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, 1997 0-9439
INTERNATIONAL BANCSHARES CORPORATION
(Exact Name of Registrant as Specified in its Charter)
TEXAS 74-2157138
(State of Incorporation) (I.R.S. Employer Identification No.)
1200 SAN BERNARDO AVENUE
LAREDO, TEXAS 78042-1359 AREA CODE (956) 722-7611
(Address of principal executive (Registrant's telephone number)
office and Zip Code)
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 20, 1998 was $529,836,489.
As of March 20, 1998, there were 11,260,197 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, 1997 (in Parts I and II) and (b) proxy
statement dated April 20, 1998 (in Part III).
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CONTENTS
PART I
PAGE
Item 1. Business........................................... 3
Item 2. Properties......................................... 25
Item 3. Legal Proceedings.................................. 26
Item 4. Submission of Matters to a Vote of
Security Holders................................. 26
PART II
Item 5. Market for the Registrant's Common Stock
and Related Security Holder Matters.............. 26
Item 6. Selected Financial Data............................ 27
Item 7. Management's Discussion and Analysis of
Financial Condition and Results of
Operations...................................... 27
Item 8. Financial Statements and Supplementary Data........ 27
Item 9. Changes In and Disagreements with Accountants on
Accounting and Financial Disclosure.............. 27
PART III
Item 10. Directors and Executive Officers of the Registrant. 27
Item 11. Executive Compensation............................. 27
Item 12. Security Ownership of Certain Beneficial
Owners and Management............................ 27
Item 13. Certain Relationships and Related Transactions..... 27
PART IV
Item 14. Exhibits, Financial Statement Schedules
and Reports on Form 8-K.......................... 28
Signatures................................................... 31
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Item 1. BUSINESS
GENERAL
International Bancshares Corporation (the "Company") is a bank holding
company with four bank subsidiaries providing commercial and retail banking
services through 76 main banking and branch facilities located in 25 communities
in South and Southeast Texas. The Company was incorporated under the General
Corporation Law of the State of Delaware in 1979 and has its principal corporate
offices in Laredo, Texas. Effective June 7, 1995, the Company's state of
incorporation was changed from Delaware to Texas. The Company was organized for
the purpose of operating as a bank holding company within the meaning of the
Bank Holding Company Act of 1956, as amended, and as such, is subject to
supervision and regulation by the Board of Governors of the Federal Reserve
System (the "FRB"). As a registered bank holding company, the Company may own
one or more banks and may engage directly, or through subsidiary corporations,
in those activities closely related to banking which are specifically permitted
under the Bank Holding Company Act and by the FRB. The Company's principal
assets at December 31, 1997 consisted of all the outstanding capital stock of
four Texas state banking associations (the "Banks" or "bank subsidiaries"). All
of the Company's bank subsidiaries are members of the Federal Deposit Insurance
Corporation.
The bank subsidiaries are in the business of gathering funds from various
sources and investing these funds in order to earn a return. Funds gathering
primarily takes the form of accepting demand and time deposits from individuals,
partnerships, corporations and public entities. Investments principally are made
in loans to various individuals and entities as well as in debt securities of
the U.S. Government and various other entities whose payments are guaranteed by
the U.S. Government. Historically, the bank subsidiaries have primarily focused
on providing commercial banking services to small and medium sized businesses
located in its trade area and international banking services. In recent years,
the bank subsidiaries have also emphasized consumer and retail banking,
including mortgage lending and credit card services, as well as branches
situated in retail locations and grocery stores.
The Company's philosophy focuses on customer service as represented by
its motto, "We Do More." The Banks maintain a strong commitment to their local
communities by, among other things, appointing selected members of the
communities in which the Banks' branches are located to local advisory boards
(the "local boards"). The local boards direct the operations of the branches,
with the supervision of the Bank's board of directors, and assist in introducing
prospective customers to the Banks as well as developing or modifying products
and services to meet customer needs. The Banks function largely on an autonomous
basis, and the Company believes that such decentralized structure enhances the
commitment of the Banks to the communities in which their branches are located.
In contrast to many of its principal competitors, the credit decisions of the
Banks are made locally and promptly. The Company believes that the knowledge and
expertise afforded by the local boards are key components to sound credit
decisions.
Expense control is an essential element in the Company's profitability.
The Company has centralized virtually all of the Banks' back office support and
investment functions in order to achieve consistency and cost efficiencies in
the
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delivery of products and services. The Company's efficiency ratio (other
operating expenses divided by net interest income and other operating income)
currently stands at 51% and has been under 57% for each of the last five years,
which the Company believes is well below national peer group ratios. One of the
benefits derived from such operating efficiencies is that the Company is not
subjected to undue pressure to generate interest income from high-risk loans.
Accordingly, the Company believes it is able to be more selective and
conservative with respect to its credit decisions. Despite this lack of economic
pressure, the Banks aggressively pursue, with the help of the local boards,
quality credits with an emphasis on loans to small and medium sized businesses.
During the last eight years, IBC, as defined below, has been an active
acquiror of financial institutions and banking assets in its trade area. The
community focus of IBC and the involvement of the local boards has resulted in
IBC becoming aware of acquisition possibilities in the ordinary course of its
business and in many instances before other potential purchasers. IBC's decision
to pursue an acquisition is based on a multitude of factors, including the
ability to efficiently assimilate the operations and assets of the acquired
entity, the cost efficiencies to be attained and the growth potential of the
market.
On July 28, 1980, the Company acquired all of the outstanding shares of
its predecessor, International Bank of Commerce ("IBC"), which is today the
flagship bank of the Company, representing 85% of the Company's banking assets.
IBC was chartered under the banking laws of Texas in 1966 and has its principal
place of business at 1200 San Bernardo Avenue, Laredo, Webb County, Texas. It is
a wholly-owned subsidiary of the Company. Since the acquisition of the flagship
bank in 1980, the Company formed three banks and acquired $1,818,036,000 in
assets and assumed $1,734,178,000 of deposits in numerous acquisition
transactions, which totals are as of the acquisition date and do not take into
account any runoff or other subsequent events. In addition to the acquisitions,
IBC has also focused on deposit growth from its traditional banking activities.
Effective November 5, 1997, University Bank, Houston, Texas a state bank
organized under the laws of the state of Texas, was merged with and into IBC. At
the date of closing, total assets acquired were approximately $250,978,000. The
acquisition was accounted for as a purchase transaction. IBC recorded intangible
assets, goodwill and core deposit premium of approximately $17,613,000 at such
date. These assets will be amortized on a straight line basis over a fifteen
year period.
Effective March 7, 1997, IBC purchased certain assets and assumed
certain liabilities of five branches of Bank of America Texas, N. A., Irving,
Texas. IBC purchased loans of approximately $381,000 and assumed deposits of
approximately $84,834,000 and received cash and other assets in the amount of
approximately $84,799,000. The acquisition was accounted for as a purchase
transaction. IBC recorded intangible assets, goodwill and core deposit premium
totaling $3,705,000 at such date. These assets are being amortized on a straight
line basis over a fifteen year period.
Effective November 21, 1996, IBC purchased certain assets and assumed
certain liabilities of three branches of Home Savings of America F.S.B.,
Irwindale, California. IBC purchased loans of approximately $769,000 and assumed
deposits of approximately $196,813,000 and received cash and other assets in the
amount of
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approximately $196,081,000. The acquisition was accounted for as a purchase
transaction. IBC recorded intangible assets, goodwill and core deposit premium
totaling $9,670,000 at such date. These assets are being amortized on a straight
line basis over a fifteen year period.
Effective June 27, 1996, IBC purchased certain assets and assumed
certain liabilities of River Valley Bank, F.S.B., in Weslaco, Texas, a federal
savings bank organized under the laws of the United States. At the date of
closing, total loans acquired were approximately $21,408,000, deposits assumed
were approximately $132,133,000 and cash and other assets received were in the
amount of approximately $110,756,000. The acquisition was accounted for as a
purchase transaction. IBC recorded intangible assets, goodwill and core deposit
premium totaling $6,599,000 at such date. These assets are being amortized on a
straight line basis over a fifteen year period.
For more information regarding the acquisition transactions of the
Company during the last three years, see note 2 of notes to Consolidated
Financial Statements of the Company located on page 27 of the 1997 Annual Report
which is incorporated herein by reference.
In addition to IBC, the Company has three other bank subsidiaries. The
three additional banks are (i) Commerce Bank, a Texas state banking association
which commenced operations in 1982, located in Laredo, Texas ("Commerce Bank");
(ii) International Bank of Commerce, a Texas state banking association which
commenced operations in 1984, located in Brownsville, Texas ("IBC-Brownsville");
and (iii) International Bank of Commerce, a Texas state banking association
which commenced operations in 1984, located in Zapata, Texas ("IBC-Zapata").
The Company also has four non-banking subsidiaries. They are (i) IBC
Life Insurance Company, a Texas chartered subsidiary which reinsures a small
percentage of credit life and accident and health risks related to loans made by
bank subsidiaries, (ii) IBC Trading Company, an export trading company which is
currently inactive, (iii) IBC Subsidiary Corporation, a second-tier bank holding
company incorporated in the State of Delaware, and (iv) IBC Capital Corporation,
a company incorporated in the State of Delaware for the purpose of holding
certain investments of the Company.
SERVICES AND EMPLOYEES
The Company, through its bank subsidiaries, IBC, Commerce Bank, IBC
Zapata and IBC Brownsville, is engaged in the business of banking, including the
acceptance of checking and savings deposits and the making of commercial, real
estate, personal, home improvement, automobile and other installment and term
loans. Certain of the bank subsidiaries are very active in facilitating
international trade along the United States border with Mexico and elsewhere.
The international banking business of the Company includes providing letters of
credit, making commercial and industrial loans, and a nominal amount of currency
exchange. As part of its international strategy the Company also aims to provide
a full array of banking services to "maquiladoras," including, account and
payroll services. A "maquiladora" is a type of assembly or manufacturing plant
under Mexican law which is typically owned by a United States company and
located on Mexico's northern border for the purpose of temporarily importing
materials to be assembled in Mexico
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and re-exported to the United States. Each bank subsidiary also offers other
related services, such as credit cards, travelers' checks, safety deposit,
collection, notary public, escrow, drive-up and walk-up facilities and other
customary banking services. Additionally, each bank subsidiary makes available
certain securities products through third party providers. The bank subsidiaries
also make banking services available during traditional and nontraditional
banking hours through their network of 152 automated teller machines, and
through their branches situated in retail locations and grocery stores. To date,
as part of the Company's expansion of its retail banking services, 27 grocery
store branches have been opened.
The Company owns U.S. and Texas service mark registrations for
"INTERNATIONAL BANK OF COMMERCE" and the related United States and Mexico logo
as well as "INTERNATIONAL BANK OF COMMERCE CENTRE" and "ITS A BRIGHTER
CHRISTMAS". In addition, the Company owns Texas service mark registrations for
"CHECK 'N SAVE" and "WALL STREET INTERNATIONAL" and the related design. Also,
IBC is investigating the availability of service mark registrations related to
certain proprietary products.
No material portion of the business of the Company may be deemed
seasonal and the deposit and loan base of the Company's bank subsidiaries are
diverse in nature. There has been no material effect upon the Company's capital
expenditures, earnings or competitive position as a result of Federal, State or
local environmental regulation.
As of December 31, 1997 the Company and its subsidiaries employed
approximately 1,152 persons full-time and 158 persons part-time.
COMPETITION
The Company is the largest minority-owned bank holding company in the
United States, with more than a majority of its common stock being held by
Hispanic shareholders. The Company is the second largest independent Texas bank
holding company. The primary market area of the Company is South and Southeast
Texas, an area bordered on the east by the Houston area, to the northwest by San
Antonio, to the southwest by Laredo and to the southeast by Brownsville. The
Company has increased its market share in its primary market area over the last
seven years through strategic acquisitions. The Company, through its bank
subsidiaries, competes for deposits and loans with other commercial banks,
savings and loan associations, credit unions and nonbank entities, which nonbank
entities serve as an alternative to traditional financial institutions and are
considered to be formidable competitors.
The Company and its bank subsidiaries do a significant amount of
business for customers domiciled in Mexico, with an emphasis in Northern Mexico.
Deposits from persons and entities domiciled in Mexico comprise a significant
portion of the deposit base of the Company's bank subsidiaries. Such deposits
comprised approximately 35%, 39% and 43% of the Company's bank subsidiaries'
total deposits as of December 31, 1997, 1996 and 1995, respectively.
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SUPERVISION AND REGULATION
GENERAL - THE COMPANY. In addition to the generally applicable state and
Federal laws governing businesses and employers, the Company and its bank
subsidiaries are further extensively regulated by special Federal and state laws
governing financial institutions. These laws comprehensively regulate the
operations of the Company's bank subsidiaries and include, among other matters,
requirements to maintain reserves against deposits; restrictions on the nature
and amount of loans that may be made and the interest that may be charged
thereon; restrictions on the amounts, terms and conditions of loans to
directors, officers, large shareholders and their affiliates; restrictions
related to investments in activities other than banking; and minimum capital
requirements. With few exceptions, state and Federal banking laws have as their
principal objective either the maintenance of the safety and soundness of the
Federal deposit insurance system or the protection of consumers, rather than the
specific protection of shareholders of the Company. Further, the earnings of the
Company are affected by the fiscal and monetary policies of the Federal Reserve
System, which regulates the national money supply in order to mitigate
recessionary and inflationary pressures. These monetary policies influence to a
significant extent the overall growth of bank loans, investments and deposits
and the interest rates charged on loans or paid on time and savings deposits.
The nature of future monetary policies and the effect of such policies on the
future earnings and business of the Company cannot be predicted.
FRB APPROVALS. The Company is a registered bank holding company within
the meaning of the Bank Holding Company Act of 1956, as amended ("BHCA"), and is
subject to supervision by the FRB and to a certain extent the Texas Department
of Banking. The Company is required to file with the FRB annual reports and
other information regarding the business operations of itself and its
subsidiaries. It is also subject to examination by the FRB. Under the BHCA, a
bank holding company is, with limited exceptions, prohibited from acquiring
direct or indirect ownership or control of any voting stock of any company which
is not a bank or bank holding company, and must engage only in the business of
banking, managing, controlling banks, and furnishing services to or performing
services for its subsidiary banks. One of the exceptions to this prohibition is
the ownership of shares of any company provided such shares do not constitute
more than 5% of the outstanding voting shares of the company and so long as the
FRB does not disapprove such ownership. Another exception to this prohibition is
the ownership of shares of a company the activities of which the FRB has
specifically determined to be so closely related to banking, managing or
controlling banks as to be a proper incident thereto. The restrictions on the
activities of bank holding companies could change significantly if the
Glass-Steagall Act of 1935 is reformed. Current congressional debate over
reforming the Glass-Steagall Act is centered around whether enhanced bank powers
should be conducted within a holding company or through 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 or its
subsidiaries.
The BHCA and the Change in Bank Control Act of 1978 require that,
depending on the circumstances, either FRB approval must be obtained or notice
must be furnished to the FRB and not disapproved prior to any person or company
acquiring "control" of a bank holding company, such as the Company, subject to
certain exceptions for certain transactions. Control is conclusively presumed to
exist if an individual or company acquires 25% or more of any class of voting
securities of
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the bank holding company. Control is rebuttably presumed to exist if a person
acquires 10% or more but less than 25% of any class of voting securities where
the bank holding company, such as the Company, has registered Securities under
Section 12 of the Securities Exchange Act of 1934 (the "Exchange Act").
As a bank holding company, the Company is required to obtain approval
prior to merging or consolidating with any other bank holding company, acquiring
all or substantially all of the assets of any bank or acquiring ownership or
control of shares of a bank or bank holding company if, after the acquisition,
the Company would directly or indirectly own or control 5% or more of the voting
shares of such bank or bank holding company.
INTERSTATE BANKING. In 1994, Congress enacted the Riegle-Neal Interstate
Banking and Branching Efficiency Act of 1994 ("Interstate Banking Act"), which
rewrote federal law governing the interstate expansion of banks in the United
States. Effective as of September 29, 1995, adequately capitalized, well managed
bank holding companies with FRB approval may acquire banks located in any State
in the United States, provided that the target bank meets the minimum age (up to
a maximum of five years, which is the maximum Texas has adopted) established by
the host State. Under the Interstate Banking Act, an anti-concentration limit
will bar interstate acquisitions that would give a bank holding company control
of more than ten percent (10%) of all deposits nationwide or thirty percent
(30%) of any one State's deposits, or such higher or lower percentage
established by the host State. The anti-concentration limit in Texas has been
set at twenty percent (20%) of all federally insured deposits in Texas. As of
December 31, 1997, 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
formation. 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 bank
subsidiaries.
FRB ENFORCEMENT POWERS. The FRB has certain cease-and-desist and
divestiture powers over bank holding companies and non-banking subsidiaries
where their actions would constitute a serious threat to the safety, soundness
or stability of a subsidiary bank. These powers may be exercised through the
issuance of cease-and-desist orders or other actions. In the event a bank
subsidiary experiences either a significant loan loss or rapid growth of loans
or deposits, the Company may be compelled by the FRB to invest additional
capital in the bank subsidiary. Further, the Company would be required to
guaranty performance of the capital restoration plan of any undercapitalized
bank subsidiary. The FRB is also empowered to assess civil money penalties
against companies or individuals who violate the BHCA in amounts up to
$1,000,000 per day, to order termination of non-banking activities of
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non-banking subsidiaries of bank holding companies and to order termination of
ownership and control of a non-banking subsidiary. Under certain circumstances
the Banking Commissioner (as herein defined) may bring enforcement proceedings
against a bank holding company in Texas.
COMPANY DIVIDENDS. The FRB's policy discourages the payment of dividends
from borrowed funds and discourages payments that would affect capital adequacy.
The FRB has issued policy statements which generally state that bank holding
companies should serve as a source of financial and managerial strength to their
bank subsidiaries, and generally should not pay dividends except out of current
earnings, and should not borrow to pay dividends if the bank holding company is
experiencing capital or other financial problems.
GENERAL - BANK SUBSIDIARIES. All of the bank subsidiaries of the Company
are state banks subject to regulation by, and supervision of, the Texas
Department of Banking and the FDIC. All of the bank subsidiaries of the Company
are members of the FDIC, which currently insures the deposits of each member
bank to a maximum of $100,000 per depositor. For this protection, each member
bank pays a statutory assessment and is subject to the rules and regulations of
the FDIC. The premiums increase incrementally based on the rating of the member
bank.
DIFA. The FDIC reduced the insurance premiums it charges on bank
deposits insured by the Bank Insurance Fund ("BIF") to the statutory minimum of
$2,000.00 for "well capitalized" banks, effective January 1, 1996. Premiums
related to deposits assessed by the Savings Association Insurance Fund ("SAIF"),
including savings association deposits acquired by banks, continued to be
assessed at a rate of between 23 cents and 31 cents per $100.00 of deposits. On
September 30, 1996, the Deposit Insurance Funds Act of 1996 ("DIFA") was enacted
and signed into law. DIFA reduced the amount of semiannual FDIC insurance
premiums for savings association deposits acquired by banks to the same levels
assessed for deposits insured by BIF.
DIFA also provided for a special one-time assessment imposed on deposits
insured by the SAIF, including such deposits held by banks, to recapitalize the
SAIF up to statutory required levels. The Company paid the one-time assessment
in the first quarter of 1997 in the amount of $3.3 million in connection with
the SAIF recapitalization.
DIFA further provides for assessments to be imposed on insured
depository institutions with respect to deposits insured by the BIF (in addition
to assessments currently imposed on depository institutions with respect to
SAIF-insured deposits) to pay amounts due on bonds issued by the Financing
Corporation used to fund the federal thrift bailout. During 1997, the Company
paid $660,000 for the FICO assessment and the Company believes similar amounts
will be assessed per year through 1999 (or earlier if no savings associations
exist prior to December 31, 1999) in connection with such bond payments.
CAPITAL ADEQUACY. The Company and its bank subsidiaries are currently
required to meet certain minimum regulatory capital guidelines utilizing total
capital-to-risk-weighted assets and Tier 1 Capital elements. At December 31,
1997 the Company's ratio of total capital-to-risk-weighted assets was 15.20%.
The guidelines make regulatory capital requirements more sensitive to
differences in risk profiles among banking organizations, take off-balance sheet
exposure into
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account in assessing capital adequacy, and encouraging the holding of liquid,
low-risk assets. At least one-half of the minimum total capital must be
comprised of Tier 1 Capital elements. Tier 1 Capital of the Company is comprised
of common shareholders' equity. The core deposit intangibles and goodwill of
$47,788,000 booked in connection with all the financial institution acquisitions
of the Company are deducted from the sum of core capital elements when
determining the capital ratios of the Company.
In addition, the FRB has established minimum leverage ratio guidelines
for bank holding companies. These guidelines provide for a minimum leverage
ratio of Tier 1 capital to adjusted average quarterly assets ("leverage ratio")
equal to three percent for bank holding companies that meet certain specified
criteria, including having the highest regulatory rating. All other bank holding
companies will generally be required to maintain a leverage ratio of at least
four to five percent. The Company's leverage ratio at December 31, 1997 was 6.41
percent. The guidelines also provide that bank holding companies experiencing
internal growth or making acquisitions will be expected to maintain strong
capital positions substantially above the minimum supervisory levels without
significant reliance on intangible assets. Furthermore, the guidelines indicate
that the FRB will continue to consider a "tangible tier 1 leverage ratio"
(deducting all intangibles) in evaluating proposals for expansion or new
activity. The FRB has not advised the Company of any specific minimum leverage
ratio or tangible tier 1 leverage ratio applicable to it.
Each of the Company's bank subsidiaries is subject to similar capital
requirements adopted by the FDIC. Each of the Company's bank subsidiaries had a
leverage ratio in excess of five percent as of December 31, 1997. As of that
date, the federal banking agencies had not advised any of the bank subsidiaries
of any specific minimum leverage ratio applicable to it.
Effective December 19, 1992, the federal bank regulatory agencies
adopted regulations which mandate a five-tier scheme of capital requirements and
corresponding supervisory actions to implement the prompt corrective action
provisions of the Federal Deposit Insurance Corporation Improvement Act of 1991
("FDICIA"). The regulations include requirements for the capital categories that
will serve as benchmarks for mandatory supervisory actions. Under the
regulations, the highest of the five categories would be a well capitalized
institution with a total risk-based capital ratio of 10%, a Tier 1 risk-based
capital ratio of 6% and a Tier 1 leverage ratio of 5%. An institution would be
prohibited from declaring any dividends, making any other capital distribution
or paying a management fee if the capital ratios drop below the levels for an
adequately capitalized institution, which are 8%, 4% and 4%, respectively. The
corresponding provisions of FDICIA mandate corrective actions be taken if a bank
is undercapitalized. Based on the Company and each of the bank subsidiaries
capital ratios as of December 31, 1997, the Company and each of the bank
subsidiaries were classified as "well capitalized" under the applicable
regulations.
In 1995, in accordance with FDICIA, the FDIC modified its risk-based
capital adequacy guidelines to explicitly include a bank's exposure to declines
in the economic value of its capital due to changes in interest rates as a
factor that it will consider in evaluating a bank's capital adequacy. In 1996
the bank regulatory agencies introduced risk-based examination procedures.
Effective January 1, 1997,
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the federal banking agencies jointly adopted regulations that amend the
risk-based capital standards to incorporate measures for market risk. Applicable
banking institutions will be required to adjust their risk-based capital ratio
to reflect market risk. On December 19, 1996, the FFIEC revised the Uniform
Financial Institutions Rating System commonly referred to as the CAMEL rating
system. A sixth component addressing sensitivity to market risk was added.
Sensitivity to market risk reflects the degree to which changes in interest
rates, foreign exchange rates, commodity prices or equity prices can adversely
affect a financial institution's earnings or economic capital.
INSOLVENCY. The Banking Commissioner of Texas (the "Banking
Commissioner") 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.
DEPOSITOR PREFERENCE STATUTE. Under federal law, deposits and certain
claims for administrative expenses and employee compensation against an insured
depository institution would be afforded a priority over other general unsecured
claims against such an institution, including federal funds and letters of
credit, in the liquidation or other resolution of such an institution by any
receiver.
TEXAS LAW. Effective September 1, 1995, the new Texas Banking Act
("Act") became effective and the Texas Banking Code of 1943 was repealed. The
purpose of the Act was to modernize and streamline the Texas banking laws. One
of the many significant provisions of the Act adopts by reference the Texas
Business Corporation Act, subject to modification by the Banking Commissioner.
Among other matters, these corporate provisions will permit Texas state banks to
merge with non-banking business entities, while national banks are only
permitted to merge with banking entities. During 1997, the Texas Constitution
was amended to permit home equity lending in Texas effective January 1, 1998 and
the Company's bank subsidiaries are currently offering home equity loans. At
present, no accurate prediction can be made as to how this legislation will
affect the Company or its bank subsidiaries.
CRA. Under the Community Reinvestment Act ("CRA"), the FDIC is required
to assess the record of each bank subsidiary to determine if the bank meets the
credit needs of its entire community, including low and moderate-income
neighborhoods served by the institution, and to take that record into account in
its evaluation of any application made by the bank for, among other things,
approval of the acquisition or establishment of a branch or other deposit
facility, an office relocation, a merger, or the acquisition of shares of
capital stock of another financial institution. The FDIC prepares a written
evaluation of an institution's record of meeting the credit needs of its entire
community and assigns a rating. In 1995, the CRA regulations were rewritten and
the new regulations and examination procedures were designed to emphasize
performance over paperwork and process. Each bank subsidiary received either an
"outstanding" or "satisfactory" CRA rating in its most recently completed
examination. Further, there are fair lending laws which prohibit discrimination
in connection with lending decisions.
BSA. The bank subsidiaries are required to report certain deposit
transactions to the U.S. Treasury Department pursuant to the Bank Secrecy Act
("BSA"). During 1997, the Financial Crimes Enforcement Network and the federal
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banking regulators amended the BSA regulations regarding suspicious activity
reporting, funds transfer recordkeeping and the definition and designation of
exempt customers. The bank subsidiaries' compliance with BSA is examined
regularly by the FDIC and the Texas Department of Banking as well as the
internal auditors of the Company.
SECTION 23A. The Company, IBC and the other bank subsidiaries of the
Company are "affiliates" within the meaning of Section 23A of the Federal
Reserve Act which sets forth certain restrictions on loans and extensions of
credit between a bank subsidiary and affiliates, on investments in an
affiliate's stock or other securities, and on acceptance of such stock or other
securities as collateral for loans. Such restrictions prevent a bank holding
company from borrowing from any of its bank subsidiaries unless the loans are
secured by specific obligations. Further, such secured loans and investments by
a bank subsidiary are limited in amount, as to a bank holding company or any
other affiliate, to 10% of such bank subsidiary's capital and surplus and, as to
the bank holding company and its affiliates, to an aggregate of 20% of such bank
subsidiary's capital and surplus. Certain restrictions do not apply to 80% or
more owned sister banks of bank holding companies. Each bank subsidiary of the
Company is wholly-owned by the Company. Section 23B of the Federal Reserve Act
requires that the terms of affiliate transactions be comparable to terms of
similar non-affiliate transactions.
LENDING RESTRICTIONS. The operations of the Banks are also subject to
lending limit restrictions pertaining to the extension of credit and making of
loans to one borrower. The scope and requirements of such laws and regulations
have been expanded significantly in recent years. Further, under the BHCA and
the regulations of the FRB thereunder, the Company and its subsidiaries are
prohibited from engaging in certain tie-in arrangements with respect to any
extension of credit or provision of property or services; however, recently the
FRB adopted a rule relaxing tying restrictions by permitting a bank holding
company to offer a discount on products or services if a customer obtains other
products or services from such company.
BANK DIVIDENDS. The ability of the Company to pay dividends is largely
dependent on the amount of cash derived from dividends declared by its bank
subsidiaries. The payment of dividends by any bank or bank holding company is
affected by the requirement to maintain adequate capital as discussed above. At
December 31, 1997, there was an aggregate of approximately $55,701,000 available
for the payment of dividends to the Company, by IBC, Commerce Bank, IBC Zapata
and IBC Brownsville under the applicable restrictions, assuming that each of
such banks continues to be classified as "well capitalized". Further, the
Company could expend the entire $55,701,000 and continue to be classified as
"well capitalized". Note 17 of notes to Consolidated Financial Statements of the
Company located on page 44 of the 1997 Annual Report is incorporated herein by
reference.
FDICIA. 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
12
<PAGE>
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.
As a result of FDICIA, the authority of the FDIC over state-chartered
banks was expanded. FDICIA limits state-chartered banks to only those principal
activities permissible for national banks, except for other activities
specifically approved by the FDIC. The new Texas Banking Act includes a parity
provision which establishes procedures for state banks to notify the Banking
Commissioner if the bank intends to conduct any activity permitted for a
national bank that is otherwise denied to a state bank. The Banking Commissioner
has thirty (30) days to prohibit the activity.
During 1996, the Office of the Comptroller of the Currency (the "OCC")
adopted a major overhaul of its rules governing corporate applications,
practices, and notices. The new rule incorporates a risk-based approach to
corporate applications and activities of national banks. The new rule includes
authority for operating subsidiaries to conduct for the first time activities
beyond those permitted for national banks directly. Under the new rule, an
operating subsidiary engaged in activities not permissible for the parent bank
must observe certain separateness requirements. National banks must file
applications for prior OCC approval to establish, or acquire, operating
subsidiaries engaged in activities that are not permissible for the parent bank
and the OCC may grant such approval on a case by case basis. Pursuant to the
Texas parity provision, a Texas state bank may be permitted to engage in such
activities permitted for national banks if notice is provided to the Banking
Commissioner and the Banking Commissioner does not prohibit the activity.
As part of the Small Business Job Protection Act of 1996, financial
institutions are now eligible to make an S election for federal income tax
purposes. To qualify as an S corporation, a financial institution must (i) not
use the reserve method of accounting for bad debts, (ii) have only one class of
stock, (iii) have no more than seventy-five shareholders, and (iv) have no
foreign shareholders. The Company currently does not qualify for the S election.
YEAR 2000. Many existing computer programs use only two digits to
identify a year. These programs were designed and developed without considering
the impact of the upcoming change in the century. If uncorrected, many computer
applications could fail or create erroneous results by or at the Year 2000. The
Year 2000 issue affects virtually all companies and organizations.
The Company has developed and implemented a plan to deal with the Year
2000 problem. The plan provides for addressing critical and noncritical issues,
with the assignment of responsibility and target dates for completion. Testing
of core applications, such as mainframe software and hardware and some platform
software, is largely complete and reflects that they will be Year 2000
compliant. The Company is expensing applicable costs incurred as a result of
addressing the Year 2000 issue.
The Company does not expect that the cost of addressing the Year 2000
issue will be a material event or uncertainty that would cause its reported
financial information not to be indicative of future operating results or future
financial condition, or that the costs or consequences of incomplete or untimely
resolution
13
<PAGE>
of any Year 2000 issue represent a known material event or uncertainty that is
reasonably likely to affect its future financial results, or cause its reported
financial information not to be indicative of future operating results or future
financial condition.
Additionally, the federal bank regulators have enforcement powers with
respect to Year 2000 compliance. Failure to institute an acceptable Year 2000
readiness plan could result in the disapproval of expansion applications filed
with bank regulatory agencies or the imposition of cease and desist orders or
civil money penalties.
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.
14
<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, 1997, 1996 and 1995 (Dollars in
Thousands) (Note 1). Nonaccrual loans have been included in assets for the
purpose of this analysis:
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
----------------------------------------------------------------------------------------------
1997 1996 1995
---------------------------- ---------------------------- ------------------------------
AVERAGE AVERAGE AVERAGE AVERAGE AVERAGE AVERAGE
BALANCE INTEREST RATE/COST BALANCE INTEREST RATE/COST BALANCE INTEREST RATE/COST
------- -------- --------- ------- -------- --------- ------- -------- ---------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
ASSETS
Interest earning assets:
Loans, net of unearned discounts:
Domestic $ 1,152,566 $115,527 10.02% $ 1,073,524 $108,852 10.14% $ 1,086,515 $115,064 10.59%
Foreign 128,923 11,821 9.17 126,067 10,331 8.19 115,621 9,347 8.08
Investment securities:
Taxable 2,121,927 146,820 6.92 1,449,211 99,411 6.86 1,381,781 91,178 6.60
Tax-exempt 1,348 90 6.68 23,916 1,292 5.40 33,668 1,825 5.42
Time deposits with banks 404 47 11.63 708 53 7.49 917 43 4.69
Federal funds sold 14,906 1,120 7.51 32,369 1,540 4.76 13,004 991 7.62
Other 2,565 307 11.97 2,576 300 11.65 3,668 419 11.42
----------- -------- ----------- -------- ----------- --------
Total interest-earning assets $ 3,422,639 $275,732 8.06 $ 2,708,371 $221,779 8.19 $ 2,635,174 $218,867 8.31
Non-interest earning assets:
Cash and due from banks $ 144,573 $ 94,972 $ 84,277
Bank premises and equipment, net 105,800 85,584 76,065
Other assets 117,381 89,450 74,451
Less allowance for possible
loan losses (23,075) (19,866) (18,794)
----------- ----------- -----------
Total $ 3,767,318 $ 2,958,511 $ 2,851,173
=========== =========== ===========
LIABILITIES AND
SHAREHOLDERS' EQUITY
Interest bearing liabilities:
Savings and interest bearing
demand deposits $ 722,559 $ 22,152 3.07 $ 617,090 $ 18,390 2.98 $ 548,917 $ 16,741 3.05
Time deposits:
Domestic 905,157 46,456 5.13 645,782 32,065 4.97 555,446 28,028 5.05
Foreign 821,214 42,957 5.23 748,343 37,652 5.03 678,908 34,050 5.02
Securities sold under
repurchase agreements
and federal funds purchased 301,511 15,754 5.23 236,223 12,151 5.14 444,379 25,594 5.76
Other borrowings 331,308 18,052 5.45 137,404 7,114 5.18 122,133 7,948 6.51
----------- -------- ----------- -------- ----------- --------
Total interest bearing
liabilities $ 3,081,749 $145,371 4.72 $ 2,384,842 $107,372 4.50 $ 2,349,783 $112,361 4.78
Non-interest bearing liabilities:
Demand deposits 361,379 297,539 269,218
Other liabilities 26,261 21,927 17,269
Shareholders' equity 297,929 254,203 214,903
----------- ----------- -----------
Total $ 3,767,318 $ 2,958,511 $ 2,851,173
=========== =========== ===========
Net interest income $130,361 $114,407 $106,506
======== ======== ========
Net yield on interest
earning assets 3.81% 4.22% 4.04%
==== ==== ====
</TABLE>
(Note 1) The average balances for purposes of the above table are calculated on
the basis of month-end balances.
15
<PAGE>
INTEREST RATES AND INTEREST DIFFERENTIAL
The following table analyzes the changes in net interest income during 1997
and 1996 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>
1997 COMPARED TO 1996 1996 COMPARED TO 1995
------------------------ ------------------------
NET INCREASE (DECREASE) NET INCREASE (DECREASE)
DUE TO 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 $ 5,732 $ 943 $ 6,675 $ (1,330) $(4,882) $(6,212)
Foreign (497) 1,987 1,490 846 138 984
Investment securities:
Taxable 48,343 (934) 47,409 4,528 3,705 8,233
Tax-exempt (1,002) (200) (1,202) (529) (4) (533)
Time deposits with banks - (6) (6) (16) 26 10
Federal funds sold (248) (172) (420) (84,272) 84,821 549
Other - 7 7 (127) 8 (119)
-------- ------- ------- -------- ------- -------
Total interest income $ 52,328 $ 1,625 $53,953 $(80,900) $83,812 $ 2,912
Interest incurred on:
Savings and interest
bearing demand deposits $ 4,630 $ (868) $ 3,762 $ 2,092 $ (443) $ 1,649
Time deposits:
Domestic 15,689 (1,298) 14,391 4,568 (531) 4,037
Foreign 8,765 (3,460) 5,305 3,482 120 3,602
Securities sold under
repurchase agreements and
federal funds purchased 3,828 (225) 3,603 (11,836) (1,607) (13,443)
Other borrowings 11,367 (429) 10,938 636 (1,470) (834)
-------- ------- ------- -------- ------- -------
Total interest expense $ 44,279 $(6,280) $37,999 $ (1,058) $(3,931) $(4,989)
-------- ------- ------- -------- ------- -------
Net interest income $ 8,049 $ 7,905 $15,954 $(79,842) $87,743 $ 7,901
======== ======= ======= ======== ======= =======
</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.
16
<PAGE>
INTEREST RATE SENSITIVITY
The net interest rate sensitivity as of December 31, 1997 is illustrated in
the following table. This information reflects the balances of assets and
liabilities whose rates are subject to change. As indicated in the table, the
Company is liability sensitive during the early time periods and is asset
sensitive in the longer periods. The table shows the sensitivity of the balance
sheet at one point in time and is not necessarily indicative of the position at
future dates.
<TABLE>
<CAPTION>
RATE/MATURITY RATE/MATURITY RATE/MATURITY RATE/MATURITY
December 31, 1997 3 MONTHS OVER 3 MONTHS OVER 1 YR OVER
(Dollars in Thousands) OR LESS TO 1 YR TO 5 YRS 5 YRS TOTAL
=========================================================================================================
SECTION A
---------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
RATE SENSITIVE ASSETS
FEDERAL FUNDS SOLD $ 7,975 - - - $ 7,975
DUE FROM BANK INTEREST EARNING 993 495 99 - 1,587
INVESTMENT SECURITIES 141,079 241,414 1,531,902 669,063 2,583,458
LOANS, NET OF NON-ACCRUALS 1,019,836 132,905 202,490 90,231 1,445,462
---------------------------------------------------------------------------------------------------------
TOTAL EARNING ASSETS $ 1,169,883 $ 374,814 $ 1,734,491 $ 759,294 $ 4,038,482
---------------------------------------------------------------------------------------------------------
CUMULATIVE EARNING ASSETS $ 1,169,883 $ 1,544,697 $ 3,279,188 $ 4,038,482
=========================================================================================================
SECTION B
---------------------------------------------------------------------------------------------------------
RATE SENSITIVE LIABILITIES
TIME DEPOSITS $ 849,327 $ 849,947 $ 205,705 $ 285 $ 1,905,264
OTHER INTEREST BEARING DEPOSITS 819,759 - - - 819,759
FED FUNDS PURCHASED AND REPOS 425,853 52,556 - - 478,409
OTHER BORROWINGS 490,000 - - - 490,000
---------------------------------------------------------------------------------------------------------
TOTAL INTEREST BEARING LIABILITIES $ 2,584,939 $ 902,503 $ 205,705 $ 285 $ 3,693,432
---------------------------------------------------------------------------------------------------------
CUMULATIVE SENSITIVE LIABILITIES $ 2,584,939 $ 3,487,442 $ 3,693,147 $ 3,693,432
=========================================================================================================
SECTION C
---------------------------------------------------------------------------------------------------------
REPRICING GAP $(1,415,056) $ (527,689) $ 1,528,786 $ 759,009 $ 345,050
CUMULATIVE REPRICING GAP (1,415,056) (1,942,745) (413,959) 345,050 345,050
RATIO OF INTEREST-SENSITIVE
ASSETS TO LIABILITIES .45 .42 8.43 - 1.09
RATIO OF CUMULATIVE, INTEREST-
SENSITIVE ASSETS TO LIABILITIES .45 .44 .89 1.09
=========================================================================================================
</TABLE>
17
<PAGE>
INVESTMENT SECURITIES
The following table sets forth the carrying value of investment securities
as of December 31, 1997, 1996 and 1995:
YEARS ENDED DECEMBER 31,
---------------------------------------
1997 1996 1995
----------- ----------- -----------
(Dollars in Thousands)
U.S. Treasury securities
Held to maturity $ - - -
Available for sale 202,123 5,020 7,058
Mortgage-backed securities
Held to maturity - - 1,044
Available for sale 2,347,722 1,734,484 1,408,705
Obligations of states and
political subdivisions
Held to maturity 695 858 -
Available for sale 520 1,014 29,975
Equity securities
Held to maturity - - -
Available for sale 30,383 16,201 14,694
Other securities
Held to maturity 2,015 1,990 1,865
----------- ----------- -----------
Total $ 2,583,458 $ 1,759,567 $ 1,463,341
=========== =========== ===========
The following tables set forth the contractual maturities of investment
securities at December 31, 1997 and the average yields of such securities,
except for the totals which reflect the weighted average yields. Actual
maturities will differ from contractual maturities because borrowers may have
the right to prepay obligations with or without prepayment penalties.
<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>
U.S. Treasury and
obligations of
other U.S. Govern-
ment agencies $ 2,148 5.63% $ 989 6.38% $198,769 7.28% - - %
Mortgage-backed
securities 12,075 6.76 206,573 7.33 522,722 7.51 1,574,085 7.57
Obligations of states
and political
subdivisions - - 71 6.20 484 7.70 - -
Equity securities 29,629 6.00 - - - - - -
------- ---- -------- ---- -------- ---- --------- ----
Total $43,852 6.19% $207,633 7.32% $721,975 7.45% 1,574,085 7.57%
======= ==== ======== ==== ======== ==== ========= ====
</TABLE>
18
<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>
Obligations of states
and political
subdivisions $ 175 8.19% $ 520 8.20% $ - - % $ - - %
Other securities 25 7.88 1,605 7.73 385 7.11 - -
--- ----- --- ---
Total $ 200 8.15% $2,125 7.84% $ 385 7.11% $ - - %
=== ===== === ---
</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, 1997,
1996, 1995, 1994 and 1993 are shown in the following table:
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
----------------------------------------------------------
1997 1996 1995 1994 1993
---------- ---------- ---------- ---------- ----------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C>
Commercial, financial
and agricultural $ 792,124 $ 719,151 $ 718,364 $ 664,449 $ 611,612
Lease financing receivables 8,840 3,910 3,910 3,910 4,323
Real estate-mortgage 188,122 193,101 200,998 201,998 180,777
Real estate-construction 59,239 32,610 39,527 46,584 21,326
Consumer 272,478 161,594 124,843 122,751 88,452
Foreign 130,401 128,932 120,748 106,707 107,771
---------- ---------- ---------- ---------- ----------
Total loans 1,451,204 1,239,298 1,208,390 1,146,399 1,014,261
Unearned discount (6,508) (3,303) (3,479) (3,885) (2,547)
---------- ---------- ---------- ---------- ----------
Loans, net of
unearned discount $1,444,696 $1,235,995 $1,204,911 $1,142,514 $1,011,714
========== ========== ========== ========== ==========
</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, 1997 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:
19
<PAGE>
MATURING
----------------------------------------------
AFTER ONE
WITHIN BUT WITHIN AFTER
ONE YEAR FIVE YEARS FIVE YEARS TOTAL
-------- ---------- ---------- -----
(Dollars in Thousands)
Commercial, financial and
agricultural $302,513 $386,640 $102,971 $792,124
Real estate - construction 35,601 13,906 9,732 59,239
Foreign 65,625 57,499 7,277 130,401
-------- -------- -------- --------
Total $403,739 $458,045 $119,980 $981,764
======== ======== ======== ========
INTEREST SENSITIVITY
----------------------
FIXED VARIABLE
RATE RATE
--------- ---------
(Dollars in Thousands)
Due after one but within five years $ 82,280 $ 375,764
Due after five years 38,096 81,884
--------- ---------
Total $ 120,376 $ 457,648
========= =========
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:
YEARS ENDED DECEMBER 31,
----------------------------------------------------
1997 1996 1995 1994 1993
------- ------- ------- ------- -------
(Dollars in Thousands)
Loans accounted for on
a non-accrual basis $ 5,014 $ 3,363 $ 5,291 $ 2,895 $ 5,371
Loans contractually past
due ninety days or more
as to interest or prin-
cipal payments 9,700 5,075 7,954 5,605 3,777
Loans accounted for as
"troubled debt restruc-
turings" 363 1,462 2,742 1,990 3,170
The following table presents information concerning the aggregate amount of
non-accrual and past due foreign loans extended to persons or entities in Mexico
or to the Mexican Government, certain loans may be classified in one or more
category:
YEARS ENDED DECEMBER 31,
----------------------------------------------------
1997 1996 1995 1994 1993
------- ------- ------- ------- -------
(Dollars in Thousands)
Loans accounted for on
a non-accrual basis $ 728 $ 1,062 $ 942 $ 732 $ 733
Loans contractually past
due ninety days or more
as to interest or prin-
cipal payments 2,096 1,321 944 1,086 759
20
<PAGE>
The gross income that would have been recorded during 1997 on non-accrual
and restructured loans in accordance with their original contract terms was
$524,000 on domestic loans and $78,000 on foreign loans. The amount of interest
income on such loans that was recognized in 1997 was $1,000 on domestic loans
and none for foreign loans.
The non-accrual loan policy of the bank subsidiaries is to discontinue the
accrual of interest on loans when management determines that it is probable that
future interest accruals will be uncollectible. Interest income on non-accrual
loans is recognized only to the extent payments are received or when, in
management's opinion, the creditor's financial condition warrants
reestablishment of interest accruals. Under special circumstances, a loan may be
more than 90 days delinquent as to interest or principal and not be placed on
non-accrual status. When any of the above occurs, loan officers are required to
recommend placing a loan on non-accrual status by sending a memo to the senior
loan officer who gives instructions to the commercial note teller that the loan
is on non-accrual status. When a loan is placed on non-accrual status, any
interest accrued but not paid is reversed and charged to operations against
interest income.
The preceding tables indicate that there are certain loans technically past
due 90 days or more on performing status. This situation generally results when
a bank subsidiary has a borrower who is experiencing financial difficulties but
not to the extent that requires a restructuring of indebtedness. The majority of
this category is composed of loans that are considered to be adequately secured
and/or for which there has been a recent payment.
The Company believes, after reviewing each bank subsidiary's loan
portfolio, that the majority of the loans with a loss potential have been
included under the categories of past due and non-accrual. Adjustments to the
loan loss allowance have been made for other credits that may have
characteristics indicating a potential for future non-performing status and some
possible loss.
The following table presents certain information about cross-border
outstanding loans, acceptances, and accrued interest thereon, related to Mexico:
YEARS ENDED DECEMBER 31,
---------------------------------------
1997 1996 1995
--------- --------- ---------
(Dollars in Thousands)
Loans:
Commercial, financial, industrial
and agricultural $ 91,945 $ 86,861 $ 90,541
Real estate-mortgage 18,416 20,591 10,254
Consumer 20,040 21,480 19,953
--------- --------- ---------
130,401 128,932 120,748
Less allowance for possible
loan losses (1,184) (1,101) (1,035)
--------- --------- ---------
Net loans $ 129,217 $ 127,831 $ 119,713
========= ========= =========
Accrued interest receivable $ 1,198 $ 1,317 $ 1,191
========= ========= =========
21
<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>
AT YEARS ENDED DECEMBER 31,
------------------------------------------------------
1997 1996 1995 1994 1993
---------- ---------- ---------- ---------- ----------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C>
Loans, net of unearned discounts,
outstanding at December 31, $1,444,696 $1,235,995 $1,204,911 $1,142,514 $1,011,714
========== ========== ========== ========== ==========
Average loans outstanding during
the year (Note 1) $1,281,489 $1,199,591 $1,202,136 $1,055,246 $ 941,381
========== ========== ========== ========== ==========
Balance of allowance
at January 1, $ 21,036 $ 18,455 $ 17,025 $ 13,831 $ 10,055
Provision charged to expense 7,740 6,630 5,150 3,804 4,540
---------- ---------- ---------- ---------- ----------
Loans charged-off:
Domestic:
Commercial, financial
and agricultural (1,503) (1,518) (2,248) (1,073) (1,299)
Real estate-mortgage (279) (261) (619) (685) (569)
Consumer (4,552) (3,363) (1,849) (816) (556)
Foreign (2) (23) (48) (148) (49)
---------- ---------- ---------- ---------- ----------
Total loans charged-off (6,336) (5,165) (4,764) (2,722) (2,473)
---------- ---------- ---------- ---------- ----------
Recoveries credited to allowance:
Domestic:
Commercial, financial
and agricultural 270 305 190 236 663
Real estate mortgage 382 51 80 968 146
Consumer 250 755 229 237 136
Foreign 95 5 110 227 67
---------- ---------- ---------- ---------- ----------
Total recoveries 997 1,116 609 1,668 1,012
---------- ---------- ---------- ---------- ----------
Net loans charged-off: (5,339) (4,049) (4,155) (1,054) (1,461)
---------- ---------- ---------- ---------- ----------
Allowance acquired in purchase
transactions 1,079 - 435 444 697
---------- ---------- ---------- ---------- ----------
Balance of allowance
at December 31, $ 24,516 $ 21,036 $ 18,455 $ 17,025 $ 13,831
========== ========== ========== ========== ==========
Ratio of net loans charged-off
during the year to average
loans outstanding during
the year (Note 1) .42% .34% .35% .10% .16%
---------- ---------- ---------- ---------- ----------
Ratio of allowance to loans, net
of unearned discounts, out-
standing at December 31, 1.70% 1.70% 1.53% 1.49% 1.37%
========== ========== ========== ========== ==========
</TABLE>
(Note 1) The average balances for purposes of the above table are calculated
on the basis of month-end balances.
22
<PAGE>
Each bank subsidiary has always provided an amount for possible loan losses
sufficient both to cover net loan losses sustained and to maintain an
appropriate balance in the allowance for possible loan losses that considers the
element of risk which is estimated to be present in outstanding loans. The
aggregate allowance for possible loan losses of all bank subsidiaries
approximated 1.70% of total loans of bank subsidiaries, net of unearned income,
at both December 31, 1997 and 1996.
The amount charged against 1997 earnings and the other years presented as a
provision for possible loan losses was the sum required to bring the allowance
to the point which management of each bank subsidiary considers adequate to
cover potential loan losses. Such a determination is based on a continual and
conservative review process of the loan portfolio performed by senior officers
of each bank subsidiary who consider certain factors, including but not limited
to, previous loss experience in portfolio segments and assessment of current
economic conditions.
The allowance for possible loan losses has been allocated based on the
amount management has deemed to be reasonably necessary to provide for the
possibility of losses being incurred within the following categories of loans at
the dates indicated and the percentage of loans to total loans in each category:
<TABLE>
<CAPTION>
AT DECEMBER 31,
----------------------------------------------------------------------------------------------------------------
1997 1996 1995 1994 1993
------------------ ----------------- ------------------- ------------------ -----------------------
PERCENT PERCENT PERCENT PERCENT PERCENT
ALLOWANCE OF LOANS ALLOWANCE OF LOANS ALLOWANCE OF LOANS ALLOWANCE OF LOANS ALLOWANCE OF LOANS
--------- -------- --------- -------- --------- -------- --------- -------- --------- --------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Commercial,
financial and
agricultural $ 13,993 54.6% $ 12,911 58.0% $ 11,506 59.4% $ 10,274 58.0% $ 8,813 60.3%
Lease financing
receivables 156 0.6 70 0.3 63 0.3 61 0.3 62 0.4
Real estate
mortgage 3,323 12.9 3,467 15.6 3,219 16.6 3,123 17.6 2,605 17.8
Real estate
construction 1,047 4.1 586 2.6 633 3.3 720 4.1 307 2.1
Consumer 4,813 18.8 2,901 13.1 1,999 10.4 1,898 10.7 1,275 8.8
Foreign 1,184 9.0 1,101 10.4 1,035 10.0 949 9.3 769 10.6
-------- ----- -------- ----- -------- ----- -------- ----- -------- -----
$ 24,516 100.0% $ 21,036 100.0% $ 18,455 100.0% $ 17,025 100.0% $ 13,831 100.0%
======== ===== ======== ===== ======== ===== ======== ===== ======== =====
</TABLE>
23
<PAGE>
DEPOSITS
The average amount of deposits, based on month-end balances and interest
expense is summarized for the years indicated in the following table:
FOR THE YEARS ENDED DECEMBER 31,
------------------------------------------
1997 1996 1995
----------- ----------- -----------
(Dollars in Thousands)
Deposits:
Demand - non-interest bearing
Domestic $ 317,759 $ 256,186 $ 234,793
Foreign 43,620 41,353 34,425
----------- ----------- -----------
Total demand non-interest
bearing 361,379 297,539 269,218
----------- ----------- -----------
Savings and interest bearing demand
Domestic 560,956 459,451 382,028
Foreign 161,603 157,639 166,889
----------- ----------- -----------
Total savings and interest
bearing demand 722,559 617,090 548,917
----------- ----------- -----------
Time certificates of deposit
$100,000 or more:
Domestic 363,471 280,550 250,103
Foreign 602,170 546,643 493,747
Less than $100,000:
Domestic 541,686 365,232 305,343
Foreign 219,044 201,700 185,161
----------- ----------- -----------
Total time, certificates of
deposit 1,726,371 1,394,125 1,234,354
Total deposits $ 2,810,309 $ 2,308,754 $ 2,052,489
=========== =========== ===========
Interest Expense:
Savings and interest
bearing demand
Domestic $ 17,559 $ 14,079 $ 12,341
Foreign 4,593 4,311 4,400
----------- ----------- -----------
Total savings and interest
bearing demand 22,152 18,390 16,741
----------- ----------- -----------
Interest, certificates of
deposit $100,000 or more:
Domestic 19,256 14,193 13,151
Foreign 32,532 28,561 25,713
Less than $100,000
Domestic 27,200 17,872 14,877
Foreign 10,425 9,091 8,337
----------- ----------- -----------
Total interest, certificates
of deposit 89,413 69,717 62,078
----------- ----------- -----------
Total interest expense $ 111,565 $ 88,107 $ 78,819
=========== =========== ===========
24
<PAGE>
Maturities of time certificates of deposit of $100,000 or more outstanding
at December 31, 1997 are summarized as follows:
DECEMBER 31, 1997
-----------------
(Dollars in Thousands)
3 months or less $ 523,171
Over 3 but through 12 months 491,802
Over 12 months 87,022
----------
Total $1,101,995
==========
RETURN ON EQUITY AND ASSETS
Certain key ratios for the Company for the years ended December 31, 1997,
1996 and 1995 follows (Note 1):
YEARS ENDED DECEMBER 31,
-----------------------------
1997 1996 1995
---- ---- ----
Percentage of net income to:
Average shareholders' equity 16.41% 17.45% 18.64%
Average total assets 1.30 1.50 1.41
Percentage of average shareholders'
equity to average total assets 7.91 8.59 7.54
Percentage of cash dividends per share
to net income per share 11.37 9.87 8.65
(Note 1) The average balances for purposes of the above table are calculated on
the basis of month-end balances.
FOREIGN ACTIVITIES
Information regarding foreign activities has been provided in the preceding
sections and Note 11 of notes to consolidated financial statements located on
page 37 of the 1997 Annual Report to Shareholders which is incorporated herein
by reference.
Item 2. PROPERTIES
The principal offices of the Company and IBC are located at 1200 San
Bernardo Avenue, Laredo, Texas in a modern building owned and completely
occupied by the Company and IBC and containing approximately 97,000 square feet.
The bank subsidiaries of IBC have a total of 76 main banking and branch
facilities. All the facilities are customary to the banking industry. Most of
the bank subsidiaries own their banking facilities and the remainder are leased.
The facilities are located in Laredo, San Antonio, Houston, Zapata, the Rio
Grande Valley of Texas and the Coastal Bend area of Texas.
As Texas state-chartered banks, no bank subsidiary of the Company may,
without the prior written consent of the Banking Commissioner, invest an amount
in excess of its capital and certified surplus in bank facilities, furniture,
fixtures and equipment. None of the Company's bank subsidiaries exceed such
limitation.
25
<PAGE>
Item 3. LEGAL PROCEEDINGS
The Company and its bank subsidiaries are involved in various legal
proceedings that are in various stages of litigation. Some of these actions
allege "lender liability" claims on a variety of theories and claim substantial
actual and punitive damages. The Company and its subsidiaries have determined,
based on discussions with their counsel, that any material loss in such actions,
individually or in the aggregate, is remote or the damages sought, even if fully
recovered, would not be considered material to the financial condition or
results of operations of the Company and its subsidiaries. However, many of
these matters are in various stages of proceedings and further developments
could cause management to revise its assessment of these matters.
Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Since the 1997 Annual Meeting of Shareholders of the Company held on May
15, 1997, 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 1998 Annual Meeting of shareholders and until his successor is duly elected
and qualified.
<TABLE>
<CAPTION>
OFFICER OF THE
NAME AGE POSITION OF OFFICE COMPANY SINCE
---- --- ------------------ -------------
<S> <C> <C> <C>
Dennis E. Nixon 55 Chairman of the Board and 1979
President of the Company,
Chief Executive Officer of IBC
Leonardo Salinas 64 Vice President of the Company 1982
and Senior Executive Vice
President of IBC
R. David Guerra 45 Vice President of the Company 1986
and President of IBC McAllen
Branch
Arnoldo Cisneros 46 Treasurer of the Company and 1982
and Executive Vice President
of IBC
</TABLE>
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 of IBC during the past five years.
Part II
Item 5. MARKET FOR THE REGISTRANT'S COMMON STOCK AND RELATED SECURITY HOLDER
MATTERS
The information set forth under the caption "Common Stock and Dividends"
located on page 12 and 13 of Registrant's 1997 Annual Report is incorporated
herein by reference.
26
<PAGE>
Item 6. SELECTED FINANCIAL DATA
The information set forth under the caption "Selected Financial Data"
located on page 1 of Registrant's 1997 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 13 of Registrant's 1997 Annual Report is incorporated herein by
reference.
Item 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The consolidated financial statements located on pages 15 through 52 of
Registrant's 1997 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 20, 1998, 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 20, 1998, on pages 5 through 8
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.
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 20, 1998, appearing on pages 3
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 20, 1998, appearing on pages 9
and 10 under the caption "Interest of Management in Certain Transactions".
27
<PAGE>
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 1997 Annual Report to shareholders filed as an
exhibit hereto and they include:
Independent Auditors' Report
Consolidated:
Statements of Condition as of December 31, 1997 and 1996
Statements of Income for the years ended December 31, 1997, 1996
and 1995 Statements of Shareholders' Equity for the years ended
December 31, 1997, 1996 and 1995
Statements of Cash Flows for the years ended December 31, 1997,
1996 and 1995
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
(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
28
<PAGE>
(10b)*- Purchase and Assumption Agreement for Oakar transaction
dated June 29, 1990 between New Valley Federal Savings
Association, International Bancshares Corporation and
International Bank of Commerce incorporated herein as an
exhibit by reference to the Annual Report, Exhibit 10(b)
therein, under the Securities Exchange Act of 1934,
filed by Registrant on Form 10-K with the Securities and
Exchange Commission on March 30, 1991, SEC File No.
0-9439
(10c)*- Purchase and Assumption Agreement dated June 21, 1991 by
and between the Resolution Trust Corporation, receiver
of Travis Federal Savings and Loan Association and New
Travis Federal Savings Association incorporated herein
as an exhibit by reference to the Annual Report, Exhibit
10(C) therein, under the Securities Exchange Act of
1934, filed by Registrant on Form 10-K with the
Securities and Exchange Commission on March 30, 1992,
SEC File No. 0-9439
(10d)*- Oakar Agreement dated June 21, 1991 between New Travis
Federal Savings Association and International Bank of
Commerce incorporated herein as an exhibit by reference
to the Annual Report, Exhibit 10(d) therein, under the
Securities Exchange Act of 1934, filed by Registrant on
Form 10-K with the Securities and Exchange Commission on
March 30, 1992, SEC File No. 0-9439
(10e)*+- The 1987 International Bancshares Corporation Key
Contributor Stock Option Plan as amended and restated
(formerly the International Bancshares Corporation 1981
Incentive Stock Option Plan) incorporated herein as an
exhibit by reference to Exhibit 28 to the Registration
Statement on Form S-8 filed with the Securities and
Exchange Commission on July 13, 1987, SEC File No.
33-15655.
(10f)*- Merger Agreement by and between International Bank of
Commerce, Michigan National Corporation and First State
Bank and Trust Company, dated May 5, 1994 incorporated
herein by reference to Exhibit 10(f) of the Form 10Q
filed with the Securities and Exchange Commission on
August 15, 1994, SEC File No. 0-9439.
(10g)*- Merger Agreement by and between International Bank of
Commerce, and The Bank of Corpus Christi, dated August
19, 1994 incorporated herein by reference to Exhibit
10(g) of Form 10-Q filed with the Securities and
Exchange Commission on November 14, 1994, SEC File No.
0-9439.
(10h)*- Merger Agreement by and between International Bank of
Commerce, and Stone Oak National Bank, dated February
28, 1995, incorporated by reference to Exhibit 10(h) of
the Registrant's Quarterly Report on Form 10Q for the
period ended March 31, 1995, filed with the Securities
and Exchange Commission on May 15, 1995, SEC File No.
0-9439.
(10i)*- Agreement and Plan of Merger dated as of June 7, 1995,
by and between International Bancshares Corporation, a
Delaware corporation, and International Bancshares
Corporation, a Texas corporation, incorporated herein by
reference to Exhibit 2 of the Current Report on Form 8-K
filed with the Securities and Exchange Commission on
June 20, 1995, SEC File No. 0-9439.
(10j)*- Purchase and Assumption Agreement dated as of February
27, 1996, by and between International Bank of Commerce,
River Valley Bank, F.S.B. and Western Capital Holdings,
Inc. incorporated herein, by reference to Exhibit 10(j)
of the Registrant's Annual Report on Form 10-K filed
with the Securities and
29
<PAGE>
Exchange Commission on April 1, 1996, SEC File No.
09439.
(10k)*- Purchase of Asset and Liability Agreement dated as of
July 30, 1996, by and between International Bank of
Commerce and Home Savings of America F.S.B. incorporated
herein by reference to Exhibit 10(k) of the Registrant's
Quarterly Report on Form 10-Q filed with the Securities
and Exchange Commission on November 13, 1996.
(10l)*+- The 1996 International Bancshares Corporation Stock
Option Plan incorporated herein by reference to Exhibit
99.1 to the Post Effective Amendment No. 1 to Form S-8
filed with the Securities and Exchange Commission on
March 21, 1997, SEC File No. 33-15655.
(10m)*+- Executive Incentive Compensation Plan of the Registrant
incorporated herein by reference to exhibit "A" of the
Registrant's Proxy Statement filed with the Securities
Exchange Commission on April 15, 1997, SEC file no.
09439.
(10n) Agreement and Plan of Merger by and among International
Bancshares Corporation, University Bancshares, Inc., Joe
L. Allbritton and Robert L. Allbritton, dated as of
August 15, 1997.
(13)**- International Bancshares Corporation 1997 Annual Report
(21)- List of Subsidiaries of International Bancshares
Corporation as of March 20, 1998
(23)- Accountants' Consent
(27)- Financial Data Schedule
----------------------------
* 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
Registrant filed a current report on Form 8-K dated November 12, 1997,
covering Item 5 - Other Events and Item 7 - Financial Statements and
Exhibits, in connection with the acquisition of University Bank,
located in Houston, Texas. Registrant filed a current report on Form
8-K dated January 6, 1998, covering Item 5 - Other Events and Item 7 -
Financial Statements and Exhibits, announcing that negotiations with
Pacific USA Holdings Corp. regarding the proposed purchase of assets
of Pacific Southwest Bank had been terminated. Registrant filed a
current report on Form 8-K dated March 11, 1998, covering Item 5 -
Other Events and Item 7 - Financial Statements and Exhibits,
announcing that Registrant's Common Stock had been listed on the
Nasdaq National Market.
30
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
INTERNATIONAL BANCSHARES CORPORATION
(Registrant)
By: /s/ DENNIS E. NIXON
Dennis E. Nixon
President
Date: MARCH 27, 1998
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 27, 1998
- --------------------------- (Principal Executive Officer)
Dennis E. Nixon
/s/ ARNOLDO CISNEROS Secretary-Treasurer MARCH 27, 1998
- --------------------------- (Principal Financial Officer)
Arnoldo Cisneros
/s/ LEONARDO SALINAS Vice President and MARCH 27, 1998
- --------------------------- Director
Leonardo Salinas
/s/ LESTER AVIGAEL Director MARCH 27, 1998
- ---------------------------
Lester Avigael
/s/ IRVING GREENBLUM Director MARCH 27, 1998
- ---------------------------
Irving Greenblum
/s/ R. DAVID GUERRA Director MARCH 27, 1998
- ---------------------------
R. David Guerra
/s/ RICHARD E. HAYNES Director MARCH 27, 1998
- ---------------------------
Richard E. Haynes
/s/ ROY JENNINGS, JR. Director MARCH 27, 1998
- ---------------------------
Roy Jennings, Jr.
Director
- --------------------------- -----------------
Sioma Neiman
/s/ ALBERTO A. SANTOS Director MARCH 27, 1998
- ---------------------------
Alberto A. Santos
/s/ ANTONIO R. SANCHEZ JR. Director MARCH 27, 1998
- ---------------------------
Antonio R. Sanchez Jr.
/s/ PEGGY J. NEWMAN Director MARCH 27, 1998
- ---------------------------
Peggy J. Newman
31
<PAGE>
Exhibit Index
Exhibit (10n) - Agreement and Plan of Merger by and among International
Bancshares Corporation, University Bancshares, Inc., Joe L.
Allbritton and Robert L. Allbritton, dated as of August 15, 1997
Exhibit 13 - International Bancshares Corporation 1997 Annual Report, page 77
Exhibit 21 - List of Subsidiaries of International Bancshares Corporation as
of March 20, 1998, page 130
Exhibit 23 - Accountants' Consent, page 131
Exhibit 27 - Financial Data Schedule, page 132
32
<PAGE>
INTERNATIONAL BANCSHARES CORPORATION AND SUBSIDIARIES
(Consolidated)
SELECTED FINANCIAL DATA
<TABLE>
<CAPTION>
AT OR FOR THE YEARS ENDED DECEMBER 31,
----------------------------------------------------------
1997 1996 1995 1994 1993
---------- ---------- ---------- ---------- ----------
(Dollars in Thousands, Except Per Share Data)
BALANCE SHEET
<S> <C> <C> <C> <C> <C>
Assets ............... $4,517,846 $3,351,231 $2,935,606 $2,659,392 $2,115,786
Net loans ............ 1,420,180 1,214,959 1,186,456 1,125,489 997,883
Deposits ............. 3,175,560 2,662,153 2,143,346 2,061,638 1,723,919
Other borrowed funds . 490,000 239,000 66,500 123,500 4,500
Shareholders' equity . 341,244 283,767 245,761 178,536 163,055
INCOME STATEMENT
Interest income ...... $ 275,732 $ 221,779 $ 218,867 $ 159,260 $ 131,829
Interest expense ..... 145,371 107,372 112,361 66,754 51,155
---------- ---------- ---------- ---------- ----------
Net interest income .. 130,361 114,407 106,506 92,506 80,674
Provision for possible
loan losses ........ 7,740 6,630 5,150 3,804 4,540
Non-interest income .. 36,776 30,194 26,009 20,945 25,935
Non-interest expense . 85,745 73,457 68,989 58,355 60,236
---------- ---------- ---------- ---------- ----------
Income before income
taxes .............. 73,652 64,514 58,376 51,292 41,833
Income taxes ......... 24,771 20,164 18,315 13,402 9,971
---------- ---------- ---------- ---------- ----------
Net income ........... $ 48,881 $ 44,350 $ 40,061 $ 37,890 $ 31,862
========== ========== ========== ========== ==========
Per common share:
Basic .............. $ 4.79 $ 4.40 $ 4.02 $ 3.84 $ 3.28
Diluted ............ $ 4.62 $ 4.31 $ 3.95 $ 3.79 $ 3.25
Cash dividend per
share .............. $ .50 $ 0.50 $ .50 $ 1.10 --
</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 made by International Bancshares Corporation and its
subsidiaries in 1997, 1996 and 1995.
Note 3: See note 8 of notes to the consolidated financial statements
regarding the other borrowed funds of the Company and its subsidiaries.
1
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Management's discussion and analysis represents an explanation of significant
changes in the financial position and results of operations of International
Bancshares Corporation (the "Company") on a consolidated basis for the three
year period ended December 31, 1997. The Company is a bank holding company with
four bank subsidiaries operating in 76 main banking and branch facilities in
South and Southeast Texas and four non-bank subsidiaries. The following
discussion should be read in conjunction with the Company's Annual Report on
Form 10-K for the year ended December 31, 1997, and the Selected Financial Data
and Consolidated Financial Statements included elsewhere herein.
Results of Operations
Net income for 1997 was $48,881,000 or $4.79 per share - basic ($4.62 per share
- -diluted) compared with $44,350,000 or $4.40 per share - basic ($4.31 per share
- -diluted) in 1996 and $40,061,000 or $4.02 per share - basic ($3.95 per share -
diluted) in 1995.
Total assets at December 31, 1997 grew 35% to $4,517,846,000 from $3,351,231,000
at December 31, 1996 while net loans increased 17% to $1,420,180,000 at December
31, 1997 from $1,214,959,000 at December 31, 1996. Deposits at December 31, 1997
were $3,175,560,000, an increase of 19% over the $2,662,153,000 at December 31,
1996. Deposits at December 31, 1996 were $2,662,153,000, an increase of 24% over
the $2,143,346,000 at December 31, 1995. Total assets at December 31, 1996 grew
14% to $3,351,231,000 from $2,935,606,000 at December 31, 1995 while net loans
increased 2% to $1,214,959,000 at December 31, 1996 from $1,186,456,000 at
December 31, 1995. The increase in assets and deposits during 1997 was partially
attributable to the acquisition of The University Bank and five branches of Bank
of America Texas, N. A. See note 2 of notes to Consolidated Financial
Statements. The aggregate amount of repurchase agreements, short term fixed
borrowings and certificates of indebtedness with the Federal Home Loan Bank of
Dallas ("FHLB"), Federal National Mortgage Association ("FNMA") and Federal Home
Loan Mortgage Corporation ("FHLMC") increased to $855,000,000 at December 31,
1997 from the $237,000,000 at December 31, 1996. Such funds were used to expand
the earning asset base of the Company.
Net interest income in 1997 increased by $15,954,000, or 14%, over that in 1996
despite the slight decrease in the net yield on average interest earning assets
of .41% from 4.22% in 1996 to 3.81% in 1997. The net yield on average interest
earning assets increased by .18% in 1996 to 4.22% from 4.04% in 1995 while net
interest income increased by $7,901,000 or 7% over 1995. A 26.4% increase in
average interest earning assets from $2,708,371,000 in 1996 to $3,422,639,000 in
1997 and a 2.8% increase from $2,635,174,000 in 1995 to $2,708,371,000 in 1996
contributed to the continued increase in net interest income for 1997 and 1996,
respectively. The Company experienced a .13% decrease in the yield on average
interest earning assets to 8.06% in 1997 from 8.19% in 1996. In 1996 a .12%
decrease was reflected in the yield on average interest earning assets to 8.19%
from 8.31% in 1995 and a decrease was reflected on the rates paid on average
interest bearing liabilities to 4.50% in 1996 from 4.78% in 1995.
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
2
<PAGE>
income is affected by both changes in the level of interest rates and changes in
the amount and composition of interest earning assets and interest bearing
liabilities.
As part of its strategy to manage interest rate risk, the Company strives to
manage both assets and liabilities so that interest sensitivities match. One
method of calculating interest rate sensitivity is through gap analysis. A gap
is the difference between the amount of interest rate sensitive assets and
interest rate sensitive liabilities that reprice or mature in a given time
period. Positive gaps occur when interest rate sensitive assets exceed interest
rate sensitive liabilities, and negative gaps occur when interest rate sensitive
liabilities exceed interest rate sensitive assets. A positive gap position in a
period of rising interest rates should have a positive effect on net interest
income as assets will reprice faster than liabilities. Conversely, net interest
income should contract somewhat in a period of falling interest rates.
Management can quickly change the Company's interest rate position at any given
point in time as market conditions dictate. Additionally, interest rate changes
do not affect all categories of assets and liabilities equally or at the same
time. Analytical techniques employed by the Company to supplement gap analysis
include simulation analysis to quantify interest rate risk exposure. The gap
analysis prepared by management is reviewed by the Investment Committee of the
Company twice a year. Management currently believes that the Company is properly
positioned for interest rate changes; however if management determines at any
time that the Company is not properly positioned, it will strive to adjust the
interest rate sensitive assets and liabilities in order to minimize the effect
of interest rate changes.
Non-interest income increased 22% in 1997 to $36,776,000 over $30,194,000 in
1996 and increased 16% over $26,009,000 in 1995. The 1997 and 1996 increases in
non-interest income were primarily due to the increases in service charges. The
increases in service charges were attributable to the amount of account
transaction fees received as a result of the deposit growth and increased
collection efforts.
Expense control is an essential element in the Company's profitability. This is
achieved through maintaining optimum staffing levels, an effective budgeting
process, and internal consolidation of bank functions. The Company's efficiency
ratio (other operating expenses divided by net interest income and other
operating income) has been under 57% for each of the last five years, which the
Company believes is well below national peer group ratios. Non-interest expense
includes such items as salaries and wages and employee benefits, net occupancy
expenses, equipment expenses and other operating expenses such as FDIC
insurance. Non-interest expense increased 17% in 1997 to $85,745,000 from
$73,457,000 in 1996 and increased 6% from $68,989,000 in 1995. The 1997 and 1996
increases in non-interest expense were primarily due to the increased operations
at certain of the bank subsidiaries as a result of acquisitions.
Most of the Company's lending activities involve commercial (domestic and
foreign), consumer and real estate mortgage financing. In 1997, the Company's
acquisition activity as well as its efforts to increase its loan volume resulted
in an increase of 7.4% in average domestic loans and a increase of 2.3% in
average foreign loans for an increase in total average loans of 6.8% over 1996.
The average yield for these loans decreased .12% for domestic loans and
increased by .97% for foreign loans in 1997 as compared to 1996. The Company
experienced a decrease of 1% in average domestic loans and a 9% increase in
average foreign loans in 1996 as compared to 1995. The yield for these loans
decreased .45% for domestic loans and increased by .11% for foreign loans in
1996 as compared to 1995. Although the economic conditions in the U.S./Mexico
border region have improved, loan demand has not improved significantly.
Competition
3
<PAGE>
for loans in the Company's market area has intensified and has resulted in loan
pricing by certain competitors which management believes is not commensurate
with the risk associated with making such loans. The result of which has been a
reduction of the Company's market penetration for loans.
The Company experienced an increase of 46% in average balances of taxable
investment securities from $1,449,211,000 for 1996 to $2,121,927,000 for 1997
and an increase of 5% from $1,381,781,000 for 1995 to $1,449,211,000 for 1996.
These trends were the results of continued increases in deposits, repurchase
agreements and borrowings during 1997 and 1996 providing the Company with
available funds for investments.
The allowance for possible loan losses increased 17% from $21,036,000 at
December 31, 1996 to $24,516,000 at December 31, 1997 and increased 14% from
$18,455,000 at December 31, 1995 to $21,036,000 at December 31, 1996. The
provision for possible loan losses charged to expense increased 17% from
$6,630,000 in 1996 to $7,740,000 in 1997 and increased 29% from $5,150,000 in
1995 to $6,630,000 in 1996. Increases in the allowance for possible loan losses
were largely due to Management's belief that conservative allowance allocations
should be maintained in a period when the business cycle is deemed to be mature.
The allowance for possible loan losses was 1.69% of total loans at December 31,
1997 compared to 1.70% at 1996 and 1.53% at 1995. Nonperforming assets as a
percentage of total loans and total assets were 1.23% and .40%, respectively, at
December 31, 1997, and .99% and .37% at December 31, 1996, respectively. Loans
accounted for on a non-accrual basis increased 30% from $4,425,000 at December
31, 1996 to $5,742,000 at December 31, 1997. As loans are placed on non-accrual
status, interest previously accrued and recorded is reversed unless the loans
are well secured and in the process of collection. Foreclosed assets increased
13% from $4,874,000 at December 31, 1996 to $5,510,000 at December 31, 1997. The
increases in the non-performing loans and foreclosed assets were primarily due
to consumer credit problems and other credit problems that a financial
institution faces in the normal course of business. In 1996, non-accruals
decreased 29% from $6,233,000 at December 31, 1995 to $4,425,000 at December 31,
1996 and foreclosed assets decreased 48% from $9,372,000 at December 31, 1995 to
$4,874,000 at December 31, 1996.
The allowance for possible loan losses consists of the aggregate loan loss
allowances of the bank subsidiaries. The allowances are established through
charges to operations in the form of provisions for possible loan losses. Loan
losses (or recoveries) are charged (or credited) directly to the allowances. The
provision for possible loan losses of each bank subsidiary is determined by
management of each bank upon consideration of several factors such as loss
experience in relation to outstanding loans and the existing level of its
allowance; independent appraisals for significant properties; a continuing
review and appraisal of its loan portfolio with particular emphasis on problem
loans by management and the credit department staff of International Bank of
Commerce, Laredo, Texas ("IBC"), the Company's largest bank subsidiary; results
of examinations by bank examiners and continuous review of current and
anticipated economic conditions in the market area served by the bank
subsidiaries. Management of each of the bank subsidiaries, along with management
of the Company, continually review the allowances to determine whether
additional provisions should be made after considering the preceding factors.
The bank subsidiaries charge off that portion of any loan which management
considers to represent a loss as well as that portion of any other loan which is
classified as a "loss" by bank examiners. Commercial and industrial or real
estate loans are generally considered by management to represent a loss, in
whole or part, when an
4
<PAGE>
exposure beyond any collateral coverage is apparent and when no further
collection of the portion of the loan so exposed is anticipated based on the
borrower's financial condition and general economic conditions in the borrower's
industry. Generally, unsecured consumer loans are charged off when 90 days past
due.
While management of the Company considers that it is generally able to identify
borrowers with financial problems reasonably early and to monitor credit
extended to such borrowers carefully, there is no precise method of predicting
loan losses. The determination that a loan is likely to be uncollectible and
that it should be wholly or partially charged off as a loss is an exercise of
judgment. Similarly, the determination of the adequacy of the allowance for
possible loan losses can be made only on a subjective basis. It is the judgment
of the Company's management that the allowance for possible loan losses at
December 31, 1997 was adequate to absorb possible losses from loans in the
portfolio at that date.
On December 31, 1997, the Company had $4,517,846,000 of consolidated assets of
which approximately $130,401,000 or 3% were related to loans outstanding to
borrowers domiciled in Mexico. The loan policies of the Company's bank
subsidiaries generally require that loans to borrowers domiciled in Mexico be
primarily secured by assets located in the United States or have credit
enhancements, in the form of guarantees, from significant United States
corporations. The composition of such loans and the related amounts of allocated
allowance for possible loan losses as of December 31, 1997 were as follows:
RELATED
AMOUNT OF ALLOWANCE FOR
LOANS POSSIBLE LOSSES
-------- ---------------
(Dollars in Thousands)
Secured by certificates of deposit in
United States banks ........................ $ 55,187 $ 27
Secured by United States real estate ............. 32,457 324
Secured by other United States collateral
(securities, gold, silver, etc.) ........... 13,520 286
Direct unsecured Mexican sovereign debt
(principally former FICORCA debt) .......... 1,821 176
Other ............................................ 27,416 371
-------- ------
$130,401 $1,184
======== ======
The transactions for the year ended December 31, 1997 in that portion of the
allowance for possible loan losses related to Mexican debt were as follows:
(Dollars in Thousands)
Balance at January 1, 1997 $ 1,101
Charge-offs (19)
Recoveries 102
-------
Net recoveries 83
Balance at December 31, 1997 $ 1,184
=======
5
<PAGE>
LIQUIDITY AND CAPITAL RESOURCES
The maintenance of adequate liquidity provides the Company's bank subsidiaries
with the ability to meet potential depositor withdrawals, provide for customer
credit needs, maintain adequate statutory reserve levels and take full advantage
of high-yield investment opportunities as they arise. Liquidity is afforded by
access to financial markets and by holding appropriate amounts of liquid assets.
The bank subsidiaries of the Company derive their liquidity largely from
deposits of individuals and business entities. In recent years, deposit growth
has largely been attributable to acquisitions. Historically, the Mexico based
deposits of the Company's bank subsidiaries have been a stable source of
funding. Deposits from persons and entities domiciled in Mexico comprise a
significant although declining portion of the deposit base of the Company's bank
subsidiaries. Such deposits comprised approximately 35%, 39% and 43% of the
Company's bank subsidiaries' total deposits as of December 31, 1997, 1996 and
1995, respectively. Other important funding sources for the Company's bank
subsidiaries during 1997 and 1996 have been wholesale liabilities with, FHLB,
FNMA, FHLMC and large certificates of deposit, requiring management to closely
monitor its asset/liability mix in terms of both rate sensitivity and maturity
distribution. Primary liquidity of the Company and its subsidiaries has been
maintained by means of increased investment in shorter-term securities,
certificates of deposit and loans. As in the past, the Company will continue to
monitor the volatility and cost of funds in an attempt to match maturities of
rate-sensitive assets and liabilities, and respond accordingly to anticipated
fluctuations in interest rates over reasonable periods of time.
The Company's funds management policy's primary focus is to measure and manage
the earnings to interest rate risk. The earliest and most simplistic concept of
interest rate risk and its measurement is the gap report, which is used to
generate a rough estimate of the vulnerability of net interest income to changes
in market rates as implied by the relative repricings of assets and liabilities.
The gap report calculates the difference between the amounts of assets and
liabilities repricing across a series of intervals in time, with emphasis
typically placed on the one-year period. This difference, or gap, is usually
expressed as a percentage of total assets.
If an excess of liabilities over assets matures or reprices within the one-year
period, the balance sheet is said to be negatively gapped. This condition is
sometimes interpreted to suggest that an institution is liability-sensitive,
indicating that earnings would suffer from rising rates and benefit from falling
rates. If a surplus of assets over liabilities occurs in the one-year time
frame, the balance sheet is said to be positively gapped, suggesting a condition
of asset sensitivity in which earnings would benefit from rising rates and
suffer from falling rates.
The gap report thus consists of an inventory of dollar amounts of assets and
liabilities that have the potential to mature or reprice within a particular
period. The flaw in drawing conclusions about interest rate risk from the gap
report is that it takes no account of the probability that potential maturities
or repricings of interest-rate-sensitive accounts will occur, or at what
relative magnitudes. Because simplicity, rather than utility, is the only virtue
of gap analysis, financial institutions increasingly have either abandoned gap
analysis or accorded it a distinctly secondary role in managing their
interest-rate risk exposure. See page 17 of the Company's Form 10-K for the
table that summarizes interest rate sensitive assets and liabilities by their
repricing dates at December 31, 1997.
6
<PAGE>
The detailed inventory of balance sheet items contained in gap reports is the
starting point of income simulation analysis. Income simulation analysis also
focuses on the variability of net interest income and net income, but without
the limitations of gap analysis. In particular, gone is the fundamental, but
often unstated, assumption of the gap approach that every balance sheet item
that can reprice will do so to the full extent of any movement in market
interest rates.
Accordingly, income simulation analysis captures not only the potential of
assets and liabilities to mature or reprice but also the probability that they
will do so. Moreover, income simulation analysis focuses on the relative
sensitivities of these balance sheet items and projects their behavior over an
extended period of time in a motion picture rather than snapshot fashion.
Finally, income simulation analysis permits management to assess the probable
effects on balance sheet items not only of changes in market interest rates but
also of proposed strategies for responding to such changes. The Company and many
other institutions rely primarily upon income simulation analysis in measuring
and managing exposure to interest rate risk.
At December 31, 1997, based on these simulations, a rate shift of 200 basis
points in earnings will not vary more than 6 percent of projected 1998 after-tax
net income. A 200 basis point rise in interest rates is a hypothetical rate
scenario, used to calibrate risk, and does not necessarily represent
management's current view of future market developments.
All the measurements of risk described above are made based upon the Company's
business mix and interest rate exposures at the particular point in time. The
exposure changes continuously as a result of the Company's ongoing business and
its risk management initiatives. While management believes these measures
provide a meaningful representation of the Company's interest rate sensitivity,
they do not necessarily take into account all business developments that affect
on net income, such as changes in credit quality or the size and composition of
the balance sheet.
Principal sources of liquidity and funding for the Company are dividends from
subsidiaries and borrowed funds, with such funds being used to finance the
Company's cash flow requirements. The Company closely monitors the dividend
restrictions and availability from the bank subsidiaries as disclosed in Note 17
to the Consolidated Financial Statements. At December 31, 1997, the aggregate
amount legally available to be distributed to the Company from bank subsidiaries
as dividends was approximately $55,701,000, assuming that each bank subsidiary
continues to be classified as "well capitalized" under the applicable
regulations. The restricted capital of the bank subsidiaries was approximately
$241,187,000 as of December 31, 1997. The undivided profits of the bank
subsidiaries were approximately $121,015,000 as of December 31, 1997.
As of December 31, 1997, the Company has outstanding $490,000,000 in short-term
and long-term borrowed funds. In addition to borrowed funds and dividends, the
Company has a number of other available alternatives to finance the growth of
its existing banks as well as future growth and expansion.
The Company maintains an adequate level of capital as a margin of safety for its
depositors and shareholders. At December 31, 1997, shareholders' equity was
$341,244,000 compared to $283,767,000 at December 31, 1996, an increase of
$57,477,000 or 20%. This increase in capital resulted primarily from the
retention of earnings.
7
<PAGE>
During 1990, the Federal Reserve Board ("FRB") adopted a minimum leverage ratio
of 3% for the most highly-rated bank holding companies and at least 4% to 5% for
all other bank holding companies. The Company's leverage ratio (defined as
stockholders' equity less goodwill and certain other intangibles divided by
average quarterly assets) was 6.41% at December 31, 1997 and 7.80% at December
31, 1996. The core deposit intangibles and goodwill of $47,788,000 as of
December 31, 1997, booked in connection with financial institution acquisitions
of the Company, are deducted from the sum of core capital elements when
determining the capital ratios of the Company.
The FRB has adopted risk-based capital guidelines which assign risk weightings
to assets and off-balance sheet items. The guidelines also define and set
minimum capital requirements (risk-based capital ratios). Under the final 1992
rules, all banks are required to have core capital (Tier 1) of at least 4.0% of
risk-weighted assets and total capital of 8.0% of risk-weighted assets. Tier 1
capital consists principally of shareholders' equity less goodwill and certain
other intangibles, while total capital consists of core capital, certain debt
instruments and a portion of the reserve for credit losses. In order to be
deemed well capitalized pursuant to the regulations, an institution must have a
total risk-weighted capital ratio of 10%, a Tier 1 risk-weighted ratio of 6% and
a Tier 1 leverage ratio of 5%. The Company had risk-weighted Tier 1 capital
ratios of 13.95% and 16.02% and risk weighted total capital ratios of 15.20% and
17.27% for December 31, 1997 and 1996, respectively, which are well above the
minimum regulatory requirements and exceed the well capitalized ratios (see note
17 to notes to Consolidated Financial Statements).
The Company had 2,085,945 treasury shares as of March 20, 1998. 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, 1997, the Company
had repurchased shares in the cumulative total amount of $14,534,000. The Board
of Directors has stated that it will not approve repurchases of more than a
total of $16,000,000. While the Board has increased previous caps related to
treasury shares once they were met, there are no assurances that an increase of
the $16,000,000 cap will occur in the future. The Company has no definite plans
for the treasury shares; however, the treasury shares may be used to fulfill
option exercises under the Company's Stock Option Plan.
During the past few years the Company has expanded its banking facilities. Among
the activities and commitments the Company funded during 1997 and 1996 were
certain capital expenditures relating to the modernization and improvement of
several existing bank facilities and the expansion of the bank branch network.
YEAR 2000
Many existing computer programs use only two digits to identify a year. These
programs were designed and developed without considering the impact of the
upcoming change in the century. If uncorrected, many computer applications could
fail or create erroneous results by or at the Year 2000. The Year 2000 issue
affects virtually all companies and organizations.
The Company has developed and implemented a plan to deal with the Year 2000
problem. The plan provides for addressing critical and noncritical issues, with
the assignment of responsibility and target dates for completion. Testing of
core applications, such as mainframe software and hardware and some platform
software, is largely complete and
8
<PAGE>
reflects that they will be Year 2000 compliant. The Company is expensing
applicable costs incurred as a result of addressing the Year 2000 issue.
The Company does not expect that the cost of addressing the Year 2000 issue will
be a material event or uncertainty that would cause its reported financial
information not to be indicative of future operating results or future financial
condition, or that the costs or consequences of incomplete or untimely
resolution of any Year 2000 issue represent a known material event or
uncertainty that is reasonably likely to affect its future financial results, or
cause its reported financial information not to be indicative of future
operating results or future financial condition.
Additionally, the federal bank regulators have enforcement powers with respect
to Year 2000 compliance. Failure to institute an acceptable Year 2000 readiness
plan could result in the disapproval of expansion applications filed with bank
regulatory agencies or the imposition of cease and desist orders or civil money
penalties.
EFFECTS OF INFLATION
The principal component of earnings is net interest income, which is affected by
changes in the level of interest rates. Changes in rates of inflation affect
interest rates. It is difficult to precisely measure the impact of inflation on
net interest income because it is not possible to accurately differentiate
between increases in net interest income resulting from inflation and increases
resulting from increased business activity. Inflation also raises costs of
operation, primarily those of employment and services.
FORWARD LOOKING INFORMATION
Certain matters discussed in this report, excluding historical information,
include forward-looking statements. Although the Company believes such
forward-looking statements are based on reasonable assumptions, no assurance can
be given that every objective will be reached. The words "estimate," "expect,"
"intend" and project," as well as other words or expressions of similar meaning
are intended to identify forward-looking statements. Readers are cautioned not
to place undue reliance on forward-looking statements, which speak only as of
the date of this annual report. Such statements are based on current
expectations, are inherently uncertain, are subject to risks and should be
viewed with caution. Actual results and experience may differ materially from
the forward-looking statements as a result of many factors.
Factors that could cause actual results to differ materially from any results
that are projected, forecasted, estimated or budgeted by the Company in
forward-looking statements include, among others, the following possibilities:
(I) changes in local, state, national and international economic conditions,
(II) changes in the capital markets utilized by the Company and its
subsidiaries, including changes in the interest rate environment that may reduce
margins, (III) changes in state and/or federal laws and regulations to which the
Company and its subsidiaries, as well as their customers, competitors and
potential competitors, are subject, including, without limitation, banking, tax,
securities, insurance and employment laws and regulations, and (IV) increased
competition from both within and without the banking industry. It is not
possible to foresee or identify all such factors. The Company makes no
commitment to update any forward-looking statement, or to disclose any facts,
events or circumstances after the date hereof that may affect the accuracy of
any forward-looking statement.
9
<PAGE>
ADOPTION OF NEW ACCOUNTING STANDARDS
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
Loan-Income Recognition and Disclosure," effective January 1, 1995. These 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 these accounting standards did not have a material
effect on the Company's consolidated 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.
The Company adopted SFAS No. 121, "Accounting for the Impairment of Long-Lived
Assets and for Long-Lived Assets to Be Disposed Of", effective January 1, 1996.
This Statement established accounting standards for the impairment of long-lived
assets, certain identifiable intangibles, and goodwill related to those assets
to be held and used and for long-lived assets and certain identifiable
intangibles which must be disposed. Long-lived assets and certain identifiable
intangibles to be disposed of must be reported at the lower of carrying amount
or fair value less cost to sell, except for assets that are covered by APB
Opinion No. 30. Adoption of this Statement did not have a material impact on the
Company's consolidated financial position, results of operations or liquidity.
The Company adopted SFAS No. 122, "Accounting for Mortgage Servicing Rights"
effective January 1, 1996. This Statement requires that a mortgage banking
enterprise assess its capitalized mortgage servicing rights for impairment based
on the fair value of those rights that are capitalized after the adoption of
this Statement based on one or more of the predominant risk characteristics of
the underlying loans. Impairment should be recognized through a valuation
allowance for each impaired stratum. The adoption of this accounting standard
did not have a material effect on the Company's consolidated financial position,
results of operation or liquidity.
In 1996, the Company adopted SFAS No. 123, "Accounting for Stock-Based
Compensation." SFAS No. 123 permits companies to recognize as expense over the
vesting period the fair value of all stock-based awards on the date of grant. In
management's opinion, the existing stock option valuation models do not
necessarily provide a reliable single measure of stock option fair value.
Therefore, as permitted, the Company will continue to apply the existing
accounting rules under APB No. 25 and provide pro forma net income and pro forma
earnings per share disclosures for employee stock option grants made in 1995 and
subsequent years as if the fair-value-based method defined in SFAS No.
123 had been applied.
Effective January 1, 1996, the Company adopted the American Institute of
Certified Public Accountants Statement Of Position ("SOP") 96-1, "Environmental
Remediation Liabilities." SOP 96-1 requires, among other things, environmental
remediation liabilities to be accrued when the criteria of SFAS No. 5,
"Accounting for Contingencies," have been met and also provides guidance with
respect to the measurement of remediation liabilities. Such accounting is
consistent with the Company's previous method of accounting for environmental
remediation costs and
10
<PAGE>
therefore, adoption of this new Statement did not have a material impact on the
Company's consolidated financial position, results of operations or liquidity.
In June 1996, the Financial Accounting Standards Board issued SFAS No. 125,
"Accounting for Transfers and Servicing of Financial Assets and Extinguishments
of Liabilities." SFAS No. 127, "Deferral of the Effective Date of Certain
Provisions of FASB Statement No. 125" was issued in December 1996. SFAS No. 127
defers portions of SFAS No. 125 to be effective for transfers and servicing of
financial assets and extinguishments of liabilities occurring after December 31,
1997. These Statements are to be applied prospectively. SFAS No. 125 provides
accounting and reporting standards for transfers and servicing of financial
assets and extinguishments of liabilities based on consistent application of a
financial-components approach that focuses on control. It distinguishes
transfers of financial assets that are sales from transfers that are secured
borrowings. The adoption of this accounting standard did not have a material
impact on the Company's consolidated financial position, results of operations
or liquidity.
In February 1997, the Financial Accounting Standards Board issued SFAS No. 128,
"Earnings per Share." SFAS No. 128 specifies the computation, presentation, and
disclosure requirements for earnings per share (EPS) for entities with publicly
held common stock or potential common stock. SFAS No. 128 replaces primary EPS
and fully diluted EPS on the face of the income statement for all entities with
complex capital structures and requires a reconciliation of the basic EPS
computation to the diluted EPS. Basic EPS is calculated by dividing net income
available to common shareholders, by the weighted average number of common
shares outstanding. The computation of diluted EPS assumes the issuance of
common shares for all dilutive potential common shares outstanding during the
reporting period. The dilutive effect of stock options are considered in
earnings per share calculations if dilutive, using the treasury stock method.
SFAS No. 128 is effective for financial statements issued for periods ending
after December 15, 1997, including interim periods. The Company adopted SFAS No.
128 in 1997, accordingly, all prior-period earnings per share data presented in
the accompanying consolidated financial statements has been restated to conform
to the requirements of SFAS No. 128.
In February 1997, the Financial Accounting Standards Board issued SFAS No. 129,
"Disclosure of Information about Capital Structure." SFAS No. 129 lists required
disclosures about capital structure that had been included in a number of
previously existing separate statements and opinions. It applies to all
entities, public and nonpublic. SFAS No. 129 is effective for financial
statements issued for periods ending after December 15, 1997.
ACCOUNTING STANDARDS ISSUED BUT NOT YET EFFECTIVE
In June 1997, the Financial Accounting Standards Board issued SFAS No. 130,
"Reporting Comprehensive Income." SFAS No. 130 establishes standards for
reporting and display of comprehensive income and its components (revenues,
expenses, gains, and losses) in a full set of general-purpose financial
statements. SFAS No. 130 requires that an enterprise (a) classify items of other
comprehensive income by their nature in a financial statement and (b) display
the accumulated balance of other comprehensive income separately from retained
earnings and additional paid-in capital in the equity section of a statement of
financial position. SFAS No. 130 is effective for fiscal years beginning after
December 15, 1997. Management of the Company does not expect
11
<PAGE>
that the adoption of SFAS 130 will have a material impact on the Company's
financial position, results of operation, or liquidity.
In June 1997, the Financial Accounting Standards Board issued SFAS No. 131,
"Disclosures about Segments of an Enterprise and Related Information." SFAS 131
establishes standards for the way that public business enterprises report
information about operation segments in annual financial statements and requires
that those enterprises report selected information about operation segments in
interim financial reports issued to shareholders. SFAS No. 131 also establishes
standards for related disclosures about products and services, geographic areas,
and major customers. SFAS 131 is effective for financial statements for periods
beginning after December 15, 1997. Management of the Company does not expect
that adoption of SFAS No. 131 will have a material impact on the Company's
financial position, results of operation, or liquidity.
COMMON STOCK AND DIVIDENDS
The Company had issued and outstanding 11,260,197 shares of $1.00 par value
Common Stock held by approximately 1,721 holders of record at March 20, 1998.
The book value of the stock at December 31, 1997 was $32.90 per share compared
with $27.86 per share, adjusted for stock dividends, one year ago.
On August 28, 1995, the Common Stock began to trade on the OTC Bulletin Board
under the trading symbol IBNC; however, trading in the Common Stock of the
Company 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. As of March 4, 1998, the Common Stock was listed on the Nasdaq
National Market under the trading symbol IBOC. Some of the transactions in the
Company's stock are handled privately; however, brokerage firms, acting
independently of the Company, handle many 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 1996 and 1997, 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, 1997. Some of the quotations reflect inter-dealer
prices, without retail mark-up, mark-down or commission and may not necessarily
represent actual transactions.
HIGH LOW
---- ---
1997:
First quarter $ 55.38 $ 48.00
Second quarter 53.50 44.80
Third quarter 64.00 50.50
Fourth quarter 78.50 61.88
HIGH LOW
---- ---
1996:
First quarter $ 32.80 $ 32.80
Second quarter 32.00 29.60
Third quarter 34.40 32.40
Fourth quarter 40.00 37.60
12
<PAGE>
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 1997 and 1996 paid a $4,426,000 and $3,507,000, or $0.50 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:
DATE STOCK DIVIDEND
---- --------------
May 20, 1993 25 %
May 19, 1994 25
May 19, 1995 25
May 17, 1996 25
May 15, 1997 25
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<PAGE>
INDEPENDENT AUDITORS' REPORT
The Board of Directors and Shareholders
International Bancshares Corporation:
We have audited the consolidated statements of condition of International
Bancshares Corporation and subsidiaries as of December 31, 1997 and 1996, 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, 1997.
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, 1997 and 1996, and
the results of their operations and their cash flows for each of the years in
the three-year period ended December 31, 1997, in conformity with generally
accepted accounting principles.
/s/ KPMG PEAT MARWICK LLP
San Antonio, Texas
March 20, 1998
14
<PAGE>
INTERNATIONAL BANCSHARES CORPORATION AND SUBSIDIARIES
Consolidated Statements of Condition
December 31, 1997 and 1996
(Dollars in Thousands)
ASSETS 1997 1996
----------- -----------
Cash and due from banks .......................... $ 229,788 $ 135,992
Federal funds sold ............................... 7,975 36,000
----------- -----------
Total cash and cash equivalents ..... 237,763 171,992
Time deposits with banks ......................... 1,587 198
Investment securities:
Held to maturity
(Market value of $2,705 on December 31, 1997
and $2,840 on December 31, 1996) ............. 2,710 2,848
Available for sale
(Amortized cost of $2,547,545 on December 31,
1997 and $1,739,198 on December 31, 1996) .... 2,580,748 1,756,719
----------- -----------
Total investment securities ......... 2,583,458 1,759,567
Loans:
Commercial, financial and agricultural ........ 792,124 719,151
Lease financing receivables, net .............. 8,840 3,910
Real estate - mortgage ........................ 188,122 193,101
Real estate - construction .................... 59,239 32,610
Consumer ...................................... 272,478 161,594
Foreign ....................................... 130,401 128,932
----------- -----------
Total loans ......................... 1,451,204 1,239,298
Less unearned discounts ....................... (6,508) (3,303)
----------- -----------
Loans, net of unearned discounts .... 1,444,696 1,235,995
Less allowance for possible loan losses ....... (24,516) (21,036)
----------- -----------
Net loans ........................... 1,420,180 1,214,959
----------- -----------
Bank premises and equipment, net ................. 129,621 94,195
Accrued interest receivable ...................... 31,271 22,913
Other assets ..................................... 113,966 87,407
----------- -----------
Total assets ........................ $ 4,517,846 $ 3,351,231
=========== ===========
(Continued)
15
<PAGE>
INTERNATIONAL BANCSHARES CORPORATION AND SUBSIDIARIES
Consolidated Statements of Condition, Continued
(Dollars in Thousands)
LIABILITIES AND SHAREHOLDERS' EQUITY 1997 1996
------------------------------------ ----------- -----------
Liabilities:
Deposits:
Demand - non-interest bearing ............... $ 450,537 $ 346,162
Savings and interest bearing demand ......... 819,759 684,867
Time ........................................ 1,905,264 1,631,124
----------- -----------
Total deposits ...................... 3,175,560 2,662,153
Securities sold under repurchase agreements ... 478,409 148,483
Other borrowed funds .......................... 490,000 239,000
Other liabilities ............................. 32,633 17,828
----------- -----------
Total liabilities ................... 4,176,602 3,067,464
----------- -----------
Shareholders' equity:
Common stock of $1.00 par value ...............
Authorized 15,000,000 shares;
issued 13,196,469 shares in 1997
and 10,353,202 shares in 1996 ............... 13,196 10,353
Surplus ....................................... 19,012 11,935
Retained earnings ............................. 301,988 260,134
Net unrealized holding gains on
available for sale securities,
net of deferred income taxes ................ 21,582 11,388
----------- -----------
355,778 293,810
Less cost of shares in treasury,
2,079,126 shares in 1997 and
1,599,788 shares in 1996 .................... (14,534) (10,043)
----------- -----------
Total shareholders' equity .......... 341,244 283,767
----------- -----------
Total liabilities and
shareholders' equity ............. $ 4,517,846 $ 3,351,231
=========== ===========
See accompanying notes to consolidated financial statements.
16
<PAGE>
INTERNATIONAL BANCSHARES CORPORATION AND SUBSIDIARIES
Consolidated Statements of Income
Years ended December 31, 1997, 1996 and 1995
(Dollars in Thousands, Except Per Share Amounts)
1997 1996 1995
-------- -------- ---------
Interest income:
Loans, including fees .................... $127,348 $119,183 $ 124,411
Time deposits with banks ................. 47 53 43
Federal funds sold ....................... 1,120 1,540 991
Investment securities:
Taxable ................................ 146,820 99,411 91,178
Tax-exempt ............................. 90 1,292 1,825
Other .................................... 307 300 419
-------- -------- ---------
Total interest income .......... 275,732 221,779 218,867
-------- -------- ---------
Interest expense:
Savings and interest bearing demand
deposits ............................... 22,152 18,390 16,741
Time deposits ............................ 89,413 69,717 62,078
Federal funds purchased and securities
sold under repurchase agreements ....... 15,754 12,151 25,594
Other borrowings ......................... 18,052 7,114 7,948
-------- -------- ---------
Total interest expense ......... 145,371 107,372 112,361
-------- -------- ---------
Net interest income ............ 130,361 114,407 106,506
Provision for possible loan losses .......... 7,740 6,630 5,150
-------- -------- ---------
Net interest income after
provision for possible
loan losses ................. 122,621 107,777 101,356
-------- -------- ---------
Non-interest income:
Service charges on deposit accounts ...... 18,511 15,642 13,522
Other service charges, commissions
and fees ............................... 8,295 6,780 5,717
Investment securities transactions, net .. 484 31 (2)
Other income ............................. 9,486 7,741 6,772
-------- -------- ---------
Total non-interest income ...... 36,776 30,194 26,009
-------- -------- ---------
(Continued)
17
<PAGE>
INTERNATIONAL BANCSHARES CORPORATION AND SUBSIDIARIES
Consolidated Statements of Income, Continued
Years ended December 31, 1997, 1996 and 1995
(Dollars in Thousands, Except Per Share Amounts)
1997 1996 1995
----------- ----------- -----------
Non-interest expense:
Employee compensation and benefits .. 33,431 28,882 25,701
Occupancy ........................... 6,258 5,336 5,105
Depreciation of bank premises and
equipment ......................... 8,256 7,024 5,478
Regulatory and deposit insurance fees 1,803 3,813 4,578
Legal expense including settlements . 2,036 2,043 5,045
Net cost of operations for other real
estate owned ...................... 161 308 558
Lease asset expenses ................ 931 931 471
Stationary and supplies ............. 3,026 2,479 2,176
Other ............................... 29,843 22,641 19,877
----------- ----------- -----------
Total non-interest expense 85,745 73,457 68,989
----------- ----------- -----------
Income before income
taxes .................. 73,652 64,514 58,376
Income taxes ........................... 24,771 20,164 18,315
----------- ----------- -----------
Net income ................ $ 48,881 $ 44,350 $ 40,061
=========== =========== ===========
Basic earnings per common share:
Net Income .......................... $ 4.79 $ 4.40 $ 4.02
=========== =========== ===========
Weighted average number of shares
outstanding ....................... 10,194,910 10,086,879 9,965,899
Diluted earnings per common share:
Net Income .......................... $ 4.62 $ 4.31 $ 3.95
=========== =========== ===========
Weighted average number of shares
outstanding ....................... 10,569,990 10,298,981 10,152,144
See accompanying notes to consolidated financial statements.
18
<PAGE>
INTERNATIONAL BANCSHARES CORPORATION AND SUBSIDIARIES
Consolidated Statements of Shareholders' Equity
Years ended December 31, 1997, 1996 and 1995
(Dollars in Thousands)
<TABLE>
<CAPTION>
UNREALIZED GAIN (LOSS)
ON AVAILABLE
NUMBER COMMON RETAINED FOR SALE TREASURY
OF SHARES STOCK EARNINGS SURPLUS SECURITIES STOCK TOTAL
-------- -------- ------- --------- -------- -------- ---------
<S> <C> <C> <C> <C> <C> <C> <C>
Balances at January 1, 1995 .................... 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 loss
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
Net income .................................. -- -- -- 44,350 -- -- 44,350
Stock dividends:
Shares issued ............................. 2,059 2,059 -- (2,059) -- -- --
Cash dividends ............................ -- -- -- (3,507) -- -- (3,507)
Purchase of treasury stock .................. -- -- -- -- -- (2,261) (2,261)
Exercise of stock options ................... 134 134 831 -- -- -- 965
Tax effect of non-qualified stock
options exercised ........................ -- -- 467 -- -- -- 467
Net change in unrealized gain
on available for sale
securities, net of deferred
income taxes .............................. -- -- -- -- (2,008) (2,008)
-------- -------- ------- --------- -------- -------- ---------
Balances at December 31, 1996 .................. 10,353 $ 10,353 $11,935 $ 260,134 $ 11,388 $(10,043) $ 283,767
Net income .................................. -- -- -- 48,881 -- -- 48,881
Stock dividends:
Shares issued ............................ 2,601 2,601 -- (2,601) -- -- --
Cash dividends ........................... -- -- -- (4,426) -- -- (4,426)
Purchase of treasury stock ................... -- -- -- -- -- (4,491) (4,491)
Exercise of stock options .................... 176 176 1,602 -- -- -- 1,778
Sale of stock ................................ 66 66 4,934 -- -- -- 5,000
Tax effect of non-qualified stock
options exercised ......................... -- -- 541 -- -- -- 541
Net change in unrealized gain
on available for sale
securities, net of deferred
income taxes .............................. -- -- -- -- 10,194 -- 10,194
-------- -------- ------- --------- -------- -------- ---------
Balances at December 31, 1997 .................. 13,196 $ 13,196 $19,012 $ 301,988 $ 21,582 $(14,534) $ 341,244
======== ======== ======= ========= ======== ======== =========
</TABLE>
See accompanying notes to consolidated financial statements.
19
<PAGE>
INTERNATIONAL BANCSHARES CORPORATION AND SUBSIDIARIES
Consolidated Statements of Cash Flows
Years ended December 31, 1997, 1996 and 1995
(Dollars in Thousands)
<TABLE>
<CAPTION>
1997 1996 1995
----------- ----------- ---------
<S> <C> <C> <C>
Operating activities:
Net income ....................................................... $ 48,881 $ 44,350 $ 40,061
Adjustments to reconcile net income to net cash
provided by operating activities:
Provision for possible loan losses ........................... 7,740 6,630 5,150
Recoveries on charged-off loans .............................. 997 1,116 609
Net profit of operations for other real
estate owned ................................................ 161 308 558
Lease asset expenses ......................................... 931 931 471
Depreciation of bank premises and equipment .................. 8,256 7,024 5,478
Accretion of investment securities discounts ................. (1,445) (1,382) (1,736)
Amortization of investment securities premiums ............... 10,017 6,762 10,831
Realized (gain) loss on investment securities
transactions, net .......................................... (484) (31) 2
Gain on sale of bank premises and equipment .................. (51) (115) (11)
Increase in accrued interest receivable ...................... (7,145) (709) (333)
Increase in other liabilities ................................ 12,676 1,996 5,484
----------- ----------- ---------
Net cash provided by operating activities ............... 80,534 66,880 66,564
----------- ----------- ---------
Investing activities:
Cash acquired in purchase transactions ........................... 102,664 284,395 7,123
Proceeds from maturities of securities ........................... 2,660 582 30,154
Proceeds from sales of available for sale
securities ..................................................... 229,287 441,151 154,506
Purchases of available for sale securities ....................... (1,366,791) (1,038,351) (490,489)
Principal collected on mortgage-backed securities ................ 355,675 285,822 209,262
Proceeds from matured time deposits with banks ................... 198 2,295 297
Purchases of time deposits with banks ............................ (603) (693) (1,602)
Net increase in loans ............................................ (74,777) (15,003) (30,154)
Net decrease (increase)in other assets ........................... 2,743 (6,829) (2,909)
Purchases of bank premises and equipment ......................... (24,626) (16,068) (11,582)
Proceeds from sale of bank premises
and equipment .................................................. 101 545 48
----------- ----------- ---------
Net cash used in investing activities .................. (773,469) (62,145) (135,346)
----------- ----------- ---------
</TABLE>
(Continued)
20
<PAGE>
INTERNATIONAL BANCSHARES CORPORATION AND SUBSIDIARIES
Consolidated Statements of Cash Flows, Continued
Years ended December 31, 1997, 1996 and 1995
(Dollars in Thousands)
<TABLE>
<CAPTION>
1997 1996 1995
--------- ----------- ---------
<S> <C> <C> <C>
Financing activities:
Net increase in non-interest bearing demand
deposits ...................................................... $ 57,137 $ 27,831 $ 3,486
Net increase (decrease) in savings and
interest bearing demand deposits .............................. 23,996 58,604 (34,712)
Net increase in time deposits ................................... 141,511 103,426 24,614
Net increase (decrease) in federal funds purchased
and securities sold under repurchase agreements ............... 287,201 (314,119) 168,864
Proceeds from issuance of other borrowed funds .................. 997,347 1,181,000 93,500
Principal payments on other borrowed funds ...................... (746,347) (1,008,500) (150,500)
Purchase of treasury stock ...................................... (4,491) (2,261) (624)
Proceeds from stock transactions ................................ 6,778 965 552
Payment of cash dividends ....................................... (4,400) (3,489) (2,762)
Payments of cash dividends in lieu of fractional
shares ........................................................ (26) (18) (9)
--------- ----------- ---------
Net cash provided by financing activities .............. 758,706 43,439 102,409
--------- ----------- ---------
Increase in cash and cash equivalents .................. 65,771 48,165 33,627
Cash and cash equivalents at beginning of year .................... 171,992 123,827 90,200
--------- ----------- ---------
Cash and cash equivalents at end of year .......................... $ 237,763 $ 171,992 $ 123,827
========= =========== =========
Supplemental cash flow information:
Interest paid ................................................... $ 148,825 $ 107,187 $ 114,685
Income taxes paid ............................................... 23,815 19,059 18,966
Supplemental schedule of noncash investing and
financing activities relating to various
purchase transactions:
Loans acquired ................................................ $ 140,112 $ 22,177 $ 37,043
Investment securities and other assets acquired ............... 93,382 22,442 54,087
Deposit and other liabilities assumed ......................... 336,158 329,014 98,253
</TABLE>
See accompanying notes to consolidated financial statements.
21
<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 (the Corporation and Subsidiaries collectively
referred to herein as the "Company") conform to generally accepted accounting
principles and to general practices within the banking industry. The following
is a description of the more significant of those policies.
CONSOLIDATION AND BASIS OF PRESENTATION
The consolidated financial statements include the accounts of the Corporation
and its wholly-owned bank subsidiaries, International Bank of Commerce, Laredo
("IBC"), Commerce Bank, International Bank of Commerce, Zapata, International
Bank of Commerce, Brownsville, and the Corporation's wholly-owned non-bank
subsidiaries, IBC Subsidiary Corporation, IBC Life Insurance Company, IBC
Trading Company and IBC Capital Corporation. All significant intercompany
balances and transactions have been eliminated in consolidation.
The Company, through its bank subsidiaries, is engaged in the business of
banking, including the acceptance of checking and savings deposits and the
making of commercial, real estate, personal, home improvement, automobile and
other installment and term loans. The primary markets of the Company are South
and Southeast Texas. Each bank subsidiary is very active in facilitating
international trade along the United States border with Mexico and elsewhere.
Although the Company's loan portfolio is diversified, the ability of the
Company's debtors to honor their contracts is primarily dependent upon the
economic conditions in the Company's trade area. In addition, the investment
portfolio is directly impacted by fluctuations in market interest rates. The
Company and its bank subsidiaries are subject to the regulations of certain
Federal agencies as well as the Texas Department of Banking and undergo periodic
examinations by those regulatory authorities. Such agencies may require certain
standards or impose certain limitations based on their judgements or changes in
law and regulations.
The financial statements have been prepared in accordance with generally
accepted accounting principles. In preparing the financial statements,
management is required to make estimates and assumptions that affect the
reported amounts of assets and liabilities as of the dates of the balance sheets
and income and expenses for the periods. Actual results could differ
significantly from those estimates. Material estimates that are particularly
susceptible to significant changes in the near-term relate to the determination
of the allowance for possible loan losses.
Per Share Data
All share and per share information has been restated giving retroactive effect
to stock dividends distributed.
(Continued)
22
<PAGE>
INTERNATIONAL BANCSHARES CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
INVESTMENT SECURITIES
The Company classifies debt and equity securities into one of these categories:
held-to maturity, available-for-sale, or trading. Such classifications are
reassessed for appropriate classification at each reporting date. Securities
classified as "held-to-maturity" are carried at amortized cost for financial
statement reporting, while securities classified as "available-for-sale" and
"trading" are carried at their fair value. Unrealized holding gains and losses
are included in net income for those securities classified as "trading", while
unrealized holding gains and losses related to those securities classified as
"available-for-sale" are excluded from net income and reported at a net amount
as a separate component of shareholders' equity until realized.
Mortgage-backed securities held at December 31, 1997 and 1996 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 its agencies. Market
interest rate fluctuations can affect the prepayment speed of principal and the
yield on the security.
UNEARNED DISCOUNTS
Consumer loans are frequently made on a discount basis. The amount of the
discount is subsequently included in interest income ratably over the term of
the related loans under the sum-of-the-digits (Rule of 78's) method. Income
recognized under the sum-of-the-digits method is not materially different than
income that would be recognized under the level yield or "interest method".
PROVISION AND ALLOWANCE FOR POSSIBLE LOAN LOSSES
The allowance for possible loan losses is maintained at a level considered
adequate by management to provide for potential loan losses. The allowance is
increased by provisions charged to operating expense and reduced by net
charge-offs. The provision for possible loan losses is the amount which, in the
judgement of management, is necessary to establish the allowance for possible
loan losses at a level that is adequate to absorb known and inherent risks in
the loan portfolio.
Management believes that the allowance for possible loan losses is adequate.
While management uses available information to recognize losses on loans, future
additions to the allowance may be necessary based on changes in economic
conditions. In addition, various regulatory agencies, as an integral part of
their examination process, periodically review the Corporation's bank
subsidiaries allowances for possible loan losses. Such agencies may require the
Corporation's bank subsidiaries'
(Continued)
23
<PAGE>
INTERNATIONAL BANCSHARES CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
to recognize additions or reductions to their allowances based on their
judgments of information available to them at the time of their examination.
Impaired loans are measured based on (1) the present value of expected future
cash flows discounted at the loan's effective interest rate; (2) the loan's
observable market price; or (3) the fair value of the collateral if the loan is
collateral dependent.
NON-ACCRUAL LOANS
The non-accrual loan policy of the Corporation's bank subsidiaries is to
discontinue the accrual of interest on loans when management determines that it
is probable that future interest accruals will be uncollectible. Interest income
on non-accrual loans is recognized only to the extent payments are received or
when, in management's opinion, the creditor's financial condition warrants
reestablishment of interest accruals.
OTHER REAL ESTATE OWNED
Other real estate owned is comprised of real estate acquired by foreclosure and
deeds in lieu of foreclosure. Other real estate is carried at the lower of the
recorded investment in the property or its fair value less estimated costs to
sell such property (as determined by independent appraisal). Prior to
foreclosure, the value of the underlying loan is written down to the fair value
of the real estate to be acquired by a charge to the allowance for loan losses
if necessary. Any subsequent write-downs are charged against other non-interest
expenses. Operating expenses of such properties and gains and losses on their
disposition are included in other non-interest expenses.
BANK PREMISES AND EQUIPMENT
Bank premises and equipment are stated at cost less accumulated depreciation.
Depreciation is computed on straight-line and accelerated methods over the
estimated useful lives of the assets. Repairs and 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.
(Continued)
24
<PAGE>
INTERNATIONAL BANCSHARES CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
STOCK OPTIONS
Prior to January 1, 1996, the Company accounted for its stock option plan in
accordance with the provisions of Accounting Principles Board ("APB") Opinion
No. 25, "Accounting for Stock Issued to Employees," and related interpretations.
As such, compensation expense would be recorded on the date of grant only if the
current market price of the underlying stock exceeded the exercise price. In
October 1995, the Financial Accounting Standards Board issued SFAS No. 123,
"Accounting for Stock-Based Compensation," which permits entities to recognize
as expense over the vesting period the fair value of all stock-based awards on
the date of grant. Alternatively, SFAS No. 123 also allows entities to continue
to apply the provisions of APB Opinion No. 25 and provide pro forma net income
and pro forma earnings per share disclosures for employee stock option grants
made in 1995 and future years as if the fair-value-based method defined in SFAS
No. 123 had been applied. The Company has elected to continue to apply the
provisions of APB Opinion No. 25 and provide the pro forma disclosure provisions
of SFAS No. 123.
NET INCOME PER SHARE
In February 1997, the Financial Accounting Standards Board issued SFAS No. 128,
"Earnings per Share." SFAS No. 128 specifies the computation, presentation, and
disclosure requirements for earnings per share (EPS) for entities with publicly
held common stock or potential common stock. SFAS No. 128 replaces primary EPS
and fully diluted EPS on the face of the income statement for all entities with
complex capital structures and requires a reconciliation of the basic EPS
computation to the diluted EPS. Basic EPS is calculated by dividing net income
available to common shareholders, by the weighted average number of common
shares outstanding. The computation of diluted EPS assumes the issuance of
common shares for all dilutive potential common shares outstanding during the
reporting period. The dilutive effect of stock options are considered in
earnings per share calculations if dilutive, using the treasury stock method.
SFAS No. 128 is effective for financial statements issued for periods ending
after December 15, 1997, including interim periods. The Company adopted SFAS No.
128 in 1997, accordingly, all prior-period earnings per share data presented in
the accompanying consolidated financial statements has been restated to conform
to the requirements of SFAS No. 128.
CAPITAL STRUCTURE
In February 1997, the Financial Accounting Standards Board issued SFAS No. 129,
"Disclosure of Information about Capital Structure." SFAS No. 129 lists required
disclosures about capital structure that had been included in a number of
previously existing separate statements and opinions. It applies to all
entities, public and nonpublic. SFAS No. 129 is effective for financial
statements issued for periods ending after December 15, 1997. Adoption of SFAS
No. 129 did not have a material effect or significantly alter the Company's
consolidated financial statements.
(Continued)
25
<PAGE>
INTERNATIONAL BANCSHARES CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
ACQUISITIONS AND AMORTIZATION OF INTANGIBLES
Operations of companies acquired in purchase transactions are included in the
consolidated statements of income from the respective dates of acquisition. The
excess of the purchase price over net identifiable assets acquired (goodwill)
and core deposit intangibles are included in other assets and are being
amortized over varying remaining lives not exceeding 15 years.
Impairment of Long-Lived Assets and Long-Lived Assets to Be Disposed of
The Company adopted SFAS No. 121, "Accounting for the Impairment of Long-Lived
Assets and for Long-Lived Assets to Be Disposed Of", effective January 1, 1996.
This Statement established accounting standards for the impairment of long-lived
assets, certain identifiable intangibles, and goodwill related to those assets
to be held and used and for long-lived assets and certain identifiable
intangibles which must be disposed. Long-lived assets and certain identifiable
intangibles to be disposed of must be reported at the lower of carrying amount
or fair value less cost to sell, except for assets that are covered by APB
Opinion No. 30. Adoption of this Statement did not have a material impact on the
Company's financial position, results of operations or liquidity.
CONSOLIDATED STATEMENT OF CASH FLOWS
For purposes of the statement of cash flows, the Company considers all
short-term investments with a maturity at date of purchase of three months or
less to be cash equivalents. Also, the Company reports transactions related to
deposits with other financial institutions, customer time deposits and loans to
customers on a net basis.
ENVIRONMENTAL REMEDIATION
Effective January 1, 1996, the Company adopted the American Institute of
Certified Public Accountants Statement Of Position ("SOP") 96-1, "Environmental
Remediation Liabilities." SOP 96-1 requires, among other things, environmental
remediation liabilities to be accrued when the criteria of SFAS No. 5,
"Accounting for Contingencies," have been met and also provides guidance with
respect to the measurement of remediation liabilities. Such accounting is
consistent with the Company's previous method of accounting for environmental
remediation costs and therefore, adoption of this new Statement did not have a
material impact on the Company's financial position, results of operations or
liquidity.
ACCOUNTING FOR TRANSFERS AND SERVICING OF FINANCIAL ASSETS
In June 1996, the Financial Accounting Standards Board issued SFAS No. 125,
"Accounting for Transfers and Servicing of Financial Assets and Extinguishments
of Liabilities". SFAS No. 127, "Deferral of the Effective Date of Certain
Provisions of FASB Statement No. 125" was issued in December 1996. SFAS No. 127
defers portions of SFAS No. 125 to
(Continued)
26
<PAGE>
INTERNATIONAL BANCSHARES CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
be effective for transfers and servicing of financial assets and extinguishments
of liabilities occurring after December 31, 1997. These Standards are to be
applied prospectively. SFAS No. 125 provides accounting and reporting standards
for transfers and servicing of financial assets and extinguishments of
liabilities based on consistent application of a financial-components approach
that focuses on control. It distinguishes transfers of financial assets that are
sales from transfers that are secured borrowings. Adoption of the Statement did
not have a material impact on the Company's financial position, results of
operations or liquidity.
COMPREHENSIVE INCOME
In June 1997, the Financial Accounting Standards Board issued SFAS No. 130,
"Reporting Comprehensive Income." SFAS No. 130 establishes standards for
reporting and display of comprehensive income and its components (revenues,
expenses, gains, and losses) in a full set of general-purpose financial
statements. SFAS No. 130 requires that an enterprise (a) classify items of other
comprehensive income by their nature in a financial statement and (b) display
the accumulated balance of other comprehensive income separately from retained
earnings and additional paid-in capital in the equity section of a statement of
financial position. SFAS No. 130 is effective for fiscal years beginning after
December 15, 1997. Management of the Company does not expect that the adoption
of SFAS 130 will have a material impact on the Company's financial position,
results of operation, or liquidity.
SEGMENTS OF AN ENTERPRISE AND RELATED INFORMATION
In June 1997, the Financial Accounting Standards Board issued SFAS No. 131,
"Disclosures about Segments of an Enterprise and Related Information." SFAS 131
establishes standards for the way that public business enterprises report
information about operation segments in annual financial statements and requires
that those enterprises report selected information about operation segments in
interim financial reports issued to shareholders. SFAS No. 131 also establishes
standards for related disclosures about products and services, geographic areas,
and major customers. SFAS 131 is effective for financial statements for periods
beginning after December 15, 1997. Management of the Company does not expect
that adoption of SFAS No. 131 will have a material impact on the Company's
financial position, results of operation, or liquidity.
(2) ACQUISITIONS
Effective November 5, 1997, University Bank, Houston, Texas a state bank
organized under the laws of the state of Texas, was merged with and into IBC. At
the date of closing, total assets acquired were approximately $250,978,000. The
acquisition was accounted for as a purchase transaction. IBC recorded intangible
assets, goodwill and core deposit premium of approximately $17,613,000 at such
date. These assets are being amortized on a straight line basis over a fifteen
year period.
(Continued)
27
<PAGE>
INTERNATIONAL BANCSHARES CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Effective March 7, 1997, IBC purchased certain assets and assumed certain
liabilities of five branches of Bank of America Texas, N. A., Irving, Texas. IBC
purchased loans of approximately $381,000 and assumed deposits of approximately
$84,834,000 and received cash or other assets in the amount of approximately
$84,799,000. The acquisition was accounted for as a purchase transaction. IBC
recorded intangible assets, goodwill and core deposit premium totaling
$3,705,000 at such date. These assets are being amortized on a straight line
basis over a fifteen year period.
Effective November 21, 1996, IBC purchased certain assets and assumed certain
liabilities of three branches of Home Savings of America F.S.B., Irwindale,
California. IBC purchased loans of approximately $769,000 and assumed deposits
of approximately $196,813,000 and received cash and other assets in the amount
of approximately $196,081,000. The acquisition was accounted for as a purchase
transaction. IBC recorded intangible assets, goodwill and core deposit premium
totaling $9,670,000 at such date. These assets are being amortized on a straight
line basis over a fifteen year period.
Effective June 27, 1996, IBC purchased certain assets and assumed certain
liabilities of River Valley Bank, F.S.B., in Weslaco, Texas, a federal savings
bank organized under the laws of the United States. At the date of closing,
total loans acquired were approximately $21,408,000, deposits assumed were
approximately $132,133,000 and cash and other assets received were in the amount
of approximately $110,756,000. The acquisition was accounted for as a purchase
transaction. IBC recorded intangible assets, goodwill and core deposit premium
totaling $6,599,000 at such date. These assets are being amortized on a straight
line basis over a fifteen year period.
Effective September 8, 1995, Stone Oak National Bank, in San Antonio, Texas, 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 at such date. 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 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 at such date. These assets are being amortized on a straight line
basis over a fifteen year period.
(Continued)
28
<PAGE>
INTERNATIONAL BANCSHARES CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(3) Investment Securities
The amortized cost and estimated market value by type of investment security at
December 31, 1997 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>
Obligations of states and
political subdivisions .. $ 695 $-- $(5) $ 690 $ 695
Other securities .......... 2,015 -- -- 2,015 2,015
------ --- --- ------ ------
Total investment securities $2,710 $-- $(5) $2,705 $2,710
====== === === ====== ======
AVAILABLE FOR SALE
--------------------------------------------------------------------
GROSS GROSS ESTIMATED
AMORTIZED UNREALIZED UNREALIZED MARKET CARRYING
COST GAINS LOSSES VALUE VALUE
---------- ------- ------ ---------- ----------
(Dollars in Thousands)
U.S. Treasury securities .. $ 201,906 $ 218 $ (1) $ 202,123 $ 202,123
Mortgage-backed securities 2,315,455 32,367 (100) 2,347,722 2,347,722
Obligations of states and
political subdivisions .. 555 4 (40) 520 520
Equity securities ......... 29,629 754 -- 30,383 30,383
---------- ------- ----- ---------- ----------
Total investment securities $2,547,545 $33,343 $(141) $2,580,748 $2,580,748
========== ======= ===== ========== ==========
</TABLE>
(Continued)
29
<PAGE>
INTERNATIONAL BANCSHARES CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
The amortized cost and estimated market value of investment securities at
December 31, 1997, 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 .............. $ 200 $ 200 $ 2,148 $ 2,147
Due after one year through five years 2,125 2,120 1,060 1,081
Due after five years through ten years 385 385 199,253 199,415
Mortgage-backed securities ........... -- -- 2,315,455 2,347,722
Equity securities .................... -- -- 29,629 30,383
------ ------ ---------- ----------
Total investment securities .......... $2,710 $2,705 $2,547,545 $2,580,748
====== ====== ========== ==========
</TABLE>
The amortized cost and estimated market value by type of investment security at
December 31, 1996 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 $ 858 $ -- $(8) $ 850 $ 858
Other securities .......... 1,990 -- -- 1,990 1,990
------ ------ --- ------ ------
Total investment securities $2,848 $ -- $(8) $2,840 $2,848
====== ====== === ====== ======
AVAILABLE FOR SALE
---------------------------------------------------------------------
GROSS GROSS ESTIMATED
AMORTIZED UNREALIZED UNREALIZED MARKET CARRYING
COST GAINS LOSSES VALUE VALUE
---------- ------- ------- ---------- ----------
(Dollars in Thousands)
U.S. Treasury securities .. $ 4,942 $ 78 $ -- $ 5,020 $ 5,020
Mortgage-backed securities 1,716,996 18,536 (1,048) 1,734,484 1,734,484
Obligations of states and
political subdivisions .. 1,059 1 (46) 1,014 1,014
Equity securities ......... 16,201 -- -- 16,201 16,201
---------- ------- ------- ---------- ----------
Total investment securities $1,739,198 $18,615 $(1,094) $1,756,719 $1,756,719
========== ======= ======= ========== ==========
</TABLE>
(Continued)
30
<PAGE>
INTERNATIONAL BANCSHARES CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Mortgage-backed securities are primarily securities issued by the Federal Home
Loan Mortgage Corporation ("Freddie Mac") and the Federal National Mortgage
Association ("Fannie Mae").
The amortized cost and fair market value of investment securities pledged to
qualify for fiduciary powers and to secure public monies as required by law and
for repurchase agreements was $1,486,262,000 and $1,506,894,000, respectively,
at December 31, 1997.
Proceeds from the sale of securities available-for-sale were $229,287,000,
$441,151,000 and $154,506,000 during 1997, 1996 and 1995, respectively. Gross
gains of $619,000 and gross losses of $135,000 were realized in 1997 primarily
from the sale of available-for-sale mortgage-backed securities. Gross gains and
losses of $1,953,000 and $1,922,000 and $541,000 and $543,000 were realized in
1996 and 1995, respectively.
During 1995, the Company transfered certain securities from held-to-maturity to
available-for-sale as allowed for under the Financial Accounting Standards
Board's Special Report on the Implementation of Statement of Financial
Accounting Standards No. 115. Effective November 30, 1995, securities with an
amortized cost of $484,196,000 were reclassified from held-to-maturity to
available-for-sale. The unrealized gain as of the date of the transfer was
$4,366,000.
The Company maintains the required level of stock at the Federal Home Loan Bank
of Dallas, Texas (the "FHLB"). The FHLB stock is included in equity securities
and is recorded at cost and totaled $28,361,000 at December 31, 1997.
(4) ALLOWANCE FOR POSSIBLE LOAN LOSSES
A summary of the transactions in the allowance for possible loan losses for the
years ended December 31, 1997, 1996 and 1995 is as follows:
1997 1996 1995
-------- -------- --------
(Dollars in Thousands)
Balance at January 1 .............. $ 21,036 $ 18,455 $ 17,025
-------- -------- --------
Losses charged to allowance ..... (6,336) (5,165) (4,764)
Recoveries credited to allowance 997 1,116 609
-------- -------- --------
Net losses charged to allowance . (5,339) (4,049) (4,155)
Provision charged to operations . 7,740 6,630 5,150
-------- -------- --------
Allowances acquired in purchase
transactions .................. 1,079 -- 435
-------- -------- --------
Balance at December 31 ............ $ 24,516 $ 21,036 $ 18,455
======== ======== ========
(Continued)
31
<PAGE>
INTERNATIONAL BANCSHARES CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Loans accounted for on a non-accrual basis at December 31, 1997, 1996 and 1995
amounted to $5,742,000, $4,425,000 and $6,233,000, respectively. The effect of
such non-accrual loans reduced interest income by $602,000, $644,000 and
$1,010,000 for the years ended December 31, 1997, 1996 and 1995, respectively.
Amounts received on non-accruals are applied, for financial accounting purposes,
first to principal and then to interest after all principal has been collected.
Impaired loans are those loans where it is probable that all amounts due
according to contractual terms of the loan agreement will not be collected. The
Company has identified these loans through its normal loan review procedures.
Impaired loans included (1) all non-accrual loans, (2) loans which are 90 days
or more past due, unless they are well secured (i.e. the collateral value is
sufficient to cover principal and accrued interest) and are in the process of
collection, and (3) other loans which management believes are impaired.
Substantially all of the Company's impaired loans are measured at the fair value
of the collateral. In limited cases the Company may use other methods to
determine the level of impairment of a loan if such loan is not collateral
dependent.
Impaired loans were $12,854,000 at December 31, 1997, $10,927,000 at December
31, 1996 and $14,287,000 at December 31, 1995. The average recorded investment
in impaired loans during 1997, 1996, and 1995 was $12,507,000, $10,940,000 and
$14,100,000, respectively. The total allowance for possible loan losses related
to these loans was $1,144,000, $972,000 and $782,000 at December 31, 1997, 1996
and 1995, respectively. Interest income on impaired loans of $777,000, $566,000
and $863,000 was recognized for cash payments received in 1997, 1996 and 1995,
respectively.
Management of the Company recognizes the risks associated with these impaired
loans. However, management's decision to place loans in this category does not
necessarily mean that the Company expects losses to occur.
The bank subsidiaries charge off that portion of any loan which management
considers to represent a loss as well as that portion of any other loan which is
classified as a "loss" by bank examiners. Commercial and industrial or real
estate loans are generally considered by management to represent a loss, in
whole or part, when an exposure beyond any collateral coverage is apparent and
when no further collection of the loss portion is anticipated based on the
borrower's financial condition and general economic conditions in the borrower's
industry. Generally, unsecured consumer loans are charged-off when 90 days past
due.
While management of the Company considers that it is generally able to identify
borrowers with financial problems reasonably early and to monitor credit
extended to such borrowers carefully, there is no precise method of predicting
loan losses. The determination that a loan is likely to be uncollectible and
that it should be wholly or partially charged-off as a loss, is an exercise of
judgment. Similarly, the determination of the adequacy of the allowance for
possible loan losses can be made only on a subjective basis. It is the judgment
of the Company's management that the allowance for possible loan losses at
December 31, 1997 was adequate to absorb possible losses from loans in the
portfolio at that date.
(Continued)
32
<PAGE>
INTERNATIONAL BANCSHARES CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(5) BANK PREMISES AND EQUIPMENT
A summary of bank premises and equipment, by asset classification, at December
31, 1997 and 1996 follows:
Estimated
useful lives 1997 1996
------------ ---- ----
(Dollars in Thousands)
Bank buildings and improvements ................ 5 - 40 years $ 91,971 $66,314
Less: accumulated depreciation ................ (14,336) (12,044)
-------- -------
77,635 54,270
Furniture, equipment and vehicles .............. 1 - 20 years 60,408 46,374
Less: accumulated depreciation ................ (32,693) (26,949)
27,715 19,425
-------- -------
Land ........................................... 22,944 19,122
-------- -------
Real estate held for future expansion:
Land, building, furniture,
fixture and equipment ........................ 7 - 27 years 2,215 2,215
Less: accumulated depreciation ................ (888) (837)
-------- -------
1,327 1,378
-------- -------
Bank premises and equipment, net $ 129,621 $ 94,195
========= ========
(Continued)
33
<PAGE>
INTERNATIONAL BANCSHARES CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(6) DEPOSITS
Deposits as of December 31, 1997 and 1996 and related interest expense for the
years ended December 31, 1997, 1996 and 1995 were as follows:
1997 1996
---- ----
(Dollars in Thousands)
Deposits:
Demand - non-interest bearing
Domestic ............................ $ 388,851 $ 294,746
Foreign ............................. 61,686 51,416
Total demand non-interest
bearing ................................. 450,537 346,162
Savings and interest bearing demand
Domestic ............................ 650,806 513,086
Foreign ............................. 168,953 171,781
---------- ----------
Total savings and interest
bearing demand .......................... 819,759 684,867
---------- ----------
Time, certificates of deposit
$100,000 or more
Domestic ............................ 446,038 323,601
Foreign ............................. 655,957 591,066
Less than $100,000
Domestic ............................ 567,853 501,484
Foreign ............................. 235,416 214,973
---------- ----------
Total time, certificates
of deposits ...................... 1,905,264 1,631,124
---------- ----------
Total deposits ............................ $3,175,560 $2,662,153
========== ==========
1997 1996 1995
------- ------- -------
(Dollars in Thousands)
Interest Expense:
Savings and interest bearing demand
Domestic ......................... $17,559 $14,079 $12,341
Foreign .......................... 4,593 4,311 4,400
------- ------- -------
Total savings and interest
bearing demand ........................ $22,152 $18,390 $16,741
======= ======= =======
Time, certificates of deposit
$100,000 or more
Domestic ......................... $19,256 $14,193 $13,151
Foreign .......................... 32,532 28,561 25,713
Less than $100,000
Domestic ......................... 27,200 17,872 14,877
Foreign .......................... 10,425 9,091 8,337
------- ------- -------
Total time, certificates of deposit ..... $89,413 $69,717 $62,078
======= ======= =======
(Continued)
34
<PAGE>
INTERNATIONAL BANCSHARES CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(7) SECURITIES SOLD UNDER REPURCHASE AGREEMENTS
The Company's bank subsidiaries have entered into repurchase agreements with the
FHLB, the FNMA, FHLMC and individual customers of the bank subsidiaries. The
purchasers have agreed to resell to the bank subsidiaries identical securities
upon the maturities of the agreements. Securities sold under repurchase
agreements were mortgage-backed book entry securities and averaged $301,511,000,
$236,223,000 and $444,389,000 during 1997, 1996 and 1995, respectively, and the
maximum amount outstanding at any month end during 1997, 1996 and 1995 was
$540,370,000, $477,874,000 and $552,628,000, respectively.
Further information related to repurchase agreements (securities sold under
agreements to repurchase) at December 31, 1997 and 1996 is set forth in the
following table:
<TABLE>
<CAPTION>
COLLATERAL SECURITIES REPURCHASE BORROWING
--------------------------------- ----------------------------
BOOK VALUE OF MARKET VALUE OF BALANCE OF WEIGHTED AVERAGE
SECURITIES SOLD SECURITIES SOLD LIABILITY INTEREST RATE
--------------- --------------- --------- -------------
(Dollars in Thousands)
<S> <C> <C> <C> <C>
December 31, 1997 Term:
Overnight agreements .. $ 54,648 $ 55,769 $ 30,355 5.28%
1 to 29 days .......... 399,737 403,951 378,988 5.88%
30 to 90 days ......... 24,878 25,552 16,325 5.41%
Over 90 days .......... 64,738 66,271 52,741 5.39%
-------- -------- -------- ----
Total ................. $544,001 $551,543 $478,409 5.77%
======== ======== ======== ====
December 31, 1996 Term:
Overnight agreements .. $ 59,730 $ 76,028 $ 50,313 4.93%
1 to 29 days .......... 43,520 43,791 22,154 4.92%
30 to 90 days ......... 32,943 33,430 23,526 5.15%
Over 90 days .......... 55,938 57,122 52,490 5.23%
-------- -------- -------- ----
Total ................. $192,131 $210,371 $148,483 5.07%
======== ======== ======== ====
</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.
(8) OTHER BORROWED FUNDS
Other borrowed funds at December 31, 1997 and 1996 are $390,000,000 and
$137,000,000, respectively, of short-term fixed borrowings with the Federal Home
Loan Bank of Dallas at the market price offered at the time of funding. The
weighted average interest rate on the short-term fixed borrowings outstanding at
December 31, 1997 and 1996 was 5.91% and 5.55%, respectively, and the weighted
average interest rate for the year 1997 and 1996 was 5.72% and 5.50%,
respectively. The average daily balance on short-term fixed borrowings was
$241,407,000 and $81,154,000 during 1997 and 1996, respectively, and the maximum
(Continued)
35
<PAGE>
INTERNATIONAL BANCSHARES CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
amount outstanding at any month end during 1997 and 1996 was $390,000,000 and
$139,000,000, respectively.
The Company had two long-term certificates of indebtedness outstanding each in
the amounts of $50,000,000 payable to the FHLB at a three month Libor floating
rate minus fifteen basis points, at both December 31, 1997 and 1996. These
certificates of indebtedness mature on June 7, 1998 and July 3, 1998 and the
borrowings are secured by a blanket lien of $133,000,000 of 1-4 family first
lien mortgage loans at both December 31, 1997 and 1996.
(9) EARNINGS PER SHARE
Basic EPS is calculated by dividing net income available to common shareholders,
by the weighted average number of common shares outstanding. The computation of
diluted EPS assumes the issuance of common shares for all dilutive potential
common shares outstanding during the reporting period. The calculation of the
basic EPS and the diluted EPS at December 31, 1997, 1996, and 1995 is set forth
in the following table:
<TABLE>
<CAPTION>
Income Shares Per-Share
(Numerator) (Denominator) Amount
----------- ------------- --------
(Dollars in Thousands, Except Per Share Amounts)
<S> <C> <C> <C>
December 31, 1997:
Basic EPS
Income available to common
stockholders $ 48,881 10,194,910 $ 4.79
Dilutive potential common shares 375,080
-------- ----------
Diluted EPS $ 48,881 10,569,990 $ 4.62
======== ==========
December 31, 1996:
Basic EPS
Income available to common
stockholders $ 44,350 10,086,879 $ 4.40
Dilutive potential common shares 212,102
-------- ----------
Diluted EPS $ 44,350 10,298,981 $ 4.31
======== ==========
December 31, 1995:
Basic EPS
Income available to common
stockholders $ 40,061 9,965,899 $ 4.02
Dilutive potential common shares 186,245
-------- ----------
Diluted EPS $ 40,061 10,152,144 $ 3.95
======== ==========
</TABLE>
(Continued)
36
<PAGE>
INTERNATIONAL BANCSHARES CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(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 $1,161,000, $939,000 and $861,000 were
charged to income for the years ended December 31, 1997, 1996, and 1995,
respectively.
(11) INTERNATIONAL OPERATIONS
The Corporation provides international banking services for its customers
through its bank subsidiaries. Neither the Corporation nor its bank subsidiaries
have facilities located outside the United States. International operations are
distinguished from domestic operations on the basis of the domicile of the
customer.
Because the resources employed by the Company are common to both international
and domestic operations, it is not practical to determine net income generated
exclusively from international activities.
A summary of assets attributable to international operations at December 31,
1997 and 1996 are as follows:
1997 1996
--------- ---------
(Dollars in Thousands)
Loans:
Commercial ............................ $ 110,361 $ 107,452
Others ................................ 20,040 21,480
--------- ---------
130,401 128,932
Less allowance for possible loan losses (1,184) (1,101)
--------- ---------
Net loans .................... $ 129,217 $ 127,831
========= =========
Accrued interest receivable ........... $ 1,198 $ 1,317
========= =========
At December 31, 1997, the Company had $9,820,000 in outstanding international
commercial letters of credit to facilitate trade activities. The letters of
credit are issued primarily in conjunction with credit facilities which are
available to various Mexican banks doing business with the Company.
Income directly attributable to international operations was $11,821,000,
$10,331,000 and $9,447,000 for the years ended December 31, 1997, 1996 and 1995,
respectively.
(Continued)
37
<PAGE>
INTERNATIONAL BANCSHARES CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(12) INCOME TAXES
The Company files a consolidated U.S. Federal income tax return. The current and
deferred portions of income tax expense (benefit) included in the consolidated
statements of income are presented below for the years ended December 31:
1997 1996 1995
------- ------- --------
(Dollars in Thousands)
Current
U.S ................................... $23,565 $19,643 $ 19,271
Foreign ............................... 67 80 22
State ................................. -- -- --
------- ------- --------
Total current taxes .......... 23,632 19,723 19,293
Deferred ................................ 1,139 441 (978)
------- ------- --------
Total income taxes ........... $24,771 $20,164 $ 18,315
======= ======= ========
Total income tax expense differs from the amount computed by applying the U.S.
Federal income tax rate of 35% for 1997, 1996 and 1995 to income before income
taxes. The reasons for the differences for the years ended December 31 are as
follows:
1997 1996 1995
------- -------- --------
(Dollars in Thousands)
Computed expected tax expense .......... $25,846 $ 22,580 $ 20,424
Change in taxes resulting from:
Tax-exempt interest income ............ (111) (481) (636)
Lease financing ....................... (1,397) (1,792) (1,587)
Other ................................. 433 (143) 114
------- -------- --------
Actual tax expense ........ $24,771 $ 20,164 $ 18,315
======= ======== ========
(Continued)
38
<PAGE>
INTERNATIONAL BANCSHARES CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
The tax effects of temporary differences that give rise to significant portions
of the deferred tax assets and deferred tax liabilities at December 31, 1997 and
1996 are reflected below:
1997 1996
-------- --------
(Dollars in Thousands)
Deferred tax assets:
Loans receivable, principally due to the
allowance for possible loan losses ........ $ 8,147 $ 7,290
Other real estate owned ..................... 512 533
Accrued expenses ............................ 1,181 1,076
Other ....................................... 475 582
-------- --------
Total deferred tax assets ................... 10,315 9,481
-------- --------
Deferred tax liabilities:
Lease financing receivable .................. (2,423) (1,215)
Bank premises and equipment, principally
due to differences in depreciation ........ (2,078) (2,032)
Net unrealized gains on available for
sale investment securities ................ (11,614) (6,132)
Purchase accounting adjustment .............. (1,351) --
Other ....................................... (460) (626)
-------- --------
Total deferred tax liabilities .............. (17,926) (10,005)
-------- --------
Net deferred tax liability ........ $ (7,611) $ (524)
======== ========
The Company did not record a valuation allowance against deferred tax assets at
December 31, 1997 and 1996 because management has concluded it is more likely
than not the Company will have future taxable earnings in excess of the future
tax deductions.
(Continued)
39
<PAGE>
INTERNATIONAL BANCSHARES CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(13) STOCK OPTIONS
On April 3, 1996, the Board of Directors adopted the 1996 International
Bancshares Corporation Stock Option Plan (the "1996 Plan"). The 1996 Plan
replaced the 1987 International Bancshares Corporation Key Contributor Stock
Option Plan (the "1987 Plan"). Under the 1987 Plan and the 1996 Plan both
qualified incentive stock options ("ISOs") and nonqualified stock options
("NQSOs") may be granted. Options granted may be exercisable for a period of up
to 10 years from the date of grant, excluding ISOs granted to 10% shareholders,
which may be exercisable for a period of up to only five years. The following
schedule summarizes the pertinent information (adjusted for stock distributions)
with regard to stock options from January 1, 1995 through December 31, 1997
which were granted by the Company under the 1987 Plan or the 1996 Plan.
OPTION PRICE OPTIONS
PER SHARE OUTSTANDING
--------- -----------
Balance at January 1, 1995 616,045
Terminated $ 3.33 - 6.83 (2,737)
Granted 24.58 244,191
Exercised 3.33 - 6.83 (67,779)
------
Balance at December 31, 1995 789,720
Terminated $ 8.54 - 26.18 (25,676)
Granted 30.40 - 37.20 2,500
Exercised 4.28 - 24.58 (134,013)
-------
Balance at December 31, 1996 632,531
Terminated $ 6.01 - 46.40 (13,897)
Granted 46.40 - 65.00 354,031
Exercised 6.01 - 24.60 (176,424)
-------
Balance at December 31, 1997 796,241
=======
At December 31, 1997 and 1996, 274,861 and 247,683 options were exercisable,
respectively, and as of December 31, 1997, 112,218 shares were available for
future grants under the 1996 Plan. All options granted under the 1987 Plan and
the 1996 Plan had an option price of not less than the fair market value of the
Company's common stock at the date of grant and a vesting period of five years.
(Continued)
40
<PAGE>
INTERNATIONAL BANCSHARES CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
The following table summarizes information about stock options outstanding at
December 31, 1997:
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
------------------- ------------------
WEIGHTED-
AVERAGE WEIGHTED- WEIGHTED-
NUMBER REMAINING AVERAGE NUMBER AVERAGE
RANGE OF OUTSTANDING CONTRACTUAL EXERCISE EXERCISABLE EXERCISE
EXERCISE PRICES AT 12/31/97 LIFE PRICE AT 12/31/97 PRICE
--------------- ----------- ---- ----- ----------- -----
$ 6.56 - 8.20 176,515 .70 years $ 6.87 176,515 $ 6.87
12.79 - 16.83 13,179 1.90 years 14.02 8,661 14.02
26.12 5,858 2.11 years 26.12 3,513 26.12
24.58 244,191 3.50 years 24.58 85,672 24.58
30.40 - 37.20 2,500 3.80 years 33.80 500 33.80
46.40 - 65.00 353,998 5.46 years 47.59 - 47.59
------- -------
$ 6.56 - 65.00 796,241 274,861
======= =======
Prior to January 1, 1996, the Company accounted for its stock option plan in
accordance with the provisions of Accounting Principles Board ("APB") Opinion
No. 25, "Accounting for Stock Issued to Employees," and related interpretations.
As such, compensation expense would be recorded on the date of grant only if the
current market price of the underlying stock exceeded the exercise price. In
October 1995, the Financial Accounting Standards Board issued SFAS No. 123,
"Accounting for Stock-Based Compensation," which permits entities to recognize
as expense over the vesting period the fair value of all stock-based awards on
the date of grant. Alternatively, SFAS No. 123 also allows entities to continue
to apply the provisions of APB Opinion No. 25 and provide pro forma net income
and pro forma earnings per share disclosures for employee stock option grants
made in 1995 and future years as if the fair-value-based method defined in SFAS
No. 123 had been applied. The Company has elected to continue to apply the
provisions of APB Opinion No. 25 and provide the pro forma disclosure provisions
of SFAS No. 123.
The fair values of options at date of grant was estimated using the
Black-Scholes option pricing model with the following weighted-average
assumptions:
1997 1996 1995
---- ---- ----
Expected life (years) 6 6 6
Interest rate 6.62% 6.53% 6.09%
Volatility 30.08% 41.00% 41.00%
(Continued)
41
<PAGE>
INTERNATIONAL BANCSHARES CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
The following schedule shows total net income as reported and the pro forma
results:
1997 1996 1995
---- ---- ----
Net income As reported $ 48,881 $ 44,350 $ 40,061
Pro forma 47,014 43,476 39,480
Basic earnings As reported $ 4.79 $ 4.40 $ 4.02
Pro forma 4.61 4.31 3.96
Diluted earnings As reported $ 4.62 $ 4.31 $ 3.95
Pro forma 4.45 4.22 3.89
The Company does not have a formal stock repurchase program; however, the
Company occasionally repurchases shares of Common Stock including repurchases
related to the exercise of stock options through the surrender of other shares
of Common Stock of the Company owned by the option holders. Stock repurchases
are presented quarterly at the Company's Board of Director meetings and the
Board of Directors has stated that they will not permit purchases of more than a
total of $16,000,000 of stock. In the past, the Board has increased previous
caps once they were met, but there are no assurances that an increase of the
$16,000,000 cap will occur in the future.
(14) COMMITMENTS AND CONTINGENT LIABILITIES
The Company is involved in various legal proceedings that are in various stages
of litigation. Some of these actions allege "lender liability" claims on a
variety of theories and claim substantial actual and punitive damages. The
Company has determined, based on discussions with its counsel, that any material
loss in such actions, individually or in the aggregate, is remote or the damages
sought, even if fully recovered, would not be considered material. However, many
of these matters are in various stages of proceedings and further developments
could cause Management to revise its assessment of these matters.
The Company leases portions of its banking premises and equipment under
operating leases. Total rental expense for the years ended December 31, 1997,
1996 and 1995 and noncancellable lease commitments at December 31, 1997 were not
significant.
Cash of approximately $58,710,000 and $40,621,000 at December 31, 1997 and 1996,
respectively, was maintained to satisfy regulatory reserve requirements.
The American Institute of Certified Public Accountants issued Statement Of
Position ("SOP") 96-1, "Environmental Remediation Liabilities." SOP 96-1 was
adopted by the Company on January 1, 1996 and requires, among other things,
environmental remediation liabilities to be accrued when the criteria of SFAS
No. 5, "Accounting for Contingencies," have been met.
(Continued)
42
<PAGE>
INTERNATIONAL BANCSHARES CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
The SOP also provides guidance with respect to the measurement of the
remediation liabilities. Such accounting is consistent with the Company's
previous method of accounting for environmental remediation costs and therefore,
adoption of this new Statement did not have a material impact on the Company's
financial position, results of operations or liquidity.
(15) TRANSACTIONS WITH RELATED PARTIES
In the ordinary course of business, the Corporation and its subsidiaries make
loans to directors and executive officers of the Corporation and the bank
subsidiaries, 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 $96,401,000 and $80,342,000 at December 31, 1997 and 1996,
respectively. During 1997, $126,363,000 of new loans were made and repayments
totaled $110,303,000. On May 21, 1996, IBC sold approximately 417.67 acres of
land in Travis County, Texas, to IBC Partners, Ltd., a Texas real estate
partnership owned by certain shareholders of the Company for an approximate
aggregate appraised value of $400,000.
(16) FINANCIAL INSTRUMENTS WITH OFF-BALANCE SHEET RISK AND CONCENTRATIONS OF
CREDIT RISK
In the normal course of business, the bank subsidiaries are party to financial
instruments with off-balance sheet risk to meet the financing needs of their
customers. These financial instruments include commitments to their customers.
These financial instruments involve, to varying degrees, elements of credit risk
in excess of the amounts recognized in the balance sheet. The contract amounts
of these instruments reflect the extent of involvement the bank subsidiaries
have in particular classes of financial instruments. At December 31, 1997, the
following financial instruments, whose contract amounts represent credit risks,
were outstanding:
Commitments to extend credit $ 346,381,000
Credit card lines 473,371,000
Letters of credit 39,298,000
The bank subsidiaries' exposure to credit loss in the event of nonperformance by
the other party to the above financial instruments is represented by the
contractual amounts of the instruments. The bank subsidiaries use the same
credit policies in making commitments and conditional obligations as they do for
on-balance sheet instruments. The bank subsidiaries control the credit risk of
these transactions through credit approvals, limits and monitoring procedures.
Commitments to extend credit are agreements to lend to a customer as long as
there is no violation of any condition established in the contract. Commitments
generally have fixed expiration dates normally less than one year or other
termination clauses and may require the payment of a fee. Since many of the
commitments are expected to expire without being drawn upon, the total
commitment amounts do not
(Continued)
43
<PAGE>
INTERNATIONAL BANCSHARES CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
necessarily represent future cash requirements. The bank subsidiaries evaluate
each customer's credit-worthiness on a case-by-case basis. The amount of
collateral obtained, if deemed necessary by the subsidiary banks upon extension
of credit, is based on management's credit evaluation of the customer.
Collateral held varies, but may include residential and commercial real estate,
bank certificates of deposit, accounts receivable and inventory.
Letters of credit are written conditional commitments issued by the bank
subsidiaries to guarantee the performance of a customer to a third party. The
credit risk involved in issuing letters of credit is essentially the same as
that involved in extending loan facilities to customers.
The bank subsidiaries make commercial, real estate and consumer loans to
customers principally located in Webb, Bexar, Hidalgo, Cameron, Starr and Zapata
counties in South Texas as well as Matagorda, Brazoria, Galveston, Fort Bend,
Calhoun, and Harris counties in Southeast Texas. Although the loan portfolio is
diversified, a substantial portion of its debtors' ability to honor their
contracts is dependent upon the economic conditions in these areas, especially
in the real estate and commercial business sectors.
To date, the Company has not experienced a material adverse impact related to
the 1994 devaluation of the peso in Mexico. Although the economic conditions
have improved in Mexico, the Company will continue to monitor Mexico's economic
progress.
(17) DIVIDEND RESTRICTIONS AND CAPITAL REQUIREMENTS
Bank regulatory agencies limit the amount of dividends which the bank
subsidiaries can pay the Corporation, through IBC Subsidiary Corporation,
without obtaining prior approval from such agencies. At December 31, 1997, the
aggregate amount legally available to be distributed to the Corporation from
bank subsidiaries as dividends was approximately $55,701,000, assuming that each
subsidiary bank continues to be classified as "well capitalized" pursuant to the
applicable regulations. The restricted capital of the bank subsidiaries was
approximately $241,187,000. The undivided profits of the bank subsidiaries was
$121,015,000. In addition to legal requirements, regulatory authorities also
consider the adequacy of the bank subsidiaries' total capital in relation to
their deposits and other factors. These capital adequacy considerations also
limit amounts available for payment of dividends. The Corporation historically
has not allowed any subsidiary bank to pay dividends in such a manner as to
impair its capital adequacy.
The Corporation and the bank subsidiaries are subject to various regulatory
capital requirements administered by the federal banking agencies. Failure to
meet minimum capital requirements can initiate certain mandatory and possibly
additional discretionary actions by regulators that, if undertaken, could have a
direct material effect on the Company's financial statements. Under capital
adequacy guidelines and the regulatory framework for prompt corrective action,
the Company must meet specific capital guidelines that involve quantitative
measures of the Company's assets, liabilities, and certain off-balance sheet
items as calculated under regulatory accounting practices. The Company's
(Continued)
44
<PAGE>
INTERNATIONAL BANCSHARES CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
capital amounts and classification are also subject to qualitative judgements by
the regulators about components, risk weightings, and other factors.
Quantitative measures established by regulation to ensure capital adequacy
require the Company to maintain minimum amounts and ratios (set forth in the
table on the following page) of total and Tier 1 capital to risk-weighted assets
and of Tier 1 capital to average assets. Management believes, as of December 31,
1997, that the Corporation and the bank subsidiaries met all capital adequacy
requirements to which it is subject.
As of December 31, 1997, the most recent notification from the Federal Deposit
Insurance Corporation categorized all the bank subsidiaries as well capitalized
under the regulatory framework for prompt corrective action. To be categorized
as "well capitalized" the Corporation and the bank subsidiaries must maintain
minimum total risk-based, Tier 1 risk-based, and Tier 1 leverage ratios as set
forth in the table. There are no conditions or events since that notification
that management believes have changed the categorization of the Corporation or
any of the bank subsidiaries as well capitalized.
(Continued)
45
<PAGE>
INTERNATIONAL BANCSHARES CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
The Corporation's and the bank subsidiaries' actual capital amounts and ratios
for 1997 are also presented in the table.
<TABLE>
<CAPTION>
TO BE WELL
CAPITALIZED UNDER
FOR CAPITAL PROMPT CORRECTIVE
ACTUAL ADEQUACY PURPOSES ACTION PROVISIONS
--------------- --------------------- -------------------
AMOUNT RATIO AMOUNT RATIO AMOUNT RATIO
------ ----- ---------- ----- ------ -----
(GREATER (GREATER (GREATER (GREATER
THAN OR THAN OR THAN OR THAN OR
EQUAL TO) EQUAL TO) EQUAL TO) EQUAL TO)
--------- --------- --------- ---------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C>
As of December 31, 1997:
Total Capital (to Risk Weighted Assets):
Consolidated ............................................. $296,235 15.20% $155,898 8.00% $194,872 10.00%
International Bank of Commerce, Laredo ................... 201,776 12.10 133,378 8.00 166,722 10.00
International Bank of Commerce, Brownsville .............. 25,305 17.07 11,862 8.00 14,827 10.00
International Bank of Commerce, Zapata ................... 12,548 32.62 3,077 8.00 3,847 10.00
Commerce Bank ............................................ 15,949 24.09 5,296 8.00 6,620 10.00
Tier 1 Capital (to Risk Weighted Assets):
Consolidated ............................................. $271,874 13.95% $ 77,949 4.00% $116,923 6.00%
International Bank of Commerce, Laredo ................... 180,926 10.85 66,689 4.00 100,033 6.00
International Bank of Commerce, Brownsville .............. 23,946 16.15 5,931 4.00 8,896 6.00
International Bank of Commerce, Zapata ................... 12,067 31.37 1,539 4.00 2,308 6.00
Commerce Bank ............................................ 15,119 22.84 2,648 4.00 3,972 6.00
Tier 1 Capital (to Average Assets):
Consolidated ............................................. $271,874 6.41% $169,560 4.00% $211,950 5.00%
International Bank of Commerce, Laredo ................... 180,926 5.15 140,431 4.00 175,539 5.00
International Bank of Commerce, Brownsville .............. 23,946 6.17 15,523 4.00 19,404 5.00
International Bank of Commerce, Zapata ................... 12,067 10.06 4,798 4.00 5,997 5.00
Commerce Bank ............................................ 15,119 10.19 5,933 4.00 7,417 5.00
</TABLE>
(Continued)
46
<PAGE>
INTERNATIONAL BANCSHARES CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
The Corporation's and the bank subsidiaries' actual capital amounts and ratios
for 1996 are also presented in the table.
<TABLE>
<CAPTION>
FOR CAPITAL PROMPT CORRECTIVE
ACTUAL ADEQUACY PURPOSES ACTION PROVISIONS
----------------- ------------------- -------------------
AMOUNT RATIO AMOUNT RATIO AMOUNT RATIO
------ ----- ------ ----- ------ -----
(GREATER (GREATER (GREATER (GREATER
THAN OR THAN OR THAN OR THAN OR
EQUAL TO) EQUAL TO) EQUAL TO) EQUAL TO)
--------- --------- --------- ---------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C>
As of December 31, 1996:
Total Capital (to Risk Weighted Assets):
Consolidated ............................................. $262,413 17.27% $121,547 8.00% $151,933 10.00%
International Bank of Commerce, Laredo ................... 189,462 14.49 104,591 8.00 130,739 10.00
International Bank of Commerce, Brownsville .............. 20,429 16.69 9,794 8.00 12,243 10.00
International Bank of Commerce, Zapata ................... 11,094 33.14 2,678 8.00 3,348 10.00
Commerce Bank ............................................ 13,384 22.76 4,705 8.00 5,881 10.00
Tier 1 Capital (to Risk Weighted Assets):
Consolidated ............................................. $243,396 16.02% $ 60,773 4.00% $ 91,160 6.00%
International Bank of Commerce, Laredo ................... 173,099 13.24 52,295 4.00 78,443 6.00
International Bank of Commerce, Brownsville .............. 19,174 15.66 4,897 4.00 7,346 6.00
International Bank of Commerce, Zapata ................... 10,675 31.89 1,339 4.00 2,009 6.00
Commerce Bank ............................................ 12,646 21.50 2,352 4.00 3,529 6.00
Tier 1 Capital (to Average Assets):
Consolidated ............................................. $243,396 7.80% $124,761 4.00% $155,951 5.00%
International Bank of Commerce, Laredo ................... 173,099 6.79 101,979 4.00 127,474 5.00
International Bank of Commerce, Brownsville .............. 19,174 5.70 13,449 4.00 16,811 5.00
International Bank of Commerce, Zapata ................... 10,675 9.97 4,282 4.00 5,353 5.00
Commerce Bank ............................................ 12,646 9.47 5,342 4.00 6,678 5.00
</TABLE>
(Continued)
47
<PAGE>
INTERNATIONAL BANCSHARES CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(18) FAIR VALUE OF FINANCIAL INSTRUMENTS
The fair value estimates, methods, and assumptions for the Company's financial
instruments at December 31, 1997 and 1996 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 pass through and related securities, fair values are
based on quoted market prices or dealer quotes. Fair values are based on the
value of one unit without regard to any premium or discount that may result from
concentrations of ownership of a financial instrument, possible tax
ramifications, or estimated transaction costs. See disclosures of fair value of
investment securities in Note 3.
Loans
Fair values are estimated for portfolios of loans with similar financial
characteristics. Loans are segregated by type such as commercial, real estate
and consumer loans as outlined by regulatory reporting guidelines. Each category
is segmented into fixed and variable interest rate terms and by performing and
non-performing categories.
For variable rate performing loans, the carrying amount approximates the fair
value. For fixed rate performing loans, except residential mortgage loans, the
fair value is calculated by discounting scheduled cash flows through the
estimated maturity using estimated market discount rates that reflect the credit
and interest rate risk inherent in the loan. For performing residential mortgage
loans, fair value is estimated by discounting contractual cash flows adjusted
for prepayment estimates using discount rates based on secondary market sources
or the primary origination market.
Fair value for significant non-performing loans is based on recent external
appraisals. If appraisals are not available, estimated cash flows are discounted
using a rate commensurate with the risk associated with the estimated cash
flows. Assumptions regarding credit risk, cash flows and discount rates are
judgementally determined using available market and specific borrower
information. As of December 31, 1997 and 1996, the carrying amount of net loans
was a reasonable estimate of the fair value.
(Continued)
48
<PAGE>
INTERNATIONAL BANCSHARES CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Deposits
The fair value of deposits with no stated maturity, such as non-interest bearing
demand deposit accounts, savings accounts and interest bearing demand deposit
accounts, was equal to the amount payable on demand as of December 31, 1997 and
1996. 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, 1997 and 1996, the carrying amount of time deposits was a
reasonable estimate of the fair value.
Federal Funds Purchased and Securities Sold Under Repurchase Agreements,
Other Borrowed Funds and Subordinated Debt
Due to the contractual terms of these financial instruments, the carrying
amounts approximated fair value at December 31, 1997 and 1996.
Commitments to Extend Credit and Letters of Credit
For commitments to extend credit and letters of credit, the carrying amount is
based on the notional amount of the agreements and fair value is based on the
discounted value of fees charged.
Fair value estimates are made at a point in time, based on relevant market
information and information about the financial instrument. These estimates do
not reflect any premium or discount that could result from offering for sale at
one time the Company's entire holdings of a particular financial instrument.
Because no market exists for a significant portion of the Company's financial
instruments, fair value 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.
(Continued)
49
<PAGE>
INTERNATIONAL BANCSHARES CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(19) International Bancshares Corporation (Parent Company Only)
Financial Information
Statements of Condition
(Parent Company Only)
December 31, 1997 and 1996
(Dollars in Thousands)
ASSETS 1997 1996
--------- ---------
Cash ........................................... $ 350 $ 336
Repurchase agreements .......................... 7,500 --
Other investments .............................. 2,021 375
Notes receivable ............................... 57,209 67,401
Investment in subsidiaries ..................... 251,002 199,108
Other assets ................................... 23,393 18,581
--------- ---------
Total assets .......................... 341,475 285,801
========= =========
LIABILITIES AND SHAREHOLDERS' EQUITY
Liabilities:
Notes payable ............................... -- 2,000
Other liabilities ........................... 231 34
--------- ---------
Total liabilities ..................... 231 2,034
Shareholders' equity:
Common stock ................................ 13,196 10,353
Surplus ..................................... 19,012 11,935
Retained earnings ........................... 301,988 260,134
Net unrealized holding gains on
available for sale securities,
net of deferred income taxes .............. 21,582 11,388
--------- ---------
355,778 293,810
Less cost of shares in treasury ............. (14,534) (10,043)
--------- ---------
Total shareholders' equity ............ 341,244 283,767
--------- ---------
Total liabilities and
shareholders' equity ............... $ 341,475 $ 285,801
========= =========
(Continued)
50
<PAGE>
INTERNATIONAL BANCSHARES CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Statements of Income
(Parent Company Only)
Years ended December 31, 1997, 1996 and 1995
(Dollars in Thousands)
1997 1996 1995
------- ------- -------
Income:
Dividends from subsidiaries ................ $17,035 $ 7,250 $13,332
Interest income on notes receivable ........ 6,134 6,944 7,218
Interest income on time deposits
with banks .............................. 36 15 11
Other interest income ...................... 307 299 419
Other ...................................... 4,517 4,603 3,368
------- ------- -------
Total income ...................... 28,029 19,111 24,348
------- ------- -------
Expenses:
Interest expense on notes payable .......... 142 158 255
Other ...................................... 380 338 271
------- ------- -------
Total expenses .................... 522 496 526
------- ------- -------
Income before federal income
taxes and equity in
undistributed net income
of subsidiaries ................ 27,507 18,615 23,822
Federal income tax expense .................... 1,785 1,847 1,302
------- ------- -------
Income before equity
in undistributed net
income of subsidiaries ......... 25,722 16,768 22,520
Equity in undistributed net income
of subsidiaries ............................ 23,159 27,582 17,541
------- ------- -------
Net income ........................ $48,881 $44,350 $40,061
======= ======= =======
(Continued)
51
<PAGE>
INTERNATIONAL BANCSHARES CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Statements of Cash Flows
(Parent Company Only)
Years ended December 31, 1997, 1996 and 1995
(Dollars in Thousands)
<TABLE>
<CAPTION>
1997 1996 1995
-------- -------- --------
<S> <C> <C> <C>
Operating activities:
Net income .................................... $ 48,881 $ 44,350 $ 40,061
Adjustments to reconcile net income to net
cash provided by operating activities:
Gain on sale of other real estate ......... (113) -- --
Increase (decrease) in other liabilities .. 197 (340) 284
Equity in undistributed net income of
subsidiaries ............................ (23,159) (27,582) (17,541)
-------- -------- --------
Net cash provided by operating activities 25,806 16,428 22,804
-------- -------- --------
Investing activities:
Contributions to subsidiaries ................. (18,656) (15,625) (10,161)
Repayment from subsidiaries ................... 166 -- --
Purchase of time deposits with banks .......... (2,900) -- (728)
Proceeds from time deposits with banks ........ 2,900 -- 1,328
Purchase of repurchase agreement with banks ... (7,500) -- --
Purchase of available for sale other securities (1,156) (375) --
Net decrease (increase) in notes receivable ... 10,192 8,677 (6,125)
Increase in other assets ...................... (5,364) (3,617) (3,197)
Proceeds from sale of other real estate ....... 665 -- --
-------- -------- --------
Net cash used in investing activities ... (21,653) (10,940) (18,883)
-------- -------- --------
Financing activities:
Proceeds from issuance of other borrowed funds 6,333 -- --
Principal payments on notes payable ........... (8,333) (500) (1,000)
Proceeds from stock transactions .............. 6,778 965 552
Payments of cash dividends .................... (4,400) (3,489) (2,762)
Payments of cash dividends in lieu of
fractional shares ........................... (26) (18) (9)
Purchase of treasury stock .................... (4,491) (2,261) (624)
-------- -------- --------
Net cash used in finan ing activities ... (4,139) (5,303) (3,843)
-------- -------- --------
Increase in cash and cash equivalents ... 14 185 78
Cash at beginning of year ....................... 336 151 73
Cash at end of year ............................. $ 350 $ 336 $ 1,151
======== ======== ========
Supplemental cash flow information:
Interest paid ................................. $ 131 $ 117 $ 239
</TABLE>
52
<PAGE>
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
RICHARD CAPPS
Vice President LESTER AVIGAEL
Retail Merchant
EDUARDO J. FARIAS
Vice President IRVING GREENBLUM
Retail Merchant
ARNOLDO CISNEROS
Treasurer RICHARD E. HAYNES
Attorney at Law; Real
WILLIAM J. CUELLAR Estate Investments
Auditor
SIOMA NEIMAN
LUISA D. BENAVIDES An International Entrepreneur
Secretary
R. DAVID GUERRA
IMELDA NAVARRO President
Assistant Treasurer International Bank of Commerce
Branch in McAllen, Texas
AMELIA A. BENAVIDES
Assistant Secretary ANTONIO R. SANCHEZ, JR.
Chairman of the Board of
Sanchez O'Brien Oil & Gas
Corporation; Investments
PEGGY J. NEWMAN
Investments
53
AGREEMENT AND PLAN OF MERGER
BY AND AMONG
INTERNATIONAL BANCSHARES CORPORATION,
UNIVERSITY BANCSHARES, INC.,
JOE L. ALLBRITTON
AND
ROBERT L. ALLBRITTON
Dated as of August 15, 1997
<PAGE>
TABLE OF CONTENTS
Page
----
ARTICLE I........................................................ 1
THE MERGER..................................................... 1
SECTION 1.1 The Merger...................................... 1
SECTION 1.2 Effective Time.................................. 2
SECTION 1.3 Certain Effects of the Merger................... 2
SECTION 1.4 Articles of Incorporation and ByLaws............ 2
SECTION 1.5 Directors and Officers.......................... 2
SECTION 1.6 Conversion of Shares............................ 2
SECTION 1.7 Shareholders' Consent........................... 3
SECTION 1.8 Closing......................................... 3
ARTICLE II....................................................... 3
DISSENTING SHARES.............................................. 3
SECTION 2.1 Dissenting Shares............................... 3
ARTICLE III...................................................... 3
REPRESENTATIONS AND WARRANTIES OF UNIVERSITY
AND ALLBRITTON................................................ 3
SECTION 3.1 Organization and Qualification.................. 3
SECTION 3.2 University Capitalization....................... 4
SECTION 3.3 Bank Capitalization; Other Securities........... 4
SECTION 3.4 Authority Relative to the Agreement............. 4
SECTION 3.5 No Violation.................................... 5
SECTION 3.6 Consents and Approvals.......................... 5
SECTION 3.7 Regulatory Reports.............................. 6
SECTION 3.8 SEC Status; Securities Issuances................ 6
SECTION 3.9 Financial Statements............................ 6
SECTION 3.10 Absence of Certain Changes...................... 7
SECTION 3.11 University Indebtedness......................... 8
SECTION 3.12 Litigation...................................... 8
SECTION 3.13 Tax Matters..................................... 9
SECTION 3.14 Employee Benefit Plans.......................... 9
SECTION 3.15 Employment Matters.............................. 12
SECTION 3.16 Leases, Contracts and Agreements................ 12
SECTION 3.17 Related University Transactions................. 13
SECTION 3.18 Compliance with Laws............................ 13
SECTION 3.19 Insurance....................................... 13
SECTION 3.20 Loans........................................... 13
SECTION 3.21 Fiduciary Responsibilities...................... 14
SECTION 3.22 Patents, Trademarks and Copyrights.............. 14
SECTION 3.23 Environmental Compliance........................ 14
SECTION 3.24 Regulatory Actions.............................. 15
SECTION 3.25 Title to Properties; Encumbrances............... 15
SECTION 3.26 Representations Not Misleading.................. 16
ARTICLE IV....................................................... 16
REPRESENTATIONS AND WARRANTIES OF IBC.......................... 16
SECTION 4.1 Organization and Authority...................... 16
SECTION 4.2 Authority Relative to Agreement................. 16
SECTION 4.3 Consents and Approvals.......................... 17
SECTION 4.4 Representations Not Misleading.................. 18
ARTICLE V........................................................ 18
COVENANTS OF UNIVERSITY AND THE SHAREHOLDERS................... 18
SECTION 5.1 Affirmative Covenants of University............. 18
SECTION 5.2 Negative Covenants of University................ 20
SECTION 5.3 Affirmative Covenants of IBC.................... 22
ARTICLE VI....................................................... 22
ADDITIONAL AGREEMENTS.......................................... 22
SECTION 6.1 Access To, and Information Concerning,
Properties and Records.......................... 22
SECTION 6.2 Filing of Regulatory Approvals.................. 23
SECTION 6.3 Miscellaneous Agreements and Consents........... 23
SECTION 6.4 University Indebtedness......................... 23
SECTION 6.5 Good Faith Efforts.............................. 23
SECTION 6.6 Exclusivity..................................... 24
SECTION 6.7 Public Announcement............................. 24
SECTION 6.8 Employee Issues................................. 24
SECTION 6.9 Environmental Investigation; Right to
Terminate Agreement............................. 24
SECTION 6.10 Shareholder Consent............................. 26
SECTION 6.11 Termination of Retirement Plan.................. 26
ARTICLE VII...................................................... 27
CONDITIONS TO CONSUMMATION OF THE MERGER....................... 27
SECTION 7.1 Conditions to Each Party's Obligation to
Effect the Merger............................... 27
SECTION 7.2 Conditions to the Obligations of IBC and
Acquisition Sub to Effect the Merger............ 27
SECTION 7.3 Conditions to the Obligations of University
and the Shareholders to Effect the Merger....... 28
ARTICLE VIII..................................................... 28
TERMINATION; AMENDMENT; WAIVER; NON-COMPETITION................ 28
SECTION 8.1 Termination..................................... 28
SECTION 8.2 Effect of Termination........................... 29
SECTION 8.3 Amendment....................................... 29
SECTION 8.4 Extension; Waiver............................... 29
SECTION 8.5 Non-Competition................................. 30
ARTICLE IX....................................................... 30
SURVIVAL; INDEMNIFICATION...................................... 30
SECTION 9.1 Survival of Representations and Warranties...... 30
SECTION 9.2 Indemnification by Shareholders................. 30
SECTION 9.3 Indemnification by IBC.......................... 31
SECTION 9.4 Basket; Limit................................... 31
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SECTION 9.5 Notice of Claim................................. 31
SECTION 9.6 Sole Remedy..................................... 31
SECTION 9.7 Adjustment of Liability; Characterization
of Indemnity Payments........................... 32
SECTION 9.8 Special Indemnity by IBC........................ 32
SECTION 9.9 Special Indemnity by Allbritton................. 32
ARTICLE X........................................................ 32
MISCELLANEOUS.................................................. 32
SECTION 10.1 Expenses........................................ 32
SECTION 10.2 Brokers and Finders............................. 33
SECTION 10.3 Entire Agreement; Assignment.................... 33
SECTION 10.4 Further Assurances.............................. 33
SECTION 10.5 Enforcement of the Agreement.................... 33
SECTION 10.6 Severability.................................... 33
SECTION 10.7 Notices......................................... 33
SECTION 10.8 Governing Law................................... 35
SECTION 10.9 Descriptive Headings............................ 35
SECTION 10.10 Parties in Interest............................. 35
SECTION 10.11 Counterparts.................................... 35
SECTION 10.12 Incorporation by References..................... 35
SECTION 10.13 Certain Definitions............................. 35
SECTION 10.14 Arbitration..................................... 36
ATTACHMENTS
EXHIBITS
A. Form of Agreement and Plan of Merger
B. Form of Bank Merger Agreement
C. Opinion of Counsel for University and the Bank
D. Certificate of President of Bank
E. Opinion of Counsel for IBC and Acquisition Sub
LIST OF SCHEDULES
Schedule 3.2 University Capitalization
Schedule 3.3 Bank Capitalization
Schedule 3.5 No Violations
Schedule 3.6 Consents and Approvals
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Schedule 3.7 Regulatory Reports
Schedule 3.9 Other Liabilities and Obligations
Schedule 3.10 Absence of Certain Changes
Schedule 3.12 Legal Proceedings
Schedule 3.13 Tax Matters
Schedule 3.14(a) Employee Welfare Benefit Plans
Schedule 3.14(b) Employee Pension Benefit Plans
Schedule 3.14(c) Deferred Compensation, Bonus and Other Plans, Programs, Etc.
Schedule 3.14(d) Governmental Approvals Relating to Pension Benefit Plans
Schedule 3.14(e) Compliance with Code
Schedule 3.14(f) ERISA Compliance
Schedule 3.14(g) Title IV of ERISA
Schedule 3.14(i) Further Commitments; Amendment; Etc.
Schedule 3.14(j) Claims, Disputes, Etc.
Schedule 3.14(k) Taxes, Penalties, Etc.
Schedule 3.14(l) Additional Payments Due Under Deferred Compensation, Bonus,
Employee Welfare Benefit Plans and Employee Pension Benefit
Plans
Schedule 3.15 Employment Matters
Schedule 3.16 Leases, Contracts and Agreements
Schedule 3.17 Related Company Transactions
Schedule 3.18 Compliance with Laws
Schedule 3.19 Insurance Policies
Schedule 3.20 Loans
Schedule 3.22 Patents, Trademarks and Copyrights
Schedule 3.23 Environmental Compliance
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Schedule 3.24 Regulatory Actions
Schedule 3.25 Title to Properties; Encumbrances
Schedule 4.2 Authority Relative to Agreement
Schedule 5.1(j) List of Accounts and Safe Deposit Boxes
Schedule 5.1(k) List of Liabilities and Obligations of University and the Bank
Schedule 6.4 University Indebtedness
v
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AGREEMENT AND PLAN OF MERGER
AGREEMENT AND PLAN OF MERGER ("Agreement") dated as of August 15, 1997, by
and among International Bancshares Corporation a Texas corporation ("IBC"),
University Bancshares, Inc., a Texas corporation ("University"), Joe L.
Allbritton and Robert L. Allbritton (together with Joe L. Allbritton, the
"Shareholders").
WHEREAS, IBC and University believe that the Merger (as defined herein) of
University with an existing or to-be-formed subsidiary ("Acquisition Sub") of
IBC incorporated under the laws of the State of Texas, with University to be the
surviving entity in such merger and as a result of which University will become
a wholly-owned subsidiary of IBC, all in the manner provided by, and subject to
the terms and conditions set forth in, this Agreement and all exhibits,
schedules and supplements hereto, is desirable and in the best interests of
their respective institutions and shareholders; and
WHEREAS, immediately after the Merger, IBC will cause (i) University, as
the surviving corporation in the Merger, to be merged with and into IBC, and
(ii) University Bank, Houston, Texas, a Texas state banking association and
wholly-owned subsidiary of University (the "Bank"), to be merged with and into
International Bank of Commerce, Laredo, Texas, a Texas state banking association
("IBC Bank"); and
WHEREAS, the respective boards of directors of University and IBC have
approved this Agreement and the proposed transactions substantially on the terms
and conditions set forth in this Agreement.
NOW, THEREFORE, in consideration of the premises and the mutual covenants
hereinafter set forth, and other good and valuable consideration, the receipt
and sufficiency of which are hereby acknowledged, the parties, intending to be
legally bound, hereby agree as follows:
ARTICLE I.
THE MERGER
SECTION 1.1 THE MERGERS. (a) Upon the terms and subject to the conditions
set forth herein and in the Agreement and Plan of Merger in the form attached
hereto as Exhibit A, with such changes thereto as may be appropriate to satisfy
the requirements of the Secretary of State of the State (the "Merger
Agreement"), and in accordance with the Texas Business Corporation Act (the
"TBCA"), Acquisition Sub shall be merged with and into University (the "Merger")
as soon as practicable following the satisfaction or waiver, if permissible, of
the conditions set forth in Article VII hereof. Following the Merger, University
shall continue as the surviving corporation (the "Surviving Corporation"), which
will be wholly-owned by IBC, and the separate corporate existence of Acquisition
Sub shall cease. IBC shall not be deemed a party to the Merger for the purposes
of Article 5.06 of the TBCA or for any other purpose.
(b) Immediately after the Merger, (i) University, as the surviving
corporation in the Merger, will be merged with and into IBC (the "Subsequent
Merger")and (ii) the Bank will be merged with and into IBC Bank (the "Bank
Merger" and, collectively with the Merger and the Subsequent Merger, the
"Mergers") pursuant to the Agreement and Plan of Merger in the form attached
hereto as Exhibit B, with such changes thereto as may be appropriate to satisfy
<PAGE>
the requirements of the Texas Department of Banking (the "Bank Merger Agreement"
and, together with the Merger Agreement, the "Merger Agreements"). University
agrees, and shall cause the Bank and the Company's and the Bank's respective
directors, officers, employees, agents and representatives, to execute and
deliver, as appropriate, the respective Merger Agreements, any appropriate
Articles of Merger and other related documents and to take any appropriate other
actions and otherwise cooperate with IBC in order to facilitate each of such
Mergers.
SECTION 1.2 EFFECTIVE TIME. The Merger shall be consummated by the filing
with the Texas Secretary of State of Articles of Merger, in the form required by
and executed in accordance with the relevant provisions of the TBCA, and by the
issuance of a Certificate of Merger by the Secretary of State of Texas. (The
date of such issuance and filing or such other time and date as may be specified
in the Articles of Merger shall be the "Effective Time").
SECTION 1.3 CERTAIN EFFECTS OF THE MERGER. The Merger shall have the
effects set forth in Article 5.06 of the TBCA.
SECTION 1.4 ARTICLES OF INCORPORATION AND BYLAWS. The Articles of
Incorporation and the Bylaws of University, in each case as in effect at the
Effective Time, shall be the Articles of Incorporation and Bylaws of the
Surviving Corporation.
SECTION 1.5 DIRECTORS AND OFFICERS. The directors and officers of
Acquisition Sub at the Effective Time shall be the directors and officers of the
Surviving Corporation and shall hold office from the Effective Time until their
respective successors are duly elected or appointed and qualified in the manner
provided in the Articles of Incorporation and Bylaws of the Surviving
Corporation, or as otherwise provided by law.
SECTION 1.6 CONVERSION OF SHARES. (a) Each share of University's common
stock, par value $1.00 per share ("University Common Stock" or "Shares"), issued
and outstanding immediately prior to the Effective Time ("Common Shares
Outstanding"), other than Dissenting Shares (as defined in Section 2.1), shall,
by virtue of the Merger and without any action on the part of the holder
thereof, be converted into and represent the right to receive the consideration
payable as set forth below (the "Merger Consideration") to the holder of record
thereof, without interest thereon, upon surrender of the certificate
representing such Share. At the Closing (as hereinafter defined), University
shall calculate and certify to IBC the number of Common Shares Outstanding.
(b) Each holder of University Common Stock shall receive, for each share
of University Common Stock so held, Merger Consideration equal to the quotient
of Forty Million and No/100 Dollars ($40,000,000.00), DIVIDED BY the number of
Common Shares Outstanding.
(c) Each share of capital stock of Acquisition Sub issued and outstanding
immediately before the Effective Time shall be converted into and become, by
virtue of the Merger, one share of capital stock of the Surviving Corporation.
(d) At the Closing, the Surviving Corporation shall, upon delivery of the
certificates representing the Shares, pay the Merger Consideration to the
Shareholders upon the terms hereinabove set forth by wire transfer of
immediately available funds to the account(s) designated by the Shareholders to
IBC at least one business day prior to the Closing.
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SECTION 1.7 SHAREHOLDERS' CONSENT. University shall, in accordance with
applicable law and in form satisfactory to IBC, obtain a unanimous written
consent of its shareholders authorizing and approving the Merger, this Agreement
and the Merger Agreement, and each of the Shareholders agrees to execute and
deliver any such written consent(s), together with any other documents necessary
or appropriate in order to consummate the Merger and each of the transactions
contemplated by this Agreement in accordance with the terms hereof.
SECTION 1.8 CLOSING. Upon the terms and subject to the conditions hereof,
as soon as practicable after the receipt of all required regulatory approvals in
connection with the Mergers and the expiration of all applicable waiting periods
and the satisfaction or waiver, if permissible, of each of the other conditions
set forth in Article VII hereof, University and Acquisition Sub shall execute
and deliver the Articles of Merger, as described in Section 1.2, and the parties
hereto shall take all such other and further actions as may be required by law
to make the Mergers effective. Prior to the filing referred to in this Section,
a closing (the "Closing") will be held at the office of Fulbright & Jaworski
L.L.P. in Houston, Texas (or such other place as the parties may agree) for the
purpose of confirming all of the foregoing.
ARTICLE II
DISSENTING SHARES
SECTION 2.1 DISSENTING SHARES. Each of the Shareholders (i) has committed
and agreed hereby to authorize and approve the Merger, this Agreement and the
Merger Agreement, and (ii) hereby agrees not to sell, convey or otherwise
dispose of any shares of University Common Stock, or any interest therein, held
by such Shareholder as of the date hereof. As such, there will be no dissenting
shareholders of University in the Merger.
ARTICLE III
REPRESENTATIONS AND WARRANTIES OF
UNIVERSITY AND ALLBRITTON
University and Joe L. Allbritton ("Allbritton") hereby jointly and
severally make the representations and warranties set forth in this Article III
to IBC. University and Allbritton have delivered to IBC the Schedules to this
Agreement referred to in this Article III prior to the date hereof. University
and Allbritton agree at the Closing to provide IBC and Acquisition Sub with
supplemental Schedules reflecting any changes thereto required to reflect any
changes in circumstances occurring between the date of this Agreement and the
date of the Closing except for changes required by this Agreement. If the
Closing shall occur, the Schedules as so supplemented shall be deemed the
Schedules of this Agreement after the Closing.
SECTION 3.1 ORGANIZATION AND QUALIFICATION. University is a Texas
corporation and a registered bank holding company under the Bank Holding Company
Act of 1956, as amended, and is duly organized, validly existing and in good
standing under the laws of the State of Texas and all laws, rules, and
regulations applicable to bank holding companies. The Bank is a Texas state
banking association, duly organized, validly existing and duly authorized to
transact the business of banking under the laws of the State of Texas, and is
not a member of the Federal Reserve System. Each of University and the Bank has
all requisite corporate power and authority to carry on its business as now
being conducted and to own, lease and operate its properties and assets as
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now owned, leased or operated. University does not own or control any Affiliate
(as defined in Section 3.17) or any Subsidiary (as defined in Section 10.13(a))
other than the Bank. True and correct copies of the Articles of Incorporation or
Association and Bylaws of University and the Bank, with all amendments thereto
through the date of this Agreement, have been delivered by University to IBC.
The nature of the business of University and the Bank and their respective
activities, as currently conducted, do not require them to be qualified to do
business in any jurisdiction other than the State of Texas.
SECTION 3.2 UNIVERSITY CAPITALIZATION. As of the date hereof, the
authorized capital stock of University consists solely of 1,200,000 shares of
University Common Stock, of which 1,116,239 shares are issued and outstanding,
and none of which are held in treasury. The Shareholders are, and will at the
Closing be, the record and beneficial owners of all of the issued and
outstanding shares of capital stock of University, each owning the respective
numbers of shares of Common Stock set forth on Schedule 3.2 free and clear of
all liens, encumbrances, restrictions and claims of every kind. Except as set
forth on Schedule 3.2, there are no outstanding subscriptions, options,
convertible securities, rights, warrants, calls, or other agreements or
commitments of any kind issued or granted by, or binding upon, University or the
Bank to purchase or otherwise acquire any security of or equity interest in
University or the Bank. Except as set forth on Schedule 3.2, there are no
outstanding subscriptions, options, rights, warrants, calls, convertible
securities or other agreements or commitments obligating University to issue any
shares of University, or to the knowledge of University, irrevocable proxies or
any agreements restricting the transfer of or otherwise relating to shares of
its capital stock of any class. All of the Shares that have been issued have
been duly authorized, validly issued and are fully paid and non-assessable, and
are free of preemptive rights. There are no restrictions applicable to the
payment of dividends on the Shares except pursuant to the TBCA and applicable
banking laws and regulations, and, except as set forth on Schedule 3.2, all
dividends declared prior to the date hereof have been paid.
SECTION 3.3 BANK CAPITALIZATION; OTHER SECURITIES. As of the date hereof,
the authorized capital stock of the Bank consists solely of 250,000 shares of
common stock, par value 10.00 per share, of which 250,000 shares are issued and
outstanding, and none of which are held in treasury. All of the issued and
outstanding shares of the capital stock of the Bank (i) are duly authorized,
validly issued, fully paid and nonassessable, (ii) are owned by University free
and clear of any liens, claims, security interests and encumbrances of any kind,
and (iii) there are no irrevocable proxies with respect to such shares and there
are no outstanding or authorized subscriptions, options, warrants, calls,
rights, or other agreements or commitments of any kind restricting the transfer
of, requiring the issuance or sale of, or otherwise relating to any of such
shares of capital stock to any person. University has no Subsidiaries (as
defined in Section 10.13(a)), except for the Bank. Set forth on Schedule 3.3
hereto is a list of all equity ownership by University or Bank for the account
of University or Bank in any other person other than the Bank (the "Other
Securities"). University or the Bank owns each Other Security free and clear of
any lien, encumbrance, security interest or charge. To the knowledge of
University, the Other Securities represent less than five percent of the
outstanding equity securities of each such person.
SECTION 3.4 AUTHORITY RELATIVE TO THE AGREEMENT. University has full
corporate power and authority, and, except for the approval by University's
shareholders and the appropriate regulatory authorities, no further proceedings
on the part of University are necessary, to execute and deliver this Agreement
and to consummate the transactions contemplated hereby, all of which have been
duly and validly authorized by its Board of Directors. The Bank has full
corporate power and authority, and, except for the approval of the appropriate
regulatory authorities, no
4
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further proceedings on the part of the Bank are necessary for the Bank to
execute and deliver the Bank Merger Agreement and to consummate the transactions
contemplated thereby, all of which have been duly and validly authorized by the
Bank's Board of Directors. Each of the Shareholders has full power and
authority, and, except for the appropriate regulatory authorities, no further
proceedings on the part of the Shareholders are necessary, to execute and
deliver this Agreement and to consummate the transactions contemplated hereby.
This Agreement has been duly executed and delivered by University and the
Shareholders and is a duly authorized, valid, legally binding and enforceable
obligation of University and the Shareholders, subject to the effect of
bankruptcy, insolvency, reorganization, moratorium, or other similar laws
relating to creditors' rights generally and general equitable principles, and
subject, with respect to University, to such shareholder approvals and such
approval of regulatory agencies and other governmental authorities having
authority over University as may be required by statute or regulation. The
execution, delivery and performance of this Agreement and the consummation of
the transactions contemplated hereby will not conflict with, or result in any
violation or breach of or default under the respective Articles of Incorporation
or Association or Bylaws of University or the Bank.
SECTION 3.5 NO VIOLATION. Except as set forth on Schedule 3.5, neither the
execution, delivery nor performance of this Agreement in its entirety, nor the
consummation of all of the transactions contemplated hereby, following the
receipt of such approvals as may be required from University's shareholders, the
Federal Deposit Insurance Corporation ("FDIC"), the Board of Governors of the
Federal Reserve System ("FRB"), and the Texas Department of Banking ("TDB"),
will (i) violate (with or without the giving of notice or the passage of time),
any law, order, writ, judgment, injunction, award, decree, rule, statute,
ordinance or regulation applicable to University or the Bank or to either
Shareholder or (ii) be in conflict with, result in a breach or termination of
any provision of, cause the acceleration of the maturity of any debt or
obligation pursuant to, constitute a default (or give rise to any right of
termination, cancellation or acceleration) under, or result in the creation of
any security interest, lien, charge or other encumbrance upon any property or
assets of University or the Bank or either Shareholder pursuant to, any terms,
conditions or provisions of any note, license, instrument, indenture, mortgage,
deed of trust or other agreement or understanding or any other restriction of
any kind or character, to which University or the Bank or either Shareholder is
a party or by which any of their assets or properties are subject or bound.
Except as set forth in Schedule 3.5, or as contemplated hereby, the corporate
existence, business organization, assets, licenses, permits, authorizations and
contracts of University and the Bank will not be terminated or impaired by
reason of the execution, delivery or performance by University of this Agreement
or consummation by University of the transactions contemplated hereby, assuming
the receipt of required shareholder and regulatory approvals.
SECTION 3.6 CONSENTS AND APPROVALS. University's Board of Directors has
unanimously determined that the Merger is fair to University's shareholders and
has unanimously resolved to recommend approval and adoption of this Agreement by
University's shareholders. Except as described in Schedule 3.6 hereto, no prior
consent, approval or authorization of, or declaration, filing or registration
with any person, domestic or foreign, is required of University or the
Shareholders in connection with the execution, delivery and performance by
University and the Shareholders of this Agreement and the transactions
contemplated hereby or the resulting change of control of the Bank, except the
filing of the Articles of Merger under the TBCA and such approvals as may be
required from the FRB, the TDB, the FDIC and holders of Shares under the TBCA.
5
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SECTION 3.7 REGULATORY REPORTS. Except as set forth on Schedule 3.7,
during the last five years University and the Bank have timely filed (including
within any authorized extension period) all reports, registrations and
statements, together with any amendments required to be made thereto, that are
required to be filed with the FRB, the TDB, and the FDIC, as well as all
material reports, registrations and statements, together with any amendments
required to be made thereto, that are required to be filed with any other
regulatory authority having jurisdiction over any such persons.
SECTION 3.8 SEC STATUS; SECURITIES ISSUANCES. University is not subject to
the registration provisions of Section 12 of the Exchange Act nor the rules and
regulations of the SEC promulgated under Section 12 of the Exchange Act. All
issuances of securities by University and the Bank have been registered under
the Securities Act, the Securities Act of the State of Texas, the Texas Banking
Act, and all other applicable laws or were exempt from any such registration
requirements.
SECTION 3.9 FINANCIAL STATEMENTS. University has provided IBC with a true
and complete copy of the audited consolidated balance sheet of University and
the Bank as of December 31, 1996, and the related consolidated statements of
income, stockholders' equity and statements of cash flows for the years ended
December 31, 1996 and 1995, and the unaudited consolidated balance sheets of
University and the Bank as of March 31, 1997, and June 30, 1997 and the related
unaudited consolidated statements of income and stockholders' equity statements
of for the three-month period ended March 31, 1997, and the six-month period
ended June 30, 1997 (such consolidated statements of financial position and the
related consolidated statements of income, shareholders' equity and changes in
cash flows are collectively referred to herein as the "Consolidated Financial
Statements") (collectively, with the Consolidated Financial Statements and the
notes and schedules thereto, referred to as the "Financial Statements"). Except
as described in the notes to the Consolidated Financial Statements, the
Consolidated Financial Statements, including the consolidated balance sheet and
the related consolidated statements of income, stockholders' equity and
statement of cash flows (including the related notes thereto) of University and
the Bank, fairly present the financial position of University and the Bank as of
the dates thereof and the results of operations and changes in consolidated
financial position of University and the Bank for the periods then ended, in
conformity with Generally Accepted Accounting Principles ("GAAP") applied on a
basis consistent with prior periods (subject, in the case of the unaudited
interim financial statements, to normal year-end adjustments and the fact that
they do not contain all of the footnote disclosures required by GAAP), except as
otherwise noted therein, and the accounting records underlying the Consolidated
Financial Statements accurately and fairly reflect in all material respects the
transactions of University and the Bank. As of their dates, the Consolidated
Financial Statements conformed in all material respects with all applicable
rules and regulations promulgated by the FRB, the TDB, and the FDIC. To the
knowledge of University, neither University nor the Bank has any liabilities or
obligations of a type which should be included in or reflected on the Financial
Statements if prepared in accordance with GAAP, whether related to tax or
non-tax matters, accrued or contingent, due or not yet due, liquidated or
unliquidated, or otherwise, except as and to the extent disclosed or reflected
in the Financial Statements or as set forth on Schedule 3.9. University will
provide IBC with the unaudited unconsolidated statements of financial position
of University and the Bank as of the end of each month hereafter, prepared on a
basis consistent with prior periods and promptly following their availability,
University will provide IBC with the Reports of Condition and Statements of
Income ("Call Reports") of the Bank for all periods ending after June 30, 1997.
University and the Bank
6
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have no off balance sheet liabilities associated with financial derivative
products or potential liabilities associated with financial derivative products.
SECTION 3.10 ABSENCE OF CERTAIN CHANGES. Except as set forth on Schedule
3.10, since December 31, 1994, University and the Bank have operated and
conducted their respective businesses in the ordinary course of business,
consistent with past practices, and, without limiting the generality of the
foregoing, have not taken any actions intended to alter in any material respect
the size or composition of the Bank's deposit base, securities portfolio, loan
portfolio or asset mix, including, without limitation, engaging in the practice
of offering above- or below-market rates to attract or maintain deposits or
loans. Additionally, except as and to the extent set forth on Schedule 3.10,
since December 31, 1996 (the "Balance Sheet Date") neither University nor the
Bank has:
(a) made any amendment to its Articles of Incorporation or Association or
Bylaws or changed the character of its business in any material manner;
(b) suffered any Material Adverse Effect (as defined in Section 10.13(b));
(c) to the knowledge of University, entered into any agreement, commitment
or transaction except in the ordinary course of business and consistent with
prudent banking practices;
(d) except in the ordinary course of business and consistent with prudent
banking practices, incurred, assumed or become subject to, whether directly or
by way of any guarantee or otherwise, any obligations or liabilities (absolute,
accrued, contingent or otherwise);
(e) permitted or allowed any of its material property or assets to be
subject to any mortgage, pledge, lien, security interest, encumbrance,
restriction or charge of any kind (other than statutory liens not yet
delinquent) except in the ordinary course of business and consistent with
prudent banking practices;
(f) except in the ordinary course of business and consistent with prudent
banking practices, canceled any debts, waived any claims or rights, or sold,
transferred, or otherwise disposed of any of its properties or assets;
(g) to the knowledge of University, disposed of or permitted to lapse any
rights to the use of any trademark, service mark, trade name or copyright, or
disposed of or disclosed to any person other than its employees or agents, any
trade secret not theretofore a matter of public knowledge;
(h) except as set forth on Schedule 3.10, granted any increase in
compensation or paid or agreed to pay or accrue any bonus, percentage
compensation, service award, severance payment or like benefit to or for the
credit of any director, officer, employee or agent (other than customary annual
compensation adjustments in accordance with past practices to employees who are
not executive officers), or entered into any employment or consulting contract
or other agreement with any director, officer or employee or adopted, amended or
terminated any pension, employee welfare, retirement, stock purchase, stock
option, stock appreciation rights, termination, severance, income protection,
golden parachute, savings or profit-sharing plan (including trust agreements and
insurance contracts embodying such plans), any deferred compensation, or
collective bargaining agreement, any group insurance contract or any other
incentive, welfare or employee benefit plan,
7
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program or agreement maintained by University or the Bank, for the directors,
employees or former employees of University or the Bank ("Employee Benefit
Plan");
(i) directly or indirectly declared, set aside or paid any dividend or
made any distribution in respect to its capital stock or redeemed, purchased or
otherwise acquired, or arranged for the redemption, purchase or acquisition of,
any shares of its capital stock or other of its securities, except for dividends
paid to University by the Bank;
(j) organized or acquired any capital stock or other equity securities or
acquired any equity or ownership interest in any person (except through
settlement of indebtedness, foreclosure, acquisition in lieu of foreclosure, the
exercise of creditors' remedies or in a fiduciary capacity, the ownership of
which does not expose University or the Bank to any liability from the business,
operations or liabilities of such person) which would or is reasonably likely to
have a Material Adverse Effect;
(k) issued, reserved for issuance, granted, sold or authorized the
issuance of any shares of its capital stock or subscriptions, options, warrants,
calls, rights or commitments of any kind relating to the issuance or sale of or
conversion into shares of its capital stock;
(l) made any or acquiesced with any change in any accounting methods,
principles or practices;
(m) to the knowledge of University, experienced any change in relations
with customers or clients of University or the Bank which would or is reasonably
likely to have a Material Adverse Effect;
(n) except for the transactions contemplated by this Agreement or as
otherwise permitted hereunder, entered into any transaction, or entered into,
modified or amended any contract or commitment, other than in the ordinary
course of business and consistent with prudent banking practices; or
(o) agreed, whether in writing or otherwise, to take any action the
performance of which would change the representations contained in this Section
3.10 in the future so that any such representation would not be true in all
material respects as of the Closing.
SECTION 3.11 UNIVERSITY INDEBTEDNESS. University has delivered to IBC true
and complete copies of all loan documents ("University Loan Documents") related
to indebtedness of University and the Bank, other than deposits, trade payables
and federal funds borrowings ("University Indebtedness"), and made available to
IBC all material correspondence concerning the status of University
Indebtedness.
SECTION 3.12 LITIGATION. Except as set forth on Schedule 3.12, there are
no actions, suits, claims, investigations, reviews or other proceedings pending
(other than any with respect to which University or the Bank has not yet been
served or otherwise been put on notice, of which, to the knowledge of
University, there are none) or, to the knowledge of University, threatened
against University or the Bank or involving any of their respective properties
or assets, or against either of the Shareholders in his capacity as a
shareholder, director or officer of University or the Bank, or involving the
Shares, at law or in equity or before or by any foreign, federal, state,
municipal, or other governmental court, department, commission, board, bureau,
agency, or other instrumentality
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or person or any board of arbitration or similar entity ("Proceeding"). The
Shareholders and University will notify IBC immediately in writing of any
Proceedings of the nature described in the foregoing sentence against either of
the Shareholders, University or the Bank.
SECTION 3.13 TAX MATTERS. University and the Bank have duly and timely
filed (including within any authorized extension period) all tax returns
required to be filed by them involving a material tax liability or other
material potential detriment for failure to file (the "Filed Returns").
University and the Bank have paid, or have established adequate reserves for the
payment of, all federal income taxes and all material state and local income
taxes and all franchise, property, sales, employment, withholding, foreign or
other taxes required to be paid by either of them with respect to the periods
covered by the Filed Returns. Except as described in Schedule 3.13, University
and the Bank have no direct or indirect liability for the payment of a material
amount of federal income taxes, state and local income taxes, and franchise,
property, sales, employment, withholding or other taxes in excess of amounts
paid or reserves established. Except as set forth on Schedule 3.13, neither
University nor the Bank has entered into any tax sharing agreement or other
agreement regarding the allocation of the tax liability of University or the
Bank. Neither University nor the Bank has filed any Internal Revenue Service
("IRS") Forms 1139 (Application for Tentative Refund). Except as set forth on
Schedule 3.13, there are no pending or threatened audits, investigations,
reviews or other similar proceedings as to which University or the Bank has been
notified in writing by the IRS or other taxing authority for taxes or
assessments of University or the Bank, nor are there any outstanding agreements
or waivers extending the statutory period of limitation applicable to any tax
return of University or the Bank for any period. University and the Bank have
withheld from employee wages all amounts required to be so withheld. For the
purposes of this Agreement, the term "tax" shall include all federal, state and
local taxes and related governmental charges and any interest or penalties
payable in connection with the payment of taxes.
SECTION 3.14 EMPLOYEE BENEFIT PLANS.
(a) Schedule 3.14(a) lists each "employee welfare benefit plan" (as
defined in Section 3(1) of the Employee Retirement Income Security Act of 1974,
as amended ("ERISA")) maintained by University or the Bank or to which
University or the Bank contribute or are required to contribute, including any
multiemployer welfare plan (such employee welfare benefit plans being
hereinafter collectively referred to as the "Welfare Benefit Plans") and sets
forth (i) the amount of any liability of University or the Bank for
contributions more than thirty days past due with respect to each Welfare
Benefit Plan as of the date hereof and as of the end of any subsequent month
ending prior to the Closing and (ii) the annual cost attributable to each of the
Welfare Benefit Plans; except as set forth on Schedule 3.14(a), no Welfare
Benefit Plan provides for continuing benefits or coverage for any participant,
beneficiary or former employee after such participant's or former employee's
termination of employment except as may be required by Section 4980B of the Code
and Sections 601-608 of ERISA;
(b) Schedule 3.14(b) lists each "employee pension benefit plan" (as
defined in Section 3(2) of ERISA and not exempted under Section 4(b) or 201 of
ERISA) maintained by University or the Bank or to which University or the Bank
contribute or are required to contribute, including any multiemployer plan (as
defined in Section 3(37) of ERISA) (such employee pension benefit plans being
hereinafter collectively referred to as the "Pension Benefit Plans");
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(c) Except as set forth on Schedule 3.14(c), neither University nor the
Bank maintains, has or is a party to any plan, program, agreement, arrangement
or commitment for the benefit of any of its employees, directors or officers
relating to any of the following: severance pay, deferred compensation, bonuses,
stock options, employee stock purchases, restricted stock, excess benefits,
incentive compensation, stock bonuses, cash bonuses, golden parachutes, life
insurance, rabbi trusts, cafeteria plans, dependent care, unfunded plans or any
other employee-related plans, programs, agreements, arrangements or commitments
(other than normal policies concerning holidays, vacations and salary
continuation during short absences for illness or other reasons), or any
program, plan, commitments, or practice of purchasing or otherwise compensating
employees, including officers, for accrued vacation or sick leave upon
termination of employment(collectively referred to as "Other Programs");
(d) All of the Pension Benefit Plans and Welfare Benefit Plans and any
related trust agreements or insurance or annuity contracts (or any other funding
instruments) and all Other Programs comply currently, and have complied in the
past, both as to form and operation, with the provisions of ERISA, the Code and
with all other applicable laws, rules and regulations governing the
establishment and operation of the Pension Benefit Plans, Welfare Benefit Plans
and all Other Programs except where such failure to comply would not have a
Material Adverse Effect; except as set forth on Schedule 3.14(d), all necessary
governmental approvals relating to the establishment of the Pension Benefit
Plans have been obtained; and with respect to each Pension Benefit Plan that is
intended to be tax-qualified under Section 401(a) or 403(a) of the Code, a
favorable determination letter as to the qualification under the Code of each
such Pension Benefit Plan and each material amendment thereto has been issued by
the Internal Revenue Service (and nothing has occurred since the date of the
last such determination letter which resulted in, or is likely to result in the
revocation of such determination);
(e) Except as set forth on Schedule 3.14(e), each Welfare Benefit Plan,
each Pension Benefit Plan and each Other Program has been administered in
compliance in all material respects with the requirements of the Code, ERISA and
all other applicable laws, and all reports and disclosures required by ERISA,
the Code and any other applicable laws with respect to each Welfare Benefit
Plan, each Pension Benefit Plan and each Other Program have been timely filed;
(f) Except as set forth on Schedule 3.14(f), on and after January 1, 1975,
neither University, the Bank nor any plan fiduciary of any Welfare Benefit Plan
or Pension Benefit Plan has engaged in any transaction in violation of Section
406 of ERISA (for which transaction no exemption exists under Section 408 of
ERISA) or in any "prohibited transaction" as defined in Section 4975(c)(1) of
the Code (for which no exemption exists under Section 4975(c)(2) or 4975(d) of
the Code);
(g) Except as set forth on Schedule 3.14(g), neither University, the Bank
nor any corporation or other trade or business controlled by or under common
control with University (as determined under Sections 414(b) and 414(c) of the
Code) ("Common Control Entity") is, or has been within the past three years, a
contributing sponsor (as defined in Section 4001(a)(13) of ERISA) of a Pension
Benefit Plan subject to the provisions of Title IV of ERISA, nor has University,
the Bank or a Common Control Entity maintained or participated in any employee
pension benefit plan (defined in Section 3(2) of ERISA) subject to the provision
of Title IV of ERISA. In addition, except as set forth on Schedule 3.14(g),
neither University, nor the Bank nor a Common Control Entity (i) is a party to a
collective bargaining agreement, (ii) has maintained or contributed to, or has
participated in or agreed to participate in, a multiemployer plan (as defined in
Section 3(37) of ERISA), or (iii) has made a complete or partial withdrawal from
a multiemployer plan (as defined
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in Section 3(37) of ERISA) so as to incur withdrawal liability as defined in
Section 4201 of ERISA (without regard to subsequent reduction or waiver of such
liability under Section 4207 or 4208 of ERISA);
(h) True and complete copies of each Welfare Benefit Plan, each Pension
Benefit Plan and each Other Program, related trust agreements or insurance or
annuity contracts (or any other funding instruments), summary plan descriptions,
the most recent determination letter issued by the Internal Revenue Service with
respect to each Pension Benefit Plan, the most recent application for a
determination letter from the Internal Revenue Service with respect to each
Pension Benefit Plan, the Annual Reports on Form 5500 Series filed with any
governmental agency for each Welfare Benefit Plan, Pension Benefit Plan and
Other Program for the three most recent plan years, the Summary Annual Report
provided to participants with respect to each Welfare Benefit Plan, Pension
Benefit Plan, and Other Program for the three most recent plan years, and any
correspondence to or from the IRS, Department of Labor, or bank examiner with
respect to any Welfare Benefit Plan, Pension Benefit Plan, or Other Program
during the three most recent plan years, have been furnished to IBC;
(i) All Welfare Benefit Plans, Pension Benefit Plans, and Other Programs
related trust agreements or insurance or annuity contracts (or any other funding
instruments), are legally valid and binding and in full force and effect and,
except as set forth on Schedule 3.14(i), there are no promised increases in
benefits (whether expressed, implied, oral or written) under any of these plans
nor any obligations, commitments or understandings to continue any of these
plans, (whether expressed, implied, oral or written) except as required by
Section 4980B of the Code and Sections 601-608 of ERISA or under the terms of
such plans; except as set forth on Schedule 3.14(i), University, the Bank, or a
Common Control Entity has the right to modify, amend, or terminate each Welfare
Benefit Plan, Pension Benefit Plan, and Other Program at any time; the
termination of any Welfare Benefit Plan, Pension Benefit Plan, or Other Program
would not accelerate or increase any benefits payable under such plan; and
except as set forth on Schedule 3.14(i), in the event of termination of any
Welfare Benefit Plan, Pension Benefit Plan, or Other Program, neither
University, nor the Bank, would have any liability with respect to such plan,
other than the payment of benefits pursuant to such plan;
(j) Except as set forth on Schedule 3.14(j), there are no claims pending
with respect to, or under, any Pension Benefit Plan, Welfare Benefit Plan or any
Other Program, other than routine claims for plan benefits, and there are no
disputes or litigation pending or threatened with respect to any such plans; and
all contributions, premiums, or other payments due from University or the Bank
have been fully paid or adequately provided for and disclosed on the books and
financial statements of University or the Bank;
(k) Except as set forth on Schedule 3.14(k), no action has been taken, nor
has there been a failure to take any action that would subject any person or
entity to any liability for any income, excise or other tax or penalty in
connection with any Pension Benefit Plan, Welfare Benefit Plan or any Other
Program, other than for income taxes due with respect to benefits paid; and
(l) Except as otherwise set forth in Schedule 3.14(l), neither the
execution and delivery of this Agreement nor the consummation of the
transactions contemplated hereby will (i) result in any payment to be made by
University or the Bank (including, without limitation, severance, unemployment
compensation, golden parachute (defined in Section 280G of the Code), or
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otherwise) becoming due to any employee, director or consultant, or (ii)
increase any benefits otherwise payable under any Welfare Benefit Plan, Pension
Benefit Plan, or any Other Program.
SECTION 3.15 EMPLOYMENT MATTERS. Except as disclosed on Schedules 3.14(a),
3.14(b), 3.14(c) and 3.15, neither University nor the Bank is a party to (i) any
oral or written contracts, agreements, understandings or commitments, express or
implied, granting any material benefits or rights to any employee(s), (ii) any
collective bargaining agreement, or (iii) any conciliation agreement with the
Department of Labor, the Equal Employment Opportunity Commission or any federal,
state or local agency which requires equal employment opportunities or
affirmative action in employment. There are no unfair labor practice complaints
pending against University or the Bank (as to which University or the Bank has
been notified in writing) before the National Labor Relations Board and no
similar claims pending before any similar state, local or foreign agency as to
which University or the Bank has been notified in writing. To the knowledge of
University, there is no activity or proceeding of any labor organization (or
representative thereof) or employee group to organize any employees of
University or the Bank, nor of any strikes, slowdowns, work stoppages, lockouts,
or threats thereof, by or with respect to any such employees. University and the
Bank are in compliance in all material respects with all applicable laws
respecting employment and employment practices, terms and conditions of
employment and wages and hours, and neither University nor the Bank are engaged
in any unfair labor practice.
SECTION 3.16 LEASES, CONTRACTS AND AGREEMENTS. Schedules 3.13, 3.14(a),
3.14(b), 3.14(c) and 3.16 set forth an accurate and complete list of all leases,
subleases, licenses, contracts and agreements to which University or the Bank is
a party or by which University or the Bank is bound which obligate or may
obligate University and/or the Bank for an amount in excess of $25,000 over the
entire term of any such agreement or related contracts of a similar nature which
in the aggregate obligate or may obligate University or the Bank in the
aggregate for an amount in excess of $25,000 over the entire term of such
related contracts (the "Contracts"). University has delivered or made available
to IBC true and correct copies of all Contracts. For the purposes of this
Agreement, the Contracts shall be deemed not to include loans made by,
repurchase agreements made by, spot foreign exchange transactions of, bankers
acceptances of, agreements with Bank customers for trust services, or deposits
by University or the Bank, but does include unfunded loan commitments and
letters of credit issued by University or the Bank where the borrowers' total
direct and indirect indebtedness to the Bank is in excess of $50,000. Except as
set forth in Schedule 3.16, no participations or loans have been sold which have
buy back, recourse or guaranty provisions which create contingent or direct
liabilities of University or the Bank. To the knowledge of University, all of
the Contracts are legal, valid and binding obligations of the parties to the
Contracts enforceable in accordance with their terms, subject to the effect of
bankruptcy, insolvency, reorganization, moratorium, or other similar laws
relating to creditors' rights generally and to general equitable principles, and
are in full force and effect. To the knowledge of University, except as
described in Schedule 3.16, all rent and other payments by University and the
Bank under the Contracts are current, there are no existing defaults by
University or the Bank under the Contracts and no termination, condition or
other event has occurred which (whether with or without notice, lapse of time or
the happening or occurrence of any other event) would constitute a default.
University and the Bank has a good and valid leasehold interest in each parcel
of real property leased by it free and clear of all mortgages, pledges, liens,
encumbrances and security interests. Except for deposit accounts entered into
with the Bank in the ordinary course of business or as set forth on Schedule
3.16, neither University nor the Bank is a party to or bound by any contract,
agreement, commitment or understanding with either Shareholder or any Affiliate
of a Shareholder.
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SECTION 3.17 RELATED COMPANY TRANSACTIONS. Except as set forth on
Schedules 3.13, 3.14(a), 3.14(b), 3.14(c), 3.15, 3.16 and 3.17, there are no
agreements, instruments, commitments, extensions of credit, tax sharing or
allocation agreements or other contractual agreements of any kind between or
among University, whether on its own behalf or in its capacity as trustee or
custodian for the funds of any employee benefit plan (as defined in ERISA), and
any of its Affiliates (including the Bank). The term "Affiliate" as used in this
Agreement means, with respect to any person, any person that, directly or
indirectly, controls, is controlled by, or is under common control with, such
person in question. For the purposes of this definition, "control" (including,
with correlative meaning, the terms "controlled by" and "under common control
with") as used with respect to any person, shall mean the possession, directly
or indirectly, of the power to direct or cause the direction of the management
and policies of such person, whether through the ownership of voting securities
or by contract or otherwise.
SECTION 3.18 COMPLIANCE WITH LAWS. Except as set forth on Schedule 3.18,
to the knowledge of University, neither University nor the Bank is in material
default in respect to or is in material violation of (i) any judgment, order,
writ, injunction or decree of any court or (ii) any statute, law, ordinance,
rule, order or regulation of any governmental department, commission, board,
bureau, agency or instrumentality, federal, state or local, including (for
purposes of illustration and not limitation) the Bank Secrecy Act, capital and
FRB reserve requirements, capital ratios and loan limitations of the FRB, the
OCC, the FDIC or the Commissioner. University and the Bank have all permits,
licenses, and franchises from governmental agencies required to conduct their
businesses as they are now being conducted, except where the failure to have any
such permit, license or franchise would not have a Material Adverse Effect.
SECTION 3.19 INSURANCE. University and the Bank have in effect the
insurance coverage (including fidelity bonds) described in Schedule 3.19 and
have had similar insurance in force for the last 5 years. Except as set forth on
Schedule 3.19, there have been no claims under such fidelity bonds within the
last 5 years and to the knowledge of University no facts exist which would form
the basis of a claim under such bonds. To the knowledge of University, there is
no reason to believe that the existing fidelity coverage would not be renewed by
its carrier on substantially the same terms unless such failure to renew is
based upon any pending claim.
SECTION 3.20 LOANS. To the knowledge of University, each loan, including,
without limitation, each loan in which the Bank holds a participation interest
(collectively, "Loans") reflected as an asset in the Financial Statements is the
legal, valid and binding obligation of the obligor of each Loan, enforceable in
accordance with its terms, subject to the effect of bankruptcy, insolvency,
reorganization, moratorium, or other similar laws relating to creditors' rights
generally and to general equitable principles; provided, however, that no
representation or warranty is made as to the collectibility of such Loans. All
such Loans were made in the ordinary course of University's business, have been
made in accordance with reasonable and prudent banking practices, and priced
consistently with all other similar Loans of University. University or the Bank
owns each such Loan free and clear of all liens, claims and encumbrances. To the
knowledge of University, the Bank does not have in its portfolio any Loan
exceeding its legal lending limit. Schedule 3.20 sets forth, as of June 30,
1997, a list of all of the Bank's outstanding Loans that were classified as
delinquent, substandard, doubtful, loss, nonperforming or problem Loans in
connection with the Bank's most recent examination or were considered to be so
classified at June 30, 1997 under the Bank's policies and procedures.
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SECTION 3.21 FIDUCIARY RESPONSIBILITIES. To the knowledge of University,
University and the Bank have performed in all respects all of their respective
duties as a trustee, custodian, guardian or as an escrow agent in a manner which
complies in all material respects with all applicable laws, regulations, orders,
agreements, instruments and common law standards, except where the failure to so
perform or comply would not have a Material Adverse Effect.
SECTION 3.22 PATENTS, TRADEMARKS AND COPYRIGHTS. Except as set forth in
Schedule 3.22, to the knowledge of University, neither University nor the Bank
requires the use of any material patent, patent application, invention, process,
trademark (whether registered or unregistered), trademark application, trade
name, service mark, copyright, or any material trade secret for the business or
operations of University or the Bank. To the knowledge of University, University
and the Bank own or are licensed or otherwise have the right to use the items
listed in Schedule 3.22.
SECTION 3.23 ENVIRONMENTAL COMPLIANCE. Except as set forth in Schedule
3.23, to the knowledge of University:
(a) University, the Bank and any property owned or operated by any of them
are in compliance in all respects with all applicable Environmental Laws (as
defined in Section 10.13(c)) and have obtained and are in compliance with all
permits, licenses and other authorizations (individually a "Permit," and
collectively, "Permits") required under any Environmental Law, except where the
failure to obtain or comply would not have a material adverse effect. There is
no past or present event, condition or circumstance that could reasonably be
expected to (1) interfere with the conduct of the business of University or the
Bank in the manner now conducted relating to such entity's compliance with
Environmental Laws, (2) constitute a material violation of any Environmental Law
or (3) have a Material Adverse Effect upon University or the Bank;
(b) Neither University nor the Bank currently leases, operates, owns, or
exercises managerial functions at nor has formerly leased, operated, owned, or
exercised managerial functions at any facility or real property that is subject
to any actual, potential, or threatened Proceeding under any Environmental Law;
(c) There are no Proceedings pending or, to the knowledge of University,
threatened against University or the Bank under any Environmental Law, or
relating to the release, threatened release, management, treatment, storage or
disposal of, or exposure to Polluting Substances (as defined in Section
10.13(d)), which Proceedings would, or could be reasonably expected to, have a
Material Adverse Effect, and neither University nor the Bank has received any
notice (whether from any regulatory body or private person) of any claim under,
or violation, or potential or threatened violation of, any Environmental Law,
which claim or violation would, or could be reasonably expected to, have a
Material Adverse Effect;
(d) There are no actions or Proceedings pending or threatened under any
Environmental Law involving the release or threat of release of any Polluting
Substances at, on or under any property where Polluting Substances generated by
University or the Bank have been disposed, treated or stored, which Proceedings
would, or could be reasonably expected to, have a Material Adverse Effect;
(e) There is no Property for which University or the Bank is or was
required to obtain any Permit under an Environmental Law to construct, demolish,
renovate, occupy, operate, or use such
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Property or any portion of it where the failure to obtain such Permit(s) would,
or could be reasonably expected to, have a Material Adverse Effect;
(f) Neither University nor the Bank has generated any Polluting Substances
for which it was required under an Environmental Law to execute any waste
disposal manifest or receipt;
(g) There has been no release of Polluting Substances at or under any
Property in violation of any Environmental Laws or which would require any
remediation or report or notification to any governmental or regulatory
authority;
(h) There are no underground or above ground storage tanks on or under any
Property which are not in compliance with Environmental Laws and any Property
previously containing such tanks has been remediated for any releases in
compliance with all Environmental Laws;
(i) There is no asbestos containing material present in any Controlled
Property (as defined below) or any Collateral Property (as defined below), nor
has University or the Bank received any written notice with respect to the
existence of asbestos containing material in any property (real or personal)
previously owned, operated, leased or managed by either of them which, in either
case, currently requires the removal of such asbestos;
(j) For purposes of this Section 3.23 and Section 6.9, "Property" includes
(1) any property (whether real or personal) which University or the Bank leases,
operates, owns or manages in any manner including without limitation any
property acquired by foreclosure or deed in lieu thereof ("Controlled Property")
and (2) property now held as security for a loan or other indebtedness by
University or the Bank or property currently proposed as security for loans or
other credit University or the Bank is currently evaluating whether to extend or
has committed to extend ("Collateral Property").
SECTION 3.24 REGULATORY ACTIONS. Except as set forth on Schedule 3.24,
there are no actions or proceedings pending (other than any with respect to
which University or the Bank has not yet been served or otherwise been put on
notice, of which, to the knowledge of University, there are none) or, to the
knowledge of University, threatened against University or the Bank by or before
the FRB, the TDB, the FDIC, the Environmental Protection Agency, the Texas
Natural Resource Conservation Commission, or any other nation or government, any
state or political subdivision thereof, or any entity exercising executive,
legislative, judicial, regulatory or administrative functions of or pertaining
to government. Except as set forth on Schedule 3.24, neither University nor the
Bank is subject to a formal or informal agreement, memorandum of understanding,
enforcement action with or any type of financial assistance by any regulatory
authority having jurisdiction over such entity. To the knowledge of University,
neither University nor the Bank has taken or agreed to take any action or has
knowledge of any fact or circumstance that would materially impede or delay
receipt of any required regulatory approval. Except as set forth in Schedule
3.24, to the knowledge of University, University and the Bank have not received
or been made aware of any complaints or inquiries under the Community
Reinvestment Act, the Fair Housing Act, the Equal Credit Opportunity Act or any
other state or federal anti-discrimination fair lending law.
SECTION 3.25 TITLE TO PROPERTIES; ENCUMBRANCES. Except as set forth on
Schedule 3.25, to the knowledge of University, University and the Bank have
unencumbered, good, legal, and indefeasible title to all their respective
properties and assets, real and personal, including, without
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limitation, all the properties and assets reflected in the Financial Statements
except for those properties and assets disposed of for fair market value in the
ordinary course of business and consistent with prudent banking practice since
the date of the Financial Statements and properties where the failure to have
such title would not have a Material Adverse Effect. Except as set forth on
Schedule 3.25, University or the Bank has a title policy in full force and
effect from a title insurance company which, to the knowledge of University, is
solvent, insuring good and indefeasible title (subject to the exceptions
identified in such title policies) to all real property owned by University and
the Bank in favor of University or the Bank, whichever is applicable. University
has made available to IBC all of the files and information in the possession of
University or the Bank concerning such properties, including any title
exceptions which might affect indefeasible title or value of such property.
University and the Bank each hold good and legal title or good and valid
leasehold rights to all assets that are necessary for them to conduct their
respective businesses as they are currently being conducted. Except as set forth
on Schedule 3.25, University owns all furniture, equipment, art and other
property used to transact business presently located on its premises except for
items of personal property owned by employees.
SECTION 3.26 REPRESENTATIONS NOT MISLEADING. No representation or warranty
by University or the Shareholders in this Agreement, nor any certificate or
schedule furnished to IBC or Acquisition Sub by the Shareholders, University or
the Bank under and pursuant to this Agreement, contains or will contain, when
taken as a whole, any untrue statement of a material fact or omit to state a
material fact necessary to make the statements contained herein or therein, in
light of the circumstances in which they were made, not misleading.
ARTICLE IV.
REPRESENTATIONS AND WARRANTIES OF IBC
IBC hereby makes the representations and warranties set forth in this
Article IV to University.
SECTION 4.1 ORGANIZATION AND AUTHORITY.
(a) IBC is a corporation 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 conduct its business as now conducted, to own, lease and
operate its properties and assets as now owned, leased or operated and to enter
into and carry out its obligations under this Agreement. IBC has provided to
University true and correct copies of its Articles of Incorporation and Bylaws.
(b) IBC is a registered bank holding company under the Bank Holding
Company Act of 1956, as amended, and in good standing under all laws, rules and
regulations applicable to bank holding companies. IBC is duly qualified or
licensed and in good standing in each jurisdiction which requires such
qualification where it owns or leases properties or conducts business.
SECTION 4.2 AUTHORITY RELATIVE TO AGREEMENT. IBC has full corporate power
and authority, and, except for the approvals of the appropriate regulatory
authorities, no further proceedings on the part of IBC are necessary to execute
and deliver this Agreement and to consummate the transactions contemplated
hereby, all of which have been duly and validly authorized by IBC's Board of
Directors. IBC Bank has full corporate power and authority, and,
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except for the approval of the appropriate regulatory authorities, no further
proceedings on the part of IBC Bank are necessary for IBC Bank to execute and
deliver the Bank Merger Agreement and to consummate the transactions
contemplated thereby, all of which have been duly and validly authorized by IBC
Bank's Board of Directors. This Agreement has been duly executed and delivered
by IBC and is a duly authorized, valid, legally binding and enforceable
obligation of IBC, subject to the effect of bankruptcy, insolvency,
reorganization, moratorium, or other similar laws relating to creditors' rights
generally and general equitable principles, and subject to such shareholder
approvals and such approval of regulatory agencies and other governmental
authorities having authority over IBC as may be required by statute or
regulation. IBC is not in violation of or default under its Articles of
Incorporation or Bylaws or any agreement, document or instrument under which IBC
is obligated or bound, or any law, order, judgment, injunction, award, decree,
statute, rule, ordinance or regulation applicable to IBC or any of its
Subsidiaries, the violation or breach of which could have a Material Adverse
Effect on IBC and its Subsidiaries taken as a whole. Except as set forth on
Schedule 4.2, neither the execution, delivery nor performance of this Agreement
in its entirety, nor the consummation of all the transactions contemplated
hereby, following the receipt of such approvals as may be required from the TDB,
the FRB, and the FDIC, will (i) violate (with or without the giving of notice or
passage of time), any law, order, writ, judgment, injunction, award, decree,
rule, statute, ordinance or regulation applicable to IBC or (ii) be in conflict
with, result in a breach or termination of any provision of, cause the
acceleration of the maturity of any debt or obligation pursuant to, constitute a
default (or give rise to any right of termination, cancellation or acceleration)
under, or result in the creation of any security interest, lien, charge or other
encumbrance upon any property or assets of IBC pursuant to, any terms,
conditions or provisions of any note, license, instrument, indenture, mortgage,
deed of trust or other agreement or understanding or any other restriction of
any kind or character, to which IBC is a party or by which any of its assets or
properties are subject or bound. Except as set forth on Schedule 4.2, there are
no proceedings pending or, to the knowledge of IBC, threatened, against IBC, at
law or in equity or before any foreign, federal, state, municipal or other
governmental court, department, commission, board, bureau, agency,
instrumentality or other person which may result in liability to University or
the Bank on the consummation of the transactions contemplated hereby or which
would prevent or delay such consummation. Except as set forth in Schedule 4.2,
or as contemplated hereby, the corporate existence, business, organization,
assets, licenses, permits, authorizations and contracts of IBC will not be
terminated or impaired by reason of the execution, delivery or performance by
IBC of this Agreement or consummation by IBC of the transactions contemplated
hereby, assuming receipt of the required regulatory approvals.
SECTION 4.3 CONSENTS AND APPROVALS. IBC's Board of Directors (at a meeting
called and duly held or by unanimous written consent) has unanimously approved
this Agreement. No prior consent, approval or authorization of, or declaration,
filing or registration with any person, domestic or foreign, is required of or
by IBC in connection with the execution, delivery and performance by IBC of this
Agreement and the transactions contemplated hereby or the resulting change in
control of University and the Bank, except the filing of Articles of Merger
under the TBCA and such approvals as may be required from the FRB, the TDB, and
the FDIC. To the knowledge of IBC, neither IBC nor IBC Bank has taken or agreed
to take any action or has knowledge of any fact or circumstance that would
materially impede or delay receipt of any required regulatory approval.
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SECTION 4.4 REPRESENTATIONS NOT MISLEADING. No representation or warranty
by IBC in this Agreement, nor any certificate or schedule furnished to
University or the Shareholders by IBC under and pursuant to this Agreement,
contains or will contain, when taken as a whole, any untrue statement of a
material fact or omit to state a material fact necessary to make the statements
contained herein or therein, in light of the circumstances in which they were
made, not misleading.
ARTICLE V.
COVENANTS OF UNIVERSITY AND THE SHAREHOLDERS
SECTION 5.1 AFFIRMATIVE COVENANTS OF UNIVERSITY. For so long as this
Agreement is in effect, University shall, and shall use its commercially
reasonable efforts to cause the Bank to, from the date of this Agreement to the
Closing, except as specifically contemplated by this Agreement:
(a) operate and conduct the businesses of University and the Bank in the
ordinary course of business and consistent with prudent banking practices;
provided, however, that any actions reasonably necessary taken in connection
with the potential purchase of the Ground Lease (as hereinafter defined) shall
not be deemed to be a violation of this paragraph if effected in accordance with
the provisions of Section 5.1(n);
(b) preserve intact University's and the Bank's corporate existence,
business organization, assets, licenses, permits, authorizations, and business
opportunities;
(c) comply with all contractual obligations applicable to University's and
the Bank's operations, except where the failure to so comply would not have a
Material Adverse Effect;
(d) maintain in a manner consistent with past practices all of
University's and the Bank's properties in good repair, order and condition,
reasonable wear and tear excepted, and maintain the insurance coverages
described in Schedule 3.19 (which shall list all Property insured by such
coverages) or obtain comparable insurance coverages from reputable insurers
which, in respect to amounts, types and risks insured, are adequate for the
business conducted by University and the Bank and consistent with the existing
insurance coverages;
(e) in good faith and in a timely manner (i) cooperate with IBC and
Acquisition Sub in satisfying the conditions in this Agreement, (ii) assist IBC
and Acquisition Sub in obtaining as promptly as possible all consents,
approvals, authorizations and rulings, whether regulatory, corporate or
otherwise, as are necessary for IBC and Acquisition Sub and University (or any
of them) to carry out and consummate the transactions contemplated by this
Agreement, including all consents, approvals and authorizations required by any
agreement or understanding existing at the Closing between University and any
governmental agency or other third party, (iii) furnish information concerning
University and the Bank not previously provided to IBC required for inclusion in
any filings or applications that may be necessary in that regard and (iv)
perform all acts and execute and deliver all documents reasonably necessary to
cause the transactions contemplated by this Agreement to be consummated in the
manner contemplated hereby;
(f) timely file with the FRB, the TDB, the FDIC and all other appropriate
regulatory authorities, all financial statements and other reports required to
be so filed by University and/or
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the Bank and to the extent permitted by applicable law, promptly thereafter
deliver to IBC copies of all financial statements and other reports required to
be so filed;
(g) comply in all respects with all applicable laws and regulations,
domestic and foreign, except where the failure to so comply would not have a
Material Adverse Effect;
(h) promptly notify IBC upon obtaining knowledge of any default, event of
default or condition with which the passage of time or giving of notice would
constitute a default or an event of default under University Loan Documents and
promptly notify and provide copies to IBC of any material written communications
concerning University Loan Documents;
(i) between the date of this Agreement and Closing, promptly give written
notice to IBC upon obtaining knowledge of any event or fact that would cause any
of the representations or warranties of University contained in or referred to
in this Agreement to be untrue or misleading in any material respect;
(j) deliver to IBC a list (Schedule 5.1(j)), dated as of the Effective
Time, showing (i) the name of each bank or institution where University and/or
the Bank have accounts or safe deposit boxes, (ii) the name(s) in which such
accounts or boxes are held and (iii) the name of each person authorized to draw
thereon or have access thereto;
(k) deliver to IBC a list (Schedule 5.1(k)), dated as of the Effective
Time, showing all liabilities and obligations of University and/or the Bank in
excess of $25,000, except those arising in the ordinary course of their
respective businesses, incurred since the Balance Sheet Date, certified by an
officer of University;
(l) promptly notify IBC of the knowledge on the part of University of any
material change or inaccuracies in any data previously given or made available
to IBC or Acquisition Sub pursuant to this Agreement;
(m) provide access, to the extent that University or the Bank have the
right to provide access, to any or all Property (as defined in Section 3.23) so
as to enable IBC to physically inspect any structure or components of any
structure on such Property, including without limitation surface and subsurface
testing and analyses; and
(n) keep IBC apprised of the status of, and provide IBC with copies of all
relevant documents and information relating to, all due diligence, negotiations
and other matters relating to the Bank's purchase of the interest of R&E Venture
under the ground lease (the "Ground Lease") covering that certain real property
upon which the Bank's main banking facility is located, and cooperate with IBC
in determining whether or not, and upon what terms, to proceed with any such
purchase.
Notwithstanding the foregoing, nothing contained in this Section 5.1 shall
be deemed to require University or the Bank to pay any amounts to any employees
of University or the Bank, other than such employees' usual and ordinary
compensation, to induce such employees to remain employees of University or the
Bank, as the case may be, pending the Closing; provided, further, however, that
University shall, and shall cause the Bank to, cooperate with IBC in determining
and making any such special payments to such employees as IBC may consent in
writing.
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SECTION 5.2.NEGATIVE COVENANTS OF UNIVERSITY. Except with the prior
written consent of IBC or as otherwise specifically permitted by this Agreement,
University shall not and shall use its best efforts not to permit the Bank to,
from the date of this Agreement to the Closing:
(a) make any amendment to its articles of incorporation or association
or bylaws;
(b) make any change in the methods used in allocating and charging costs,
except as may be required by applicable law, regulation or GAAP and after notice
to IBC;
(c) make any change in the number of shares of the capital stock issued
and outstanding, or issue, reserve for issuance, grant, sell or authorize the
issuance of any shares of its capital stock or subscriptions, options, warrants,
calls, rights or commitments of any kind relating to the issuance or sale of or
conversion into shares of its capital stock;
(d) contract to create any obligation or liability (absolute, accrued,
contingent or otherwise) except in the ordinary course of business and
consistent with prudent banking practices; provided, however, that any actions
reasonably necessary taken in connection with the potential purchase of the
Ground Lease shall not be deemed to be a violation of this paragraph if effected
in accordance with the provisions of Section 5.1(n);
(e) contract to create any mortgage, pledge, lien, security interest or
encumbrances, restrictions, or charge of any kind (other than statutory liens
for which the obligations secured thereby shall not become delinquent), except
in the ordinary course of business and consistent with prudent banking
practices; provided, however, that any actions reasonably necessary taken in
connection with the potential purchase of the Ground Lease shall not be deemed
to be a violation of this paragraph if effected in accordance with the
provisions of Section 5.1(n);
(f) cancel any debts, waive any claims or rights of value or sell,
transfer, or otherwise dispose of any of its material properties or assets,
except in the ordinary course of business and consistent with prudent banking
practices;
(g) sell any real estate owned as of the date of this Agreement or
acquired thereafter, which real estate qualifies as "other real estate owned"
under accounting principles applicable to it, except in the ordinary course of
business and consistent with prudent banking practices and applicable banking
laws and regulations;
(h) dispose of or permit to lapse any rights to the use of any material
trademark, service mark, trade name or copyright, or dispose of or disclose to
any person other than its employees any material trade secret not theretofore a
matter of public knowledge;
(i) grant any increase in compensation or directors' fees, or pay or agree
to pay or accrue any bonus or like benefit to or for the credit of any director,
officer, employee or other person (other than customary annual compensation
adjustments in accordance with past practices, and immaterial customary
severance payments not to exceed $25,000 in the aggregate, to employees who are
not executive officers) or enter into any employment, consulting or severance
agreement or other agreement with any director, officer or employee, or adopt,
amend or terminate any Employee Benefit Plan, Welfare Benefit Plan, Pension
Benefit Plan or other Program or change or modify the period of vesting or
retirement age for any participant of such a plan;
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(j) declare, pay or set aside for payment any dividend or other
distribution or payment in respect of shares of its capital stock, except for
dividends from the Bank to University;
(k) except through settlement of indebtedness, foreclosure, acquisition in
lieu of foreclosure, the exercise of creditors' remedies or in a fiduciary
capacity, acquire the capital stock or other equity securities or interest of
any person;
(l) make any capital expenditure or a series of expenditures of a similar
nature in excess of $100,000 in the aggregate; provided, however, that any
actions reasonably necessary taken in connection with the potential purchase of
the Ground Lease shall not be deemed to be a violation of this paragraph if
effected in accordance with the provisions of Section 5.1(n);
(m) except with the consent of IBC, which consent shall not be
unreasonably withheld, make any income tax or franchise tax election or settle
or compromise any federal, state, local or foreign income tax or franchise tax
liability, or, except in the ordinary course of business consistent with prudent
banking practices, make any other tax election or settle or compromise any other
federal, state, local or foreign tax liability;
(n) except for negotiations and discussions between the parties hereto
relating to the transactions contemplated by this Agreement or as otherwise
permitted hereunder, enter into any transaction, or enter into, modify or amend
any contract or commitment by which any such transaction, contract, or
commitment would obligate University in an amount which would exceed $50,000
alone or in the aggregate other than in the ordinary course of business and
consistent with prudent banking practices;
(o) except as contemplated by this Agreement, adopt a plan of complete or
partial liquidation, dissolution, merger, consolidation, restructuring,
recapitalization, or other reorganization or business combination of University
or the Bank;
(p) issue any certificates of deposit except in the ordinary course of
business and in accordance with prudent banking practices;
(q) make any investments except in the ordinary course of business and in
accordance with prudent banking practices;
(r) modify, amend, waive or extend any University Loan Documents or any
rights under such agreements;
(s) modify any outstanding loan, make any new loan, or acquire any loan
participation, unless such modification, new loan, or participation is made in
the ordinary course of business and in accordance with prudent banking
practices;
(t) sell or contract to sell any part of University's or the Bank's
premises;
(u) change any fiscal year or the length thereof;
(v) prepay in whole or in part University Indebtedness, except as
otherwise specifically contemplated hereby;
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(w) enter into any agreement, understanding or commitment, written or
oral, with any other person which is in any manner inconsistent with the
obligations of University and the Shareholders under this Agreement or any
related written agreement; or
(x) alter the size or composition of the Bank's deposit base, securities
portfolio, loan portfolio or asset mix, except in the ordinary course of
business, without the prior written consent of IBC.
Nothing contained in this Section 5.2 or in Section 5.1 is intended to influence
the general management or overall operations of University or the Bank in a
manner not permitted by applicable law and the provisions thereof shall
automatically be reduced in compliance therewith.
SECTION 5.3.AFFIRMATIVE COVENANTS OF IBC. For so long as this Agreement is
in effect, IBC shall, and shall use its commercially reasonable efforts to cause
Acquisition Sub to, from the date of this Agreement to the Closing, except as
specifically contemplated by this Agreement:
(e) in good faith and in a timely manner (i) cooperate with University and
the Bank in satisfying the conditions in this Agreement, (ii) assist University
and the Bank in obtaining as promptly as possible all consents, approvals,
authorizations and rulings, whether regulatory, corporate or otherwise, as are
necessary for IBC, Acquisition Sub and University (or any of them) to carry out
and consummate the transactions contemplated by this Agreement, including all
consents, approvals and authorizations required by any agreement or
understanding existing at the Closing between IBC and any governmental agency or
other third party, (iii) furnish information concerning IBC and Acquisition Sub
not previously provided to University required for inclusion in any filings or
applications that may be necessary in that regard and (iv) perform all acts and
execute and deliver all documents reasonably necessary to cause the transactions
contemplated by this Agreement to be consummated in the manner contemplated
hereby; and
(i) between the date of this Agreement and Closing, promptly give written
notice to University upon obtaining knowledge of any event or fact that would
cause any of the representations or warranties of IBC contained in or referred
to in this Agreement to be untrue or misleading in any material respect.
ARTICLE VI.
ADDITIONAL AGREEMENTS
SECTION 6.1 ACCESS TO, AND INFORMATION CONCERNING, PROPERTIES AND RECORDS.
(a) During the pendency of the transactions contemplated hereby, University
shall, to the extent permitted by law, give IBC, its legal counsel, accountants
and other representatives full access, during normal business hours, throughout
the period prior to the Closing, to all of University's and the Bank's
properties, books, contracts, commitments and records, permit IBC to make such
inspections (including without limitation physical inspection of the surface and
subsurface of any property thereof and any structure thereon) as they may
require and furnish to IBC during such period all such information concerning
University and the Bank and their affairs as IBC may reasonably request. IBC and
its respective affiliates, subsidiaries, officers, employees, directors and
agents shall not disclose, or make available, to any third party or use for any
purpose other than the transactions contemplated hereby any confidential
information provided, or made available, pursuant to the terms of this Agreement
relating to the financial condition, results of
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operations, business, properties, assets, liabilities, or future prospects of
University and the Bank; PROVIDED, however, that the restrictions of this
sentence shall not apply (a) as may otherwise be required by law, or (b) to the
extent such information is generally available to the public other than as a
result of a disclosure by or through the receiving party. In the event this
Agreement is terminated pursuant to the provisions of Article VIII, upon the
written request of University, IBC agrees to destroy or return to University all
copies of such confidential information.
(b) IBC acknowledges to University that University has, prior to the date
hereof, cooperated in providing IBC access to the books and records of
University and the Bank and has been afforded by University the opportunity to
conduct due diligence; however, the foregoing acknowledgement does not negate,
void or modify the representations, warranties, or obligations of University
and/or the Shareholders under this Agreement, including without limitation the
obligation to continue to provide access as provided by subsection (a) above.
SECTION 6.2 FILING OF REGULATORY APPROVALS. As soon as reasonably
practicable, IBC shall file all notices and applications to the FRB, the TDB and
the FDIC which IBC deems necessary or appropriate to complete the transactions
contemplated herein, including, without limitation, each of the Mergers. IBC
will deliver to University, and University will deliver to IBC, copies of all
non- confidential portions of any such applications. University and the
Shareholders shall cooperate, and shall cause the Bank and their respective
directors, officers, employees and representatives to cooperate, with IBC in
connection such notices and applications.
SECTION 6.3 MISCELLANEOUS AGREEMENTS AND CONSENTS. Subject to the terms
and conditions of this Agreement, IBC and University agree to use all reasonable
efforts to take, or cause to be taken, all actions, and to do, or cause to be
done, all things necessary, proper, or advisable under applicable laws and
regulations to consummate and make effective, as soon as practicable after the
date hereof, the transactions contemplated by this Agreement. Subject to the
terms and conditions of this Agreement, IBC and University shall use their
respective commercially reasonable efforts to obtain or cause to be obtained
consents of all third parties and governmental and regulatory authorities
necessary or desirable for the consummation of the transactions contemplated
herein.
SECTION 6.4 UNIVERSITY INDEBTEDNESS. Prior to the Effective Time,
University shall pay all regularly scheduled payments on all University
Indebtedness and shall cooperate with IBC in taking such actions as are
reasonably appropriate or necessary in connection with the redemption,
prepayment, modification, satisfaction or elimination of any outstanding
indebtedness of University or the Bank with respect to which a consent is
required to be obtained to effectuate the Merger and the transactions
contemplated by this Agreement and has not been so obtained. Furthermore,
immediately after the Closing, IBC shall cause the Surviving Corporation to pay
or cause to be paid in full all amounts payable to either of the Shareholders
pursuant to those certain instruments of indebtedness described on Schedule 6.4.
The Shareholders and University, jointly and severally, represent, warrant and
agree that Schedule 6.4 sets forth an accurate and complete listing of all
indebtedness of University and/or the Bank to the Shareholders, or either of
them.
SECTION 6.5 GOOD FAITH EFFORTS. All parties hereto agree that the parties
will use their good faith efforts to secure all regulatory approvals necessary
to consummate the Mergers and other transactions provided herein and to satisfy
the other conditions to Closing contained herein.
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SECTION 6.6 EXCLUSIVITY. Prior to the termination of this Agreement in
accordance with the provisions hereof, University shall not solicit, entertain
or negotiate with respect to any offer to acquire University or the Bank from
any other person. During the term of this Agreement, neither University nor the
Bank shall provide information to any other person in connection with a possible
acquisition of University or the Bank (an "Acquisition Proposal"). Immediately
upon receipt of any such unsolicited offer, University will communicate to IBC
the terms of any proposal or request for information and the identity of parties
involved.
SECTION 6.7 PUBLIC ANNOUNCEMENT. Subject to written advice of counsel with
respect to legal requirements relating to public disclosure of matters related
to the subject matter of this Agreement, the timing and content of any
announcements, press releases or other public statements concerning the proposal
contained herein will occur upon, and be determined by, the mutual consent of
University and IBC.
SECTION 6.8 EMPLOYEE ISSUES. Within ten (10) days prior to the Closing,
IBC shall be afforded the opportunity to give notice to University, the Bank and
their respective employees as to those employees which are expected to remain
employees of the Surviving Corporation and its Subsidiaries immediately after
the Effective Time, as well the terms of such employees' continued employment
immediately after the Effective Time, which terms may be amended thereafter by
IBC in its sole discretion. IBC presently intends that, except to the extent
that may be required by law, after the Merger, IBC, University and the Bank will
not make additional contributions to the employee benefit plans that were
sponsored by University or the Bank immediately prior to the Merger. IBC agrees
that the employees of University and the Bank who are retained as employees of
IBC or IBC Bank will be entitled to participate as newly hired employees in the
employee benefit plans and programs maintained for employees of IBC and its
affiliates, in accordance with the respective terms of such plans and programs,
and IBC shall take all actions necessary or appropriate to facilitate coverage
of University's and the Bank's employees in such plans and programs from and
after the Effective Time, provided, however, that any preexisting condition
exclusion or waiting period applicable to any health care plan sponsored by IBC
shall be waived with respect to any University or Bank employee. For purposes of
determining each University or Bank employee's benefit for the year in which the
Merger occurs under the IBC vacation or sick leave program, any vacation or sick
leave taken by a University or Bank employee preceding the Effective Time for
the year in which the Merger occurs will be deducted from the total IBC vacation
or sick leave benefits available to such employee for such year.
SECTION 6.9 ENVIRONMENTAL INVESTIGATION; RIGHT TO TERMINATE AGREEMENT. (a)
IBC and its consultants, agents and representatives, shall have the right, at
IBC's expense, to the same extent that University and the Bank have such right,
but not the obligation or responsibility, to inspect any Property, including,
without limitation, for the purpose of conducting asbestos surveys and sampling,
and other environmental assessments and investigations ("Environmental
Inspections"). IBC's right to conduct Environmental Inspections shall include
the right to sample and analyze air, sediment, soil and groundwater of any
Property to the same extent that University or the Bank have such right. IBC may
conduct such Environmental Inspections at any time subject to Section 6.9(d)
below.
(b) University and the Bank shall cause to be performed by an
environmental consulting firm acceptable to IBC an environmental investigation
of any Property acquired, leased, foreclosed, managed or controlled by
University or the Bank between the date hereof and the Closing Date, the scope
and results of which shall be acceptable to IBC in its sole discretion.
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(c) University and the Bank shall cause to be performed by an
environmental consulting firm acceptable to IBC a Phase I and, if indicated
thereby, a Phase II environmental investigation of any commercial or
agricultural Property in which University or the Bank acquires a security
interest between the date hereof and the Closing Date in accordance with the
Bank's existing policies and procedures, the results of which investigations(s)
shall be acceptable to IBC.
(d) IBC shall notify University of any physical inspections of Property
which it intends to conduct, and University may place reasonable restrictions on
the time of such inspections. Upon IBC's notification to University of the
Property upon which it intends to conduct such physical inspections, University
and the Bank shall notify the owner of such Property and use their best efforts
to secure access to such Property for IBC. If, as a result of any such
Environmental Inspection, further investigation ("secondary investigation")
including, without limitation, test borings, soil, water and other sampling is
deemed desirable by IBC, IBC shall notify University of the Properties on which
it intends to conduct a secondary investigation on or prior to the 52nd day
after the date hereof. University and the Bank will provide notification to
owners of Property on which IBC intends to conduct secondary investigations and
will use their commercially reasonable efforts to secure access to such property
for IBC. IBC shall notify University of any Properties that, in the sole
discretion of IBC, are not acceptable and require remediation on or prior to the
45th day after the date hereof.
(e) Each party hereto agrees to indemnify and hold harmless the other
parties for any claims for damage to the Property or injury or death to persons
in connection with any Environmental Inspection or secondary investigation of
the Property to the extent such damage, injury or death is directly attributable
to the negligent actions or negligent omissions of such indemnifying party. IBC
shall have no liability or responsibility of any nature whatsoever for the
results, conclusions or other findings related to any Environmental Inspection,
secondary investigation or other environmental survey. If this Agreement is
terminated, then except as otherwise required by law, IBC shall have no
obligation to make any reports to any governmental authority of the results of
any Environmental Inspection, secondary investigation or other environmental
survey, but such reporting shall remain the responsibility of and within the
discretion of University. IBC shall have no liability to University or the Bank
for making any report of such results to any governmental authority. If the
Merger is not consummated other than as a result of any breach of any provision
of this Agreement by University and/or the Shareholders, or either of them, IBC
shall reimburse University and the Bank for all reasonable costs and expenses
incurred as a result of any Environmental Inspection conducted at IBC's request.
(f) IBC shall have the right to terminate this Agreement in any of the
following circumstances:
(i) the factual substance of any warranties set forth in Section
3.23 is not true and accurate in all material respects irrespective of the
knowledge or lack of knowledge of University or the Shareholders;
(ii) the Environmental Inspection, secondary investigation or other
environmental survey identifies any past or present violations or potential
violations of Environmental Laws or any event, condition or circumstance that,
based on the estimates of the environmental professionals referred to in this
Section 6.9, may currently or in the future require or result in expenditures in
connection with (1) fines, penalties or other damages, (2) investigation,
remediation
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or monitoring of any Controlled Property (including without limitation eventual
removal of asbestos-containing material), (3) preparing and obtaining approval
by the appropriate Environmental Regulatory Authority of remediation plans with
respect to Controlled Properties, or (4) any violations of applicable
Environmental Laws, which expenditures individually or in the aggregate may
exceed $100,000; provided, however, that to the extent such expenditures are
expected to be in excess of $100,000, University may elect to pay or agree to
pay (or to cause the Bank to pay or agree to pay) such excess expenditures, in
which event (a) IBC shall not have the right to terminate this Agreement
pursuant to this paragraph (iii) as a result of such expected expenditures being
in excess of $100,000, and (b) the Merger Consideration to be paid to the
Shareholders pursuant to Article I hereof shall be reduced by the amount by
which such expected expenditures exceed $100,000; or
(iii) IBC is not permitted to conduct an Environmental Inspection or
secondary investigation of any Property to the extent it deems appropriate.
In the event IBC terminates this Agreement pursuant solely to this Section
6.9(f), neither University nor either of the Shareholders shall have any
liability to IBC pursuant to this Agreement.
(g) University agrees to make available to IBC and its consultants, agents
and representatives all documents and other material relating to environmental
conditions of the Property including, without limitation, the results of all
other environmental inspections and surveys. University also agrees that all
engineers and consultants who prepared or furnished such reports may discuss
such reports and information with IBC and shall be entitled to certify the same
in favor of IBC and its consultants, agents and representatives in such a manner
which will entitle IBC to rely upon such reports and make all other data
available to IBC and its consultants, agents and representatives. At the written
request of University, IBC agrees to provide University with a copy of all
environmental reports prepared by its consultants as a result of the
Environmental Inspections. IBC shall keep confidential the reports, surveys and
results relating to and of the Environmental Inspections, unless otherwise
required by law.
SECTION 6.10 SHAREHOLDER CONSENT. University and the Shareholders
acknowledge that the Shareholders have agreed that they will vote the Shares
owned by them in favor of this Agreement and the transactions contemplated
hereby (and/or execute a written consent to such effect), subject to required
regulatory approvals, and that they will retain the right to vote such Shares
during the term of this Agreement
SECTION 6.11 TERMINATION OF RETIREMENT PLAN. Within 10 days after the date
hereof, University and the Shareholders shall cause the Bank to give notice of
termination of the University Bank Retirement Plan (the "Retirement Plan"),
which notice shall provide for termination 60 days thereafter, and shall use
their reasonable good faith efforts to cause such termination to be effected in
a manner intended to minimize any amounts payable in connection with such
termination or otherwise in connection with such Retirement Plan.
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ARTICLE VII
CONDITIONS TO CONSUMMATION OF THE MERGER
SECTION 7.1 CONDITIONS TO EACH PARTY'S OBLIGATION TO EFFECT THE MERGER.
The respective obligations of University, IBC and Acquisition Sub to effect the
Merger are subject to the satisfaction or waiver of the following conditions
prior to the Effective Time:
(a) the receipt of all required regulatory approvals in connection with
each of the Mergers, which approvals shall not have imposed any condition or
requirement which in the reasonable judgment of the party or parties affected by
such condition or requirement would adversely impact in a material respect the
economic or business benefits to such party of the transactions contemplated by
this Agreement or otherwise would in the reasonable judgment of such party be so
burdensome as to render reasonably inadvisable the consummation of the Mergers,
or any of them, and the expiration of any applicable waiting periods with
respect thereto; and
(b) the Closing will not violate any injunction, order or decree of any
court or governmental body having competent jurisdiction;
SECTION 7.2 CONDITIONS TO THE OBLIGATIONS OF IBC AND ACQUISITION SUB TO
EFFECT THE MERGER.
The obligations of IBC and Acquisition Sub to effect the Merger are
subject to the satisfaction or waiver in writing of the following conditions
prior to the Effective Time:
(a) all representations and warranties of University and the Shareholders
shall be true and correct in all material respects as of the date hereof and at
and as of the Closing (after consideration of all supplemental Schedules for
events occurring after the date hereof), except for representations and
warranties made as of a specific date which shall be true and correct as of such
date, with the same force and effect as though made on and as of the Closing,
and the supplemental Schedules provided by University and Allbritton pursuant to
Article III hereof shall not differ in any material respect from the Schedules
as in effect on the date of this Agreement;
(b) University and the Shareholders shall have performed in all material
respects all obligations and agreements and in all material respects complied
with all covenants and conditions, contained in this Agreement to be performed
or complied with by it or them prior to the Effective Time;
(c) there shall not have occurred a Material Adverse Effect with respect
to University or the Bank, provided that the failure of any employees of
University or the Bank to remain employees of University or the Bank, as the
case may be, shall not be deemed a Material Adverse Effect for purposes of this
paragraph;
(d) IBC shall have received the opinions of counsel to University
acceptable to it as to the matters set forth on Exhibit C attached hereto;
(e) the holders of all of the shares of issued and outstanding capital
stock of University shall have authorized and approved the Merger, this
Agreement and the Merger Agreement, and
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University shall have delivered evidence of same to IBC in form and substance
reasonably satisfactory to IBC;
(f) the aggregate principal amount of all University Indebtedness shall
not exceed $2,682,777;
(g) IBC shall have received (i) certificates dated the Closing executed by
Allbritton, individually and as Chairman of the Board of University, certifying
in such reasonable detail as IBC may reasonably request, to the effect described
in Sections 7.2(a), (b), (c), (e) and (f), and (ii) a certificate dated the
Closing Date executed by the President of the Bank in the form of Exhibit D
attached hereto; and
(h) Immediately prior to the Closing, the Shareholders shall have made a
cash capital contribution to University in the amount of $241,746.
SECTION 7.3.CONDITIONS TO THE OBLIGATIONS OF UNIVERSITY AND THE
SHAREHOLDERS TO EFFECT THE MERGER. The obligations of University and the
Shareholders to effect the Merger are subject to the satisfaction or waiver of
the following conditions prior to the Effective Time:
(a) all representations and warranties of IBC shall be true and correct in
all material respects as of the date hereof and at and as of the Closing, with
the same force and effect as though made on and as of the Closing;
(b) IBC and Acquisition Sub shall have performed in all material respects
all obligations and agreements and in all material respects complied with all
covenants and conditions contained in this Agreement to be performed or complied
with by either of them prior to the Effective Time;
(c) University shall have received the opinions of counsel to IBC
acceptable to it as to the matters set forth on Exhibit E attached hereto; and
(d) University and the Shareholders shall have received certificates dated
the Closing, executed by an appropriate officers of IBC and Acquisition Sub,
respectively, certifying, in such detail as University may reasonably request,
to the effect described in Sections 7.3(a) and (b).
ARTICLE VIII
TERMINATION; AMENDMENT; WAIVER; NON-COMPETITION
SECTION 8.1 TERMINATION. This Agreement may be terminated and the Merger
contemplated hereby may be abandoned at any time notwithstanding approval
thereof by the shareholders of University, but prior to the Effective Time:
(a) by mutual written consent duly authorized by the Boards of Directors
of IBC and University and signed by the Shareholders;
(b) by IBC (i) if IBC learns or becomes aware of a state of facts or
breach or inaccuracy of any representation or warranty of University or the
Shareholders contained in Article III which constitutes a Material Adverse
Effect, (ii) pursuant to Section 6.9, (iii) if any of the conditions to Closing
contained in Section 7.1 or 7.2 are not satisfied or waived in writing by IBC,
(iv) if the
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Board of Directors of University shall have withdrawn or modified in
any manner its approval or recommendation of this Agreement, or shall have
resolved to do the same (including without limitation, the execution of an
agreement for the disposition or merger of University or the Bank); (v) if there
shall have been a breach of Section 6.6; or (vi) if the shareholders of
University do not approve this Agreement, the Merger Agreement and the Merger;
(c) by University (i) if University learns or becomes aware of a state of
facts or breach or inaccuracy of any representation or warranty of IBC contained
in Article IV which constitutes a Material Adverse Effect, (ii) if the
conditions to Closing contained in Section 7.1 or 7.3 are not satisfied or
waived in writing by University; or (iii) if the Board of Directors of IBC shall
have withdrawn or modified in any manner its approval or recommendation of this
Agreement, or shall have resolved to do the same;
(d) by IBC or University if the Effective Time shall not have occurred on
or before December 31, 1997, or such later date agreed to in writing by IBC,
University and the Shareholders;
(e) by IBC or University if any court of competent jurisdiction in the
United States or other United States (federal or state) governmental body shall
have issued an order, decree or ruling or taken any other action restraining,
enjoining or otherwise prohibiting the Merger and such order, decree, ruling or
other action shall have been final and nonappealable.
SECTION 8.2 EFFECT OF TERMINATION. In the event of the termination and
abandonment of this Agreement pursuant to Section 8.1 hereof, this Agreement
shall forthwith become void and have no effect, without any liability on the
part of any party or its directors, officers or shareholders, other than the
provisions of Sections 6.9, 8.2, 10.1, 10.8 and 10.14, except that if such
termination shall result (i) from the willful failure of a party to fulfill a
condition to the performance of the obligations of any other party or to perform
a covenant of this Agreement or (ii) from a breach by any party of any provision
of this Agreement (including, without limitation, any breach of or inaccuracy in
any representation or warranty contained in this Agreement), such party shall be
fully liable for any and all damages, costs and expenses (including, but not
limited to, reasonable counsel fees) sustained or incurred by the other party or
parties as a result of such failure or breach.
SECTION 8.3 AMENDMENT. This Agreement may not be amended except by an
instrument in writing signed by all the parties hereto.
SECTION 8.4 EXTENSION; WAIVER. At any time prior to the Effective Time,
the parties may (i) extend the time for the performance of any of the
obligations or other acts of the other parties hereto, (ii) waive any
inaccuracies in the representations and warranties contained herein or in any
document, certificate or writing delivered pursuant hereto, or (iii) waive
compliance with any of the agreements or conditions contained herein. Any
agreement on the part of any party to any such extension or waiver shall be
valid only if set forth in an instrument in writing signed on behalf of such
party. In the event any party specifically waives in accordance with the
provisions hereof any inaccuracy in any representation or warranty, the
performance of any agreement or compliance with any condition, such inaccuracy,
failure to perform or non-compliance shall not be a basis for a claim for
indemnification under Article IX.
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SECTION 8.5 NON-COMPETITION. In consideration of the benefits of this
Agreement to Allbritton and as a material inducement to IBC to enter into this
Agreement and pay the Merger Consideration, Allbritton hereby covenants and
agrees that, commencing at the Effective Time and ending on the third
anniversary of the Effective Time, he shall not, and Allbritton will cause his
Affiliates and representatives not to, directly or indirectly, as proprietor,
partner, stockholder, director, executive, officer, employee, consultant, joint
venturer, investor or in any other capacity, engage in, or own, manage, operate
or control, or participate in the ownership, management, operation or control,
of any entity which engages, directly or indirectly, in the business of banking
(including, without limitation, the solicitation of deposits) within the
territory circumscribed by a fifty-mile radius of any banking premise of the
Bank in existence immediately prior to the Effective Time; provided, however,
the foregoing shall not prohibit either Shareholder from purchasing and holding
as an investment not more than 1% of any class of publicly traded securities of
any entity which conducts the business of banking, so long as such Shareholder
does not participate in any way in the management, operation or control of such
entity; and provided further, however, that the provisions of this sentence
shall not restrict Riggs National Corporation, a Delaware corporation, or any of
its subsidiaries, including Riggs Bank, N.A., a national banking association,
from engaging in any business in any location. Furthermore, from and after the
Effective Time, neither of the Shareholders nor any of their respective
Affiliates or representatives shall use any proprietary customer list, other
similar records of the holders of accounts that constitute deposits of the Bank
or any other proprietary lists, records, information or documents of the Bank or
University for any purposes, including, without limitation, to solicit deposits,
loans, or other products or services, all of such lists, records, information
and documents to remain the property of the Surviving Corporation.
ARTICLE IX.
SURVIVAL; INDEMNIFICATION
SECTION 9.1 SURVIVAL OF REPRESENTATIONS AND WARRANTIES. The respective
representations and warranties contained in this Agreement or in any Schedule
delivered pursuant hereto shall survive for a period of two (2) years after the
Effective Time. This Section 9.1 shall not limit any covenant or agreement of
the parties contained in Sections 1.6 or 2.1 of this Agreement which by its
terms contemplates performance after the Effective Time. Further, this Section
9.1 shall not limit any party's obligation to indemnify another party hereunder
if notice of such claim for indemnification generally describing the information
then available regarding the amount and nature of such claim shall have been
given to the party against whom indemnification is sought prior to the
termination of the two-year period described in this Section 9.1.
SECTION 9.2 INDEMNIFICATION BY ALLBRITTON. Allbritton agrees to indemnify
and hold IBC and its officers, directors, employees, shareholders, Affiliates
and agents harmless from damages, losses, costs or expenses (collectively,
"Damages") suffered or paid, directly or indirectly, through application of the
assets of University, the Bank, IBC, IBC Bank or otherwise, as a result of any
and all claims, demands, suits, causes of action, proceedings, judgments and
liabilities (whether asserted directly or as a common law or statutory claim for
contribution or indemnity), including, without limitation, reasonable counsel
fees and costs incurred in litigation or otherwise, assessed, incurred or
sustained by or against any of them with respect to or arising out of the
failure of any representation or warranty made by the Shareholders, or either of
them, and/or University in this Agreement or in any Schedule delivered pursuant
hereto to be true and correct in
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all respects as of the date of this Agreement and as of the Closing Date or the
breach of any covenant made by the Shareholders, or either of them, or by
University hereunder
SECTION 9.3 INDEMNIFICATION BY IBC. IBC agrees to indemnify and hold the
Shareholders and University harmless from Damages suffered or paid, directly or
indirectly, as a result of any and all claims, demands, suits, causes of action,
proceedings, judgments and liabilities, including reasonable counsel fees
incurred in litigation or otherwise, assessed, incurred or sustained by or
against any of them with respect to or arising out of the failure of any
representation or warranty made by IBC in this Agreement to be true and correct
in all respects as of the date of this Agreement or out of the breach of any
covenant made by IBC hereunder.
SECTION 9.4 BASKET; LIMIT. A party seeking indemnification (an
"Indemnitee") shall not be entitled to assert any claim for indemnification
under Section 9.2, 9.3 or 9.9(iii) unless and until such time as all claims for
Damages of such Indemnitee arising pursuant to Section 9.2, 9.3 and/or 9.9(iii)
exceed $100,000 in the aggregate (the "Basket"). Once all Damages of an
Indemnitee exceed the Basket, the Indemnitee shall, subject to the terms of this
Article IX, be entitled to full indemnification for all Damages in excess of the
Basket. Further, the maximum amount that an indemnifying party shall be required
to pay under Section 9.2, 9.3 and 9.9(iii) shall be limited to $20,000,000 in
the aggregate. Notwithstanding the foregoing, however, this Section 9.4 shall
not apply with respect to any claim based on any breach of the Shareholders'
and/or University's representations and warranties to the extent such breach
constituted or resulted from a fraudulent action, inaction, statement or
omission under applicable law.
SECTION 9.5 NOTICE OF CLAIM. If indemnification pursuant to Sections 9.2,
9.3, 9.8 or 9.9 is sought, the Indemnitee shall give notice to the indemnifying
party of an event giving rise to the obligation to indemnify, allow the
indemnifying party to assume and conduct the defense of the claim or action with
counsel reasonably satisfactory to the Indemnitee, and cooperate with the
indemnifying party in the defense thereof; provided, however, that the omission
to give such notice to the indemnifying party shall not relieve the indemnifying
party from any liability which it may have to the Indemnitee, except to the
extent that the indemnifying party is prejudiced by the failure to give such
notice. The Indemnitee shall have the right to employ separate counsel to
represent the Indemnitee if the Indemnitee is advised by counsel that an actual
conflict of interest makes it advisable for the Indemnitee to be represented by
separate counsel and the reasonable expenses and fees of such separate counsel
shall be paid by the indemnifying party. If the party obligated to indemnify and
hold the other harmless wrongfully refuses to assume the defense of the party
seeking indemnification, the party refusing to indemnify shall be responsible
for all legal and other expenses incurred by the other party in connection with
the investigation or defense of such claim or action including, without
limitation, expenses incurred in enforcing such obligation to indemnify.
SECTION 9.6 SOLE REMEDY. The parties agree that if the Closing occurs,
then the provisions of Article IX shall be the sole basis for recovery as a
result of any failure of a representation or warranty or breach of any covenant
under this Agreement, other than as a result of a breach of Section 1.6 or the
second sentence of Section 6.4, and no party shall have a separate cause of
action for any breach of any representation, warranty or covenant contained
herein; provided, however, that the provisions of this Section 9.6 shall not
limit in any manner any claim any party may have to the extent such claim is
based on fraud.
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SECTION 9.7 ADJUSTMENT OF LIABILITY; CHARACTERIZATION OF INDEMNITY
PAYMENTS. The amount which an Indemnitee shall be entitled to receive from an
indemnifying party under this Article IX with respect to any Damages shall be
net of any insurance recovery by the Indemnitee on account of such Damages from
an unaffiliated party; provided, however, that the foregoing provision shall not
be deemed to impose any obligation on any party to obtain or maintain any
insurance coverage against any risks. Any tax benefit actually realized by an
Indemnitee with respect to any Damages that are fully indemnified by an
indemnifying party shall be paid to the indemnifying party when and if such
benefit is actually realized and then only to the extent such benefit is
attributable to the indemnified portion of such Damages. The benefit actually
realized shall be based on the Federal tax returns of the Indemnitee and any
benefit shall be considered realized when the tax return reflecting such benefit
is filed. In the event such benefit is disallowed or reduced in connection with
any audit, the indemnifying party shall promptly refund to the Indemnitee that
portion of the amount of the benefit previously paid to the indemnifying party
to the extent such benefit is disallowed or reduced. The parties agree to treat
any payment(s) by Allbritton under this Article IX as an adjustment to the
Merger Consideration.
SECTION 9.8 SPECIAL INDEMNITY BY IBC. IBC agrees to indemnify and hold
harmless the directors, officers, employees, agents and representatives of
University and the Bank for and against any claim, demand, suit, cause of
action, proceeding, judgment, obligation, cost or expense incurred as a result
of any action taken by any of them at the request of IBC pursuant to Section
1.1(b) of this Agreement to approve, facilitate or otherwise cooperate in
authorizing or effecting the Subsequent Merger or the Bank Merger.
SECTION 9.9 SPECIAL INDEMNITY BY ALLBRITTON. Allbritton agrees to
indemnify and hold IBC, IBC Bank and their respective officers, directors,
employees, shareholders, Affiliates and agents harmless from Damages suffered or
paid, directly or indirectly, through application of the assets of University,
the Bank, IBC, IBC Bank or otherwise, whether before or after the Effective
Time, as a result of any and all claims, demands, suits, causes of action,
proceedings, judgments, obligations and liabilities, including reasonable
counsel fees incurred in litigation or otherwise, assessed, incurred or
sustained by or against any of them with respect to or arising out of (i) the
draft severance policy of the Bank previously made available to IBC, which draft
severance policy University and the Shareholders have represented was never
adopted, (ii) the University Bank Supplemental Executive Retirement Plan, but
only to the extent such Damages with respect to such plan exceed $330,000 in the
aggregate, or (iii) the Early Retirement Option Plan, as that term is defined on
Schedule 3.14, including, without limitation, any taxes, penalties, interest or
fines payable with respect thereto, but only to the extent such Damages with
respect to the Early Retirement Option Plan exceed $50,000 in the aggregate.
ARTICLE X.
MISCELLANEOUS
SECTION 10.1 EXPENSES. All costs and expenses incurred in connection with
the transactions contemplated by this Agreement, including without limitation,
attorneys' fees, accountants' fees, other professional fees and costs related to
expenses of officers and directors of University and the Bank, shall be paid by
the party incurring such costs and expenses; provided, however, without the
consent of IBC, which consent may be withheld in IBC's sole discretion, all such
costs and expenses incurred by University and the Bank (including expenses
incurred for or on behalf the Shareholders) shall not exceed $50,000. Each party
hereto hereby agrees to and shall
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indemnify the other parties hereto against any liability arising from any such
fee or payment incurred by such party;
SECTION 10.2 BROKERS AND FINDERS. All negotiations on behalf of IBC and
University relating to this Agreement and the transactions contemplated by this
Agreement have been carried on by the parties hereto and their respective agents
directly without the intervention of any other person in such manner as to give
rise to any claim against IBC, Acquisition Sub, University or the Bank for
financial advisory fees, brokerage or commission fees, finder's fees or other
like payment in connection with the consummation of the transactions
contemplated hereby.
SECTION 10.3 ENTIRE AGREEMENT; ASSIGNMENT. This Agreement, including the
Exhibits and Schedules hereto, (a) constitutes the entire agreement among the
parties with respect to the subject matter hereof and supersedes all other prior
agreements and understandings, both written and oral, among the parties or any
of them with respect to the subject matter hereof, and (b) shall not be assigned
by operation of law or otherwise, provided that IBC may assign its rights and
obligations or those of Acquisition Sub to any direct or indirect, wholly-owned,
subsidiary of IBC, but no such assignment shall relieve IBC of its obligations
hereunder.
SECTION 10.4 FURTHER ASSURANCES. From time to time as and when requested
by IBC or its successors or assigns, University, the officers and directors of
University, or the Bank, shall execute and deliver such further agreements,
documents, deeds, certificates and other instruments and shall take or cause to
be taken such other actions, including those as shall be necessary to vest or
perfect in or to confirm of record or otherwise University's or the Bank's title
to and possession of, all of their respective property, interests, assets,
rights, privileges, immunities, powers, franchises and authority, as shall be
reasonably necessary or advisable to carry out the purposes of and effect the
transactions contemplated by this Agreement.
SECTION 10.5 ENFORCEMENT OF THE AGREEMENT. The parties hereto agree that
irreparable damage would occur in the event that any of the provisions of this
Agreement were not performed in accordance with their specific terms or were
otherwise breached. It is accordingly agreed that the parties shall be entitled
to an injunction or injunctions to prevent breaches of this Agreement and to
enforce specifically the terms and provisions hereof, this being in addition to
any other remedy to which they are entitled at law or in equity.
SECTION 10.6 SEVERABILITY. The invalidity or unenforceability of any
provision of this Agreement shall not affect the validity or enforceability of
any other provisions of this Agreement, which shall remain in full force and
effect.
SECTION 10.7 NOTICES. All notices, requests, claims, demands and other
communications hereunder shall be in writing and shall be deemed to have been
duly given when delivered if in person, by cable, telegram or telex or by
telecopy, or five business days after mailing if delivered by registered or
certified mail (postage prepaid, return receipt requested) to the respective
parties as follows:
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if to IBC or Acquisition Sub:
International Bancshares Corporation
1200 San Bernardo
Laredo, Texas 7801
Attn: Dennis E. Nixon, President
Telecopy No.: (210) 726-6616
with copies to:
Cox & Smith Incorporated
112 E. Pecan Street, Suite 1800
San Antonio, Texas 78205
Attn: William J. McDonough, Jr.
Telecopy No.: (210) 226-8395
if to University:
University Bancshares, Inc.
5615 Kirby Drive
Houston, Texas 77005
Attn: Joe L. Allbritton, Chairman of the Board
Telecopy: (713) 523-2167
with a copy to:
Fulbright & Jaworski LLP
801 Pennsylvania Avenue, N.W.
Washington, D.C. 20004-2604
Attn: Michael W. Conlon
Telecopy: (202) 662-4643
if to the Shareholders:
Joe L. Allbritton, Individually
808 Seventeenth Street, N.W., Suite 300
Washington, D.C. 20006
Telecopy: (202) 331-1898
Robert L. Allbritton, Individually
808 Seventeenth Street, N.W., Suite 300
Washington, D.C. 20006
Telecopy: (202) 331-1898
with a copy to:
Fulbright & Jaworski LLP
801 Pennsylvania Avenue, N.W.
Washington, D.C. 20004-2604
Attn: Michael W. Conlon
Telecopy: (202) 662-4643
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or to such other address as the person to whom notice is given may have
previously furnished to the others in writing in the manner set forth above
(provided that notice of any change of address shall be effective only upon
receipt thereof).
SECTION 10.8 GOVERNING LAW. This Agreement shall be governed by and
construed in accordance with the laws of the State of Texas, regardless of the
laws that might otherwise govern under applicable principles of conflicts of
laws thereof.
SECTION 10.9 DESCRIPTIVE HEADINGS. The descriptive headings are inserted
for convenience of reference only and are not intended to be part of or to
affect the meaning or interpretation of this Agreement.
SECTION 10.10 PARTIES IN INTEREST. This Agreement shall be binding upon
and inure solely to the benefit of each party hereto, and nothing in this
Agreement, express or implied, is intended to confer upon any other person any
rights or remedies of any nature whatsoever under or by reason of this
Agreement.
SECTION 10.11 COUNTERPARTS. This Agreement may be executed in two or more
counterparts, each of which shall be deemed to be an original, but all of which
shall constitute one and the same agreement.
SECTION 10.12 INCORPORATION BY REFERENCE. Any and all schedules, exhibits,
annexes, statements, reports, certificates or other documents or instruments
referred to herein or attached hereto are incorporated herein by reference
hereto as though fully set forth at the point referred to in the Agreement.
SECTION 10.13 CERTAIN DEFINITIONS.
(a) "Subsidiary" or "Subsidiaries" shall mean, when used with reference to
an entity, any corporation, a majority of the outstanding voting securities of
which are owned directly or indirectly by such entity or any partnership, joint
venture or other enterprise in which any entity has, directly or indirectly, any
equity interest.
(b) "Material Adverse Effect" shall mean any circumstance, event or series
of events which has a material adverse effect on the financial condition,
assets, liabilities (absolute, accrued, contingent or otherwise), reserves,
business or results of operations of University and the Bank, taken as a whole
(or when the reference is to IBC, to IBC and its Subsidiaries, taken as a
whole).
(c) "Environmental Laws" shall mean all federal, state and local laws,
ordinances, rules, regulations, guidance documents, directives, and decisions,
interpretations and orders of courts or administrative agencies or authorities,
relating to the release, threatened release, recycling, processing, use,
handling, transportation treatment, storage, disposal, remediation, removal,
inspection or monitoring of Polluting Substances or protection of human health
or safety or the environment (including, without limitation, wildlife, air,
surface water, ground water, land surface, and subsurface strata), including,
without limitation, the Comprehensive Environmental Response Compensation and
Liability Act of 1980, as amended ("CERCLA"), the Superfund Amendments and
Reauthorization Act of 1986, as amended ("SARA"), the Resource Conservation and
Recovery Act of 1976, as amended ("RCRA"), Hazardous and Solid Waste Amendments
of 1984, as
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amended ("HSWA"), the Hazardous Materials Transportation Act, as amended
("HMTA"), the Toxic Substances Control Act ("TSCA"), Occupational Safety and
Health Act ("OSHA"), Federal Water Pollution Control Act, Clean Air Act, and any
and all regulations promulgated pursuant to any of the foregoing.
(d) "Polluting Substances" shall mean those substances included within the
statutory or regulatory definitions, listings or descriptions of "pollutant,"
"contaminant," "toxic waste," "hazardous substance," "hazardous waste," "solid
waste," or "regulated substance" pursuant to CERCLA, SARA, RCRA, HSWA, HMTA,
TSCA, OSHA, and/or any other Environmental Laws, as amended, and shall include,
without limitation, any material, waste or substance which is or contains
explosives, radioactive materials, oil or any fraction thereof, asbestos, or
formaldehyde. To the extent that the laws or regulations of the State of Texas
establish a meaning for "hazardous substance," "hazardous waste," "hazardous
materials," "solid waste," or "toxic waste," which is broader than that
specified in any of CERCLA, SARA, RCRA, HSWA, HMTA, TSCA, OSHA or other
Environmental Laws such broader meaning shall apply.
(e) "Release" shall mean any spilling, leaking, pumping, pouring,
emitting, emptying, discharging, injecting, escaping, leaching, dumping,
disposing, discarding or abandoning.
(f) "Knowledge" or "known" -- An individual shall be deemed to have
"knowledge" of or to have "known" a particular fact or other matter if (i) such
individual is actually aware of such fact or other matter, or (ii) such
individual ought reasonably to be aware of such fact or other matter in the
prudent exercise of his or her duties and responsibilities. University shall be
deemed to have "knowledge" of or to have "known" a particular fact or other
matter if Allbritton, Lawrence I. Hebert, Randall Reeves or Wayne Walker has
knowledge of such fact or other matter. IBC shall be deemed to have "knowledge"
of or to have "known" a particular fact or other matter if Dennis E. Nixon, R.
David Guerra or Carlos A. Martinez has knowledge of such fact or other matter.
SECTION 10.14 ARBITRATION. The parties shall submit to binding arbitration
by a panel 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 (whether based on contract, tort or any other
basis). Any such arbitration shall be conducted at Houston, 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 Dallas, Texas (or the city located in Texas that is
closest to Dallas) 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 panel of three arbitrators shall be appointed promptly upon filing of
the complaint in arbitration by the initiating party, and shall be selected from
the Commercial Arbitration Panel 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
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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 panel 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 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, provided, however, that the
filing of a complaint in arbitration shall serve to toll such statutes of
limitation to the same extent as they would be tolled if an action had been
filed in a court of competent jurisdiction.
The provisions of this Section 10.14 shall survive any termination,
amendment, or expiration of the Agreement in which this section is contained,
unless all the parties hereto otherwise expressly agree in writing.
The parties acknowledge that this Agreement evidences a transaction
involving interstate commerce. 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 Harris 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.
[REMAINDER OF THIS PAGE LEFT BLANK INTENTIONALLY]
37
<PAGE>
IN WITNESS WHEREOF, each of the parties has executed or caused this Agreement to
be executed on its behalf by its officers thereunto duly authorized, all as of
the day and year first above written.
INTERNATIONAL BANCSHARES CORPORATION
By: /s/ DENNIS E. NIXON
Dennis E. Nixon, President
UNIVERSITY BANCSHARES, INC.
By: /s/ JOE L. ALLBRITTON
Joe L. Allbritton, Chairman of the Board
/s/ JOE L. ALLBRITTON
Joe L. Allbritton, Individually
/s/ ROBERT L. ALLBRITTON
Robert L. Allbritton, Individually
"EXHIBIT 21"
LIST OF SUBSIDIARIES
Subsidiaries of International Bancshares Corporation
NAME BUSINESS % OF OWNERSHIP
---- -------- --------------
IBC Subsidiary Corporation Bank Holding Company 100%
IBC Life Insurance Company Credit Life Insurance 100%
IBC Trading Company Export Trading 100%
IBC Capital Corporation Investments 100%
Subsidiaries of IBC Subsidiary Corporation
NAME BUSINESS % OF OWNERSHIP
---- -------- --------------
International Bank of Commerce State Bank 100%
Commerce Bank State Bank 100%
International Bank of Commerce,
Zapata State Bank 100%
International Bank of Commerce,
Brownsville State Bank 100%
86
"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
20, 1998 relating to the consolidated statements of condition of International
Bancshares Corporation and subsidiaries as of December 31, 1997 and 1996, 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, 1997,
which report is incorporated by reference in the December 31, 1997 annual report
on Form 10-K of International Bancshares Corporation.
KPMG PEAT MARWICK LLP
San Antonio, Texas
March 20, 1998
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