herein, the
covenants, agreements, representations and warranties of the parties hereto
made, contained in or to be performed pursuant to this Agreement shall survive
Closing until the first anniversary of the Closing Date. Notwithstanding the
preceding sentence, any covenant, agreement, representation, warranty or claim
in respect of which indemnity may be sought under SECTIONS 9.2 or 9.3 shall
survive the time at which it would otherwise terminate pursuant to the preceding
sentence, if notice of the claim, inaccuracy or breach giving rise to such right
to indemnify shall have been given to the party against whom such indemnity may
be sought prior to such time. After Closing, the sole and exclusive remedy of
PURCHASER and SELLER for any breach of any covenant or agreement or inaccuracy
of any such representation or warranty by SELLER or PURCHASER shall be the
indemnities contained in SECTIONS 9.2 and 9.3, respectively. The indemnities
contained in SECTIONS 9.2(III) and 9.3(II) shall survive Closing until the first
anniversary date thereof. Notwithstanding anything to the contrary contained
herein, the indemnities contained in SECTIONS 9.2(I) and (II) and 9.3(I) shall
not terminate but shall survive Closing without any limitation as to duration.
9.2 SELLER'S INDEMNITY. (a) Subject to the provisions of Sections 9.1,
9.2(b) and 9.4 hereof, SELLER and HOLDING COMPANY, jointly and severally, each
hereby indemnifies PURCHASER against and agrees to hold it harmless from any and
all damage, loss, settlement, obligation, deficiency, liability and expense
(including, without limitation, reasonable expenses of investigation and
attorney's fees and expenses in connection with any action, suit or proceeding
brought against PURCHASER) demanded, claimed or threatened in writing against
PURCHASER or incurred or suffered by PURCHASER arising out of (i) ownership or
operation of the SELLER or its business and properties prior to Closing; (ii)
all liabilities of SELLER not expressly assumed hereunder by PURCHASER, whether
before or after the Closing, and (iii) any misrepresentation or breach of any
representation, warranty, covenant or agreement made, contained in or to be
performed by SELLER or HOLDING COMPANY pursuant to this Agreement (all such
claims, damages, losses, settlements, obligations, deficiencies, liabilities and
expenses under clauses (i) - (iii) being hereinafter collectively referred to as
"SELLER Indemnifiable Claims"). Any direct claim by PURCHASER against SELLER, as
distinguished from a claim against PURCHASER by a third party, shall be settled
by arbitration pursuant to ARTICLE X. SELLER or HOLDING COMPANY shall not be
liable under this SECTION 9.2 for any settlement effected without its consent
(which consent shall not be unreasonably withheld) of any claim, litigation or
proceeding in respect of which indemnity may be sought hereunder. PURCHASER
agrees to give prompt notice to SELLER of the assertion of any claim, or the
commencement of any suit, action or proceeding in respect of that indemnity may
be sought hereunder. SELLER may, and at the request of PURCHASER shall (unless
SELLER disclaims any liability or obligation under this Section 9.2 with respect
to such suit, action or proceeding), participate in and control the defense of
any such suit, action or proceeding at its own expense.
(b) Notwithstanding anything herein to the contrary, no indemnification
shall be payable with respect to SELLER Indemnifiable Claims except to the
extent that the cumulative amount of all SELLER Indemnifiable Claims shall
exceed $25,000, whereupon the full amount of such claims shall be recoverable in
accordance with the terms hereof.
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9.3 PURCHASER'S INDEMNITY. (a) Subject to the provisions of Sections
9.1, 9.3(b) and 9.4 hereof, PURCHASER hereby indemnifies SELLER against and
agrees to hold it harmless from any and all damage, loss, settlement,
obligation, deficiency, liability and expense (including, without limitation,
reasonable expenses of investigation and attorney's fees and expenses in
connection with any action, suit or proceeding brought against SELLER) demanded,
claimed or threatened in writing against SELLER or incurred or suffered by
SELLER arising out of (i) ownership of the Assets acquired or Liabilities
assumed in the Transaction after Closing (except as to such damage, liability,
loss or expense resulting from actions taken by PURCHASER at the written
direction of SELLER); and (ii) any misrepresentation or breach of any
representation, warranty, covenant or agreement made, contained in or to be
performed by PURCHASER pursuant to this Agreement (all such claims, damages,
losses, settlements, obligations, deficiencies, liabilities and expenses under
clauses (i) and (ii) being hereinafter collectively referred to as "PURCHASER
Indemnifiable Claims"). Any direct claim by SELLER against PURCHASER, as
distinguished from a claim against SELLER by a third party, shall be settled by
arbitration pursuant to ARTICLE X. PURCHASER shall not be liable under this
SECTION 9.3 for any settlement effected by SELLER without its consent (which
consent shall not be unreasonably withheld) of any claim, litigation or
proceeding in respect of which indemnity may be sought hereunder. SELLER agrees
to give prompt notice to PURCHASER of the assertion of any claim, or the
commencement of any suit, action or proceeding in respect to which indemnity may
be sought hereunder. PURCHASER may, and at the request of SELLER shall (unless
PURCHASER disclaims any liability or obligation under this Section 9.3) with
respect to such suit, action or proceeding), participate in and control the
defense of any such suit, action or proceeding at its own expense.
(b) Notwithstanding anything herein to the contrary, no indemnification
shall be payable with respect to PURCHASER Indemnifiable Claims except to the
extent the cumulative amount of all PURCHASER Indemnifiable Claims shall exceed
$25,000, whereupon the full amount of such claims shall be recoverable in
accordance with the terms hereof.
9.4 NOTICE AND DEFENSE OF CLAIMS. The obligations and liabilities of
each indemnified party hereunder with respect to claims resulting from the
assertion of liability by any indemnified party or third parties shall be
subject to the following terms and conditions:
(a) The indemnified party shall give prompt written notice to
the indemnifying party of any claim or event known to it which does or may give
rise to a claim by the indemnified party against the indemnifying party for
which the indemnified party believes it is entitled to indemnification pursuant
to Sections 9.2 or 9.3 of this Agreement, stating the nature and basis of said
claims or events and the amounts thereof, to the extent known, and in the case
of any claim, action, suit or proceeding brought by any third party, a copy of
any claim, process or legal pleadings with respect thereto promptly after such
documents are received by the indemnified party. Such notice shall be given in
accordance with Section 11.8 hereof.
(b) The indemnified party shall give prompt notice in the
event any claim, action, suit or proceeding is made or brought by any third
party against any indemnified party, with respect to which an indemnifying party
may have liability under Section 9.2 or 9.3 of this
33
Agreement. The indemnifying party shall, at its own expense, be entitled to
participate in and, to the extent that it shall wish, jointly and with any other
indemnifying party, to assume the defense, with independent counsel reasonably
satisfactory to the indemnified party, provided that in assuming the defense of
any such third party claim, action, suit or proceeding, the indemnifying party
acknowledges in writing to the indemnified party that the indemnifying party
shall thereafter be liable for any Indemnifiable Claims with respect to such
claim, action, suit or proceeding.
(c) If the indemnifying party elects to assume control of such
defense or settlement, it shall conduct such defense or settlement in a manner
reasonably satisfactory and effective to protect the indemnified party fully;
the indemnifying parties and their counsel will keep the indemnified party fully
advised as to their conduct of such defense or settlement, and no compromise or
settlement (other than any compromise or settlement solely requiring the payment
of money by the indemnifying party for full and final resolution thereof) shall
be agreed or made without the indemnified party's written consent. In any case,
the indemnified party shall have the right to employ its own counsel and such
counsel may participate in such action, but the reasonable fees and expenses of
such counsel shall be at the expense of the indemnified party, when and as
incurred, unless (a) the employment of counsel by the indemnified party has been
authorized in writing by the indemnifying party; (b) the indemnified party shall
have reasonably concluded that there may be a conflict of interest between the
indemnifying party and the indemnified party in the conduct of the defense of
such action; (c) the indemnifying party shall not in fact have employed
independent counsel reasonably satisfactory to the indemnified party to assume
the defense of such action and shall have been so notified by the indemnified
party; (d) the indemnified party shall have reasonably concluded and
specifically notified the indemnifying party either that there may be specific
defenses available to it which are different from or additional to those
available to the indemnifying party or that such claim, action, suit, or
proceeding involves or could have a material adverse effect upon it beyond the
financial resources of the indemnifying party or the scope of this Agreement; or
(e) the indemnifying party fails to conduct such defense or settlement in a
manner reasonably satisfactory to protect the indemnified party fully. If clause
(b), (c) (d) or (e) of the preceding sentence shall be applicable, then counsel
for the indemnified party shall have the right to direct the defense of such
claim, action, suit or proceeding on behalf of the indemnified party and the
reasonable fees and disbursements of such counsel shall constitute Indemnifiable
Claims hereunder.
(d) If the indemnifying parties do not elect to assume the
defense or settlement in a manner reasonably satisfactory to protect the
indemnified party fully, the indemnified party may engage independent counsel
selected by the indemnified party to assume the defense and may contest, pay,
settle or compromise any such claim on such terms and conditions as the
indemnified party may determine. The fees and disbursements of such counsel
shall constitute Indemnifiable Claims hereunder.
(e) The indemnified party shall be kept fully informed of such
claim, action, suit or proceeding at all stages thereof whether or not such
party is represented by its own counsel.
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ARTICLE X
ARBITRATION
The parties shall submit to binding arbitration by a board of three
arbitrators any disputed question or controversy arising under this Agreement or
arising out of or relating to the transactions contemplated by the Agreement.
Any such arbitration shall be conducted at Dallas, Dallas County, Texas. Either
party may initiate the arbitration, by notice in writing to the other party,
setting forth the nature of the dispute, the amount involved, if any, and the
remedy sought. Any party desiring to initiate arbitration shall serve a written
notice of intention to arbitrate to the other party and to the American
Arbitration Association office in or closest to Dallas, Texas within 180 days
after dispute has arisen. A dispute is deemed to have arisen upon receipt of
written demand or service of judicial process. Failure to serve a notice of
intention to arbitrate within the time specified above shall be deemed a waiver
of the notifying party's right to compel arbitration of such claim. Such notice
of intention to arbitrate may be informal and need not comply with Rule 6 of the
American Arbitration Association. Legal action regarding this Agreement and any
liabilities hereunder shall either be brought by arbitration, as described
herein, or by judicial proceedings- but shall not be pursued in different or
alternative forums. The issue of waiver pursuant to this paragraph is an
arbitrable issue.
The board of three arbitrators shall be appointed promptly upon written
application of the initiating party, and shall be selected in accordance with
the Commercial Arbitration Rules of the American Arbitration Association. All of
the arbitrators shall be members of the American Arbitration Association, and,
if commercially reasonable, at least two of the arbitrators shall be experienced
in the banking industry. Depositions may be taken and other discovery obtained
in any arbitration under this Agreement. The board of arbitrators appointed
hereunder shall conduct the arbitration pursuant to the Commercial Arbitration
Rules of the American Arbitration Association then in effect, except as such
rules may be modified for the purpose of the arbitration proceeding by action of
a majority vote of the arbitrators or by mutual written agreement of the parties
to this Agreement.
In the arbitration proceeding subject to these provisions-the
arbitrators, or a majority of them, are specifically empowered to decide (by
documents only, or with a hearing, at the arbitrators sole discretion)
pre-hearing motions which are substantially similar to prehearing motions to
dismiss and motions for summary adjudication.
The award of the arbitrators shall be final and binding upon the
parties and judgment thereon may be entered in any court having jurisdiction.
All statutes of limitations which would otherwise be applicable shall
apply to any arbitration proceeding hereunder.
The provisions of this Article X shall survive any termination,
amendment, or expiration of the Agreement in which this section is contained,
unless all the Parties otherwise expressly agree in writing.
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The parties acknowledge that this Agreement evidences a transaction
involving interstate commerce in that the funds which may be advanced or
committed under this Agreement are derived from interstate financial markets.
The Federal Arbitration Act shall govern the interpretation, enforcement, and
proceedings pursuant to the arbitration clause in this Agreement.
The arbitrators, or a majority of them, shall award attorney's fees and
costs to the prevailing party pursuant to the terms of this Agreement.
Venue of any arbitration proceeding hereunder will be in Dallas County,
Texas.
Except as set forth above concerning awards to the prevailing party,
each party shall bear its own expenses in connection with preparation for the
presentation of its case at the arbitration proceedings and the fees and
expenses of the arbitrators and all other expenses of the arbitration (except
those referred to in the preceding sentence) shall be borne equally by the
parties to such arbitration.
ARTICLE XI
MISCELLANEOUS
11.1 ENTIRE AGREEMENT. This Agreement embodies the entire
agreement of the parties with respect to the subject matter and supersedes
all prior understandings or agreements, oral or written, between the
parties hereto.
11.2 HEADINGS. The Articles and Sections contained in this Agreement,
except the terms identified for definition in Article I and elsewhere in this
Agreement, are inserted for convenience only and shall not affect the meaning or
interpretation of this Agreement or any provision hereof.
11.3 DISCLOSURE IN SCHEDULES. Disclosure in any particular schedule
required by this Agreement may be made by reference to another schedule,
provided that such reference shall specify such other schedule (unless the
number and title of the referenced schedule is provided in the disclosure, then
the disclosure will not be considered made by cross reference).
11.4 COUNTERPARTS. This Agreement may be executed in any number of
counterparts, each of which when so executed shall be deemed to be an original
and all of which when taken together shall constitute one and the same
Agreement.
11.5 GOVERNING LAW. THIS AGREEMENT AND ALL MATTERS IN CONNECTION
HEREWITH SHALL BE CONSTRUED AND ENFORCED IN ACCORDANCE WITH THE LAWS OF THE
STATE OF TEXAS, EXCEPT INSOFAR AS FEDERAL LAW SHALL BE APPLICABLE TO THE
AGREEMENT AND THE TRANSACTIONS CONTEMPLATED HEREBY.
11.6 SUCCESSORS. All terms and conditions of this Agreement shall
be binding on the successors and assigns of the parties.
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11.7 MODIFICATION; ASSIGNMENT. No amendment or other modification,
rescission, release, annulment or assignment of any part of this Agreement shall
be effective except pursuant to a written agreement subscribed by the duly
authorized representatives of the parties hereto.
11.8 NOTICE. Any notice, request, demand, consent, approval or other
communication to any party hereto shall be effective when received and shall be
given in writing, and delivered in person against receipt therefor, or sent by
certified mail, postage prepaid, courier service, telex or facsimile
transmission at its address set forth below or at such other address as it shall
hereafter furnish in writing to the others.
If to SELLER: Mr. Richard J. Dalton
River Valley Bank, F.S.B.
4316 N. 10th St.
McAllen, Texas 78504
With a copy to: Mr. Mark Kipnis
Holleb & Coff
55 East Monroe Street, Suite 4100
Chicago, IL 60603
If to PURCHASER: Mr. Dennis E. Nixon, President
International Bank of Commerce
1200 San Bernardo
Laredo, TX 78040
With a copy to: Ms. Cary Plotkin Kavy
Cox & Smith Incorporated
112 E. Pecan, Suite 1800
San Antonio, TX 78205
If to HOLDING COMPANY:Mr. Steven Bangert, President
Western Capital Holdings, Inc.
c/o Colorado Business Bankshares, Inc.
821 17th Street
Denver, CO 80202
With a copy to: Mr. Mark Kipnis
Holleb & Coff
55 East Monroe Street, Suite 4100
Chicago, Illinois 60603
All such notices and other communications shall be deemed given on the
date received by the addressee.
11.9 COSTS, FEES AND EXPENSES. Except as otherwise set forth herein,
each party hereto agrees to pay all costs, fees and expenses that it has
incurred in connection with or incidental to the matters contained in this
Agreement, including without limitation, any fees and disbursements to its
accountants and counsel. The parties specifically agree that if SELLER sells a
substantial portion of its non-consumer loan portfolio before the Closing,
SELLER shall retain Sandler O'Neill as its non-exclusive marketing agent in
connection with said sale, and the parties acknowledge that Sandler O'Neill has
agreed that upon such occurrence it will forgive any and all amounts paid or
owed by PURCHASER to Sandler O'Neill in connection with the review of the market
value and
37
saleability of the loans of SELLER which Sandler O'Neill performed and Sandler
O'Neill shall reimburse any amounts paid by PURCHASER from the marketing fees
and/or commissions paid to Sandler O'Neill in connection with the sale of loans
of SELLER.
11.10 SEVERABILITY. If any provision of this Agreement is invalid or
unenforceable, then, to the extent possible, all of the remaining provisions of
this Agreement shall remain in full force and effect and shall be binding upon
the parties hereto.
38
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be
executed by their duly authorized representatives on the date first above
written and SELLER and PURCHASER have each caused this Agreement to be executed
by a majority of their Board of Directors as of the date first above written.
ATTEST: INTERNATIONAL BANK OF COMMERCE
/S/ ARNOLDO CISNEROS By: /S/ DENNIS E. NIXON
Arnoldo Cisneros, Cashier Dennis E. Nixon, President
ATTEST: RIVER VALLEY BANK, F.S.B.
/S/ MARK KIPNIS By: /S/ RICHARD J. DALTON
Mark Kipnis, Secretary Richard J. Dalton, President
ATTEST: WESTERN CAPITAL HOLDINGS, INC.
/S/ MARK KIPNIS By: /S/ STEVEN BANGERT
Mark Kipnis, Secretary Steven Bangert, President
1
BOARD OF DIRECTORS OF
INTERNATIONAL BANK OF COMMERCE
/S/ LESTER AVIGAEL
Lester Avigael
/S/ R. DAVID GUERRA
R. David Guerra
/S/ RICHARD E. HAYNES
Richard E. Haynes
/S/ ROY JENNINGS, JR.
Roy Jennings, Jr.
/S/ DENNIS E. NIXON
Dennis E. Nixon
/S/ LEONARDO SALINAS
Leonardo Salinas
/S/ ANTONIO R. SANCHEZ, JR.
Antonio R. Sanchez, Jr.
/S/ ALBERTO SANTOS
Alberto Santos
2
BOARD OF DIRECTORS OF
RIVER VALLEY BANK, F.S.B.
/S/ JAMES BATSELL
James Batsell
/S/ CONRADO DE LA GARZA
Conrado de la Garza
/S/ LARRY PRESSLER
Larry Pressler
/S/ RICHARD J. DALTON
Richard J. Dalton
/S/ HOWARD ROSS
Howard Ross
/S/ HOMER HOLLAND
Homer Holland
/S/ RON PIKUS
Ron Pikus
/S/ STEVEN BANGERT
Steven Bangert
/S/ JOHN ROSE
John Rose
/S/ MARK KIPNIS
Mark Kipnis
3
INTERNATIONAL BANCSHARES CORPORATION AND SUBSIDIARIES
(Consolidated)
SELECTED FINANCIAL DATA
(Dollars in Thousands, Except Per Share Data)
<TABLE>
<CAPTION>
1995 1994 1993 1992 1991
----------- ---------- ---------- --------- ----------
<S> <C> <C> <C> <C> <C>
BALANCE SHEET
At December 31:
Assets ............... $ 2,935,606 2,659,392 2,115,786 1,883,883 1,736,705
Net loans ............ 1,186,456 1,125,489 997,883 884,853 749,008
Deposits ............. 2,143,346 2,061,638 1,723,919 1,626,935 1,571,394
Other borrowed funds . 66,500 123,500 4,500 5,500 6,500
Shareholders' equity . 245,761 178,536 163,055 131,154 101,945
INCOME STATEMENT
Years ended December 31:
Interest income ...... $ 218,867 159,260 131,829 135,972 144,898
Interest expense ..... (112,361) (66,754) (51,155) (60,769) (84,982)
----------- ---------- ---------- ---------- ----------
Net interest income .. 106,506 92,506 80,674 75,203 59,916
Provision for possible
loan losses ........ (5,150) (3,804) (4,540) (4,664) (5,227)
Non-interest income .. 26,009 22,483 25,935 24,657 14,099
Non-interest expense . (68,989) (59,893) (60,236) (51,224) (39,181)
----------- ---------- ---------- ---------- ----------
Income before income
taxes .............. 58,376 51,292 41,833 43,972 29,607
Income taxes ......... (18,315) (13,402) (9,971) (14,262) (9,752)
----------- ---------- ---------- ---------- ----------
Net income ........... $ 40,061 37,890 31,862 29,710 19,855
----------- ---------- ---------- ---------- ----------
Cash dividend per
share .............. $ .50 1.10 -- -- --
Per common share:
Primary ............ $ 5.81 5.31 4.48 4.11 2.76
Fully diluted ...... $ 5.81 5.31 4.29 3.94 2.64
</TABLE>
Note 1: See note l of notes to the consolidated financial statements
regarding the adoption of Statement of Financial Accounting Standards No. 115.
Note 2: See note 2 of notes to the consolidated financial statements
regarding the acquisitions in 1995 and 1994.
Note 3: See note 8 of notes to the consolidated financial statements
regarding the other borrowed funds.
1
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 and Subsidiaries ("Company"), a bank holding company with
four subsidiary banks operating in 42 locations in South Texas and three
non-bank subsidiaries, for the three year period ended December 31, 1995. This
discussion should be read in conjunction with the Selected Financial Data and
consolidated financial statements included elsewhere herein.
RESULTS OF OPERATIONS
Net income for 1995 was $40,061,000 or $5.81 per share - primary ($5.81 per
share- fully diluted) compared with $37,890,000 or $5.31 per share - primary
($5.31 per share - fully diluted) in 1994 and $31,862,000 or $4.48 per share -
primary ($4.29 per share -fully diluted) in 1993.
Total assets at December 31, 1995 grew 10% to $2,935,606,000 from $2,659,392,000
while net loans increased 5% to $1,186,456,000 from $1,125,489,000 for the prior
year. Deposits at December 31, 1995 were $2,143,346,000, an increase of 4% over
the $2,061,638,000 amount reported at December 31, 1994. Total assets at
December 31, 1994 grew 26% to $2,659,392,000 from $2,115,786,000 while net loans
increased 13% to $1,125,489,000 from $997,883,000 in 1993. Deposits at December
31, 1994 were $2,061,638,000 an increase of 20% over the $1,723,919,000 amount
reported at December 31, 1993. The increase in assets and deposits during 1995
is partially the result of the acquisition of The Bank of Corpus Christi, Corpus
Christi, Texas, ("BCC") and the Stone Oak National Bank, San Antonio, Texas,
("SONB"), (see note 2 of notes to consolidated financial statements). Also,
reflected in total assets is the increase in repurchase agreements with the
Federal National Mortgage Association ("FNMA") and Federal Home Loan Mortgage
Corporation ("FHLMC") to $359,500,000 at December 31, 1995, from $ 180,000,000
of repurchase agreements with the Federal Home Loan Bank of Dallas ("FHLB") at
December 31, 1994, which funds were used to expand the earning asset base of the
Company.
In order to achieve a net yield that is relatively immune from major swings in
market rates, the Company strives to manage both assets and liabilities so that
interest sensitivities match. In this way, the Company attempts to cause both
earning assets and funding sources of the Company to respond to changes in a
similar time frame. 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. The net yield on average interest
earning assets is the difference between the average rate earned on earning
assets and the average rate incurred on interest bearing liabilities.
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. However,
this type of analysis should be used with caution as the positions at any given
point in time can be quickly changed by management 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
2
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 the interest rate changes.
Net interest income increased by $14,000,000 or 15%, over that in 1994 despite
the slight decrease in the net yield on average interest earning assets of .25%
from 4.30% in 1994 to 4.04% in 1995. The net yield on average interest earning
assets decreased by .21% in 1994 to 4.30% from 4.51% in 1993 while net interest
income increased $11,832,000 or 15% over 1993. A 23% increase in average
interest earning assets from $2,149,599,000 in 1994 to $2,635,174,000 in 1995
and a 20% increase from $1,787,364,000 in 1993 to $2,149,599,000 in 1994
contributed to the continued increase in net interest income for 1995 and 1994,
respectively. The growth in net interest income for 1995 was due to the .91%
increase in the yield on average interest earning assets to 8.31% in 1995 from
7.41% in 1994. The growth in net interest income for 1994 can be attributed to
the maintenance of an adequate interest rate spread between interest earning
assets and interest bearing liabilities. In 1994 a .03% increase was reflected
in the yield on average interest earning assets to 7.41% from 7.38% in 1993 and
an increase was reflected on the rates paid on average interest bearing
liabilities to 3.52% in 1994 from 3.21% in 1993.
Non-interest income increased 16% in 1995 to $26,009,000 over $22,483,000 in
1994 and increased .29% over $25,935,000 in 1993. The 1995 increase in
non-interest income is primarily due to the increase in service charges. The
1994 decrease is primarily due to the $1,783,000 investment securities loss
recorded in 1994 compared to the $6,931,000 investment securities gains recorded
in 1993.
Successful 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 overhead ratio (operating expenses divided by net interest income and
other operating income) has been under 57% for each of the last five years,
which is well below 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 15% in 1995 to $68,989,000 from $59,893,000 in 1994 and
increased 15% from $60,236,000 in 1993. The 1995 increase in non-interest
expense is primarily due to the increased operations at each of the subsidiary
banks and in particular, was the result of the $2,800,000 reserve for litigation
costs created by the Company in connection with certain pending litigation
involving a lender liability claim. The 1994 decrease in non-interest expense is
primarily due to certain non-recurring expenses reflected in 1993 related to
other real estate provisions, writedown of capitalized fees related to leveraged
lease transactions and the $2,072,000 of writedown of certain leveraged lease
assets.
The Company has 1,235,352 treasury shares. 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, 1995, the Company had repurchased shares
in the total amount of $7,782,000. The Board of Directors has stated that it
will not approve repurchases of more than a total of $9,000,000; however, the
board has increased previous caps related to treasury shares once they were met
but there are no assurances that an increase of the $9,000,000 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.
Most of the Company's lending activities involve commercial (domestic and
foreign), consumer and real estate mortgage financing. The Company's
acquisitions and efforts to increase its loan volume in 1995 resulted in an
increase of 15% in average domestic loans and a increase of 7% in average
foreign loans for an increase in total average loans of 14% over 1994. The yield
for these loans increased 1.16% for domestic loans and .92% for foreign loans in
1995 as compared to 1994, due to increasing interest rates. The Company
experienced an increase of 14% in average domestic loans and a 1% decrease in
average foreign loans in 1994 as compared to 1993. The yield for these
3
loans increased .95% for domestic loans and .74% for foreign loans in 1994 as
compared to 1993, due to increasing interest rates.
The Company experienced an increase of 36% in average balances of taxable
investment securities from $1,016,871,000 during 1994 to $1,381,781,000 for 1995
and an increase of 23% from $825,864,000 during 1993 to $1,016,871,000 for 1994.
These trends are the results of continued increases in deposits, repurchase
agreements and borrowings during 1995 and 1994 providing available funds for
investments.
The allowance for possible loan losses increased 8% from $17,025,000 in 1994 to
$18,455,000 in 1995 and 23% from $13,831,000 in 1993 to $17,025,000 in 1994. The
provision for possible loan losses charged to expense increased 35% from
$3,804,000 in 1994 to $5,150,000 in 1995 and decreased 16% from $4,540,000 in
1993 to $3,804,000 in 1994. Increases in the allowance for possible loan losses
were largely due to the increase in the loan portfolio and uncertain economic
conditions. The allowance for possible loan losses was 1.53% of total loans at
December 31, 1995 compared to 1.49% at 1994 and 1.36% at 1993. Non-performing
assets as a percentage of total loans and total assets were 1.27% and .52%,
respectively, at December 31, 1995, and .87% and .37% in 1994, respectively.
Loans accounted for on a non-accrual basis increased 72% from $3,627,000 in 1994
to $6,233,000 in 1995. As loans are placed on a non-accrual status, interest
previously accrued and recorded is reversed unless the loans are well secured
and in the process of collection. Foreclosed assets increased 53% from
$6,145,000 in 1994 compared to $9,372,000 in 1995. The increases in the
non-performing loans and foreclosed assets are primarily due to the negative
effect of the devaluation of the Mexican peso. While further increases in
non-performing loans and foreclosed assets are anticipated, the Company does not
expect the peso devaluation to have a materially negative impact on the
operations of the Company. In 1994, non-accruals decreased 41% from $6,104,000
in 1993 to $3,627,000 in 1994 while foreclosed assets had a decrease of 47% from
$11,622,000 in 1993 to $6,145,000 in 1994.
The allowance for possible loan losses consists of the aggregate loan loss
allowances of the subsidiary banks. 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 subsidiary bank 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 ("IBC"), the Company's lead bank; results of examinations by bank
examiners and continuous review of current and anticipated economic conditions
in the market area served by the subsidiary banks. Management of each of the
subsidiary banks, along with management of the Company, continually review the
allowances to determine whether additional provisions should be made after
considering the preceding factors. Please see note 4 of the notes to the
Consolidated Financial Statements for a discussion of impaired loans pursuant to
SFAS 114 as amended by SFAS 118. No additional provision to the allowance for
possible loan losses was required by the adoption of SFAS 114 by the Company on
January 1, 1995.
The subsidiary banks charge off that portion of any loan which management
considers to represent a loss as well as that portion of any other loan which is
classified as a "loss" by bank examiners. Commercial and industrial or real
estate loans are generally considered by management to represent a loss, in
whole or part, when an exposure beyond any collateral coverage is apparent and
when no further collection of the loss portion is anticipated based on the
borrower's financial condition and general economic conditions in the borrower's
industry. Generally, unsecured consumer loans are charged-off when 90 days past
due.
While management of the Company considers that it is generally able to identify
borrowers with financial problems reasonably early and to monitor credit
extended to such borrowers carefully, there is no precise method of predicting
loan losses. The determination that a loan is likely to be uncollectible and
that it should be wholly or partially charged-off as a loss is an exercise of
judgment. Similarly, the
4
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, 1995, was adequate
to absorb possible losses from loans in the portfolio at that date.
On December 31, 1995, the Company had $2,935,606,000 of consolidated assets of
which approximately $120,748,000 or 4% were related to loans outstanding to
borrowers from Mexico. The composition of such loans and the related amounts of
allocated allowance for possible loan losses as of December 31, 1995 were as
follows:
RELATED
AMOUNT OF ALLOWANCE FOR
LOANS POSSIBLE LOSSES
-------- ---------------
(Dollars in Thousands)
Secured by certificates of deposit in
United States banks ........................ $ 51,762 23
Secured by United States real estate ......... 38,697 516
Secured by other United States collateral
(securities, gold, silver, etc.) ........... 12,131 134
Direct unsecured Mexican sovereign debt
(principally former FICORCA debt) .......... 1,681 188
Other ........................................ 16,477 174
-------- -----
$120,748 1,035
-------- -----
The transactions for the year ended December 31, 1995 in that portion of the
allowance for possible loan losses related to Mexican debt were as follows:
(Dollars in Thousands)
Balance at January 1, 1995 ................ $ 949
Charge-offs ............................ (176)
Recoveries ............................. 113
Net charge-offs ........................... (63)
Provision for possible loan losses ........ 149
Balance at December 31, 1995 .............. $ 1,035
-----
The financial results of the Company have been influenced by inflation in many
ways. The principal component of earnings is net interest income, which is
primarily affected by earnings, asset growth and the sensitivity of assets and
liabilities to changes in the level of interest rates. Although the rate of
inflation in the United States has declined significantly over the past several
years, inflation's impact is still felt in many foreign nations such as the
recent high inflation in Mexico. Since inflation induces an increase in earning
assets and interest rates, a large part of the impact of inflation on net income
is reflected in the net interest yield on earning assets. It is difficult to
precisely measure the impact because it is not possible to accurately
differentiate between growth resulting from inflation and growth resulting from
increased business activity. Inflation also raises costs of operation, primarily
those of employment and services.
5
LIQUIDITY AND CAPITAL RESOURCES
The maintenance of adequate liquidity provides the Company's subsidiary banks
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 subsidiary banks of the Company derive their liquidity largely from deposits
of individuals and business entities; however, the deposits are not growing at
as high a rate as they did in the past. Consequently, the Company is relying
more on other funding sources. Other important funding sources for the Company's
bank subsidiaries during 1995 and 1994 have been securities sold under agreement
to repurchase, FHLB certificates of indebtedness and large time certificates of
deposit requiring management to closely monitor its asset/liability mix in terms
of both rate sensitivity and maturity distribution. The Company does not have or
solicit brokered deposits. Primary liquidity of each bank has been maintained by
means of increased investment in 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.
Principal sources of liquidity and funding for the Company are earnings of
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 subsidiary banks as disclosed in Note 16
to the consolidated financial statements. At December 31, 1995, the aggregate
amount legally available to be distributed to the Company from subsidiary banks
as dividends was approximately $85,670,000. The restricted capital of the
subsidiary banks was approximately $138,289,000 as of December 31, 1995. The
Company has outstanding $66,500,000 in 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 stockholders. At December 31, 1995, stockholders' equity was
$245,761,000 compared to $178,536,000 at December 31, 1994, an increase of
$67,225,000 or 38%. This increase in capital resulted primarily from the
retention of earnings and the unrealized gains recorded in accordance with
Statement of Financial Accounting Standards, No. 115 (see note 1 of notes to
consolidated financial statements) and cash dividends.
During 1990, the Federal Reserve Board 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 ratio (defined as stockholders'
equity less goodwill and certain other intangibles divided by average quarterly
assets) was 7.46% at December 31, 1995 and 7.20% at December 31, 1994. The core
deposit intangibles and goodwill of $16,560,000 booked in connection with
financial institution acquisition of the Company are deducted from the sum of
core capital elements when determining the capital ratios of the Company.
The Federal Reserve Board 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 stockholders' 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. The Company had risk-weighted Tier 1 capital ratios of 14.78% and 13.19%
and risk weighted total capital ratios of 15.93% and 14.30% for December 31,
1995 and 1994, respectively, which are well above the minimum regulatory
requirements.
During the past few years the Company has expanded its banking facilities. Among
the activities and commitments the Company funded during 1995 and 1994 were
certain capital
6
expenditures as they related to modernization and improvement of several
existing bank facilities and expansion of the bank branch network.
ADOPTION OF NEW ACCOUNTING STANDARDS
During 1993 the Financial Accounting Standard Board ("FASB") issued Statement of
Financial Accounting Standards ("SFAS") No. 115, "Accounting for Certain
Investments in Debt and Equity Securities" which required that an enterprise
classify debt and equity securities into one of these categories:
held-to-maturity, available-for-sale, or trading. SFAS No. 115 also states that
these classifications need to be reassessed for appropriate classification at
each reporting date. Securities classified as "held- to-maturity" are to be
carried at amortized cost for financial statement reporting, while securities
classified as "available for sale" and "trading" are to be carried at their fair
value. Unrealized holding gains and losses are included in net income for those
securities classified as "trading", while unrealized holding gains and losses
related to those securities classified as "available-for-sale" are excluded from
net income and reported as a net amount in a separate component of shareholders'
equity until realized. This statement was adopted by the Company on January 1,
1994. The effect of the change in accounting treatment as of January 1, 1994,
resulted in an increase in shareholders' equity of $5,312,000, and is reported
separately in the consolidated statement of shareholders' equity (see note 1 of
notes to consolidated financial statements).
The Company adopted SFAS No. 114, "Accounting by Creditors for Impairment of a
Loan", as amended by SFAS No. 118, "Accounting by Creditors for Impairment of a
Loan-Income Recognition and Disclosure", effective January 1, 1995. These
Statements are applicable to all creditors and to all loans, uncollateralized as
well as collateralized, except consumer loans. These Statements require that
impaired loans be measured based on (1) the present value of expected future
cash flows discounted at the loan's effective interest rate; (2) the loan's
observable market price; or, (3) the fair value of the collateral if the loan is
collateral dependent. The adoption of this accounting standard did not have a
material effect on the Company's financial position or results of operations
since the Company's previous recognition and measurement policies regarding
non-performing loans were consistent with the accounting requirements for
impaired loans.
ACCOUNTING STANDARDS ISSUED BUT NOT YET EFFECTIVE
In March 1995, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards ("SFAS") No. 121, "Accounting for the Impairment
of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of" which requires
adoption of the disclosure provisions no later than fiscal years beginning after
December 15, 1995. This Statement establishes 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 to be disposed of. 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. Management believes that these Statements, which
must be implemented by the Company in 1996, will not have a material effect on
the consolidated financial statements of the Company when implemented.
In May 1995, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards ("SFAS") No. 122, "Accounting for Mortgage
Servicing Rights" which requires adoption of the disclosure provisions no later
than fiscal years beginning after December 15, 1995. 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. Management
believes that these Statements, which must be implemented by the Company in
1996, will not have a material effect on the consolidated financial statements
of the Company when implemented.
7
In October 1995, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards ("SFAS") No. 123, "Accounting for Stock-Based
Compensation," which requires adoption of the disclosure provisions no later
than fiscal years beginning after December 15, 1995. Companies are permitted to
continue to account for such transactions under Accounting Principles Board
Opinion No. 25, "Accounting for Stock Issued to Employees," but will be required
to disclose in a note to the financial statements pro forma net income and, if
presented, earnings per share as if the company had applied the new method of
accounting, as outlined in SFAS No. 123. The Company has not yet determined the
effect the new standard will have on net income and earnings per share should it
elect to make such a change. Adoption of the new standard will have no effect on
the Company's cash flows.
COMMON STOCK AND DIVIDENDS
The Company had outstanding 6,961,674 shares of $1.00 par value Common Stock
held by approximately 1,344 holders of record at March 28, 1996. The book value
of the stock at December 31, 1995 was $41.00 per share compared with $35.51 per
share, adjusted for stock dividends, one year ago. On March 25, 1996 shares of
the Common Stock were most recently sold for $41.00 per share.
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 has not been extensive and such trades cannot be characterized as
amounting to an active trading market. The Common Stock is not listed on any
exchange. Most of the transactions in the Company's stock are handled privately;
however, local brokerage firms, acting independently of the Company, handle some
of the transactions for buyers and sellers of the stock on a negotiated basis.
The following table sets forth the approximate high and low bid prices in the
Company's Common Stock, adjusted for stock dividends during 1994 and 1995, as
quoted on the OTC Bulletin Board, as recorded by local brokerage firms or from
information in the Company's records for each of the quarters in the two year
period ended December 31, 1995:
HIGH LOW
1995:
First quarter $ 41.60 $ 40.00
Second quarter 41.60 40.00
Third quarter 41.00 40.00
Fourth quarter 42.00 40.00
HIGH LOW
1994:
First quarter $ 51.63 $ 46.00
Second quarter 40.00 36.80
Third quarter 41.60 40.00
Fourth quarter 44.00 40.80
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 1994 and 1995 paid a $6,012,000 and $2,771,000, or $1.10 and $.50
per share respectively, special cash dividend to the shareholders. In addition,
the Company has issued stock dividends during the last five year period as
follows:
Stock
DATE DIVIDEND
May 16, 1991 15 %
May 22, 1992 20
May 20, 1993 25
May 19, 1994 25
May 19, 1995 25
8
A covenant of the Company's $2,500,000 note payable (see note 16 of notes to
consolidated financial statements) restricts the Company from declaring or
paying any dividends to its shareholders, other than stock dividends. The
subsidiary banks are subject to certain dividend restrictions as disclosed in
note 16 of notes to consolidated financial statements. The Company paid a
special cash dividend on June 12, 1995. A dividend waiver was received from the
lender regarding the covenant restricting the payment of cash dividends, which
would permit current and future dividends up to a certain amount.
9
INDEPENDENT AUDITOR'S 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, 1995 and 1994, and
the related consolidated statements of income, shareholders' equity, and cash
flows for each of the years in the three-year period ended December 31, 1995.
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, 1995 and 1994, and
the results of their operations and their cash flows for each of the years in
the three-year period ended December 31, 1995, in conformity with generally
accepted accounting principles.
As discussed in Notes 1 and 4 to the consolidated financial statements effective
January 1, 1995, the Company changed its method of accounting for impairment of
loans receivable to adopt the provisions of the Financial Accounting Standards
Board's Statement of Financial Accounting Standards (SFAS) No. 114, "Accounting
by Creditors for Impairment of a Loan", as amended by SFAS No. 118, "Accounting
by Creditors for Impairment of a Loan-Income Recognition and Disclosures".
As discussed in Note 1 in notes to the consolidated financial statements, the
Company changed its method of accounting for investment securities in 1994.
/s/ KPMG PEAT MARWICK LLP
San Antonio, Texas
March 22, 1996
<PAGE>
10
INTERNATIONAL BANCSHARES CORPORATION AND SUBSIDIARIES
Consolidated Statements of Condition
December 31, 1995 and 1994
(Dollars in Thousands)
ASSETS 1995 1994
----------- ----------
Cash and due from banks ........................... $ 86,827 86,200
Federal funds sold ................................ 37,000 4,000
----------- ----------
Total cash and cash equivalents ...... 123,827 90,200
Time deposits with banks .......................... 1,800 495
Investment securities:
Held to maturity
(Market value of $2,895 on December 31, 1995
and $612,420 on December 31, 1994 ............. 2,909 647,832
Available for sale
(Amortized cost of $1,439,823 on December 31,
1995 and $671,957 on December 31, 1994 ........ 1,460,432 646,402
----------- ----------
Total investment securities .......... 1,463,341 1,294,234
Loans:
Commercial, financial and agricultural ......... 718,364 664,449
Lease financing receivables, net ............... 3,910 3,910
Real estate - mortgage ......................... 200,998 201,998
Real estate - construction ..................... 39,527 46,584
Consumer ....................................... 124,843 122,751
Foreign ........................................ 120,748 106,707
----------- ----------
Total loans .......................... 1,208,390 1,146,399
Less unearned discounts ........................ (3,479) (3,885)
----------- ----------
Loans, net of unearned discounts ..... 1,204,911 1,142,514
Less allowance for possible loan losses ........ (18,455) (17,025)
----------- ----------
Net loans ............................ 1,186,456 1,125,489
----------- ----------
Bank premises and equipment, net .................. 80,410 70,686
Accrued interest receivable ....................... 22,204 20,941
Other assets ...................................... 57,568 57,347
----------- ----------
Total assets ......................... $ 2,935,606 2,659,392
----------- ----------
11
LIABILITIES AND SHAREHOLDERS' EQUITY 1995 1994
----------- ----------
Liabilities:
Deposits:
Demand - non-interest bearing ................ $ 295,301 274,563
Savings and interest bearing demand .......... 576,878 562,824
Time ......................................... 1,271,167 1,224,251
----------- ----------
Total deposits ....................... 2,143,346 2,061,638
Securities sold under repurchase agreements .... 462,602 284,113
Other borrowed funds ........................... 66,500 123,500
Other liabilities .............................. 17,397 11,605
----------- ----------
Total liabilities .................... 2,689,845 2,480,856
----------- ----------
Shareholders' equity:
Common stock of $1.00 par value ................
Authorized 15,000,000 shares;
issued 8,159,814 shares in 1995
and 6,466,307 shares in 1994 ................. 8,160 6,466
Surplus ........................................ 10,637 10,154
Retained earnings .............................. 221,350 185,685
Net unrealized holding gains (losses) on
available for sale securities, net of
deferred income taxes ........................ 13,396 (16,611)
----------- ----------
253,543 185,694
Less cost of shares in treasury,
1,229,332 shares in 1995 and
971,257 shares in 1994 ....................... (7,782) (7,158)
----------- ----------
Total shareholders' equity ........... 245,761 178,536
----------- ----------
Total liabilities and
shareholders' equity .............. $ 2,935,606 2,659,392
----------- ----------
See accompanying notes to consolidated financial statements.
12
<PAGE>
INTERNATIONAL BANCSHARES CORPORATION AND SUBSIDIARIES
Consolidated Statements of Income
Years ended December 31, 1995, 1994 and 1993
(Dollars in Thousands, Except Per Share Amounts)
1995 1994 1993
----------- ---------- ---------
Interest income:
Loans, including fees ................. $ 124,411 97,057 77,602
Time deposits with banks .............. 43 38 40
Federal funds sold .................... 991 1,022 657
Investment securities:
Taxable ............................. 91,178 58,983 52,410
Tax-exempt .......................... 1,825 1,691 1,120
Other ................................. 419 469 --
----------- ---------- ---------
Total interest income ....... 218,867 159,260 131,829
----------- ---------- ---------
Interest expense:
Savings and interest bearing demand
deposits ............................ 16,741 10,930 9,590
Time deposits ......................... 62,078 43,119 36,467
Federal funds purchased and securities
sold under repurchase agreements .... 25,594 10,311 4,685
Other borrowings ...................... 7,948 2,365 299
Subordinated debt ..................... -- 29 114
----------- ---------- ---------
Total interest expense ...... 112,361 66,754 51,155
----------- ---------- ---------
Net interest income ......... 106,506 92,506 80,674
Provision for possible loan losses ....... 5,150 3,804 4,540
----------- ---------- ---------
Net interest income after
provision for possible
loan losses .............. 101,356 88,702 76,134
----------- ---------- ---------
Non-interest income:
Service charges on deposit accounts ... 5,488 4,535 4,037
Other service charges, commissions
and fees ............................ 13,684 12,033 10,722
Investment securities transactions, net (2) (1,783) 6,931
Other income .......................... 6,839 7,698 4,245
----------- ---------- ---------
Total non-interest income ... 26,009 22,483 25,935
----------- ---------- ---------
13
Non-interest expense:
Employee compensation and benefits .... 25,701 22,113 19,294
Occupancy ............................. 5,105 4,161 4,014
Depreciation of bank premises and
equipment ........................... 5,478 5,964 4,963
Regulatory and deposit insurance fees . 4,578 4,756 4,170
Legal expense including settlements ... 5,045 1,481 1,906
Net cost of operations for other real
estate owned ........................ 558 -- 2,887
Lease asset write-downs and expenses .. 471 787 4,003
Stationary and supplies ............... 2,176 1,821 1,770
Other ................................. 19,877 18,810 17,229
----------- ---------- ---------
Total non-interest expense .. 68,989 59,893 60,236
----------- ---------- ---------
Income before income
taxes .................... 58,376 51,292 41,833
Income taxes ............................. 18,315 13,402 9,971
----------- ---------- ---------
Net income .................. $ 40,061 37,890 31,862
----------- ---------- ---------
Per share:
Net income - primary .................. $ 5.81 5.31 4.48
Net income - fully diluted ............ $ 5.81 5.31 4.29
Weighted average number of shares
outstanding ......................... 6,896,370 7,131,455 7,442,208
See accompanying notes to consolidated financial statements.
14
<PAGE>
INTERNATIONAL BANCSHARES CORPORATION AND SUBSIDIARIES
Consolidated Statements of Shareholders' Equity
Years ended December 31, 1995, 1994 and 1993
(Dollars in Thousands)
<TABLE>
<CAPTION>
UNREALIZED
GAIN (LOSS)
ON AVAILABLE
NUMBER COMMON RETAINED FOR SALE TREASURY
OF SHARES STOCK SURPLUS EARNINGS SECURITIES STOCK TOTAL
----- ------ ------ -------- ------- ------ --------
<S> <C> <C> <C> <C> <C> <C> <C>
Balances at January 1, 1993 ................... 3,939 $3,939 8,362 124,261 -- (5,408) 131,154
Net income .................................. -- -- -- 31,862 -- -- 31,862
Stock dividends:
Shares issued ............................. 1,019 1,019 -- (1,019) -- -- --
Cash dividend in lieu
of fractional shares ...................... -- -- -- (10) -- -- (10)
Purchase of treasury stock .................. -- -- -- -- -- (1,291) (1,291)
Exercise of stock options ................... 155 155 1,185 -- -- -- 1,340
----- ------ ------ -------- ------- ------ --------
Balances at December 31, 1993 ................. 5,113 $5,113 9,547 155,094 -- (6,699) 163,055
Net income .................................. -- -- -- 37,890 -- -- 37,890
Effect of adopting Financial
Statement of Financial
Accounting Statement No. 115
at January 1, 1994, net of
deferred income taxes ..................... -- -- -- -- 5,312 -- 5,312
Stock dividends:
Shares issued ............................. 1,287 1,287 -- (1,287) -- -- --
Cash dividends .............................. -- -- -- (6,012) -- -- (6,012)
Purchase of treasury stock .................. -- -- -- -- -- (459) (459)
Exercise of stock options ................... 66 66 607 -- -- -- 673
Net change in unrealized loss
on available for sale
securities, net of deferred
income taxes .............................. -- -- -- -- (21,923) -- (21,923)
----- ------ ------ -------- ------- ------ --------
Balances at December 31, 1994 ................. 6,466 $6,466 10,154 185,685 (16,611) (7,158) 178,536
Net income .................................. -- -- -- 40,061 -- -- 40,061
Stock dividends:
Shares issued ............................. 1,625 1,625 -- (1,625) -- -- --
Cash dividends .............................. -- -- -- (2,771) -- -- (2,771)
Purchase of treasury stock .................. -- -- -- -- -- (624) (624)
Exercise of stock options ................... 69 69 483 -- -- -- 552
Net change in unrealized gain
on available for sale
securities, net of deferred
income taxes .............................. -- -- -- -- 30,007 -- 30,007
----- ------ ------ -------- ------- ------ --------
Balances at December 31, 1995 ................. 8,160 $8,160 10,637 221,350 13,396 (7,782) 245,761
===== ====== ====== ======== ======= ====== ========
</TABLE>
See accompanying notes to consolidated financial statements.
15
<PAGE>
INTERNATIONAL BANCSHARES CORPORATION AND SUBSIDIARIES
Consolidated Statements of Cash Flows
Years ended December 31, 1995, 1994 and 1993
(Dollars in Thousands)
<TABLE>
<CAPTION>
1995 1994 1993
--------- -------- --------
<S> <C> <C> <C>
Operating activities:
Net income ............................................................. $ 40,061 37,890 31,862
Adjustments to reconcile net income to net cash
provided by operating activities:
Provision for possible loan losses ................................. 5,150 3,804 4,540
Recoveries on charged-off loans .................................... 609 1,668 1,012
Net cost (profit) of operations for other real
estate owned ..................................................... 558 (761) 2,887
Lease asset write-downs ............................................ 471 787 4,003
Depreciation of bank premises and equipment ........................ 5,478 5,964 4,963
Accretion of investment securities discounts ....................... (1,736) (593) (264)
Amortization of investment securities premiums ..................... 10,831 14,818 10,792
Realized loss (gain) on investment securities
transactions, net ................................................ 2 1,783 (6,931)
Gain on sale of bank premises and equipment ........................ (11) (26) (3)
(Increase) decrease in accrued interest
receivable ....................................................... (333) (2,839) 2,113
Increase (decrease) in other liabilities ........................... 5,484 (24,443) 1,527
--------- -------- --------
Net cash provided by operating
activities ................................................. 66,564 38,052 56,501
--------- -------- --------
Investing activities:
Cash acquired in purchase transactions ................................. 7,123 21,938 8,150
Proceeds from sales of held to maturity
securities ........................................................... -- -- 223,732
Proceeds from maturities of securities ................................. 30,154 3,757 3,046
Purchases of held to maturity securities ............................... -- (323,309) (728,642)
Proceeds from sales of available for sale
securities ........................................................... 154,506 395,656 --
Purchases of available for sale securities ............................. (490,489) (531,552) --
Principal collected on mortgage-backed securities ...................... 209,262 249,899 396,051
Principal collected on other investment securities ..................... -- 15 --
Proceeds from matured time deposits with banks ......................... 297 1,091 507
Purchases of time deposits with banks .................................. (1,602) (297) (794)
Net increase in loans .................................................. (30,154) (84,874) (96,801)
Net (increase) decrease in other assets ................................ (2,909) (20,646) 2,355
Purchases of bank premises and equipment ............................... (11,582) (11,978) (16,879)
Proceeds from sale of bank premises
and equipment ........................................................ 48 83 356
--------- -------- --------
Net cash used in investing activities ........................ (135,346) (300,217) (208,919)
--------- -------- --------
16
Financing activities:
Net increase in non-interest bearing demand
deposits ............................................................. $ 3,486 27,364 37,791
Net (decrease) increase in savings and
interest bearing demand deposits ..................................... (34,712) 837 29,888
Net increase (decrease) in time deposits ............................... 24,614 83,652 (24,068)
Net increase in federal funds purchased and
securities sold under repurchase agreements .......................... 168,864 69,207 103,122
Proceeds from issuance of other borrowed funds ......................... 93,500 120,000 --
Principal payments on other borrowed funds and
subordinated debt .................................................... (150,500) (2,451) (2,000)
Purchase of treasury stock ............................................. (624) (459) (1,291)
Proceeds from exercise of stock options ................................ 552 673 1,340
Payment of cash dividends .............................................. (2,762) (6,012) --
Payments of cash dividends in lieu of fractional
shares ............................................................... (9) -- (10)
--------- -------- --------
Net cash provided by
financing activities ....................................... 102,409 292,811 144,772
--------- -------- --------
Increase (decrease) in cash and cash
equivalents ................................................ 33,627 30,646 (7,646)
Cash and cash equivalents at beginning of year ........................... 90,200 59,554 67,200
--------- -------- --------
Cash and cash equivalents at end of year ................................. $ 123,827 90,200 59,554
--------- -------- --------
Supplemental cash flow information:
Interest paid .......................................................... $ 114,685 69,506 58,023
Income taxes paid ...................................................... 18,966 18,177 8,041
Supplemental schedule of noncash investing and
financing activities relating to various purchase
transactions:
Loans acquired ....................................................... $ 37,043 48,991 23,853
Investment securities and other assets acquired ...................... 54,087 183,030 21,739
Deposit liabilities assumed .......................................... 98,253 253,959 53,742
</TABLE>
See accompanying notes to consolidated financial statements.
17
<PAGE>
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 ("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 ("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 and IBC Trading Company. All
significant intercompany balances and transactions have been eliminated
in consolidation.
The Company through its bank subsidiaries, is 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 principally located in
Webb, Bexar, and Zapata counties and the lower Rio Grande Valley and
Texas Coastal Bend area. Each bank subsidiary is very active in
facilitating international trade along the United States border with
Mexico and elsewhere. The issuance of commercial letters of credit
forms a substantial part of this business. 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 above mentioned counties and areas. 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 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.
INVESTMENT SECURITIES
On January 1, 1994, the Company adopted the provisions of the Financial
Accounting Standards Board's Statement of Financial Accounting
Standards No. 115, "Accounting for Certain Investments in Debt and
Equity Securities." The Company classified debt securities, including
mortgage-backed securities (MBS's), as either held-to-maturity or
available-for-sale as of January 1, 1994. Under Statement 115, debt
securities classified as held-to-maturity are those which the Company
has the positive intent and ability to hold until maturity. These
securities are carried at amortized cost with premiums and discounts
being amortized using the effective interest method over the estimated
remaining life of the security. Securities classified as available-for
sale are carried at fair
18
value with unrealized gains or losses (net of deferred income taxes)
reflected in shareholders' equity. The effect of this change in
accounting principle as of January 1, 1994, resulted in an increase in
shareholders' equity of $5,312,000 and is reported separately in the
consolidated statement of shareholders' equity. Gains and losses
recognized on the sale of securities are based on the specific
identification method.
Mortgage-backed securities held at December 31, 1995 and 1994,
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 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 it's 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
78th'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 Company's bank subsidiaries allowances for
possible loan losses. Such agencies may require the Company'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.
The Company adopted SFAS No. 114, "Accounting by Creditors for
Impairment of a Loan", and SFAS No. 118, "Accounting by Creditors for
Impairment of a Loan Income Recognition and Disclosure" effective
January 1, 1995. These Statements are applicable to all creditors and
to all loans, uncollateralized as well as collateralized, except
consumer loans. These Statements require that impaired loans be
measured based on (1) the present value of expected future cash flows
discounted at the loan's effective interest rate; (2) the loan's
observable market price; or, (3) the fair value of the collateral if
the loan is collateral dependent. The adoption of this accounting
standard did not have a material effect on the Comapany's financial
position or results of operations since the
19
Company's previous recognition and measurement policies regarding
non-performing loans were consistent with the accounting requirements
for impaired loans.
NON-ACCRUAL LOANS
The non-accrual loan policy of the banking 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.
MORTGAGE SERVICING RIGHTS
In May 1995, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards ("SFAS") No. 122, "Accounting for
Mortgage Servicing Rights" which requires adoption of the disclosure
provisions beginning after December 15, 1995. 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. Management believes that this Statement,
which must be implemented by the Company in 1996, will not have a
material effect on the consolidated financial statements of the Company
when implemented.
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 (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
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.
20
STOCK OPTION PLAN
The stock option plan provides for the granting of options to purchase
common stock at the market price on the date of the grant as determined
by the Board of Directors of the Company. Consequently, no accounting
is made for options until they are exercised, at which time the
aggregate option price is credited to the common stock and surplus
accounts.
NET INCOME PER SHARE
Primary net income per common and common equivalent shares has been
computed on the basis of the weighted average shares outstanding. All
share and per share information has been restated giving retroactive
effect to stock dividends distributed.
Because the Company redeemed the outstanding mandatory convertible
subordinate notes in the aggregate principal amount of $1,451,000 on
April 29, 1994, the related as-if-converted common shares are not
included in the determination of fully-diluted earnings per share for
the years ended December 31, 1994 and 1995.
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
assets acquired (goodwill) and core deposit intangibles are included in
other assets and are being amortized over varying remaining lives not
exceeding 15 years.
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.
(2) ACQUISITIONS
On February 27, 1996, the Company entered into a purchase and
assumption agreement whereby IBC will purchase certain assets and will
assume certain liabilities of River Valley Bank, F.S.B., headquartered
in Weslaco, Texas. This agreement is subject to regulatory approval.
IBC will purchase loans of approximately $22,915,000 and assume
deposits of approximately $137,780,000 and will receive cash or other
assets in the amount of approximately $114,865,000.
Effective September 8, 1995, Stone Oak National Bank, in San Antonio,
Texas, ("SONB") a national banking association organized under the laws
of the United States, was merged with and into IBC. At the date of
closing, total assets acquired were approximately $18,000,000. The
acquisition was accounted for as a purchase transaction. IBC recorded
intangible assets, goodwill and core deposit premium totaling
$1,387,000. These assets are being amortized on a straight line basis
over a fifteen year period.
Effective February 1, 1995, The Bank of Corpus Christi, Corpus Christi,
Texas ("BCC") a state bank organized under the laws of the state of
Texas, was merged with and into IBC. At the date of closing, total
assets acquired were approximately $80,000,000. The acquisition was
accounted for as a purchase transaction. IBC recorded intangible
assets, goodwill and core deposit premium totaling $4,062,000. These
assets will be amortized on a straight line basis over a fifteen year
period.
21
Effective as of the close of business on August 31, 1994, First State
Bank and Trust Company, Port Lavaca, Texas ("LAVACA"), a wholly-owned
subsidiary of Michigan National Corporation ("MNC"), was merged with
IBC. At the date of closing, total assets acquired were approximately
$254,000,000. The acquisition was accounted for as a purchase. IBC
recorded intangible assets, goodwill and core deposit premium totalling
approximately $8,300,000. These assets are being amortized on a
straight line basis over a fifteen year period.
The following unaudited pro forma financial information presents the
consolidated results of operations as if the acquisition of LAVACA had
occurred on January 1 of each respective year (dollars in thousands,
except per share data, for the years ended December 31):
1994 1993
Interest and other income $ 192,706 176,966
Net Income 39,452 35,831
Per Share:
Net income - primary 6.92 6.31
Net income - fully diluted 6.92 5.97
The acquisitions of SONB and BCC did not have a material pro forma
impact on operations.
Effective October 1, 1993, International Bank of Commerce, Brownsville,
Texas acquired certain assets and assumed deposits and certain other
liabilities of International Bank, N.A. ("IBNA"), Brownsville, Texas
through a purchase and assumption agreement. Total assets acquired and
liabilities assumed, at the date of the transaction, each totalled
approximately $53,472,000. The acquisition was accounted for as a
purchase transaction.
(3) INVESTMENT SECURITIES
The amortized cost and estimated market value by type of investment
security at December 31, 1995 are as follows:
<TABLE>
<CAPTION>
HELD TO MATURITY
-----------------------------------------------------------------------------
GROSS GROSS ESTIMATED
AMORTIZED UNREALIZED UNREALIZED MARKET CARRYING
COST GAINS LOSSES VALUE VALUE
---------- ------ ------ --------- ---------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C>
Mortgage-backed securities ................... $ 1,044 -- (14) 1,030 1,044
Obligations of states and
political subdivisions ..................... -- -- -- -- --
Other securities ............................. 1,865 -- -- 1,865 1,865
---------- ------ ------ --------- ---------
Total investment securities .................. $ 2,909 -- (14) 2,895 2,909
========== ====== ====== ========= =========
<CAPTION>
AVAILABLE FOR SALE
-----------------------------------------------------------------------------
AMORTIZED GROSS GROSS ESTIMATED CARRYING
COST GAINS LOSSES VALUE VALUE
---------- ------ ------ --------- ---------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C>
U.S. Treasury securities ..................... $ 6,877 181 -- 7,058 7,058
Mortgage-backed securities ................... 1,388,292 22,335 (1,922) 1,408,705 1,408,705
Obligations of states and
political subdivisions ..................... 29,960 200 (185) 29,975 29,975
Equity securities ............................ 14,694 -- -- 14,694 14,694
---------- ------ ------ --------- ---------
Total investment securities .................. $1,439,823 22,716 (2,107) 1,460,432 1,460,432
========== ====== ====== ========= =========
</TABLE>
22
The amortized cost and estimated market value of investment securities
at December 31, 1995, 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.
<TABLE>
<CAPTION>
HELD TO MATURITY AVAILABLE FOR SALE
-------------------------- -----------------------------
ESTIMATED ESTIMATED
AMORTIZED MARKET AMORTIZED MARKET
COST VALUE COST VALUE
------ ----- --------- ---------
(Dollars in Thousands)
<S> <C> <C> <C> <C>
Due in one year or less ................................... $ 180 180 2,520 2,563
Due after one year through five years ..................... 880 870 5,359 5,524
Due after five years through ten years .................... 1,849 1,845 11,780 11,746
Due after ten years ....................................... -- -- 17,178 17,200
Mortgage-backed securities ................................ -- -- 1,388,292 1,408,705
Equity securities ......................................... -- -- 14,694 14,694
------ ----- --------- ---------
Total investment securities ............................... $2,909 2,895 1,439,823 1,460,432
====== ===== ========= =========
</TABLE>
The amortized cost and estimated market value by type of investment
security at December 31, 1994 are as follows:
<TABLE>
<CAPTION>
HELD TO MATURITY
--------------------------------------------------------------------------
GROSS GROSS ESTIMATED
AMORTIZED UNREALIZED UNREALIZED MARKET CARRYING
COST GAINS LOSSES VALUE VALUE
-------- ----- ------- ------- -------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C>
U.S. Treasury securities ........................ $ 23,074 -- (74) 23,000 23,074
Mortgage-backed securities ...................... 610,553 302 (35,224) 575,631 610,553
Obligations of states and
political subdivisions ........................ 10,564 34 (450) 10,148 10,564
Other securities ................................ 3,641 -- -- 3,641 3,641
-------- --- ------- ------- -------
Total investment securities ..................... $647,832 336 (35,748) 612,420 647,832
======== === ======= ======= =======
<CAPTION>
AVAILABLE FOR SALE
--------------------------------------------------------------------------
GROSS GROSS ESTIMATED
AMORTIZED UNREALIZED UNREALIZED MARKET CARRYING
COST GAINS LOSSES VALUE VALUE
-------- ----- ------- ------- -------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C>
U.S. Treasury securities ........................ $ 5,998 -- (170) 5,828 5,828
Mortgage-backed securities ...................... 628,543 2,142 (25,488) 605,197 605,197
Obligations of states and
political subdivisions ........................ 25,052 34 (2,073) 23,013 23,013
Equity securities ............................... 12,364 -- -- 12,364 12,364
-------- --- ------- ------- -------
Total investment securities ..................... $671,957 2,176 (27,731) 646,402 646,402
======== === ======= ======= =======
</TABLE>
23
The Company may invest in collateralized mortgage obligations and
structured notes; however, such investments at December 31, 1995 are
not significant to the financial position of the Company.
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 $921,180,000 and
937,015,000 at December 31, 1995, respectively.
Gross gains of $541,000 and gross losses of $543,000 were realized in
1995 primarily from the sale of mortgage-backed securities. Gross gains
and losses of $1,310,000 and $3,093,000, and $7,071,000 and $140,000
were realized in 1994 and 1993, respectively.
During 1995, the Company decided to transfer certain securities from
held-to-maturity to available-for-sale as allowed for under the
Financial Accounting Standard Board's Special Report on the
Implementation of Statement of Financial Accounting Standards No. 115.
Effective November 30, 1995, securities with a amortized cost of
$484,196,000 were reclassified from held-to-maturity to
available-for-sale, and the unrealized gain as of the date of the
transfer was $4,366,000.
The bank maintains the required level of stock at the Federal Home Loan
Bank of Dallas, Texas. The stock included in the equity securities is
recorded at cost and totalled $14,694,000 at December 31, 1995.
(4) ALLOWANCE FOR POSSIBLE LOAN LOSSES
A summary of the transactions in the allowance for possible loan losses
for the years ended December 31, 1995, 1994 and 1993 are as follows:
<TABLE>
<CAPTION>
1995 1994 1993
-------- ------- -------
(Dollars in Thousands)
<S> <C> <C> <C>
Balance at January 1 .................................................. $ 17,025 13,831 10,055
-------- ------- -------
Losses charged to allowance ......................................... (4,764) (2,722) (2,473)
Recoveries credited to allowance .................................... 609 1,668 1,012
-------- ------- -------
Net losses charged to allowance ..................................... (4,155) (1,054) (1,461)
Provision charged to operations ..................................... 5,150 3,804 4,540
-------- ------- -------
Allowances acquired in purchase transactions ........................ 435 444 697
-------- ------- -------
Balance at December 31 ................................................ $ 18,455 17,025 13,831
-------- ------- -------
</TABLE>
Loans accounted for on a non-accrual basis at December 31, 1995, 1994
and 1993 amounted to $6,233,000, $3,627,000 and $6,104,000,
respectively. The effect of such non-accrual loans reduced interest
income by $1,010,000, $667,000 and $588,000 for the years ended
December 31, 1995, 1994 and 1993, respectively.
On January 1, 1995, the Company adopted SFAS 114 as amended by SFAS
118. The Company classifies as impaired those loans where it is
probable that all amounts due according
24
to contractual terms of the loan agreement will not be collected. The
Company has identified these loans through its normal loan review
procedures. Impaired loans included 1) all non-accrual loans, 2) loans
which are 90 days or over past due unless they are well secured (the
collateral value is sufficient to cover principal and accrued interest)
and are in the process of collection, and 3) other loans which
management believes are impaired. Substantially all of the Company's
impaired loans are measured at the fair value of the collateral. In
limited cases the Company may use other methods to determine the level
of impairment of a loan if such loan is not collateral dependent.
Amounts received on non-accruals are applied, for financial accounting
purposes, first to principal and then to interest after all principal
has been collected.
At December 31, 1995, the recorded investment in loans considered
impaired was approximately $14,287,000, including trouble debt
restructured loans in the amount of approximately $2,742,000. The
allowance for possible loan losses related to impaired loans totaled
approximately $782,000. The average recorded investment in impaired
loans during the twelve months ended December 31, 1995 (using December
31, 1994, June 30, 1995 September 30, 1995 and December 31, 1995
balances), was approximately $14,100,000.
The following table shows, for those loans accounted for as impaired
loans, the gross interest that would have been recorded if the loans
had been current in accordance with their original terms, and the
amount of interest income that was included in net income for the
period.
For the Twelve months ended
December 31, 1995
(Dollars in Thousands)
Principal amount at December 31, 1995 ................. $14,287
=======
Interest income in accordance with original terms ..... 1,646
Interest income recognized ............................ 863
-------
Net impact on interest income ...................... $ 783
=======
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 Company had previously measured the allowance for credit losses
using methods similar to the prescribed method in SFAS 114. As a
result, no additional provision was required by the adoption of SFAS
114. The subsidiary banks charge off that portion of any loan which
management considers to represent a loss as well as that portion of any
other loan which is classified as a "loss" by bank examiners.
Commercial and industrial or real estate loans are generally considered
by management to represent a loss, in whole or part, when an exposure
beyond any collateral coverage is apparent and when no further
collection of the loss portion is anticipated based on the borrower's
financial condition and general 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, 1995, was adequate to absorb possible losses from loans in
the portfolio at that date.
25
(5) BANK PREMISES AND EQUIPMENT
A summary of bank premises and equipment, by asset classification, at
December 31, 1995 and 1994 follows:
ESTIMATED
USEFUL LIVES 1995 1994
------------ ------ ------
(Dollars in Thousands)
Bank buildings and improvements 5 - 40 years $ 54,734 47,277
Less: accumulated depreciation (10,134) (8,304)
------ ------
44,600 38,973
Furniture, equipment and vehicles 1 - 20 years 39,025 34,214
Less: accumulated depreciation (21,990) (17,739)
------ ------
17,035 16,475
Land 17,346 13,758
------ ------
Real estate held for future expansion:
Land, building, furniture,
fixture and equipment 7 - 27 years 2,215 2,215
Less: accumulated depreciation (786) (735)
------ ------
1,429 1,480
Bank premises and equipment, net $ 80,410 70,686
------ ------
26
(6) DEPOSITS
Deposits as of December 31, 1995 and 1994 and related interest expense
for the years ended December 31, 1995, 1994 and 1993 were as follows:
1995 1994
---------- ---------
(Dollars in Thousands)
Deposits:
Demand - non-interest bearing
Domestic ................................ $ 258,710 245,787
Foreign ................................. 36,592 28,776
---------- ---------
Total demand non-interest
bearing .............................. 295,302 274,563
---------- ---------
Savings and interest bearing demand
Domestic ................................ 396,999 381,066
Foreign ................................. 179,879 181,758
---------- ---------
Total savings and interest
bearing demand ....................... 576,878 562,824
---------- ---------
Time, certificates of deposit
$100,000 or more
Domestic ................................ 253,960 248,938
Foreign ................................. 515,415 491,126
Less than $100,000
Domestic ................................ 308,182 298,694
Foreign ................................. 193,609 185,493
---------- ---------
Total time, certificates
of deposits .......................... 1,271,166 1,224,251
---------- ---------
Total deposits ................................ $2,143,346 2,061,638
========== =========
1995 1994 1993
------- ------ ------
(Dollars in Thousands)
Interest Expense:
Savings and interest bearing demand
Domestic ........................... $12,341 7,271 5,571
Foreign ............................ 4,400 3,659 4,019
------- ------ ------
Total savings and interest
bearing demand .......................... 16,741 10,930 9,590
------- ------ ------
Time, certificates of deposit
$100,000 or more
Domestic ........................... 13,151 8,502 6,466
Foreign ............................ 25,713 18,692 16,407
Less than $100,000
Domestic ........................... 14,877 9,788 8,064
Foreign ............................ 8,337 6,137 5,530
------- ------ ------
Total time, certificates of deposit ....... $62,078 43,119 36,467
======= ====== ======
(7) SECURITIES SOLD UNDER REPURCHASE AGREEMENTS
Information related to repurchase agreements (securities sold under
agreements to repurchase) at December 31, 1995 and 1994 is set forth in
the following table:
27
<TABLE>
<CAPTION>
COLLATERAL SECURITIES REPURCHASE BORROWING
------------------------------------- -----------------------------------
WEIGHTED
BOOK VALUE MARKET VALUE OF BALANCE OF AVERAGE
DECEMBER 31, 1995 SECURITIES SOLD SECURITIES SOLD LIABILITY INTEREST RATE
--------------- --------------- ------- --------
(Dollars in Thousands)
<S> <C> <C> <C> <C>
Term:
Overnight agreements ............... $ 40,014 40,423 23,075 5.13%
1 to 29 days ....................... 272,730 277,713 210,879 5.04%
30 to 90 days ...................... 178,350 178,793 176,840 5.37%
Over 90 days ....................... 62,529 63,907 51,308 5.23%
-------- ------- ------- --------
Total .............................. $553,623 560,836 462,102 5.21%
======== ======= ======= ========
December 31, 1994
Term:
Overnight agreements ............... $ 47,617 44,835 25,113 4.22%
1 to 29 days ....................... 281,150 263,210 200,407 3.96%
30 to 90 days ...................... 28,546 27,258 14,188 3.93%
Over 90 days ....................... 56,354 54,166 43,905 4.26%
-------- ------- ------- --------
Total .............................. $413,667 389,469 283,613 4.10%
======== ======= ======= ========
</TABLE>
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.
The Company's subsidiary banks have entered into repurchase agreements
with the Federal Home Loan Bank, the Federal Home Loan Mortgage
Corporation and individual customers of the subsidiary banks. The
purchasers have agreed to resell to the subsidiary banks identical
securities upon the maturities of the agreements. Securities sold under
repurchase agreements were mortgage-backed book entry securities and
averaged $444,389,000 and $248,817,000 during 1995 and 1994,
respectively, and the maximum amount outstanding at any month end
during 1995 and 1994 was $552,628,000 and $337,296,000, respectively.
(8) OTHER BORROWED FUNDS
Other borrowed funds at December 31, 1995 and 1994 consist of one note
payable to an unaffiliated bank at a floating prime rate in the amounts
of $2,500,000 and $3,500,000 respectively, (with an average rate of
8.81% in 1995 and 7.04% in 1994). The note is secured by the stock of
IBC. It was renewed in 1990 with interest only payable quarterly until
October 4, 1991, with principal installments of $250,000 plus accrued
interest payable quarterly until maturity on June 4, 1997 (See Note
16). A note payable requires the Company to maintain certain covenants
which at December 31, 1995, the Company was in compliance with or had
obtained a written waiver with respect to the covenant of the note
payable agreement. Also, included in other borrowed funds at December
31, 1995 are $64,000,000 of short-term fixed borrowings with the
Federal Home Loan Bank of Dallas at the market price offered at the
time of funding. As of December 31, 1994, the Company had two
certificates of indebtedness outstanding in the amounts of $100,000,000
and $20,000,000 payable to Federal Home Loan Bank of Dallas at a one
month Libor rate minus five basis points and a three month Libor rate
minus six basis points, respectively.
(9) SUBORDINATED DEBT
The Company redeemed the outstanding mandatory convertible subordinate
notes in the aggregate principal amount of $1,451,000 on April 29,
1994.
28
(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 among officers' and employees'
accounts is based on length of service and amount of salary earned.
Profit sharing costs of $861,000, $610,000 and $559,000 were charged to
income for the years ended December 31, 1995, 1994 and 1993,
respectively.
(11) INTERNATIONAL OPERATIONS
The Company provides international banking services for its customers
through its banking subsidiaries. Neither the Company nor its banking
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, 1995 and 1994 are as follows:
1995 1994
--------- --------
(Dollars in Thousands)
Loans:
Commercial .................................. $ 100,795 98,352
Others ...................................... 19,953 8,355
--------- --------
120,748 106,707
Less allowance for possible loan losses ..... (1,035) (949)
--------- --------
Net loans .......................... $ 119,713 105,758
========= ========
Accrued interest receivable ................. $ 1,191 1,151
========= ========
Included in accrued interest receivable is $105,000 in 1995 and
$114,000 in 1994 on loans to international customers totalling
$6,243,000 and $7,260,000 which were past due five days and greater of
which $942,000 and $732,000 have been placed on a non-accrual status at
December 31, 1995 and 1994, respectively.
At December 31, 1995, the Company had $6,833,000 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
$9,447,000, $7,725,000, and $6,989,000 for the years ended December 31,
1995, 1994 and 1993, 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 in the following
page for the years ended December 31:
29
1995 1994 1993
-------- ------- -------
(Dollars in Thousands)
Current
U.S .............................. $ 19,271 14,610 12,066
Foreign .......................... 22 109 80
State ............................ -- 130 85
-------- ------- -------
Total current taxes ..... 19,293 14,849 12,231
Deferred ............................ (978) (1,447) (2,260)
-------- ------- -------
Total income taxes ...... $ 18,315 13,402 9,971
======== ======= =======
Total income tax expense differs from the amount computed by applying
the U.S. Federal income tax rate of 35% for 1995, 1994 and 1993 to
income before income taxes. The reasons for the differences for the
years ended December 31 are as follows:
1995 1994 1993
-------- ------- -------
(Dollars in Thousands)
Computed expected tax expense ....... $ 20,424 17,952 14,642
Change in taxes resulting from:
Tax-exempt interest income ....... (636) (629) (385)
Lease financing .................. (1,587) (3,624) (4,653)
Other ............................ 114 (297) 367
-------- ------- -------
Actual tax expense $ 18,315 13,402 9,971
======== ======= =======
The tax effects of temporary differences that give rise to significant
portions of the deferred tax assets and deferred tax liabilities at
December 31, 1995 and 1994 are reflected below:
1995 1994
-------- -------
(Dollars in Thousands)
Deferred tax assets:
Loans receivable, principally due to the
allowance for possible loan losses ........... $ 6,406 5,745
Other real estate owned ........................ 1,090 913
Net unrealized losses on available for sale
investment securities ........................ -- 8,944
Accrued Expenses ............................... 980 --
Other .......................................... 379 558
-------- -------
Total deferred tax assets ...................... 8,855 16,160
-------- -------
Deferred tax liabilities:
Lease financing receivable ..................... (420) (843)
Bank premises and equipment, principally
due to differences in depreciation ........... (1,968) (1,731)
Net unrealized gains on available for
sale investment securities ................... (7,213) _
Other .......................................... (417) (64)
-------- -------
Total deferred tax liabilities ................. (10,018) (2,638)
-------- -------
Net deferred tax asset (liability) ............ $ (1,163) 13,522
======== =======
30
The Company did not record a valuation allowance against deferred tax
assets at December 31, 1995 and 1994 because management believes that
it is more likely than not the Company will have future taxable
earnings in excess of the future tax deductions.
(13) STOCK OPTIONS
Under the 1987 International Bancshares Corporation Key Contributor
Stock Option Plan as Amended and Restated both qualified incentive
stock options ("ISO's") and nonqualified stock options ("NQSO's") may
be granted. Options granted may be exercisable for a period of up to 10
years from the date of grant, excluding ISO's 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, 1993 through December 31, 1995 which were granted by the
Company.
OPTION PRICE OPTIONS
PER SHARE OUTSTANDING
---------------- ----------
Balance at January 1, 1993 ... 667,182
Terminated ................. $ 6.49 - 10.67 (9,294)
Granted ................... 20.00 - 26.24 17,031
Exercised ................. 5.20 - 13.34 (161,647)
--------
Balance at December 31, 1993 . 513,272
Terminated ................ 5.20 - 6.49 (4,681)
Granted ................... 40.80 3,750
Exercised ................. 5.20 - 13.34 (74,328)
--------
Balance at December 31, 1994 . 438,013
Terminated ................ 5.20 - 10.67 (2,737)
Granted ................... 38.40 188,437
Exercised ................. 5.20 - 10.67 (67,779)
Balance at December 31, 1995 . 555,934
========
At December 31, 1995 and 1994, 94,814 and 121,794 options were
exercisable, respectively and as of December 31, 1995, 17,502 shares
were available for future grants.
The Company does not have a formal stock repurchase program; however,
the Company occasionally repurchases shares of Common Stock, which
repurchases are usually related to the exercise of stock options
through the surrender of other shares of Common Stock of the Company
owned by the option holders. Stock repurchases are presented quarterly
at the Company's Board of Director meetings and the Board of Directors
has stated that they will not permit purchases of more than a total of
$9,000,000 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
$9,000,000 cap will occur in the future.
In October 1995, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards ("SFAS") No. 123,
"Accounting for Stock-Based Compensation," which requires adoption of
the disclosure provisions no later than fiscal years beginning after
December 15, 1995. Companies are permitted to continue to account for
such transactions under Accounting Principles Board Opinion N. 25,
"Accounting for Stock Issued to Employees," but will be required to
disclose in a note to the financial statements pro
31
forma net income and, if presented, earnings per share as if the
company had applied the new method of accounting, as outlined in SFAS
No. 123. The Company has not yet determined the effect the new standard
will have on net income and earnings per share should it elect to make
such a change. Adoption of the new standard will have no effect on the
Company's cash flows.
(14) COMMITMENTS AND CONTINGENT LIABILITIES
The Company is involved in various legal proceedings that are in
various stages of litigation by the Company and its legal counsel. Some
of these actions allege "lender liability" claims on a variety of
theories and claim substantial actual and punitive damages. The Company
has determined, based on discussions with its counsel, that any
material loss in such action, 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,
1995, 1994 and 1993 and noncancellable lease commitments at December
31, 1995 were not significant.
Certain subsidiary banks of the Company are required to maintain
average reserve balances with the Federal Reserve Bank. The amounts of
such balances are calculated based upon specified percentages of a
bank's deposits. The average amount of those reserve balances during
1995 was approximately $2,256,000. At December 31, 1995, IBC had
$564,549,000 available through various line of credit agreements with
banks. Also see note 17 regarding other commitments.
(15) TRANSACTIONS WITH RELATED PARTIES
In the ordinary course of business, the Company and its subsidiaries
make loans to directors and executive officers of the Company and the
subsidiary banks, 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 $58,285,000 and $50,802,000 at December 31, 1995 and
1994, respectively. During 1995, $37,287,000 of new loans were made and
repayments totalled $29,805,000.
Between June 29 and July 15, 1994, IBC sold for an approximate
aggregate appraised value of $4,700,000, (44%) of its other real estate
portfolio to IBC Partners, LTD., a Texas real estate limited
partnership owned by certain shareholders of the Company.
(16) DIVIDEND RESTRICTIONS
Bank regulatory agencies limit the amount of dividends which the
subsidiary banks can pay the Company, through IBC Subsidiary
Corporation, without obtaining prior approval from such agencies. At
December 31, 1995, the aggregate amount legally available to be
distributed to the Company from subsidiary banks as dividends was
approximately $85,670,000. The restricted capital of the subsidiaries
was approximately $138,289,000. In addition to legal requirements,
regulatory authorities also consider the adequacy of the subsidiary
banks' total capital in relation to its deposits and other factors.
These capital adequacy considerations also limit amounts available for
payment of dividends. The Company historically has not allowed any
subsidiary bank to pay dividends in such a manner as to impair its
capital adequacy.
32
A covenant of the Company's $2,500,000 note payable (Note 8) restricts
the Company from declaring or paying any dividends to its shareholders,
other than stock dividends. The Company paid a special cash dividend on
June 12, 1995. The appropriate waiver was received from the lender
regarding the covenant restricting the payment of cash dividends.
(17) FINANCIAL INSTRUMENTS WITH OFF-BALANCE SHEET RISK AND CONCENTRATIONS OF
CREDIT RISK
In the normal course of business, the subsidiary banks 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 subsidiary banks have
in particular classes of financial instruments. At December 31, 1995,
the following financial instruments, whose contract amounts represent
credit risks, were outstanding:
Commitments to extend credit $ 161,808,000
Credit card lines 152,499,000
Letters of credit 25,099,000
The subsidiary banks' 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
subsidiary banks use the same credit policies in making commitments and
conditional obligations as they do for on-balance sheet instruments.
The subsidiary banks 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 subsidiary banks 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
subsidiary banks 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.
The subsidiary banks 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 and Calhoun
counties in the Texas Coastal Bend area. 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 recent devaluation of the peso in Mexico.
(18) CAPITAL REQUIREMENTS
The Company is currently required to meet certain minimum regulatory
capital guidelines utilizing total capital-to-risk weighted assets and
Tier 1 (core) capital elements. At December 31, 1995, the Company's
ratio of total capital-to-risk-weighted assets was
33
15.93%. The guidelines make regulatory capital requirements more
sensitive to differences in risk profiles among banking organizations,
taking 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
stockholders' equity.
Effective December 31, 1990, the Office of the Comptroller of the
Currency, the Federal Reserve Board and, effective April 10, 1991, the
FDIC revised their respective capital requirements to a minimum 3% Tier
1 leverage capital ratio to complement the risk-based capital
standards. The 3% ratio will apply only to the most highly-rated banks
or bank holding companies that are not anticipating or experiencing any
significant growth. All other banks and bank holding companies will
need to meet a minimum leverage ratio in connection with the risk based
ratio that is at least 100 to 200 basis points above this minimum. As
of December 31, 1995, the Company's Tier 1 leverage capital ratio was
7.46%. Core deposit intangibles are deducted from the sum of core
capital elements when determining the capital ratios of the Company.
(19) FAIR VALUE OF FINANCIAL INSTRUMENTS
The fair value estimates, methods, and assumptions for the Company's
financial instruments at December 31, 1995 and 1994 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.
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 passthrough 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.
34
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, 1995 and
1994, the carrying amount of net loans is 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, is equal to the amount
payable on demand as of December 31, 1995 and 1994. 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, 1995 and 1994, the carrying amount of time deposits is 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 approximate fair value at December 31, 1995 and 1994.
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.
Limitations
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
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.
35
(20) INTERNATIONAL BANCSHARES CORPORATION (PARENT COMPANY ONLY) FINANCIAL
INFORMATION
Statements of Condition
(Parent Company Only)
December 31, 1995 and 1994
(Dollars in Thousands)
ASSETS 1995 1994
--------- --------
Cash ........................................ $ 151 73
Time deposits with banks .................... -- 600
Notes receivable ............................ 76,078 69,953
Investment in subsidiaries .................. 157,442 99,733
Other assets ................................ 14,964 11,767
--------- --------
Total assets ....................... 248,635 182,126
========= ========
LIABILITIES AND SHAREHOLDERS' EQUITY
Liabilities:
Notes payable ............................ 2,500 3,500
Other liabilities ........................ 374 90
--------- --------
Total liabilities .................. 2,874 3,590
--------- --------
Shareholders' equity:
Common stock ............................. 8,160 6,466
Surplus .................................. 10,637 10,154
Retained earnings ........................ 221,350 185,685
Net unrealized holding gains (losses)
on available for sale securities,
net of deferred income taxes ........... 13,396 (16,611)
--------- --------
253,543 185,694
Less cost of shares in treasury .......... (7,782) (7,158)
--------- --------
Total shareholders' equity ......... 245,761 178,536
--------- --------
Total liabilities and
shareholders' equity ............ $ 248,635 182,126
========= ========
36
Statements of Income
(Parent Company Only)
Years ended December 31, 1995, 1994 and 1993
(Dollars in Thousands)
1995 1994 1993
------- ------ -------
Income:
Dividends from subsidiaries .......... $13,332 16,053 3,123
Interest income on notes receivable .. 7,218 6,881 6,800
Interest income on time deposits
with banks ........................ 11 6 3
Other interest income ................ 419 469 --
Other ................................ 3,368 1,615 1,141
------- ------ -------
Total income ................ 24,348 25,024 11,067
------- ------ -------
Expenses:
Interest expense on notes payable .... 255 275 300
Interest expense on subordinated debt -- 29 87
Other ................................ 271 1,029 768
------- ------ -------
Total expenses .............. 526 1,333 1,155
------- ------ -------
Income before federal income
taxes and equity in
undistributed net income
of subsidiaries .......... 23,822 23,691 9,912
Federal income tax expense (benefit) .... 1,302 333 (48)
------- ------ -------
Income before equity
in undistributed net
income of subsidiaries ... 22,520 23,358 9,960
Equity in undistributed net income
of subsidiaries ...................... 17,541 14,532 21,902
------- ------ -------
Net income .................. $40,061 37,890 31,862
======= ====== =======
37
<PAGE>
Statements of Cash Flows
(Parent Company Only)
Years ended December 31, 1995, 1994 and 1993
(Dollars in Thousands)
<TABLE>
<CAPTION>
1995 1994 1993
-------- ------- -------
<S> <C> <C> <C>
Operating activities:
Net income ..................................... $ 40,061 37,890 31,862
Adjustments to reconcile net income to net
cash provided by operating activities:
Increase (decrease) in other liabilities ... 284 (29) (8)
Equity in undistributed net income of
subsidiaries ............................. (17,541) (14,532) (21,902)
-------- ------- -------
Net cash provided by operating activities 22,804 23,329 9,952
-------- ------- -------
Investing activities:
Contributions to subsidiaries .................. (10,161) (6,870) (6,797)
Purchase of time deposits with banks ........... (728) (600) --
Proceeds from time deposits with banks ......... 1,328 -- --
Net increase in loans .......................... (6,125) (1,953) --
Increase in other assets ....................... (3,197) (5,654) (2,215)
-------- ------- -------
Net cash used in investing activities .... (18,883) (15,077) (9,012)
-------- ------- -------
Financing activities:
Principal payments on notes payable and
subordinated debt ............................ (1,000) (2,451) (1,000)
Proceeds from exercise of stock options ........ 552 673 1,340
Payments of cash dividends ..................... (2,762) (6,012) --
Payments of cash dividends in lieu of fractional
shares ....................................... (9) -- (10)
Purchase of treasury stock ..................... (624) (459) (1,291)
-------- ------- -------
Net cash used in financing activities .... (3,843) (8,249) (961)
-------- ------- -------
Increase (decrease) in cash and cash
equivalents ............................ 78 3 (21)
Cash at beginning of year ........................ 73 70 91
-------- ------- -------
Cash at end of year .............................. $ 151 73 70
======== ======= =======
Supplemental cash flow information:
Interest paid .................................. $ 239 275 379
</TABLE>
38
INTERNATIONAL BANCSHARES CORPORATION
OFFICERS AND DIRECTORS
OFFICERS DIRECTORS
DENNIS E. NIXON DENNIS E. NIXON
Chairman of the Board and President President
International Bank of Commerce
ROY JENNINGS, JR.
Vice Chairman of the Board ROY JENNINGS, JR.
Investments
ALBERTO SANTOS
Secretary of the Board ALBERTO SANTOS
Investments
R. DAVID GUERRA Chairman of the Board
Vice President International Bank of Commerce
LEONARDO SALINAS LEONARDO SALINAS
Vice President Senior Executive Vice President
International Bank of Commerce
ARNOLDO CISNEROS
Secretary - Treasurer LESTER AVIGAEL
Retail Merchant
WILLIAM J. CUELLAR (Las Novedades, Inc.)
Auditor
IRVING GREENBLUM
AMELIA A. BENAVIDES Retail Merchant
Assistant Secretary (Muebleria Mexico, S.A.)
IMELDA NAVARRO RICHARD E. HAYNES
Assistant Treasurer 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
39
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%
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
22, 1996, relating to the consolidated statements of condition of International
Bancshares Corporation and subsidiaries as of December 31, 1995 and 1994, and
the related consolidated statements of income, shareholders' equity and cash
flows for each of the years in the three-year period ended December 31, 1995,
which report is incorporated by reference in the December 31, 1995 annual report
on Form 10-K of International Bancshares Corporation.
Our report refers to a change in the method of accounting for investment
securities in 1994 and a change in the method of accounting for impairment of
loans receivable in 1995.
/s/ KPMG PEAT MARWICK LLP
San Antonio, Texas
March 25, 1996
<TABLE> <S> <C>
<ARTICLE> 9
<LEGEND>
THE FINANCIAL DATA SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED
FROM THE COMPANIES 10-K AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH
FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1995
<PERIOD-END> DEC-31-1995
<CASH> 86,827
<INT-BEARING-DEPOSITS> 1,848,045
<FED-FUNDS-SOLD> 37,000
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 1,460,432
<INVESTMENTS-CARRYING> 2,909
<INVESTMENTS-MARKET> 2,895
<LOANS> 1,208,390
<ALLOWANCE> 18,455
<TOTAL-ASSETS> 2,935,606
<DEPOSITS> 2,143,346
<SHORT-TERM> 64,000
<LIABILITIES-OTHER> 17,397
<LONG-TERM> 2,500
0
0
<COMMON> 8,160
<OTHER-SE> 237,601
<TOTAL-LIABILITIES-AND-EQUITY> 2,935,606
<INTEREST-LOAN> 124,411
<INTEREST-INVEST> 93,003
<INTEREST-OTHER> 419
<INTEREST-TOTAL> 218,867
<INTEREST-DEPOSIT> 78,819
<INTEREST-EXPENSE> 112,361
<INTEREST-INCOME-NET> 106,506
<LOAN-LOSSES> 5,150
<SECURITIES-GAINS> (2)
<EXPENSE-OTHER> 68,989
<INCOME-PRETAX> 58,376
<INCOME-PRE-EXTRAORDINARY> 58,376
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 40,061
<EPS-PRIMARY> 5.81
<EPS-DILUTED> 5.81
<YIELD-ACTUAL> 0
<LOANS-NON> 6,233
<LOANS-PAST> 8,898
<LOANS-TROUBLED> 2,742
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 0
<CHARGE-OFFS> 4,764
<RECOVERIES> 609
<ALLOWANCE-CLOSE> 0
<ALLOWANCE-DOMESTIC> 0
<ALLOWANCE-FOREIGN> 1,035
<ALLOWANCE-UNALLOCATED> 0
</TABLE>
