SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended Commission file number
December 31, 1998 0-9439
INTERNATIONAL BANCSHARES CORPORATION
(Exact Name of Registrant as Specified in its Charter)
TEXAS 74-2157138
(State of Incorporation) (I.R.S. Employer Identification No.)
1200 San Bernardo Avenue
Laredo, Texas 78042-1359 Area Code (956) 722-7611
(Address of principal executive (Registrant's telephone number)
office and Zip Code)
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 [ ] No [X].
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of Registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [X]
The aggregate market value of the voting stock held by non-affiliates of the
Registrant as of March 19, 1999 was $399,370,664 based on the closing sales
price of the stock on such date.
As of March 19, 1999, there were 14,118,158 shares of the Registrant's Common
Stock outstanding.
Portions of the following documents are incorporated by reference into the
designated parts of this Form 10-K: (a) Annual Report to security holders for
the fiscal year ended December 31, 1998 (in Parts I and II) and (b) Proxy
Statement dated April 15, 1999 (in Part III).
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CONTENTS
PART I
PAGE
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Item 1. Business.......................................................... 3
Item 2. Properties........................................................ 26
Item 3. Legal Proceedings................................................. 27
Item 4. Submission of Matters to a Vote of Security Holders............... 27
Item 4A. Executive Officers of the Registrant.............................. 27
PART II
Item 5. Market for the Registrant's Common Stock
and Related Security Holder Matters............................. 28
Item 6. Selected Financial Data........................................... 28
Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations............................. 28
Item 7A. Quantitative and Qualitative Disclosure about Market Risk......... 28
Item 8. Financial Statements and Supplementary Data....................... 28
Item 9. Changes In and Disagreements with Accountants on
Accounting and Financial Disclosure............................. 28
PART III
Item 10. Directors and Executive Officers of the Registrant................ 28
Item 11. Executive Compensation............................................ 28
Item 12. Security Ownership of Certain Beneficial Owners and Management.... 29
Item 13. Certain Relationships and Related Transactions.................... 29
PART IV
Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K... 29
FORWARD LOOKING INFORMATION
Certain matters discussed in this report, excluding historical information,
include forward-looking statements. Although the Company believes such
forward-looking statements are based on reasonable assumptions, no assurance can
be given that every objective will be reached. The words "estimate," "expect,"
"intend" and "project," as well as other words or expressions of similar meaning
are intended to identify forward-looking statements. Readers are cautioned not
to place undue reliance on forward-looking statements, which speak only as of
the date of this annual report. Such statements are based on current
expectations, are inherently uncertain, are subject to risks and should be
viewed with caution. Actual results and experience may differ materially from
the forward-looking statements as a result of many factors.
The Company makes no commitment to update any forward-looking statement, or to
disclose any facts, events or circumstances after the date hereof that may
affect the accuracy of any forward-looking statement.
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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 93 main banking and branch facilities located in 28 communities
in South and Southeast Texas. The Company was incorporated under the General
Corporation Law of the State of Delaware in 1979 and has its principal corporate
offices in Laredo, Texas. Effective June 7, 1995, the Company's state of
incorporation was changed from Delaware to Texas. The Company was organized for
the purpose of operating as a bank holding company within the meaning of the
Bank Holding Company Act of 1956, as amended, and as such, is subject to
supervision and regulation by the Board of Governors of the Federal Reserve
System (the "FRB"). As a registered bank holding company, the Company may own
one or more banks and may engage directly, or through subsidiary corporations,
in those activities closely related to banking which are specifically permitted
under the Bank Holding Company Act and by the FRB. The Company's principal
assets at December 31, 1998 consisted of all the outstanding capital stock of
four Texas state banking associations (the "Banks" or "bank subsidiaries"). All
of the Company's bank subsidiaries are members of the Federal Deposit Insurance
Corporation.
The bank subsidiaries are in the business of gathering funds from various
sources and investing these funds in order to earn a return. Funds gathering
primarily takes the form of accepting demand and time deposits from individuals,
partnerships, corporations and public entities. Investments principally are made
in loans to various individuals and entities as well as in debt securities of
the U.S. Government and various other entities whose payments are guaranteed by
the U.S. Government. Historically, the bank subsidiaries have primarily focused
on providing commercial banking services to small and medium sized businesses
located in its trade area and international banking services. In recent years,
the bank subsidiaries have also emphasized consumer and retail banking,
including mortgage lending and credit card services, as well as branches
situated in retail locations and grocery stores.
The Company's philosophy focuses on customer service as represented by its
motto, "We Do More." The Banks maintain a strong commitment to their local
communities by, among other things, appointing selected members of the
communities in which the Banks' branches are located to local advisory boards
(the "local boards"). The local boards direct the operations of the branches,
with the supervision of the lead Bank's board of directors, and assist in
introducing prospective customers to the Banks as well as developing or
modifying products and services to meet customer needs. The Banks function
largely on a delegated basis, and the Company believes that such decentralized
structure enhances the commitment of the Banks to the communities in which their
branches are located. In contrast to many of its principal competitors, the
credit decisions of the Banks are made locally and promptly. The Company
believes that the knowledge and expertise afforded by the local boards are key
components to sound credit decisions.
Expense control is an essential element in the Company's profitability.
The Company has centralized virtually all of the Banks' back office support and
investment functions in order to achieve consistency and cost efficiencies in
the delivery of products and services. The Company's efficiency ratio (other
operating expenses
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divided by net interest income and other operating income) for the year ended
December 31, 1998 stands at 53% and has been under 53% for each of the last five
years, which the Company believes is well below national peer group ratios. One
of the benefits derived from such operating efficiencies is that the Company is
not subjected to undue pressure to generate interest income from high-risk
loans. Accordingly, the Company believes it is able to be more selective and
conservative with respect to its credit decisions. Despite this lack of economic
pressure, the Banks aggressively pursue, with the help of the local boards,
quality credits with an emphasis on loans to small and medium sized businesses.
During the last eight years, IBC, as defined below, has been an active
acquiror of financial institutions and banking assets in its trade area. The
community focus of IBC and the involvement of the local boards has resulted in
IBC becoming aware of acquisition possibilities in the ordinary course of its
business and in many instances before other potential purchasers. IBC's decision
to pursue an acquisition is based on a multitude of factors, including the
ability to efficiently assimilate the operations and assets of the acquired
entity, the cost efficiencies to be attained and the growth potential of the
market.
On July 28, 1980, the Company acquired all of the outstanding shares of
its predecessor, International Bank of Commerce ("IBC"), which is today the
flagship bank of the Company, representing 85% of the Company's banking assets.
IBC was chartered under the banking laws of Texas in 1966 and has its principal
place of business at 1200 San Bernardo Avenue, Laredo, Webb County, Texas. It is
a wholly-owned subsidiary of the Company. Since the acquisition of the flagship
bank in 1980, the Company formed three banks and acquired $1,846,435,000 in
assets and assumed $1,762,577,000 of deposits in numerous acquisition
transactions, which totals are as of the acquisition date and do not take into
account any runoff or other subsequent events. In addition to the acquisitions,
IBC has also focused on deposit growth from its traditional banking activities.
Effective February 19, 1999, IBC purchased certain assets and assumed
certain liabilities of the Laredo branch of Pacific Southwest Bank, Corpus
Christi, Texas. IBC purchased loans of approximately $4,590,000 and assumed
deposits of approximately $28,399,000 and received cash and other assets in the
amount of approximately $23,809,000. The acquisition was accounted for as a
purchase transaction. IBC recorded intangible assets, goodwill and core deposit
premium totaling $2,525,000 which are being amortized on a straight line basis
over a fifteen year period.
Effective November 5, 1997, University Bank, Houston, Texas a state bank
organized under the laws of the state of Texas, was merged with and into IBC. At
the date of closing, total assets acquired were approximately $250,978,000. The
acquisition was accounted for as a purchase transaction. IBC recorded intangible
assets, goodwill and core deposit premium of totaling $17,613,000 which are
being amortized on a straight line basis over a fifteen year period.
Effective March 7, 1997, IBC purchased certain assets and assumed certain
liabilities of five branches of Bank of America Texas, N. A., Irving, Texas. IBC
purchased loans of approximately $381,000 and assumed deposits of approximately
$84,834,000 and received cash and other assets in the amount of approximately
$84,799,000. The acquisition was accounted for as a purchase transaction. IBC
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recorded intangible assets, goodwill and core deposit premium totaling
$3,705,000 which are being amortized on a straight line basis over a fifteen
year period.
For more information regarding the acquisition transactions of the Company
during the last three years, see note 2 of notes to Consolidated Financial
Statements of the Company located on page 23 of the 1998 Annual Report which is
incorporated herein by reference.
In addition to IBC, the Company has three other bank subsidiaries. The
three additional banks are (i) Commerce Bank, a Texas state banking association
which commenced operations in 1982, located in Laredo, Texas ("Commerce Bank");
(ii) International Bank of Commerce, a Texas state banking association which
commenced operations in 1984, located in Brownsville, Texas ("IBC-Brownsville");
and (iii) International Bank of Commerce, a Texas state banking association
which commenced operations in 1984, located in Zapata, Texas ("IBC-Zapata").
The Company also has four non-banking subsidiaries. They are (i) IBC Life
Insurance Company, a Texas chartered subsidiary which reinsures a small
percentage of credit life and accident and health risks related to loans made by
bank subsidiaries, (ii) IBC Trading Company, an export trading company which is
currently inactive, (iii) IBC Subsidiary Corporation, a second-tier bank holding
company incorporated in the State of Delaware, and (iv) IBC Capital Corporation,
a company incorporated in the State of Delaware for the purpose of holding
certain investments of the Company.
SERVICES AND EMPLOYEES
The Company, through its bank subsidiaries, IBC, Commerce Bank, IBC Zapata
and IBC Brownsville, is engaged in the business of banking, including the
acceptance of checking and savings deposits and the making of commercial, real
estate, personal, home improvement, automobile and other installment and term
loans. Certain of the bank subsidiaries are very active in facilitating
international trade along the United States border with Mexico and elsewhere.
The international banking business of the Company includes providing letters of
credit, making commercial and industrial loans, and a nominal amount of currency
exchange. As part of its international strategy the Company also aims to provide
a full array of banking services to "maquiladoras," including, account and
payroll services. A "maquiladora" is a type of assembly or manufacturing plant
under Mexican law which is typically owned by a United States company and
located on Mexico's northern border for the purpose of temporarily importing
materials to be assembled in Mexico and re-exported to the United States. Each
bank subsidiary also offers other related services, such as credit cards,
travelers' checks, safety deposit, collection, notary public, escrow, drive-up
and walk-up facilities and other customary banking services. Additionally, each
bank subsidiary makes available certain securities products through third party
providers. The bank subsidiaries also make banking services available during
traditional and nontraditional banking hours through their network of 168
automated teller machines, and through their branches situated in retail
locations and grocery stores. To date, as part of the Company's expansion of its
retail banking services, 33 grocery store branches have been opened.
The Company owns U.S. service mark registrations for "INTERNATIONAL BANK
OF COMMERCE," "WALL STREET INTERNATIONAL," "INTERNATIONAL BANK OF COMMERCE
CENTRE," and
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"IT'S A BRIGHTER CHRISTMAS" as well as the design marks depicting the United
States and Mexico and the design mark depicting "WALL STREET INTERNATIONAL." In
addition, the Company owns Texas service mark registrations for "CHECK'N SAVE,"
"WALL STREET INTERNATIONAL," "INTERNATIONAL BANK OF COMMERCE" and the design
marks depicting "CHECK'N SAVE" and "WALL STREET INTERNATIONAL," as well as the
design marks depicting the United States and Mexico. Also, IBC owns certain
pending applications for federal registrations of other proprietary service
marks and is regularly investigating the availability of service mark
registrations related to certain proprietary products.
No material portion of the business of the Company may be deemed seasonal
and the deposit and loan base of the Company's bank subsidiaries are diverse in
nature. There has been no material effect upon the Company's capital
expenditures, earnings or competitive position as a result of Federal, State or
local environmental regulation.
As of December 31, 1998 the Company and its subsidiaries employed
approximately 1,235 persons full-time and 192 persons part-time.
COMPETITION
The Company is the largest minority-owned bank holding company in the
United States, with more than a majority of its common stock being held by
Hispanic shareholders. The Company is the second largest independent Texas bank
holding company. The primary market area of the Company is South and Southeast
Texas, an area bordered on the east by the Houston area, to the northwest by San
Antonio, to the southwest by Laredo and to the southeast by Brownsville. The
Company has increased its market share in its primary market area over the last
seven years through strategic acquisitions. The Company, through its bank
subsidiaries, competes for deposits and loans with other commercial banks,
savings and loan associations, credit unions and nonbank entities, which nonbank
entities serve as an alternative to traditional financial institutions and are
considered to be formidable competitors.
The Company and its bank subsidiaries do a significant amount of business
for customers domiciled in Mexico, with an emphasis in Northern Mexico. Deposits
from persons and entities domiciled in Mexico comprise a significant portion of
the deposit base of the Company's bank subsidiaries. Such deposits comprised
approximately 38%, 35% and 39% of the Company's bank subsidiaries' total
deposits as of December 31, 1998, 1997 and 1996, respectively.
SUPERVISION AND REGULATION
GENERAL - THE COMPANY. In addition to the generally applicable state and
Federal laws governing businesses and employers, the Company and its bank
subsidiaries are further extensively regulated by special Federal and state laws
governing financial institutions. These laws comprehensively regulate the
operations of the Company's bank subsidiaries and include, among other matters,
requirements to maintain reserves against deposits; restrictions on the nature
and amount of loans that may be made and the interest that may be charged
thereon; restrictions on the amounts, terms and conditions of loans to
directors, officers, large shareholders and their affiliates; restrictions
related to investments in activities other than banking; and minimum capital
requirements. With few exceptions, state and Federal banking laws have as their
principal objective either the maintenance of the safety and soundness of the
Federal
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deposit insurance system or the protection of consumers, rather than the
specific protection of shareholders of the Company. Further, the earnings of the
Company are affected by the fiscal and monetary policies of the Federal Reserve
System, which regulates the national money supply in order to mitigate
recessionary and inflationary pressures. These monetary policies influence to a
significant extent the overall growth of bank loans, investments and deposits
and the interest rates charged on loans or paid on time and savings deposits.
The nature of future monetary policies and the effect of such policies on the
future earnings and business of the Company cannot be predicted.
FRB APPROVALS. The Company is a registered bank holding company within the
meaning of the Bank Holding Company Act of 1956, as amended ("BHCA"), and is
subject to supervision by the FRB and to a certain extent the Texas Department
of Banking (the "DOB"). The Company is required to file with the FRB annual
reports and other information regarding the business operations of itself and
its subsidiaries. It is also subject to examination by the FRB. Under the BHCA,
a bank holding company is, with limited exceptions, prohibited from acquiring
direct or indirect ownership or control of any voting stock of any company which
is not a bank or bank holding company, and must engage only in the business of
banking, managing, controlling banks, and furnishing services to or performing
services for its subsidiary banks. One of the exceptions to this prohibition is
the ownership of shares of any company provided such shares do not constitute
more than 5% of the outstanding voting shares of the company and so long as the
FRB does not disapprove such ownership. Another exception to this prohibition is
the ownership of shares of a company the activities of which the FRB has
specifically determined to be so closely related to banking, managing or
controlling banks as to be a proper incident thereto.
The restrictions on the activities of bank holding companies could change
significantly if the Glass-Steagall Act of 1935 is reformed. Current
congressional debate over reforming the Glass-Steagall Act is centered around
whether enhanced bank powers should be conducted within a holding company or
through bank subsidiaries. It is impossible to predict at this time whether any
of the reform proposals will pass, or what effect the proposals would have on
the Company or its subsidiaries.
The BHCA and the Change in Bank Control Act of 1978 require that,
depending on the circumstances, either FRB approval must be obtained or notice
must be furnished to the FRB and not disapproved prior to any person or company
acquiring "control" of a bank holding company, such as the Company, subject to
certain exceptions for certain transactions. Control is conclusively presumed to
exist if an individual or company acquires 25% or more of any class of voting
securities of the bank holding company. Control is rebuttably presumed to exist
if a person acquires 10% or more but less than 25% of any class of voting
securities where the bank holding company, such as the Company, has registered
Securities under Section 12 of the Securities Exchange Act of 1934 (the
"Exchange Act").
As a bank holding company, the Company is required to obtain approval
prior to merging or consolidating with any other bank holding company, acquiring
all or substantially all of the assets of any bank or acquiring ownership or
control of shares of a bank or bank holding company if, after the acquisition,
the Company would directly or indirectly own or control 5% or more of the voting
shares of such bank or bank holding company.
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INTERSTATE BANKING. In 1994, Congress enacted the Riegle-Neal Interstate
Banking and Branching Efficiency Act of 1994 ("Interstate Banking Act"), which
rewrote federal law governing the interstate expansion of banks in the United
States. Effective as of September 29, 1995, adequately capitalized, well managed
bank holding companies with FRB approval may acquire banks located in any State
in the United States, provided that the target bank meets the minimum age (up to
a maximum of five years, which is the maximum Texas has adopted) established by
the host State. Under the Interstate Banking Act, an anti-concentration limit
will bar interstate acquisitions that would give a bank holding company control
of more than ten percent (10%) of all deposits nationwide or thirty percent
(30%) of any one State's deposits, or such higher or lower percentage
established by the host State. The anti-concentration limit in Texas has been
set at twenty percent (20%) of all federally insured deposits in Texas. As of
December 31, 1998, many of Texas' largest bank holding companies had either
merged with or been acquired by out-of-state banking concerns.
In addition to providing for interstate acquisitions of banks by bank
holding companies, the Interstate Banking Act provides for interstate branching
by permitting mergers between banks domiciled in different States beginning June
1, 1997. The Interstate Banking Act provides that States may opt out of
interstate branching by enacting non-discriminatory legislation prohibiting
interstate bank mergers before June 1, 1997. In 1995, Texas passed legislation
opting out of the interstate branching provisions of The Interstate Banking Act
until September 1999. In May 1998, the Texas DOB determined that the Texas
opt-out statute was not effective and the Texas DOB began accepting applications
for interstate branching transactions. Currently, legislation implementing
interstate branching is pending in the Texas legislature. No accurate prediction
can be made at this time as to how this legislation will affect the Company
and/or its bank subsidiaries.
FRB ENFORCEMENT POWERS. The FRB has certain cease-and-desist and
divestiture powers over bank holding companies and non-banking subsidiaries
where their actions would constitute a serious threat to the safety, soundness
or stability of a subsidiary bank. These powers may be exercised through the
issuance of cease-and-desist orders or other actions. In the event a bank
subsidiary experiences either a significant loan loss or rapid growth of loans
or deposits, the Company may be compelled by the FRB to invest additional
capital in the bank subsidiary. Further, the Company would be required to
guaranty performance of the capital restoration plan of any undercapitalized
bank subsidiary. The FRB is also empowered to assess civil money penalties
against companies or individuals who violate the BHCA in amounts up to
$1,000,000 per day, to order termination of non-banking activities of
non-banking subsidiaries of bank holding companies and to order termination of
ownership and control of a non-banking subsidiary. Under certain circumstances
the Texas Banking Commissioner may bring enforcement proceedings against a bank
holding company in Texas.
COMPANY DIVIDENDS. The FRB's policy discourages the payment of dividends
from borrowed funds and discourages payments that would affect capital adequacy.
The FRB has issued policy statements which generally state that bank holding
companies should serve as a source of financial and managerial strength to their
bank subsidiaries, and generally should not pay dividends except out of current
earnings, and should not borrow to pay dividends if the bank holding company is
experiencing capital or other financial problems.
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CROSS-GUARANTEE PROVISIONS. The Financial Institutions Reform Recovery and
Enforcement Act of 1989 ("FIRREA") contains a "cross-guarantee" provision which
generally makes commonly controlled insured depository institutions liable to
the FDIC for any losses incurred in connection with the failure of a commonly
controlled depository institution.
AUDIT REPORTS. Insured institutions with total assets of $500 million or
more must submit annual audit reports prepared by independent auditors to
federal and state regulators. In some instances, the audit report of the
institution's holding company can be used to satisfy this requirement. Auditors
must receive examination reports and examination related correspondence. In
addition, financial statements prepared in accordance with generally accepted
accounting principles, management's certifications concerning responsibility for
the financial statements, internal controls and compliance with legal
requirements designated by the FDIC, and an attestation by the auditor regarding
the statements of management relating to the internal controls must be
submitted. For institutions with total assets of more than $3 billion,
independent auditors may be required to review quarterly financial statements.
The Federal Deposit Insurance Corporation Improvement Act of 1991 ("FDICIA")
requires that independent audit committees be formed, consisting of outside
directors only. The committees of such institutions must include members with
experience in banking or financial management, must have access to outside
counsel, and must not include representatives of large customers.
GENERAL - BANK SUBSIDIARIES. All of the bank subsidiaries of the Company
are state banks subject to regulation by, and supervision of, the Texas DOB and
the FDIC. All of the bank subsidiaries of the Company are members of the FDIC,
which currently insures the deposits of each member bank to a maximum of
$100,000 per depositor. For this protection, each member bank pays a statutory
assessment and is subject to the rules and regulations of the FDIC. The premiums
increase incrementally based on the rating of the member bank.
DEPOSIT INSURANCE. The deposits of the Bank are insured by the FDIC
through the Bank Insurance Fund ("BIF") to the extent provided by law. Under the
FDIC's risk-based insurance system, BIF-insured institutions are currently
assessed premiums of between zero and twenty seven cents per $100 of eligible
deposits, depending upon the institution's capital position and other
supervisory factors. During 1996, Congress enacted legislation that, among other
things, provides for assessments against BIF-insured institutions that will be
used to pay certain Financing Corporation ("FICO") obligations. In addition to
any BIF insurance assessments, BIF-insured banks are expected to make payments
for the FICO obligations equal to $0.01296 per $100 of eligible deposits each
year during 1997 through 1999. Thereafter, BIF and Savings Association Insurance
Fund payers will be assessed pro rata for the FICO bond obligations.
CAPITAL ADEQUACY. The Company and its bank subsidiaries are currently
required to meet certain minimum regulatory capital guidelines utilizing total
capital-to-risk-weighted assets and Tier 1 Capital elements. At December 31,
1998 the Company's ratio of total capital-to-risk-weighted assets was 14.45%.
The guidelines make regulatory capital requirements more sensitive to
differences in risk profiles among banking organizations, take off-balance sheet
exposure into account in assessing capital adequacy, and encourage the holding
of liquid, low-risk assets. At least one-half of
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the minimum total capital must be comprised of Tier 1 Capital elements. Tier 1
Capital of the Company is comprised of common shareholders' equity. The core
deposit intangibles and goodwill of $43,692,000 booked in connection with all
the financial institution acquisitions of the Company are deducted from the sum
of core capital elements when determining the capital ratios of the Company.
In addition, the FRB has established minimum leverage ratio guidelines for
bank holding companies. These guidelines provide for a minimum leverage ratio of
Tier 1 capital to adjusted average quarterly assets ("leverage ratio") equal to
three percent for bank holding companies that meet certain specified criteria,
including having the highest regulatory rating. All other bank holding companies
will generally be required to maintain a leverage ratio of at least four to five
percent. The Company's leverage ratio at December 31, 1998 was 6.50 percent. The
guidelines also provide that bank holding companies experiencing internal growth
or making acquisitions will be expected to maintain strong capital positions
substantially above the minimum supervisory levels without significant reliance
on intangible assets. Furthermore, the guidelines indicate that the FRB will
continue to consider a "tangible tier 1 leverage ratio" (deducting all
intangibles) in evaluating proposals for expansion or new activity. The FRB has
not advised the Company of any specific minimum leverage ratio or tangible tier
1 leverage ratio applicable to it.
Each of the Company's bank subsidiaries is subject to similar capital
requirements adopted by the FDIC. Each of the Company's bank subsidiaries had a
leverage ratio in excess of five percent as of December 31, 1998. As of that
date, the federal banking agencies had not advised any of the bank subsidiaries
of any specific minimum leverage ratio applicable to it.
Effective December 19, 1992, the federal bank regulatory agencies adopted
regulations which mandate a five-tier scheme of capital requirements and
corresponding supervisory actions to implement the prompt corrective action
provisions of FDICIA. The regulations include requirements for the capital
categories that will serve as benchmarks for mandatory supervisory actions.
Under the regulations, the highest of the five categories would be a well
capitalized institution with a total risk-based capital ratio of 10%, a Tier 1
risk-based capital ratio of 6% and a Tier 1 leverage ratio of 5%. An institution
would be prohibited from declaring any dividends, making any other capital
distribution or paying a management fee if the capital ratios drop below the
levels for an adequately capitalized institution, which are 8%, 4% and 4%,
respectively. The corresponding provisions of FDICIA mandate corrective actions
be taken if a bank is undercapitalized. Based on the Company and each of the
bank subsidiaries capital ratios as of December 31, 1998, the Company and each
of the bank subsidiaries were classified as "well capitalized" under the
applicable regulations.
In 1995, in accordance with FDICIA, the FDIC modified its risk-based
capital adequacy guidelines to explicitly include a bank's exposure to declines
in the economic value of its capital due to changes in interest rates as a
factor that it will consider in evaluating a bank's capital adequacy. In 1996
the bank regulatory agencies introduced risk-based examination procedures.
Effective January 1, 1997, the federal banking agencies jointly adopted
regulations that amend the risk-based capital standards to incorporate measures
for market risk. Applicable banking institutions will be required to adjust
their risk-based capital ratio to reflect market risk. On December 19, 1996, the
FFIEC revised the Uniform Financial Institutions Rating System
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commonly referred to as the CAMEL rating system. A sixth component addressing
sensitivity to market risk was added. Sensitivity to market risk reflects the
degree to which changes in interest rates, foreign exchange rates, commodity
prices or equity prices can adversely affect a financial institution's earnings
or economic capital.
STATE ENFORCEMENT POWERS. The Banking Commissioner of Texas may determine
to close a Texas state bank when she finds that the interests of depositors and
creditors of a state bank are jeopardized through its insolvency or imminent
insolvency and that it is in the best interest of such depositors and creditors
that the bank be closed. The Texas DOB also has broad enforcement powers over
the Bank, including the power to impose orders, remove officers and directors,
impose fines and appoint supervisors and conservators.
DEPOSITOR PREFERENCE. Because the Company is a legal entity separate and
distinct from its bank subsidiaries, its right to participate in the
distribution of assets of any subsidiary upon the subsidiary's liquidation or
reorganization will be subject to the prior claims of the subsidiary's
creditors. In the event of a liquidation or other resolution of a subsidiary
bank, the claims of depositors and other general or subordinated creditors of
the bank are entitled to a priority of payment over the claims of holders of any
obligation of the institution to its shareholders, including any depository
institution holding company (such as the Company) or any shareholder or creditor
thereof.
TEXAS LAW. Effective September 1, 1995, the new Texas Banking Act ("Act")
became effective and the Texas Banking Code of 1943 was repealed. The purpose of
the Act was to modernize and streamline the Texas banking laws. One of the many
significant provisions of the Act adopts by reference the Texas Business
Corporation Act, subject to modification by the Banking Commissioner. Among
other matters, these corporate provisions will permit Texas state banks to merge
with non-banking business entities, while national banks are only permitted to
merge with banking entities. During 1997, the Texas Constitution was amended to
permit home equity lending in Texas effective January 1, 1998 and the Company's
bank subsidiaries are currently offering home equity loans.
CRA. Under the Community Reinvestment Act ("CRA"), the FDIC is required to
assess the record of each bank subsidiary to determine if the bank meets the
credit needs of its entire community, including low and moderate-income
neighborhoods served by the institution, and to take that record into account in
its evaluation of any application made by the bank for, among other things,
approval of the acquisition or establishment of a branch or other deposit
facility, an office relocation, a merger, or the acquisition of shares of
capital stock of another financial institution. The FDIC prepares a written
evaluation of an institution's record of meeting the credit needs of its entire
community and assigns a rating. FIRREA requires federal banking agencies to make
public a rating of a bank's performance under the CRA. Each bank subsidiary
received either an "outstanding" or "satisfactory" CRA rating in its most
recently completed examination. Further, there are fair lending laws which
prohibit discrimination in connection with lending decisions.
CONSUMER LAWS. In addition to the laws and regulations discussed herein,
the Bank is also subject to certain consumer laws and regulations that are
designed to protect consumers in transactions with banks. While the list set
forth herein is not
11
<PAGE>
exhaustive, these laws and regulations include the Truth in Lending Act, the
Truth in Savings Act, the Electronic Funds Transfer Act, the Expedited Funds
Availability Act, the Equal Credit Opportunity Act, and the Fair Housing Act,
among others. These laws and regulations mandate certain disclosure requirements
and regulate the manner in which financial institutions must deal with customers
when taking deposits or making loans to such customers. The Bank must comply
with the applicable provisions of these consumer protection laws and regulations
as part of their ongoing customer relations.
AFFILIATE TRANSACTIONS. The Company, IBC and the other bank subsidiaries
of the Company are "affiliates" within the meaning of Section 23A of the Federal
Reserve Act which sets forth certain restrictions on loans and extensions of
credit between a bank subsidiary and affiliates, on investments in an
affiliate's stock or other securities, and on acceptance of such stock or other
securities as collateral for loans. Such restrictions prevent a bank holding
company from borrowing from any of its bank subsidiaries unless the loans are
secured by specific obligations. Further, such secured loans and investments by
a bank subsidiary are limited in amount, as to a bank holding company or any
other affiliate, to 10% of such bank subsidiary's capital and surplus and, as to
the bank holding company and its affiliates, to an aggregate of 20% of such bank
subsidiary's capital and surplus. Certain restrictions do not apply to 80% or
more owned sister banks of bank holding companies. Each bank subsidiary of the
Company is wholly-owned by the Company. Section 23B of the Federal Reserve Act
requires that the terms of affiliate transactions be comparable to terms of
similar non-affiliate transactions.
INSIDER LOANS. The restrictions on loans to directors, executive officers,
principal shareholders and their related interests (collectively referred to
herein as "insiders") contained in the Federal Reserve Act and Regulation O
apply to all insured institutions and their subsidiaries and holding companies.
These restrictions include limits on loans to one borrower and conditions that
must be met before such a loan can be made. There is also an aggregate
limitation on all loans to insiders and their related interests. These loans
cannot exceed the institution's total unimpaired capital and surplus, and the
FDIC may determine that a lesser amount is appropriate. Insiders are subject to
enforcement actions for knowingly accepting loans in violation of applicable
restrictions.
LENDING RESTRICTIONS. The operations of the Banks are also subject to
lending limit restrictions pertaining to the extension of credit and making of
loans to one borrower. The scope and requirements of such laws and regulations
have been expanded significantly in recent years. Further, under the BHCA and
the regulations of the FRB thereunder, the Company and its subsidiaries are
prohibited from engaging in certain tie-in arrangements with respect to any
extension of credit or provision of property or services; however, recently the
FRB adopted a rule relaxing tying restrictions by permitting a bank holding
company to offer a discount on products or services if a customer obtains other
products or services from such company.
DIVIDENDS. The ability of the Company to pay dividends is largely
dependent on the amount of cash derived from dividends declared by its bank
subsidiaries. The payment of dividends by any bank or bank holding company is
affected by the requirement to maintain adequate capital as discussed above. At
December 31, 1998 there was an aggregate of approximately $38,208,000 available
for the payment of dividends to the Company, by IBC, Commerce Bank, IBC Zapata
and IBC Brownsville under the applicable
12
<PAGE>
restrictions, assuming that each of such banks continues to be classified as
"well capitalized". Further, the Company could expend the entire $38,208,000 and
continue to be classified as "well capitalized". Note 17 of notes to
Consolidated Financial Statements of the Company located on page 35 of the 1998
Annual Report is incorporated herein by reference.
POWERS. As a result of FDICIA, the authority of the FDIC over
state-chartered banks was expanded. FDICIA limits state-chartered banks to only
those principal activities permissible for national banks, except for other
activities specifically approved by the FDIC. The new Texas Banking Act includes
a parity provision which establishes procedures for state banks to notify the
Banking Commissioner if the bank intends to conduct any activity permitted for a
national bank that is otherwise denied to a state bank. The Banking Commissioner
has thirty (30) days to prohibit the activity.
During 1996, the Office of the Comptroller of the Currency (the "OCC")
adopted a major overhaul of its rules governing corporate applications,
practices, and notices. The new rule incorporates a risk-based approach to
corporate applications and activities of national banks. The new rule includes
authority for operating subsidiaries to conduct for the first time activities
beyond those permitted for national banks directly. Under the new rule, an
operating subsidiary engaged in activities not permissible for the parent bank
must observe certain separateness requirements. National banks must file
applications for prior OCC approval to establish, or acquire, operating
subsidiaries engaged in activities that are not permissible for the parent bank
and the OCC may grant such approval on a case by case basis. Pursuant to the
Texas parity provision, a Texas state bank may be permitted to engage in such
activities permitted for national banks if notice is provided to the Banking
Commissioner and the Banking Commissioner does not prohibit the activity.
SUBCHAPTER S. As part of the Small Business Job Protection Act of 1996,
financial institutions are now eligible to make an S election for federal income
tax purposes. To qualify as an S corporation, a financial institution must (i)
not use the reserve method of accounting for bad debts, (ii) have only one class
of stock, (iii) have no more than seventy-five shareholders, and (iv) have no
foreign shareholders. The Company currently does not qualify for the S election.
INSTABILITY OF REGULATORY STRUCTURE. Various legislation, including
proposals to overhaul the bank regulatory system, expand the powers of banking
institutions and bank holding companies and limit the investments that a
depository institution may make with insured funds, is from time to time
introduced in Congress. Such legislation may change banking statutes and the
operating environment of the Company and the bank subsidiaries in substantial
and unpredictable ways. The Company cannot determine the ultimate effect that
potential legislation, if enacted, or implementing regulations with respect
thereto, would have upon the financial condition or results of operations of the
Company or its subsidiaries.
YEAR 2000
This section contains forward-looking statements that have been prepared
on the basis of the Company's best judgments and currently available
information. These forward-looking statements are inherently subject to
significant business, third party,
13
<PAGE>
and regulatory uncertainties and other contingencies, many of which are beyond
the control of the Company. In addition, these forward-looking statements are
based upon the Company's current internal assessments and remediation plans,
incorporating certain representations of third-party servicers, and are subject
to change. Accordingly, there can be no assurance that the Company's results of
operations will not be adversely affected by difficulties or delays in the
Company's or third parties' Year 2000 readiness efforts.
Many existing computer programs use only two digits to identify a year.
These programs were designed and developed without considering the impact of the
upcoming change in the century. If uncorrected, many computer applications could
fail or create erroneous results by or at the Year 2000. The Year 2000 issue
affects virtually all companies and organizations.
The Company has developed and implemented a plan to deal with the Year
2000 problem. The plan consists of a five-phase program ("Action Plan")
recommended by the Federal Financial Institutions Examination Council. This
Action Plan consists of awareness, assessment, renovation, validation and
implementation processes. The Action Plan provides for addressing critical and
noncritical issues, with the assignment of responsibility and target dates for
completion, and as of December 31, 1998, the Company was principally involved in
the validation and implementation phases of the Action Plan. Testing of core
applications, such as mainframe software, hardware, and network applications
were substantially complete by December 31, 1998.
Currently, the Company estimates that the dollar amount to remediate its
Year 2000 issue will be less than one million dollars. The data processing
system which the Company purchased in 1990 was substantially Year 2000
compliant. The cost of remediating the remaining Year 2000 issues are based on
management's best estimates which were derived utilizing assumptions of future
events including the continued availability of certain resources, third party
vendor remediation plans and other factors. The related costs totaled
approximately $620,000 for the year 1998. The eligible costs are being expensed
as incurred.
The Company does not expect that the cost of addressing the Year 2000
issue will be a material event or uncertainty that would cause its reported
financial information not to be indicative of future operating results or future
financial condition, or that the costs or consequences of incomplete or untimely
resolution of any Year 2000 issue represent a known material event or
uncertainty that is reasonably likely to affect its future financial results, or
cause its reported financial information not to be indicative of future
operating results or future financial condition. However, the Year 2000 issue is
pervasive and complex and can potentially affect any computer process.
Accordingly, no assurance can be given that Year 2000 compliance can be achieved
without additional unanticipated expenditures and uncertainties that might
affect future financial results.
Additionally, the federal bank regulators have enforcement powers with
respect to Year 2000 compliance. Failure to institute an acceptable Year 2000
readiness plan could result in the disapproval of expansion applications filed
with bank regulatory agencies or the imposition of cease and desist orders or
civil money penalties.
14
<PAGE>
Regardless of the Year 2000 compliance of the Company's systems, there is
no complete assurance that the Company will not be adversely affected to the
extent other entities not affiliated with the Company are unsuccessful in
properly addressing this issue. In an effort to minimize this possibility,
active communication has been ongoing between the Company and its external
service providers and intermediaries. In addition, a risk reduction program was
initiated in 1998 that addresses potential Year 2000 exposure in the loan
portfolio. Correspondence has been sent by the Company to customers and
suppliers during 1998 urging them to adequately address their Year 2000 issues,
and such communication is planned to continue throughout 1999. However, there
can be no guarantee that customers and suppliers will become Year 2000 compliant
on a timely basis or in a manner that is compatible with the Company's systems.
Significant business interruptions or failures by key business customers,
suppliers, trading partners or governmental agencies resulting from the effects
of the Year 2000 issue could have a material adverse effect on the Company.
The Company currently has in place a remediation and contingency plan in
the event an application has unresolved Year 2000 issues as well as a disaster
recovery plan in the event of an unforeseen interruption in the Company's data
processing capabilities. These plans focus on an application-by-application
strategy that would be implemented in the event of Year 2000 related problems in
particular applications, which strategies include, among others, the replacement
of the faulty application as well as strategies to be employed should the
Company suffer an area wide interruption of data processing capabilities due to
loss of power or communications or a similar failure, which strategies would
include, among others, alternate processing facilities.
While the Company will have contingency plans in place to address a
temporary disruption in these services, there can be no assurance that any
disruption or failure will be only temporary, that the Company's contingency
plans will function as anticipated, or that the results of operations, financial
condition, or liquidity of the Company will not be adversely affected in the
event of a prolonged disruption or failure.
Additionally, there can be no assurance that the banking or other federal
regulators will not issue new regulatory requirements that require additional
work by the Company and, if issued, that new regulatory requirements will not
increase the cost or delay the completion of the Company's Action Plan.
DISTRIBUTION OF ASSETS, LIABILITIES AND SHAREHOLDERS' EQUITY
The main areas in which the Company has directed its lendable assets are
(i) commercial, financial and industrial loans; (ii) real estate loans; and
(iii) loans to individuals for household, family and other consumer
expenditures. The relationship that these three categories of loans bear to the
total assets of the Company and other detailed statistical information about the
business of the Company are presented on the following pages.
15
<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, 1998, 1997 and 1996 (Dollars in
Thousands) (Note 1). Nonaccrual loans have been included in assets for the
purpose of this analysis:
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
--------------------------------------------------------------------------------
1998 1997
--------------------------------------- -------------------------------------
AVERAGE AVERAGE AVERAGE AVERAGE
BALANCE INTEREST RATE/COST BALANCE INTEREST RATE/COST
------- -------- --------- ------- -------- ---------
ASSETS
<S> <C> <C> <C> <C> <C> <C>
Interest earning assets:
Loans, net of unearned discounts:
Domestic ...................... $ 1,351,796 $ 133,221 9.86% $ 1,152,566 $ 115,527 10.02%
Foreign ....................... 141,869 11,795 8.31 128,923 11,821 9.17
Investment securities:
Taxable ....................... 2,771,927 179,030 6.46 2,121,927 146,820 6.92
Tax-exempt .................... 4,824 241 5.00 1,348 90 6.68
Time deposits with banks ........ 1,005 89 8.86 404 47 11.63
Federal funds sold .............. 22,738 1,462 6.43 14,906 1,120 7.51
Other ........................... 2,686 336 12.51 2,565 307 11.97
----------- ----------- ----------- ----------
Total interest-earning assets . $ 4,296,845 $ 326,174 7.59 $ 3,422,639 $ 275,732 8.06
Non-interest earning assets:
Cash and due from banks ......... $ 131,539 $ 144,573
Bank premises and equipment, net 134,152 105,800
Other assets .................... 132,620 117,381
Less allowance for possible
loan losses ................... (25,837) (23,075)
----------- -----------
Total ......................... $ 4,669,319 $ 3,767,318
=========== ===========
LIABILITIES AND
SHAREHOLDERS' EQUITY
Interest bearing liabilities:
Savings and interest bearing
demand deposits ............... $ 867,594 $ 26,419 3.05% $ 722,559 $ 22,152 3.07%
Time deposits:
Domestic ...................... 1,009,000 53,230 5.28 905,157 46,456 5.13
Foreign ....................... 964,459 48,593 5.04 821,214 42,957 5.23
Securities sold under
repurchase agreements and
federal funds purchased ....... 257,589 13,396 5.20 301,511 15,754 5.23
Other borrowings ................ 751,628 39,969 5.32 331,308 18,052 5.45
Other ........................... 2,664 302 11.34 -- -- --
----------- ----------- ----------- ----------
Total interest bearing
liabilities ................. $ 3,852,934 $ 181,909 4.72 $ 3,081,749 $ 145,371 4.72
Non-interest bearing liabilities:
Demand deposits ................. 433,863 361,379
Other liabilities ............... 35,532 26,261
Shareholders' equity ............... 346,990 297,929
----------- -----------
Total ......................... $ 4,669,319 $ 3,767,318
=========== ===========
Net interest income ...... $ 144,265 $ 130,361
=========== ==========
Net yield on interest
earning assets ......... 3.36% 3.81%
===== =====
<CAPTION>
YEARS ENDED DECEMBER 31,
--------------------------------------
1996
-------------------------------------
AVERAGE AVERAGE
BALANCE INTEREST RATE/COST
<S> <C> <C> <C>
ASSETS
Interest earning assets:
Loans, net of unearned discounts:
Domestic ...................... $ 1,073,524 $ 108,852 10.14%
Foreign ....................... 126,067 10,331 8.19
Investment securities:
Taxable ....................... 1,449,211 99,411 6.86
Tax-exempt .................... 23,916 1,292 5.40
Time deposits with banks ........ 708 53 7.49
Federal funds sold .............. 32,369 1,540 4.76
Other ........................... 2,576 300 11.65
----------- ---------
Total interest-earning assets . $ 2,708,371 $ 221,779 8.19
Non-interest earning assets:
Cash and due from banks ......... $ 94,972
Bank premises and equipment, net 85,584
Other assets .................... 89,450
Less allowance for possible
loan losses ................... (19,866)
-----------
Total ......................... $ 2,958,511
===========
LIABILITIES AND
SHAREHOLDERS' EQUITY
Interest bearing liabilities:
Savings and interest bearing
demand deposits ............... $ 617,090 $ 18,390 2.98%
Time deposits:
Domestic ...................... 645,782 32,065 4.97
Foreign ....................... 748,343 37,652 5.03
Securities sold under
repurchase agreements and
federal funds purchased ....... 236,223 12,151 5.14
Other borrowings ................ 137,404 7,114 5.18
Other ........................... -- -- --
----------- ---------
Total interest bearing
liabilities ................. $ 2,384,842 $ 107,372 4.50
Non-interest bearing liabilities:
Demand deposits ................. 297,539
Other liabilities ............... 21,927
Shareholders' equity ............... 254,203
-----------
Total ......................... $ 2,958,511
===========
Net interest income ...... $ 114,407
=========
Net yield on interest
earning assets ......... 4.22%
=====
</TABLE>
(Note 1) The average balances for purposes of the above table are calculated on
the basis of month-end balances.
16
<PAGE>
INTEREST RATES AND INTEREST DIFFERENTIAL
The following table analyzes the changes in net interest income during 1998
and 1997 and the relative effect of changes in interest rates and volumes for
each major classification of interest earning assets and interest-bearing
liabilities. Nonaccrual loans have been included in assets for the purpose of
this analysis, which reduces the resulting yields (Note 1):
<TABLE>
<CAPTION>
1998 COMPARED TO 1997 1997 COMPARED TO 1996
-------------------------------- --------------------------------
NET INCREASE (DECREASE) NET INCREASE (DECREASE)
DUE TO DUE TO
-------------------------------- --------------------------------
VOLUME RATE TOTAL VOLUME RATE TOTAL
-------- --------- -------- -------- --------- --------
(Dollars in Thousands) (Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C>
Interest earned on:
Loans, net of unearned discounts:
Domestic ...................... $ 19,574 $ (1,880) $ 17,694 $ 7,970 $ (1,295) $ 6,675
Foreign ....................... 1,133 (1,159) (26) 237 1,253 1,490
Investment securities:
Taxable ....................... 42,507 (10,297) 32,210 46,532 877 47,409
Tax-exempt .................... 179 (28) 151 (1,450) 248 (1,202)
Time deposits with banks ........ 55 (13) 42 (28) 22 (6)
Federal funds sold .............. 521 (179) 342 (1,062) 642 (420)
Other ........................... 15 14 29 (1) 8 7
-------- -------- -------- -------- -------- --------
Total interest income ........... $ 63,984 $(13,542) $ 50,442 $ 52,198 $ 1,755 $ 53,953
-------- -------- -------- -------- -------- --------
Interest incurred on:
Savings and interest
bearing demand deposits ....... $ 4,413 $ (146) $ 4,267 $ 3,197 $ 565 $ 3,762
Time deposits:
Domestic ...................... 5,398 1,376 6,774 13,323 1,068 14,391
Foreign ....................... 7,247 (1,611) 5,636 3,767 1,538 5,305
Securities sold under
repurchase agreements and
federal funds purchased ....... (2,269) (89) (2,358) 3,388 215 3,603
Other borrowings ................ 22,358 (441) 21,917 10,548 390 10,938
Other ........................... 302 -- 302 -- -- --
-------- -------- -------- -------- -------- --------
Total interest expense .......... $ 37,449 $ (911) $ 36,538 $ 34,223 $ 3,776 $ 37,999
-------- -------- -------- -------- -------- --------
Net interest income ............... $ 26,535 $(12,631) $ 13,904 $ 17,975 $ (2,021) $ 15,954
======== ======== ======== ======== ======== ========
</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.
17
<PAGE>
INTEREST RATE SENSITIVITY
The net interest rate sensitivity as of December 31, 1998 is illustrated in
the following table. This information reflects the balances of assets and
liabilities whose rates are subject to change. As indicated in the table, the
Company is liability sensitive during the early time periods and is asset
sensitive in the longer periods. The table shows the sensitivity of the balance
sheet at one point in time and is not necessarily indicative of the position at
future dates.
<TABLE>
<CAPTION>
RATE/MATURITY RATE/MATURITY RATE/MATURITY RATE/MATURITY
DECEMBER 31, 1998 3 MONTHS OVER 3 MONTHS OVER 1 YEAR OVER
(DOLLARS IN THOUSANDS) OR LESS TO 1 YEAR TO 5 YEARS 5 YEARS TOTAL
================================================================================================================================
SECTION A
- --------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
RATE SENSITIVE ASSETS
FEDERAL FUNDS SOLD ............... $ 26,000 -- -- -- $ 26,000
DUE FROM BANK INTEREST EARNING ... 284 1,089 -- -- 1,373
INVESTMENT SECURITIES ............ 375,673 499,617 1,609,580 523,007 3,007,877
LOANS, NET OF NON-ACCRUALS ....... 1,165,399 114,420 232,097 105,910 1,617,826
- --------------------------------------------------------------------------------------------------------------------------------
TOTAL EARNING ASSETS ............. $ 1,567,356 $ 615,126 $ 1,841,677 $ 628,917 $ 4,653,076
- --------------------------------------------------------------------------------------------------------------------------------
CUMULATIVE EARNING ASSETS ........ $ 1,567,356 $ 2,182,482 $ 4,024,159 $ 4,653,076
================================================================================================================================
SECTION B
- --------------------------------------------------------------------------------------------------------------------------------
RATE SENSITIVE LIABILITIES
TIME DEPOSITS .................... $ 922,423 $ 825,529 $ 259,556 $ 309 $ 2,007,817
OTHER INTEREST BEARING DEPOSITS .. 1,112,382 -- -- -- 1,112,382
FED FUNDS PURCHASED AND REPOS .... 63,988 60,911 10,801 -- 135,700
OTHER BORROWINGS ................. 1,074,000 -- -- -- 1,074,000
- --------------------------------------------------------------------------------------------------------------------------------
TOTAL INTEREST BEARING LIABILITIES $ 3,172,793 $ 886,440 $ 270,357 $ 309 $ 4,329,899
- --------------------------------------------------------------------------------------------------------------------------------
CUMULATIVE SENSITIVE LIABILITIES . $ 3,172,793 $ 4,059,233 $ 4,329,590 $ 4,329,899
================================================================================================================================
SECTION C
- --------------------------------------------------------------------------------------------------------------------------------
REPRICING GAP .................... $(1,605,437) $ (271,314) $ 1,571,320 $ 628,608 $ 323,177
CUMULATIVE REPRICING GAP ......... (1,605,437) (1,876,751) (305,431) 323,177 323,177
RATIO OF INTEREST-SENSITIVE
ASSETS TO LIABILITIES ......... .49 .69 6.81 -- 1.08
RATIO OF CUMULATIVE, INTEREST-
SENSITIVE ASSETS TO LIABILITIES .49 .54 .93 1.08
================================================================================================================================
</TABLE>
18
<PAGE>
INVESTMENT SECURITIES
The following table sets forth the carrying value of investment securities
as of December 31, 1998, 1997 and 1996:
YEARS ENDED DECEMBER 31,
-----------------------------------------
1998 1997 1996
---------- ----------- -----------
(Dollars in Thousands)
U.S. Treasury securities
Available for sale ......... $ 207,688 $ 202,123 $ 5,020
Mortgage-backed securities
Available for sale ......... 2,551,395 2,347,722 1,734,484
Obligations of states and
political subdivisions
Held to maturity ........... 518 695 858
Available for sale ......... 28,200 520 1,014
Equity securities
Available for sale ......... 62,995 30,383 16,201
Other securities
Held to maturity ........... 1,990 2,015 1,990
Available for sale ......... 155,091 -- --
---------- ---------- ----------
Total .................. $3,007,877 $2,583,458 $1,759,567
========== ========== ==========
The following tables set forth the contractual maturities of investment
securities at December 31, 1998 and the average yields of such securities,
except for the totals which reflect the weighted average yields. Actual
maturities will differ from contractual maturities because borrowers may have
the right to prepay obligations with or without prepayment penalties.
<TABLE>
<CAPTION>
AVAILABLE FOR SALE
MATURING
=========================================================================================================
AFTER ONE AFTER FIVE
WITHIN BUT WITHIN BUT WITHIN AFTER
ONE YEAR FIVE YEARS TEN YEARS TEN YEARS
---------------------- ----------------------- --------------------------- ----------------------
ADJUSTED ADJUSTED ADJUSTED ADJUSTED
COST YIELD COST YIELD COST YIELD COST YIELD
---------- --------- ---------- ---------- ---------- ----------- ----------- --------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C> <C>
U.S. Treasury and
obligations of
other U.S. Govern-
agencies .......... $ 1,490 5.69% $ -- -% $ 12,500 7.30% $ 193,553 6.72%
Mortgage-backed
securities ........ 22,642 6.52 269,442 7.22 320,268 7.56 1,922,515 6.99
Obligations of states
and political
subdivisions ...... -- -- 538 5.81 479 7.70 27,217 5.15
Other securities .... -- -- -- -- 158,916 6.00
Equity securities ... 62,276 5.75 -- -- -- -- -- --
---------- ----------- ---------- ----------
Total ..... $ 86,408 5.95% $ 269,980 7.22% $ 333,247 7.55% $2,302,201 6.88%
========== ========== ========== ==========
</TABLE>
19
<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>
Obligations of states
and political
subdivisions ...... $ 140 8.50% $ 378 8.93% $ -- -% $ -- -%
Other securities .... 5 6.75 1,825 8.10 160 6.76 -- --
------ ------ ------ ----
Total ...... $ 145 8.44% $2,203 8.24% $ 160 6.76% $ -- -%
====== ====== ====== ====
</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, 1998,
1997, 1996, 1995 and 1994 are shown in the following table:
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
-----------------------------------------------------------------------
1998 1997 1996 1995 1994
----------- ----------- ----------- ----------- -----------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C>
Commercial, financial
and agricultural ..... $ 896,060 $ 800,964 $ 723,061 $ 722,274 $ 668,359
Real estate-mortgage ... 215,689 188,122 193,101 200,998 201,998
Real estate-construction 94,374 59,239 32,610 39,527 46,584
Consumer ............... 250,917 272,478 161,594 124,843 122,751
Foreign ................ 166,324 130,401 128,932 120,748 106,707
----------- ----------- ----------- ----------- -----------
Total loans ....... 1,623,364 1,451,204 1,239,298 1,208,390 1,146,399
Unearned discount ...... (8,025) (6,508) (3,303) (3,479) (3,885)
----------- ----------- ----------- ----------- -----------
Loans, net of
unearned discount ...... $ 1,615,339 $ 1,444,696 $ 1,235,995 $ 1,204,911 $ 1,142,514
=========== =========== =========== =========== ===========
</TABLE>
The table on the following page shows the amounts of loans (excluding real
estate mortgages and consumer loans) outstanding as of December 31, 1998 which,
based on remaining scheduled repayments of principal, are due in the years
indicated. Also, the amounts due after one year are classified according to the
sensitivity to changes in interest rates:
20
<PAGE>
MATURING
-------------------------------------------------
AFTER ONE
WITHIN BUT WITHIN AFTER
ONE YEAR FIVE YEARS FIVE YEARS TOTAL
---------- ---------- ---------- ----------
(Dollars in Thousands)
Commercial, financial and
agricultural ........... $ 321,101 $ 460,414 $ 114,545 $ 896,060
Real estate - construction 50,977 40,205 3,192 94,374
Foreign .................. 79,784 75,370 11,170 166,324
---------- ---------- ---------- ----------
Total .......... $ 451,862 $ 575,989 $ 128,907 $1,156,758
========== ========== ========== ==========
INTEREST SENSITIVITY
-----------------------
FIXED VARIABLE
RATE RATE
-------- ---------
(Dollars in Thousands)
Due after one but within five years ..... $116,601 $459,388
Due after five years .................... 41,213 87,694
-------- --------
Total ......................... $157,814 $547,082
======== ========
The following table presents information concerning the aggregate amount of
non-accrual, past due and restructured domestic loans; certain loans may be
classified in one or more category:
YEARS ENDED DECEMBER 31,
-------------------------------------------
1998 1997 1996 1995 1994
------ ------ ------ ------ -------
(Dollars in Thousands)
Loans accounted for on
a non-accrual basis .......... $4,868 $5,014 $3,363 $5,291 $2,895
Loans contractually past
due ninety days or more
as to interest or prin-
cipal payments ............... 8,543 9,700 5,075 7,954 5,605
Loans accounted for as
"troubled debt restruc-
turings" ..................... 592 363 1,462 2,742 1,990
The following table presents information concerning the aggregate amount of
non-accrual and past due foreign loans extended to persons or entities in Mexico
or to the Mexican Government, certain loans may be classified in one or more
category:
YEARS ENDED DECEMBER 31,
------------------------------------------
1998 1997 1996 1995 1994
------- ------- ------ ------- ------
(Dollars in Thousands)
Loans accounted for on
a non-accrual basis ......... $ 670 $ 728 $1,062 $ 942 $ 732
Loans contractually past
due ninety days or more
as to interest or prin-
cipal payments .............. 242 2,096 1,321 944 1,086
21
<PAGE>
The gross income that would have been recorded during 1998 on non-accrual
and restructured loans in accordance with their original contract terms was
$632,000 on domestic loans and $76,000 on foreign loans. The amount of interest
income on such loans that was recognized in 1998 was $6,000 on domestic loans
and none for foreign loans.
The non-accrual loan policy of the bank subsidiaries is to discontinue the
accrual of interest on loans when management determines that it is probable that
future interest accruals will be uncollectible. Interest income on non-accrual
loans is recognized only to the extent payments are received or when, in
management's opinion, the creditor's financial condition warrants
reestablishment of interest accruals. Under special circumstances, a loan may be
more than 90 days delinquent as to interest or principal and not be placed on
non-accrual status. When any of the above occurs, loan officers are required to
recommend placing a loan on non-accrual status by sending a memo to the senior
loan officer who gives instructions to the commercial note teller that the loan
is on non-accrual status. When a loan is placed on non-accrual status, any
interest accrued but not paid is reversed and charged to operations against
interest income.
The preceding tables indicate that there are certain loans technically past
due 90 days or more on performing status. This situation generally results when
a bank subsidiary has a borrower who is experiencing financial difficulties but
not to the extent that requires a restructuring of indebtedness. The majority of
this category is composed of loans that are considered to be adequately secured
and/or for which there has been a recent payment.
The Company believes, after reviewing each bank subsidiary's loan
portfolio, that the majority of the loans with a loss potential have been
included under the categories of past due and non-accrual. Adjustments to the
loan loss allowance have been made for other credits that may have
characteristics indicating a potential for future non-performing status and some
possible loss.
The following table presents certain information about cross-border
outstanding loans, acceptances, and accrued interest thereon, related to Mexico:
YEARS ENDED DECEMBER 31,
-----------------------------------
1998 1997 1996
--------- --------- ---------
(Dollars in Thousands)
Loans:
Commercial, financial, industrial
and agricultural .................... $ 135,328 $ 91,945 $ 86,861
Real estate-mortgage .................. 8,133 18,416 20,591
Consumer .............................. 22,863 20,040 21,480
--------- --------- ---------
166,324 130,401 128,932
Less allowance for possible
loan losses ......................... (1,124) (1,184) (1,101)
--------- --------- ---------
Net loans .................... $ 165,200 $ 129,217 $ 127,831
========= ========= =========
Accrued interest receivable ............. $ 1,327 $ 1,198 $ 1,317
========= ========= =========
22
<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,
---------------------------------------------------------------------------
1998 1997 1996 1995 1994
----------- ----------- ----------- ----------- -----------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C>
Loans, net of unearned discounts,
outstanding at December 31, ... $ 1,615,339 $ 1,444,696 $ 1,235,995 $ 1,204,911 $ 1,142,514
=========== =========== =========== =========== ===========
Average loans outstanding during
the year (Note 1) ............. $ 1,493,664 $ 1,281,489 $ 1,199,591 $ 1,202,136 $ 1,055,246
=========== =========== =========== =========== ===========
Balance of allowance
at January 1, ................. $ 24,516 $ 21,036 $ 18,455 $ 17,025 $ 13,831
Provision charged to expense .... 8,571 7,740 6,630 5,150 3,804
----------- ----------- ----------- ----------- -----------
Loans charged-off:
Domestic:
Commercial, financial
and agricultural ............. (2,180) (1,503) (1,518) (2,248) (1,073)
Real estate-mortgage .......... (157) (279) (261) (619) (685)
Consumer ...................... (6,483) (4,552) (3,363) (1,849) (816)
Foreign ....................... (65) (2) (23) (48) (148)
----------- ----------- ----------- ----------- -----------
Total loans charged-off ......... (8,885) (6,336) (5,165) (4,764) (2,722)
----------- ----------- ----------- ----------- -----------
Recoveries credited to allowance:
Domestic:
Commercial, financial
and agricultural ............ 795 270 305 190 236
Real estate mortgage .......... 18 382 51 80 968
Consumer ...................... 531 250 755 229 237
Foreign ....................... 5 95 5 110 227
----------- ----------- ----------- ----------- -----------
Total recoveries ................ 1,349 997 1,116 609 1,668
----------- ----------- ----------- ----------- -----------
Net loans charged-off: .......... (7,536) (5,339) (4,049) (4,155) (1,054)
----------- ----------- ----------- ----------- -----------
Allowance acquired in purchase
transactions .................. -- 1,079 -- 435 444
----------- ----------- ----------- ----------- -----------
Balance of allowance
at December 31, ............... $ 25,551 $ 24,516 $ 21,036 $ 18,455 $ 17,025
=========== ----------- ----------- ----------- -----------
Ratio of net loans charged-off
during the year to average
loans outstanding during
the year (Note 1) ............. .50% .42% .34% .35% .10%
=========== =========== =========== =========== ===========
Ratio of allowance to loans, net
of unearned discounts, out-
standing at December 31, ...... 1.58% 1.70% 1.70% 1.53% 1.49%
=========== =========== =========== =========== ===========
</TABLE>
(Note 1) The average balances for purposes of the above table are calculated on
the basis of month-end balances.
23
<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 1.58% and 1.70% of total loans of bank subsidiaries, net of
unearned income, for December 31, 1998 and 1997, respectively.
The amount charged against 1998 earnings and the other years presented as a
provision for possible loan losses was the sum required to bring the allowance
to the point which management of each bank subsidiary considers adequate to
cover potential loan losses. Such a determination is based on a continual and
conservative review process of the loan portfolio performed by senior officers
of each bank subsidiary who consider certain factors, including but not limited
to, previous loss experience in portfolio segments and assessment of current
economic conditions.
The allowance for possible loan losses has been allocated based on the
amount management has deemed to be reasonably necessary to provide for the
possibility of losses being incurred within the following categories of loans at
the dates indicated and the percentage of loans to total loans in each category:
<TABLE>
<CAPTION>
AT DECEMBER 31,
------------------------------------------------------------------------------------------------------------------
1998 1997 1996 1995 1994
--------------------- --------------------- -------------------- ---------------------- --------------------
PERCENT PERCENT PERCENT PERCENT PERCENT
ALLOWANCE OF LOANS ALLOWANCE OF LOANS ALLOWANCE OF LOANS ALLOWANCE OF LOANS ALLOWANCE OF LOANS
--------- -------- --------- -------- --------- -------- --------- -------- --------- --------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Commercial,
financial and
agricultural $15,022 55.2% $14,149 55.2% $12,981 58.3% $11,569 59.7% $10,335 58.3%
Real estate
mortgage ... 3,616 13.3 3,323 12.9 3,467 15.6 3,219 16.6 3,123 17.6
Real estate
construction 1,582 5.8 1,047 4.1 586 2.6 633 3.3 720 4.1
Consumer ..... 4,207 15.5 4,813 18.8 2,901 13.1 1,999 10.4 1,898 10.7
Foreign ...... 1,124 10.2 1,184 9.0 1,101 10.4 1,035 10.0 949 9.3
------- ----- ------- ----- ------- ----- ------- ----- ------- -----
$25,551 100.0% $24,516 100.0% $21,036 100.0% $18,455 100.0% $17,025 100.0%
======= ===== ======= ===== ======= ===== ======= ===== ======= =====
</TABLE>
24
<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,
------------------------------------
1998 1997 1996
---------- ---------- ----------
(Dollars in Thousands)
Deposits:
Demand - non-interest bearing
Domestic ...................... $ 377,084 $ 317,759 $ 256,186
Foreign ....................... 56,779 43,620 41,353
---------- ---------- ----------
Total demand non-interest
bearing ..................... 433,863 361,379 297,539
---------- ---------- ----------
Savings and interest bearing demand
Domestic ...................... 660,870 560,956 459,451
Foreign ....................... 206,724 161,603 157,639
---------- ---------- ----------
Total savings and interest
bearing demand .............. 867,594 722,559 617,090
---------- ---------- ----------
Time certificates of deposit
$100,000 or more:
Domestic ...................... 465,789 363,471 280,550
Foreign ....................... 713,060 602,170 546,643
Less than $100,000:
Domestic ...................... 543,211 541,686 365,232
Foreign ....................... 251,399 219,044 201,700
---------- ---------- ----------
Total time, certificates of
deposit .......................... 1,973,459 1,726,371 1,394,125
---------- ---------- ----------
Total deposits ....................... $3,274,916 $2,810,309 $2,308,754
========== ========== ==========
Interest Expense:
Savings and interest bearing demand
Domestic ...................... $ 21,580 $ 17,559 $ 14,079
Foreign ....................... 4,839 4,593 4,311
---------- ---------- ----------
Total savings and interest
bearing demand ..................... 26,419 22,152 18,390
---------- ---------- ----------
Time, certificates of deposit
$100,000 or more
Domestic ...................... 24,484 19,256 14,193
Foreign ....................... 36,865 32,532 28,561
Less than $100,000
Domestic ...................... 28,746 27,200 17,872
Foreign ....................... 11,728 10,425 9,091
---------- ---------- ----------
Total time, certificates
of deposit ......................... 101,823 89,413 69,717
---------- ---------- ----------
Total interest expense on deposits ... $ 128,242 $ 111,565 $ 88,107
========== ========== ==========
25
<PAGE>
Maturities of time certificates of deposit of $100,000 or more outstanding
at December 31, 1998 are summarized as follows:
DECEMBER 31, 1998
----------------------
(Dollars in Thousands)
3 months or less........................... $ 575,516
Over 3 but through 12 months............... 491,583
Over 12 months............................. 140,841
----------
Total................................. $1,207,940
==========
RETURN ON EQUITY AND ASSETS
Certain key ratios for the Company for the years ended December 31, 1998,
1997 and 1996 follows (Note 1):
YEARS ENDED DECEMBER 31,
-----------------------------
1998 1997 1996
------- ------ -------
Percentage of net income to:
Average shareholders' equity ........... 15.48% 16.41% 17.45%
Average total assets ................... 1.15 1.30 1.50
Percentage of average shareholders'
equity to average total assets ......... 7.43 7.91 8.59
Percentage of cash dividends per share
to net income per share ................ 23.65 11.37 9.87
(Note 1) The average balances for purposes of the above table are calculated on
the basis of month-end balances.
FOREIGN ACTIVITIES
Information regarding foreign activities has been provided in the preceding
sections and Note 11 of notes to consolidated financial statements located on
page 36 of the 1998 Annual Report to Shareholders which is incorporated herein
by reference.
Item 2. PROPERTIES
The principal offices of the Company and IBC are located at 1200 San
Bernardo Avenue, Laredo, Texas in a modern building owned and completely
occupied by the Company and IBC and containing approximately 97,000 square feet.
The bank subsidiaries of IBC have a total of 93 main banking and branch
facilities. All the facilities are customary to the banking industry. Most of
the bank subsidiaries own their banking facilities and the remainder are leased.
The facilities are located in Laredo, San Antonio, Houston, Zapata, the Rio
Grande Valley of Texas and the Coastal Bend area of Texas.
As Texas state-chartered banks, no bank subsidiary of the Company may,
without the prior written consent of the Banking Commissioner, invest an amount
in excess of its capital and certified surplus in bank facilities, furniture,
fixtures and equipment. None of the Company's bank subsidiaries exceed such
limitation.
26
<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 1998 Annual Meeting of Shareholders of the Company held on May
21, 1998, no matter was submitted to a vote of Registrant's security holders
through the solicitation of proxies or otherwise.
Item 4A. EXECUTIVE OFFICERS OF THE REGISTRANT
Certain information is set forth in the following table concerning the
executive officers of the Company, each of whom has been elected to serve until
the 1999 Annual Meeting of shareholders and until his successor is duly elected
and qualified.
<TABLE>
<CAPTION>
OFFICER OF
THE COMPANY
NAME AGE POSITION OF OFFICE OR IBC SINCE
------- ----- ------------------ --------------
<S> <C> <C>
Dennis E. Nixon 56 Chairman of the Board and 1979
President of the Company,
Chief Executive Officer of IBC
Leonardo Salinas 65 Vice President of the Company 1982
and Senior Executive Vice
President of IBC
R. David Guerra 46 Vice President of the Company 1986
and President of IBC McAllen
Branch
Imelda Navarro 41 Treasurer of the Company 1982
and Senior Executive Vice
President of IBC
</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 or IBC during the past five years.
27
<PAGE>
PART II
Item 5. MARKET FOR THE REGISTRANT'S COMMON STOCK AND RELATED SECURITY HOLDER
MATTERS
The information set forth under the caption "Common Stock and Dividends"
located on page 11 and 12 of Registrant's 1998 Annual Report is incorporated
herein by reference.
Item 6. SELECTED FINANCIAL DATA
The information set forth under the caption "Selected Financial Data"
located on page 1 of Registrant's 1998 Annual Report is incorporated herein by
reference.
Item 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
The information set forth under the caption "Management's Discussion and
Analysis of Financial Condition and Results of Operations" located on pages 2
through 12 of Registrant's 1998 Annual Report is incorporated herein by
reference.
Item 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
The information set forth under the caption "Liquidity and Capital
Resources" located on pages 5 and 6 of the Registrant's 1998 Annual Report is
incorporated herein by reference.
Item 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The consolidated financial statements located on pages 14 through 18 of
Registrant's 1998 Annual Report are incorporated herein by reference.
Item 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
PART III
Item 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
There is incorporated in this Item 10 by reference (i) that portion of the
Company's definitive proxy statement dated April 15, 1999 entitled "Election of
Directors" and (ii) Item 4A of this report entitled "Executive Officers of the
Registrant."
Item 11. EXECUTIVE COMPENSATION
There are incorporated in this Item 11 by reference those portions of the
Company's definitive proxy statement dated April 15, 1999 entitled "Executive
Compensation"; provided, however, that such incorporation by reference shall not
include the information referred to in item 402(a) (8) of Securities and
Exchange Commission Regulation S-K.
28
<PAGE>
Item 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
There are incorporated in this Item 12 by reference those portions of the
Company's definitive proxy statement dated April 15, 1999 entitled "Principal
Shareholders" and "Security Ownership of Management."
Item 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
There is incorporated in this Item 13 by reference that portion of the
Company's definitive proxy statement dated April 15, 1999 entitled "Interest of
Management in Certain Transactions."
PART IV
Item 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a) DOCUMENTS
1. The consolidated financial statements of the Company and
subsidiaries are incorporated into Item 8 of this report by
reference from the 1998 Annual Report to Shareholders filed as an
exhibit hereto and they include:
Independent Auditors' Report
Consolidated:
Statements of Condition as of December 31, 1998 and 1997
Statements of Income for the years ended December 31, 1998, 1997 and
1996
Statements of Comprehensive Income for the years ended December 31,
1998, 1997 and 1996
Statements of Shareholders' Equity for the years ended December 31,
1998, 1997 and 1996
Statements of Cash Flows for the years ended December 31, 1998, 1997
and 1996
Notes to Financial Statements
2. All Financial Statement Schedules are omitted as the required
information is inapplicable or the information is presented in the
financial statements or related notes.
3. The following exhibits are filed as a part of this Report:
(3)(a)*-Articles of Incorporation of International Bancshares
Corporation incorporated herein as an exhibit by reference to the
Current Report, Exhibit 3.1 therein, under the Securities Exchange
Act of 1934, filed by Registrant on Form 8-K with the Securities and
Exchange Commission on June 20, 1995, SEC File No. 09439.
(3)(b)*-By-Laws of International Bancshares Corporation incorporated
herein as an exhibit by reference to the Current Report, Exhibit 3.2
therein, under the Securities Exchange Act of 1934, filed by
Registrant on Form 8-K with the Securities and Exchange Commission
on June 20, 1995, SEC File No. 0-9439.
29
<PAGE>
(3)(c) -Articles of Amendment to the Articles of Incorporation of
International Bancshares Corporation dated May 22, 1998.
(10)*-Sublease between Commerce Bank and Americity Federal Savings
Bank incorporated herein as an exhibit by reference to the Annual
Report, Exhibit 11(b) therein, under the Securities Exchange Act of
1934, filed by Registrant on Form 10-K with the Securities and
Exchange Commission on March 23, 1982, SEC File No. 0-9439.
(10a)*-Purchase and Assumption Agreement dated June 29, 1990 by and
between the Resolution Trust Corporation, receiver of Valley Federal
Savings Association and New Valley Federal Savings Association
incorporated herein as an exhibit by reference to the Annual Report,
Exhibit 10(a) therein, under the Securities Exchange Act of 1934,
filed by Registrant on Form 10-K with the Securities and Exchange
Commission on March 30, 1992, SEC File No. 0-9439.
(10b)*-Purchase and Assumption Agreement for Oakar transaction dated
June 29, 1990 between New Valley Federal Savings Association,
International Bancshares Corporation and International Bank of
Commerce incorporated herein as an exhibit by reference to the
Annual Report, Exhibit 10(b) therein, under the Securities Exchange
Act of 1934, filed by Registrant on Form 10-K with the Securities
and Exchange Commission on March 30, 1991, SEC File No. 0-9439.
(10c)*-Purchase and Assumption Agreement dated June 21, 1991 by and
between the Resolution Trust Corporation, receiver of Travis Federal
Savings and Loan Association and New Travis Federal Savings
Association incorporated herein as an exhibit by reference to the
Annual Report, Exhibit 10(c) therein, under the Securities Exchange
Act of 1934, filed by Registrant on Form 10-K with the Securities
and Exchange Commission on March 30, 1992, SEC File No. 0-9439.
(10d)*-Oakar Agreement dated June 21, 1991 between New Travis
Federal Savings Association and International Bank of Commerce
incorporated herein as an exhibit by reference to the Annual Report,
Exhibit 10(d) therein, under the Securities Exchange Act of 1934,
filed by Registrant on Form 10-K with the Securities and Exchange
Commission on March 30, 1992, SEC File No. 0-9439.
(10e)*+-The 1987 International Bancshares Corporation Key
Contributor Stock Option Plan as amended and restated (formerly the
International Bancshares Corporation 1981 Incentive Stock Option
Plan) incorporated herein as an exhibit by reference to Exhibit 28
to the Registration Statement on Form S-8 filed with the Securities
and Exchange Commission on July 13, 1987, SEC File No. 33-15655.
30
<PAGE>
(10f)*-Merger Agreement by and between International Bank of
Commerce, Michigan National Corporation and First State Bank and
Trust Company, dated May 5, 1994 incorporated herein by reference to
Exhibit 10(f) of the Form 10Q filed with the Securities and Exchange
Commission on August 15, 1994, SEC File No. 0-9439.
(10g)*-Merger Agreement by and between International Bank of
Commerce, and The Bank of Corpus Christi, dated August 19, 1994
incorporated herein by reference to Exhibit 10(g) of Form 10-Q filed
with the Securities and Exchange Commission on November 14, 1994,
SEC File No. 0-9439.
(10h)*-Merger Agreement by and between International Bank of
Commerce, and Stone Oak National Bank, dated February 28, 1995,
incorporated by reference to Exhibit 10(h) of the Registrant's
Quarterly Report on Form 10Q for the period ended March 31, 1995,
filed with the Securities and Exchange Commission on May 15, 1995,
SEC File No. 0-9439.
(10i)*-Agreement and Plan of Merger dated as of June 7, 1995, by and
between International Bancshares Corporation, a Delaware
corporation, and International Bancshares Corporation, a Texas
corporation, incorporated herein by reference to Exhibit 2 of the
Current Report on Form 8-K filed with the Securities and Exchange
Commission on June 20, 1995, SEC File No. 0-9439.
(10j)*-Purchase and Assumption Agreement dated as of February 27,
1996, by and between International Bank of Commerce, River Valley
Bank, F.S.B. and Western Capital Holdings, Inc. incorporated herein,
by reference to Exhibit 10(j) of the Registrant's Annual Report on
Form 10-K filed with the Securities and Exchange Commission on April
1, 1996, SEC File No. 09439.
(10k)*-Purchase of Asset and Liability Agreement dated as of July
30, 1996, by and between International Bank of Commerce and Home
Savings of America F.S.B. incorporated herein by reference to
Exhibit 10(k) of the Registrant's Quarterly Report on Form 10-Q
filed with the Securities and Exchange Commission on November 13,
1996.
(10l)*+-The 1996 International Bancshares Corporation Stock Option
Plan incorporated herein by reference to Exhibit 99.1 to the Post
Effective Amendment No. 1 to Form S-8 filed with the Securities and
Exchange Commission on March 21, 1997, SEC File No. 33-15655.
(10m)*+-Executive Incentive Compensation Plan of the Registrant
incorporated herein by reference to exhibit "A" of the Registrant's
Proxy Statement filed with the Securities Exchange Commission on
April 15, 1997, SEC File No. 09439.
(10n)*- Agreement and Plan of Merger by and among International
Bancshares Corporation, University Bancshares, Inc., Joe L.
Allbritton and Robert L. Allbritton, dated as of August 15, 1997.
(13)**-International Bancshares Corporation 1998 Annual Report
31
<PAGE>
(21) -List of Subsidiaries of International Bancshares Corporation
as of March 19, 1999
(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
None
32
<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 29, 1999
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed by the following persons on behalf of the Registrant and
in the capacities and on the date indicated.
SIGNATURES TITLE DATE
------------- -------- ------
/s/ DENNIS E. NIXON President and Director MARCH 29, 1999
Dennis E. Nixon (Principal Executive Officer)
/s/ IMELDA NAVARRO Treasurer MARCH 29, 1999
Imelda Navarro (Principal Financial Officer)
/s/ LEONARDO SALINAS Vice President and MARCH 29, 1999
Leonardo Salinas Director
/s/ LESTER AVIGAEL Director MARCH 29, 1999
Lester Avigael
/s/ IRVING GREENBLUM Director MARCH 29, 1999
Irving Greenblum
/s/ R. DAVID GUERRA Director MARCH 29, 1999
R. David Guerra
/s/ RICHARD E. HAYNES Director MARCH 29, 1999
Richard E. Haynes
/s/ ROY JENNINGS, JR. Director MARCH 29, 1999
Roy Jennings, Jr.
___________________________ Director ______________
Sioma Neiman
/s/ ANTONIO R. SANCHEZ JR. Director MARCH 29, 1999
Antonio R. Sanchez Jr.
/s/ PEGGY J. NEWMAN Director MARCH 29, 1999
Peggy J. Newman
33
<PAGE>
EXHIBIT INDEX
Exhibit (3)(c) - Articles of Amendment to the Articles of Incorporation of
International Bancshares Corporation dated May 22, 1998, page
35
Exhibit 13 - International Bancshares Corporation 1998 Annual Report,
Exhibit 13, page 1
Exhibit 21 - List of Subsidiaries of International Bancshares Corporation
as of March 19, 1999, page 130
Exhibit 23 - Accountants' Consent, page 131
Exhibit 27 - Financial Data Schedule, page 132
34
"EXHIBIT (3)(C)"
ARTICLES OF AMENDMENT
TO
THE ARTICLES OF INCORPORATION
OF
INTERNATIONAL BANCSHARES CORPORATION
Pursuant to the provisions of Article 4.04 of the Texas Business
Corporation Act, International Bancshares Corporation (the "Corporation") hereby
adopts the following Articles of Amendment to its Articles of Incorporation:
ARTICLE ONE
The name of the corporation is International Bancshares Corporation.
ARTICLE TWO
The following amendment to the Articles of Incorporation of the
Corporation was adopted by the shareholders of the Corporation on May 21, 1998
in conformity with the provisions of the Texas Business Corporation Act.
Article IV of the Articles of Incorporation of the Corporation is hereby
amended to read in its entirety as follows:
ARTICLE IV
The aggregate number of shares which the corporation shall have the
authority to issue is Forty Million (40,000,000) shares of Common Stock
of the par value of One Dollar ($1.00) per share.
ARTICLE THREE
The number of shares of the capital stock of the Corporation outstanding
and entitled to vote on the amendment was 11,260,197 shares of Common Stock, par
value $1.00 per share.
ARTICLE FOUR
The number of shares of Common Stock, par value $1.00 per share, of the
Corporation voted for (representing at least a majority of the shares entitled
to vote on such matter as required by the Articles of Incorporation of the
Corporation) and against the amendment, respectively, are as follows:
For: 9,025,257
Against: 84,607
35
<PAGE>
ARTICLE FIVE
The amendment will have no effect on the stated capital of the
Corporation.
EXECUTED this 22nd day of May, 1998.
INTERNATIONAL BANCSHARES CORPORATION
By: /s/ DENNIS E. NIXON
Dennis E. Nixon, President
36
<PAGE>
EXHIBIT 13
INTERNATIONAL BANCSHARES CORPORATION AND SUBSIDIARIES
(CONSOLIDATED)
SELECTED FINANCIAL DATA
<TABLE>
<CAPTION>
AT OR FOR THE YEARS ENDED DECEMBER 31,
--------------------------------------------------------------------
1998 1997 1996 1995 1994
------------ ------------ ------------ ------------ ------------
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C>
BALANCE SHEET
Assets.......................... $ 4,987,877 $ 4,517,846 $ 3,351,231 $ 2,935,606 $ 2,659,392
Net loans....................... 1,589,788 1,420,180 1,214,959 1,186,456 1,125,489
Deposits........................ 3,369,637 3,175,560 2,662,153 2,143,346 2,061,638
Other borrowed funds............ 1,074,000 490,000 239,000 66,500 123,500
Shareholders' equity............ 370,283 341,244 283,767 245,761 178,536
INCOME STATEMENT
Interest income................. $ 326,174 $ 275,732 $ 221,779 $ 218,867 $ 159,260
Interest expense................ 181,909 145,371 107,372 112,361 66,754
------------ ------------ ------------ ------------ ------------
Net interest income............. 144,265 130,361 114,407 106,506 92,506
Provision for possible loan
losses........................ 8,571 7,740 6,630 5,150 3,804
Non-interest income............. 41,698 36,776 30,194 26,009 20,945
Non-interest expense............ 99,047 85,745 73,457 68,989 58,355
------------ ------------ ------------ ------------ ------------
Income before income taxes...... 78,345 73,652 64,514 58,376 51,292
Income taxes.................... 24,620 24,771 20,164 18,315 13,402
------------ ------------ ------------ ------------ ------------
Net income...................... $ 53,725 $ 48,881 $ 44,350 $ 40,061 $ 37,890
============ ============ ============ ============ ============
Per common share:
Basic...................... $ 4.12 $ 3.84 $ 3.52 $ 3.22 $ 3.07
Diluted.................... $ 4.02 $ 3.70 $ 3.41 $ 3.08 $ 2.92
Cash dividend per share......... $ .90 $ .50 $ 0.50 $ .50 $ 1.10
</TABLE>
- ------------
Note 1: See note 2 of notes to the consolidated financial statements
regarding the acquisitions made by International Bancshares Corporation and its
subsidiaries in 1997 and 1996.
Note 2: See note 8 of notes to the consolidated financial statements
regarding the other borrowed funds of the Company and its subsidiaries.
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, 1998. The Company is a bank holding
company with four bank subsidiaries operating in 93 main banking and branch
facilities in South and Southeast Texas and four non-bank subsidiaries. The
following discussion should be read in conjunction with the Company's Annual
Report on Form 10-K for the year ended December 31, 1998, and the Selected
Financial Data and Consolidated Financial Statements included elsewhere herein.
RESULTS OF OPERATIONS
Net income for 1998 was $53,725,000 or $4.12 per share -- basic ($4.02 per
share -- diluted) compared with $48,881,000 or $3.84 per share -- basic ($3.70
per share -- diluted) in 1997 and $44,350,000 or $3.52 per share -- basic ($3.41
per share -- diluted) in 1997.
Historically, the Company's acquisitions have been accounted for using the
purchase method of accounting which results in the creation of goodwill. The
Company's goodwill is being amortized as a non-cash reduction of net income over
time periods from ten to twenty years. "Cash" earnings reflect the net income
of the Company excluding goodwill amortization. In computing the income tax
adjustment, Management has considered tax deductible goodwill separately from
non-tax deductible goodwill in making this calculation. The income tax on tax
deductible goodwill has been computed using the standard corporate tax rate of
35%, and non-tax deductible goodwill has been grossed-up using the same 35% tax
rate to reflect the earnings result. These two calculations have been combined
to reflect the net income tax adjustment displayed in the cash earnings table
below. The following table reconciles reported earnings to net income excluding
intangible amortization ("cash" earnings) to help facilitate peer group
comparisons:
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
-------------------------------
1998 1997 1996
--------- --------- ---------
(DOLLARS IN THOUSANDS, EXCEPT
PER SHARE DATA)
<S> <C> <C> <C>
Reported net income.................. $ 53,725 $ 48,881 $ 44,350
Amortization of intangible assets.... 3,936 2,949 1,802
Income tax adjustment................ (322) (645) (349)
--------- --------- ---------
Cash earnings........................ $ 57,339 $ 51,185 $ 45,803
========= ========= =========
Cash earnings per common share:
Basic........................... $ 4.40 $ 4.02 $ 3.63
Diluted......................... 4.29 3.87 3.52
</TABLE>
Total assets at December 31, 1998 grew 10% to $4,987,877,000 from
$4,517,846,000 at December 31, 1997 while net loans increased 12% to
$1,589,788,000 at December 31, 1998 from $1,420,180,000 at December 31, 1997.
Deposits at December 31, 1998 were $3,369,637,000, an increase of 6% over the
$3,175,560,000 at December 31, 1997. Deposits at December 31, 1997 were
$3,175,560,000, an increase of 19% over the $2,662,153,000 at December 31, 1996.
Total assets at December 31, 1997 grew 35% to $4,517,846,000 from $3,351,231,000
at December 31, 1996 while net loans increased 17% to $1,420,180,000 at December
31, 1997 from $1,214,959,000 at December 31, 1996. The increase in assets and
deposits during 1998 was partially the result in growth in the Company's branch
system. The aggregate amount of repurchase agreements, short term fixed
borrowings and certificates of indebtedness with the Federal Home Loan Bank of
Dallas ("FHLB"), Federal National Mortgage Association ("FNMA") and Federal
Home Loan Mortgage Corporation ("FHLMC") increased to $1,074,000,000 at
December 31, 1998 from the $855,000,000 at December 31, 1997. Such funds were
used to expand the earning asset base of the Company.
Net interest income in 1998 increased by $13,904,000, or 11%, over that in
1997 despite the slight decrease in the net yield on average interest earning
assets of .45% from 3.81% in 1997 to 3.36% in 1998.
2
<PAGE>
The net yield on average interest earning assets decreased by .41% in 1997 from
4.22% to 3.81% in 1996 while net interest income increased by $15,954,000 or 14%
over 1996. A 25.5% increase in average interest earning assets from
$3,422,639,000 in 1997 to $4,296,845,000 in 1998 and a 26.4% increase from
$2,708,371,000 in 1996 to $3,422,639,000 in 1997 contributed to the continued
increase in net interest income for 1998 and 1997, respectively. The Company
experienced a .47% decrease in the yield on average interest earning assets to
7.59% in 1998 from 8.06% in 1997. In 1997 a .13% decrease was reflected in the
yield on average interest earning assets to 8.06% from 8.19% in 1996 and an
increase was reflected on the rates paid on average interest bearing liabilities
to 4.72% in 1997 from 4.50% in 1996.
Net interest income is the spread between income on interest earning
assets, such as loans and securities, and the interest expense on liabilities
used to fund those assets, such as deposits, repurchase agreements and funds
borrowed. Net interest income is affected by both changes in the level of
interest rates and changes in the amount and composition of interest earning
assets and interest bearing liabilities.
As part of its strategy to manage interest rate risk, the Company strives
to manage both assets and liabilities so that interest sensitivities match. One
method of calculating interest rate sensitivity is through gap analysis. A gap
is the difference between the amount of interest rate sensitive assets and
interest rate sensitive liabilities that reprice or mature in a given time
period. Positive gaps occur when interest rate sensitive assets exceed interest
rate sensitive liabilities, and negative gaps occur when interest rate sensitive
liabilities exceed interest rate sensitive assets. A positive gap position in a
period of rising interest rates should have a positive effect on net interest
income as assets will reprice faster than liabilities. Conversely, net interest
income should contract somewhat in a period of falling interest rates.
Management can quickly change the Company's interest rate position at any given
point in time as market conditions dictate. Additionally, interest rate changes
do not affect all categories of assets and liabilities equally or at the same
time. Analytical techniques employed by the Company to supplement gap analysis
include simulation analysis to quantify interest rate risk exposure. The gap
analysis prepared by management is reviewed by the Investment Committee of the
Company twice a year. Management currently believes that the Company is properly
positioned for interest rate changes; however if management determines at any
time that the Company is not properly positioned, it will strive to adjust the
interest rate sensitive assets and liabilities in order to minimize the effect
of interest rate changes.
Non-interest income increased 13% in 1998 to $41,698,000 over $36,776,000
in 1997 and increased 22% over $30,194,000 in 1996. The 1998 and 1997 increases
in non-interest income were primarily due to the increases in service charge
income. The increases in service charges were attributable to the amount of
account transaction fees received as a result of the deposit growth and
increased collection efforts. Investment securities gains of $3,893,000 was
recorded in 1998 compared to $484,000 in 1997.
Expense control is an essential element in the Company's profitability.
This is achieved through maintaining optimum staffing levels, an effective
budgeting process, and internal consolidation of bank functions. The Company's
efficiency ratio (other operating expenses divided by net interest income and
other operating income) has been under 53% for each of the last five years,
which the Company believes is below national peer group ratios. Non-interest
expense includes such items as salaries and wages and employee benefits, net
occupancy expenses, equipment expenses and other operating expenses such as FDIC
insurance. Non-interest expense increased 16% in 1998 to $99,047,000 from
$85,745,000 in 1997 and increased 17% from $73,457,000 in 1996. The 1998 and
1997 increases in non-interest expense were primarily due to the increased
operations at certain of the bank subsidiaries as a result of acquisitions, and
expanded branch operations.
Most of the Company's lending activities involve commercial (domestic and
foreign), consumer and real estate mortgage financing. In 1998, the Company's
efforts to increase its loan volume resulted in an increase of 17% in average
domestic loans and an increase of 10% in average foreign loans for an increase
in total average loans of 17% over 1997. The average yield for these loans
decreased .16% for domestic loans and decreased by .86% for foreign loans in
1998 as compared to 1997. The Company experienced an increase of 7% in average
domestic loans and a 2% increase in average foreign loans in 1997 as compared
3
<PAGE>
to 1996. The yield for these loans decreased .12% for domestic loans and
increased by .98% for foreign loans in 1997 as compared to 1996.
The Company experienced an increase of 31% in average balances of taxable
investment securities from $2,121,927,000 for 1997 to $2,771,927,000 for 1998
and an increase of 46% from $1,449,211,000 for 1996 to $2,121,927,000 for 1997.
These trends were the results of continued increases in deposits, repurchase
agreements and borrowings during 1998 and 1997 providing the Company with
available funds for investments.
The allowance for possible loan losses increased 4% from $24,516,000 at
December 31, 1997 to $25,551,000 at December 31, 1998 and increased 17% from
$21,036,000 at December 31, 1996 to $24,516,000 at December 31, 1997. The
provision for possible loan losses charged to expense increased 11% from
$7,740,000 in 1997 to $8,571,000 in 1998 and increased 17% from $6,630,000 in
1996 to $7,740,000 in 1997. Increases in the allowance for possible loan losses
were largely due to the increase in the size of the loan portfolio. The
allowance for possible loan losses was 1.57% of total loans at December 31, 1998
compared to 1.69% at 1997 and 1.70% at 1996. Non-performing assets as a
percentage of total loans and total assets were .92% and .30%, respectively, at
December 31, 1998, and 1.23% and .40% at December 31, 1997, respectively. Loans
accounted for on a non-accrual basis decreased 4% from $5,742,000 at December
31, 1997 to $5,538,000 at December 31, 1998. As loans are placed on non-accrual
status, interest previously accrued and recorded is reversed unless the loans
are well secured and in the process of collection. Foreclosed assets decreased
43% from $5,510,000 at December 31, 1997 to $3,129,000 at December 31, 1998. The
decreases in the non-performing loans and foreclosed assets were primarily due
to improving conditions in the Company's loan portfolio as well as the sale of
foreclosed assets. In 1997, non-accruals increased 30% from $4,425,000 at
December 31, 1996 to $5,742,000 at December 31, 1997 and foreclosed assets
increased 13% from $4,874,000 at December 31, 1996 to $5,510,000 at December 31,
1997.
The allowance for possible loan losses consists of the aggregate loan loss
allowances of the bank subsidiaries. The allowances are established through
charges to operations in the form of provisions for possible loan losses. Loan
losses (or recoveries) are charged (or credited) directly to the allowances. The
provision for possible loan losses of each bank subsidiary is determined by
management of each bank upon consideration of several factors such as loss
experience in relation to outstanding loans and the existing level of its
allowance; independent appraisals for significant properties; a continuing
review and appraisal of its loan portfolio with particular emphasis on problem
loans by management and the credit department staff of International Bank of
Commerce, Laredo, Texas ("IBC"), the Company's largest bank subsidiary;
results of examinations by bank examiners and continuous review of current and
anticipated economic conditions in the market area served by the bank
subsidiaries. Management of each of the bank subsidiaries, along with management
of the Company, continually review the allowances to determine whether
additional provisions should be made after considering the preceding factors.
The bank subsidiaries charge off that portion of any loan which management
considers to represent a loss as well as that portion of any other loan which is
classified as a "loss" by bank examiners. Commercial and industrial or real
estate loans are generally considered by management to represent a loss, in
whole or part, when an exposure beyond any collateral coverage is apparent and
when no further collection of the portion of the loan so exposed is anticipated
based on the borrower's financial condition and general economic conditions in
the borrower's industry. Generally, unsecured consumer loans are charged off
when 90 days past due.
While management of the Company considers that it is generally able to
identify borrowers with financial problems reasonably early and to monitor
credit extended to such borrowers carefully, there is no precise method of
predicting loan losses. The determination that a loan is likely to be
uncollectible and that it should be wholly or partially charged off as a loss is
an exercise of judgment. Similarly, the determination of the adequacy of the
allowance for possible loan losses can be made only on a subjective basis. It is
the judgment of the Company's management that the allowance for possible loan
losses at December 31, 1998 was adequate to absorb possible losses from loans in
the portfolio at that date.
4
<PAGE>
On December 31, 1998, the Company had $4,987,877,000 of consolidated assets
of which approximately $166,324,000 or 3% were related to loans outstanding to
borrowers domiciled in Mexico. The loan policies of the Company's bank
subsidiaries generally require that loans to borrowers domiciled in Mexico be
primarily secured by assets located in the United States or have credit
enhancements, in the form of guarantees, from significant United States
corporations. The composition of such loans and the related amounts of allocated
allowance for possible loan losses as of December 31, 1998 were as follows:
<TABLE>
<CAPTION>
RELATED
AMOUNT OF ALLOWANCE FOR
LOANS POSSIBLE LOSSES
--------- ---------------
<S> <C> <C>
(DOLLARS IN THOUSANDS)
Secured by certificates of deposit in
United States banks................ $ 72,548 $ 35
Secured by United States real
estate............................. 30,964 314
Secured by other United States
collateral (securities, gold,
silver, etc.)...................... 9,416 142
Direct unsecured Mexican sovereign
debt (principally former FICORCA
debt).............................. 1,585 59
Other................................ 51,811 574
--------- ---------------
$ 166,324 $ 1,124
========= ===============
</TABLE>
The transactions for the year ended December 31, 1998 in that portion of
the allowance for possible loan losses related to Mexican debt were as follows:
<TABLE>
<CAPTION>
(DOLLARS IN THOUSANDS)
<S> <C>
Balance at January 1, 1998........... $1,184
Charge-offs..................... (65)
Recoveries...................... 5
--------
Net charge-offs...................... (60)
--------
Balance at December 31, 1998......... $1,124
========
</TABLE>
LIQUIDITY AND CAPITAL RESOURCES
The maintenance of adequate liquidity provides the Company's bank
subsidiaries with the ability to meet potential depositor withdrawals, provide
for customer credit needs, maintain adequate statutory reserve levels and take
full advantage of high-yield investment opportunities as they arise. Liquidity
is afforded by access to financial markets and by holding appropriate amounts of
liquid assets. The bank subsidiaries of the Company derive their liquidity
largely from deposits of individuals and business entities. In recent years,
deposit growth has largely been attributable to acquisitions. Historically, the
Mexico based deposits of the Company's bank subsidiaries have been a stable
source of funding. Deposits from persons and entities domiciled in Mexico
comprise a significant and stable portion of the deposit base of the Company's
bank subsidiaries. Such deposits comprised approximately 38%, 35% and 39% of the
Company's bank subsidiaries' total deposits as of December 31, 1998, 1997 and
1996, respectively. Other important funding sources for the Company's bank
subsidiaries during 1998 and 1997 have been wholesale liabilities with, FHLB,
FNMA, FHLMC and large certificates of deposit, requiring management to closely
monitor its asset/liability mix in terms of both rate sensitivity and maturity
distribution. Primary liquidity of the Company and its subsidiaries has been
maintained by means of increased investment in shorter-term securities,
certificates of deposit and loans. As in the past, the Company will continue to
monitor the volatility and cost of funds in an attempt to match maturities of
rate-sensitive assets and liabilities, and respond accordingly to anticipated
fluctuations in interest rates over reasonable periods of time.
The Company's funds management policy's primary focus is to measure and
manage the earnings to interest rate risk. The earliest and most simplistic
concept of interest rate risk and its measurement is the gap report, which is
used to generate a rough estimate of the vulnerability of net interest income to
changes in
5
<PAGE>
market rates as implied by the relative repricings of assets and liabilities.
The gap report calculates the difference between the amounts of assets and
liabilities repricing across a series of intervals in time, with emphasis
typically placed on the one-year period. This difference, or gap, is usually
expressed as a percentage of total assets.
If an excess of liabilities over assets matures or reprices within the
one-year period, the balance sheet is said to be negatively gapped. This
condition is sometimes interpreted to suggest that an institution is
liability-sensitive, indicating that earnings would suffer from rising rates and
benefit from falling rates. If a surplus of assets over liabilities occurs in
the one-year time frame, the balance sheet is said to be positively gapped,
suggesting a condition of asset sensitivity in which earnings would benefit from
rising rates and suffer from falling rates.
The gap report thus consists of an inventory of dollar amounts of assets
and liabilities that have the potential to mature or reprice within a particular
period. The flaw in drawing conclusions about interest rate risk from the gap
report is that it takes no account of the probability that potential maturities
or repricings of interest-rate-sensitive accounts will occur, or at what
relative magnitudes. Because simplicity, rather than utility, is the only virtue
of gap analysis, financial institutions increasingly have either abandoned gap
analysis or accorded it a distinctly secondary role in managing their
interest-rate risk exposure. See page 18 of the Company's Form 10-K for the
table that summarizes interest rate sensitive assets and liabilities by their
repricing dates at December 31, 1998.
The detailed inventory of balance sheet items contained in gap reports is
the starting point of income simulation analysis. Income simulation analysis
also focuses on the variability of net interest income and net income, but
without the limitations of gap analysis. In particular, gone is the fundamental,
but often unstated, assumption of the gap approach that every balance sheet item
that can reprice will do so to the full extent of any movement in market
interest rates.
Accordingly, income simulation analysis captures not only the potential of
assets and liabilities to mature or reprice but also the probability that they
will do so. Moreover, income simulation analysis focuses on the relative
sensitivities of these balance sheet items and projects their behavior over an
extended period of time in a motion picture rather than snapshot fashion.
Finally, income simulation analysis permits management to assess the probable
effects on balance sheet items not only of changes in market interest rates but
also of proposed strategies for responding to such changes. The Company and many
other institutions rely primarily upon income simulation analysis in measuring
and managing exposure to interest rate risk.
At December 31, 1998, based on these simulations, a rate shift of 200 basis
points in earnings either up or down will not vary earnings by more than 8
percent of projected 1999 after-tax net income. A 200 basis point shift in
interest rates is a hypothetical rate scenario used to calibrate risk, and does
not necessarily represent management's current view of future market
developments.
All the measurements of risk described above are made based upon the
Company's business mix and interest rate exposures at the particular point in
time. The exposure changes continuously as a result of the Company's ongoing
business and its risk management initiatives. While management believes these
measures provide a meaningful representation of the Company's interest rate
sensitivity, they do not necessarily take into account all business developments
that have an affect on net income, such as changes in credit quality or the size
and composition of the balance sheet.
Principal sources of liquidity and funding for the Company are dividends
from subsidiaries and borrowed funds, with such funds being used to finance the
Company's cash flow requirements. The Company closely monitors the dividend
restrictions and availability from the bank subsidiaries as disclosed in Note 17
to the Consolidated Financial Statements. At December 31, 1998, the aggregate
amount legally available to be distributed to the Company from bank subsidiaries
as dividends was approximately $38,208,000, assuming that each bank subsidiary
continues to be classified as "well capitalized" under the applicable
regulations. The restricted capital of the bank subsidiaries was approximately
$292,574,000 as of
6
<PAGE>
December 31, 1998. The undivided profits of the bank subsidiaries were
approximately $140,653,000 as of December 31, 1998.
As of December 31, 1998, the Company has outstanding $1,074,000,000 in
short-term and long-term borrowed funds. In addition to borrowed funds and
dividends, the Company has a number of other available alternatives to finance
the growth of its existing banks as well as future growth and expansion.
The Company maintains an adequate level of capital as a margin of safety
for its depositors and shareholders. At December 31, 1998, shareholders' equity
was $370,283,000 compared to $341,244,000 at December 31, 1997, an increase of
$29,039,000 or 9%. This increase in capital resulted primarily from the
retention of earnings.
During 1990, the Federal Reserve Board ("FRB") adopted a minimum leverage
ratio of 3% for the most highly-rated bank holding companies and at least 4% to
5% for all other bank holding companies. The Company's leverage ratio (defined
as stockholders' equity less goodwill and certain other intangibles divided by
average quarterly assets) was 6.50% at December 31, 1998 and 6.41% at December
31, 1997. The core deposit intangibles and goodwill of $43,692,000 as of
December 31, 1998, recorded in connection with financial institution
acquisitions of the Company, are deducted from the sum of core capital elements
when determining the capital ratios of the Company.
The FRB has adopted risk-based capital guidelines which assign risk
weightings to assets and off-balance sheet items. The guidelines also define and
set minimum capital requirements (risk-based capital ratios). Under the final
1992 rules, all banks are required to have core capital (Tier 1) of at least
4.0% of risk-weighted assets and total capital of 8.0% of risk-weighted assets.
Tier 1 capital consists principally of shareholders' equity less goodwill and
certain other intangibles, while total capital consists of core capital, certain
debt instruments and a portion of the reserve for credit losses. In order to be
deemed well capitalized pursuant to the regulations, an institution must have a
total risk-weighted capital ratio of 10%, a Tier 1 risk-weighted ratio of 6% and
a Tier 1 leverage ratio of 5%. The Company had risk-weighted Tier 1 capital
ratios of 13.36% and 13.95% and risk weighted total capital ratios of 14.45% and
15.20% for December 31, 1998 and 1997, respectively, which are well above the
minimum regulatory requirements and exceed the well capitalized ratios (see note
17 to notes to Consolidated Financial Statements).
The Company had 2,689,513 treasury shares as of March 19, 1999. The Company
does not have a formal stock repurchase program; however, the Company
occasionally repurchases shares of Common Stock, including repurchases related
to the exercise of stock options through the surrender of other shares of Common
Stock of the Company owned by the option holders. As of December 31, 1998, the
Company had repurchased shares in the cumulative total amount of $18,580,000.
The Board of Directors has stated that it will not approve repurchases of more
than a total of $21,000,000. While the Board has increased previous caps related
to treasury shares once they were met, there are no assurances that an increase
of the $21,000,000 cap will occur in the future. The Company has no definite
plans for the treasury shares; however, the treasury shares may be used to
fulfill option exercises under the Company's Stock Option Plan.
During the past few years the Company has expanded its banking facilities.
Among the activities and commitments the Company funded during 1998 and 1997
were certain capital expenditures relating to the modernization and improvement
of several existing bank facilities and the expansion of the bank branch
network.
YEAR 2000
This section contains forward-looking statements that have been prepared on
the basis of the Company's best judgments and currently available information.
These forward-looking statements are inherently subject to significant business,
third party, and regulatory uncertainties and other contingencies, many of which
are beyond the control of the Company. In addition, these forward-looking
statements are based upon the Company's current internal assessments and
remediation plans, incorporating certain representations of third-party
servicers, and are subject to change. Accordingly, there can be no assurance
7
<PAGE>
that the Company's results of operations will not be adversely affected by
difficulties or delays in the Company's or third parties' Year 2000 readiness
efforts.
Many existing computer programs use only two digits to identify a year.
These programs were designed and developed without considering the impact of the
upcoming change in the century. If uncorrected, many computer applications could
fail or create erroneous results by or at the Year 2000. The Year 2000 issue
affects virtually all companies and organizations.
The Company has developed and implemented a plan to deal with the Year 2000
problem. The plan consists of a five-phase program ("Action Plan") recommended
by the Federal Financial Institutions Examination Council. This Action Plan
consists of awareness, assessment, renovation, validation and implementation
processes. The Action Plan provides for addressing critical and noncritical
issues, with the assignment of responsibility and target dates for completion,
and as of December 31, 1998, the Company was principally involved in the
validation and implementation phases of the Action Plan. Testing of core
applications, such as mainframe software, hardware, and network applications
were substantially complete by December 31, 1998.
Currently, the Company estimates that the total dollar amount to remediate
its Year 2000 issue will be less than one million dollars. The data processing
system which the Company purchased in 1990 was substantially Year 2000
compliant. The cost of remediating the remaining Year 2000 issues are based on
management's best estimates which were derived utilizing assumptions of future
events including the continued availability of certain resources, third party
vendor remediation plans and other factors. The related costs totaled
approximately $620,000 for the year 1998. The eligible costs are being expensed
as incurred.
The Company does not expect that the cost of addressing the Year 2000 issue
will be a material event or uncertainty that would cause its reported financial
information not to be indicative of future operating results or future financial
condition, or that the costs or consequences of incomplete or untimely
resolution of any Year 2000 issue represent a known material event or
uncertainty that is reasonably likely to affect its future financial results, or
cause its reported financial information not to be indicative of future
operating results or future financial condition. However, the Year 2000 issue is
pervasive and complex and can potentially affect any computer process.
Accordingly, no assurance can be given that Year 2000 compliance can be achieved
without additional unanticipated expenditures and uncertainties that might
affect future financial results.
Additionally, the federal bank regulators have enforcement powers with
respect to Year 2000 compliance. Failure to institute an acceptable Year 2000
readiness plan could result in the disapproval of expansion applications filed
with bank regulatory agencies or the imposition of cease and desist orders or
civil money penalties.
Regardless of the Year 2000 compliance of the Company's systems, there is
no complete assurance that the Company will not be adversely affected to the
extent other entities not affiliated with the Company are unsuccessful in
properly addressing this issue. In an effort to minimize this possibility,
active communication has been ongoing between the Company and its external
service providers and intermediaries. In addition, a risk reduction program was
initiated in 1998 that addresses potential Year 2000 exposure in the loan
portfolio. Correspondence has been sent by the Company to customers and
suppliers during 1998 urging them to adequately address their Year 2000 issues,
and such communication is planned to continue throughout 1999. However, there
can be no guarantee that customers and suppliers will become Year 2000 compliant
on a timely basis or in a manner that is compatible with the Company's systems.
Significant business interruptions or failures by key business customers,
suppliers, trading partners or governmental agencies resulting from the effects
of the Year 2000 issue could have a material adverse effect on the Company.
The Company currently has in place a remediation and contingency plan in
the event an application has unresolved Year 2000 issues as well as a disaster
recovery plan in the event of an unforeseen interruption in the Company's data
processing capabilities. These plans focus on an application-by-
8
<PAGE>
application strategy that would be implemented in the event of Year 2000 related
problems in particular applications, which strategies include, among others, the
replacement of the faulty application as well as strategies to be employed
should the Company suffer an area wide interruption of data processing
capabilities due to loss of power or communications or a similar failure, which
strategies would include, among others, alternate processing facilities.
While the Company will have contingency plans in place to address a
temporary disruption in these services, there can be no assurance that any
disruption or failure will be only temporary, that the Company's contingency
plans will function as anticipated, or that the results of operations, financial
condition, or liquidity of the Company will not be adversely affected in the
event of a prolonged disruption or failure.
Additionally, there can be no assurance that the banking or other federal
regulators will not issue new regulatory requirements that require additional
work by the Company and, if issued, that new regulatory requirements will not
increase the cost or delay the completion of the Company's Action Plan.
EFFECTS OF INFLATION
The principal component of earnings is net interest income, which is
affected by changes in the level of interest rates. Changes in rates of
inflation affect interest rates. It is difficult to precisely measure the impact
of inflation on net interest income because it is not possible to accurately
differentiate between increases in net interest income resulting from inflation
and increases resulting from increased business activity. Inflation also raises
costs of operation, primarily those of employment and services.
FORWARD LOOKING INFORMATION
Certain matters discussed in this report, excluding historical information,
include forward-looking statements. Although the Company believes such
forward-looking statements are based on reasonable assumptions, no assurance can
be given that every objective will be reached. The words "estimate,"
"expect," "intend" and "project," as well as other words or expressions of
similar meaning are intended to identify forward-looking statements. Readers are
cautioned not to place undue reliance on forward-looking statements, which speak
only as of the date of this annual report. Such statements are based on current
expectations, are inherently uncertain, are subject to risks and should be
viewed with caution. Actual results and experience may differ materially from
the forward-looking statements as a result of many factors.
Factors that could cause actual results to differ materially from any
results that are projected, forecasted, estimated or budgeted by the Company in
forward-looking statements include, among others, the following possibilities:
(I) changes in local, state, national and international economic conditions,
(II) changes in the capital markets utilized by the Company and its
subsidiaries, including changes in the interest rate environment that may reduce
margins, (III) changes in state and/or federal laws and regulations to which the
Company and its subsidiaries, as well as their customers, competitors and
potential competitors, are subject, including, without limitation, banking, tax,
securities, insurance and employment laws and regulations, and (IV) the loss of
senior management or operating personnel, (V) the Company's inability to
complete its Year 2000 action plan on a timely basis, and (VI) increased
competition from both within and without the banking industry. It is not
possible to foresee or identify all such factors. The Company makes no
commitment to update any forward-looking statement, or to disclose any facts,
events or circumstances after the date hereof that may affect the accuracy of
any forward-looking statement.
ADOPTION OF NEW ACCOUNTING STANDARDS
The Company adopted SFAS No. 121, "Accounting for the Impairment of
Long-Lived Assets and for Long-Lived Assets to Be Disposed Of", effective
January 1, 1996. This Statement established accounting standards for the
impairment of long-lived assets, certain identifiable intangibles, and goodwill
related to those assets to be held and used and for long-lived assets and
certain identifiable intangibles which must be disposed. Long-lived assets and
certain identifiable intangibles to be disposed of must be reported at the lower
of carrying amount or fair value less cost to sell, except for assets that are
covered by APB Opinion
9
<PAGE>
No. 30. The adoption of this Statement did not have a material impact on the
Company's consolidated financial position, results of operations, or liquidity.
The Company adopted SFAS No. 122, "Accounting for Mortgage Servicing
Rights" effective January 1, 1996. This Statement requires that a mortgage
banking enterprise assess its capitalized mortgage servicing rights for
impairment based on the fair value of those rights that are capitalized after
the adoption of this Statement based on one or more of the predominant risk
characteristics of the underlying loans. Impairment should be recognized through
a valuation allowance for each impaired stratum. The adoption of this Statement
did not have a material impact on the Company's consolidated financial position,
results of operation, or liquidity.
In 1996, the Company adopted SFAS No. 123, "Accounting for Stock-Based
Compensation." SFAS No. 123 permits companies to recognize as expense over the
vesting period the fair value of all stock-based awards on the date of grant. In
management's opinion, the existing stock option valuation models do not
necessarily provide a reliable single measure of stock option fair value.
Therefore, as permitted, the Company will continue to apply the existing
accounting rules under APB No. 25 and provide pro forma net income and pro forma
earnings per share disclosures for employee stock option grants made in 1995 and
subsequent years as if the fair-value-based method defined in SFAS No. 123 had
been applied.
Effective January 1, 1996, the Company adopted the American Institute of
Certified Public Accountants Statement Of Position ("SOP") 96-1,
"Environmental Remediation Liabilities." SOP 96-1 requires, among other
things, environmental remediation liabilities to be accrued when the criteria of
SFAS No. 5, "Accounting for Contingencies," have been met and also provides
guidance with respect to the measurement of remediation liabilities. Such
accounting is consistent with the Company's previous method of accounting for
environmental remediation costs and therefore, adoption of this Statement did
not have a material impact on the Company's consolidated financial position,
results of operations, or liquidity.
In June 1996, the Financial Accounting Standards Board issued SFAS No. 125,
"Accounting for Transfers and Servicing of Financial Assets and Extinguishments
of Liabilities." SFAS No. 127, "Deferral of the Effective Date of Certain
Provisions of FASB Statement No. 125" was issued in December 1996. SFAS No. 127
defers portions of SFAS No. 125 to be effective for transfers and servicing of
financial assets and extinguishments of liabilities occurring after December 31,
1997. These Statements are to be applied prospectively. SFAS No. 125 provides
accounting and reporting standards for transfers and servicing of financial
assets and extinguishments of liabilities based on consistent application of a
financial-components approach that focuses on control. It distinguishes
transfers of financial assets that are sales from transfers that are secured
borrowings. The adoption of this Statement did not have a material impact on the
Company's consolidated financial position, results of operations, or liquidity.
In February 1997, the Financial Accounting Standards Board issued SFAS No.
128, "Earnings per Share." SFAS No. 128 specifies the computation,
presentation, and disclosure requirements for earnings per share (EPS) for
entities with publicly held common stock or potential common stock. SFAS No. 128
replaces primary EPS and fully diluted EPS on the face of the income statement
for all entities with complex capital structures and requires a reconciliation
of the basic EPS computation to the diluted EPS. Basic EPS is calculated by
dividing net income available to common shareholders, by the weighted average
number of common shares outstanding. The computation of diluted EPS assumes the
issuance of common shares for all dilutive potential common shares outstanding
during the reporting period. The dilutive effect of stock options are considered
in earnings per share calculations if dilutive, using the treasury stock method.
SFAS No. 128 is effective for financial statements issued for periods ending
after December 15, 1997, including interim periods. The Company adopted SFAS No.
128 in 1997, accordingly, all prior-period earnings per share data presented in
the accompanying consolidated financial statements has been restated to conform
to the requirements of SFAS No. 128.
In February 1997, the Financial Accounting Standards Board issued SFAS No.
129, "Disclosure of Information about Capital Structure." SFAS No. 129 lists
required disclosures about capital structure that had been included in a number
of previously existing separate statements and opinions. It applies to all
entities, public and nonpublic. SFAS No. 129 is effective for financial
statements issued for periods ending
10
<PAGE>
after December 15, 1997. The adoption of this Statement did not have a material
impact on the Company's consolidated financial statements.
In June 1997, the Financial Accounting Standards Board issued SFAS No. 130,
"Reporting Comprehensive Income." SFAS No. 130 establishes standards for
reporting and display of comprehensive income and its components (revenues,
expenses, gains, and losses) in a full set of general-purpose financial
statements. SFAS No. 130 requires that an enterprise (a) classify items of other
comprehensive income by their nature in a financial statement and (b) display
the accumulated balance of other comprehensive income separately from retained
earnings and additional paid-in capital in the equity section of a statement of
financial position. SFAS No. 130 is effective for fiscal years beginning after
December 15, 1997. The adoption of this Statement did not have a material impact
on the Company's consolidated financial position, results of operations, or
liquidity.
In June 1997, the Financial Accounting Standards Board issued SFAS No. 131,
"Disclosures about Segments of an Enterprise and Related Information." SFAS
No. 131 establishes standards for the way that public business enterprises
report information about operation segments in annual financial statements and
requires that those enterprises report selected information about operation
segments in interim financial reports issued to shareholders. SFAS No. 131 also
establishes standards for related disclosures about products and services,
geographic areas, and major customers. Management of the Company believes that
it does not have separate reportable operating segments under the provision of
SFAS No. 131. The provisions of SFAS No. 131 are effective for financial
statements for periods beginning after December 15, 1997.
ACCOUNTING STANDARDS ISSUED BUT NOT YET EFFECTIVE
In June 1998, the Financial Accounting Standards Board issued SFAS No. 133,
"Accounting for Derivative Instruments and Hedging Activities." SFAS No. 133
establishes accounting and reporting standards for derivative instruments,
including certain derivative instruments embedded in other contracts, and for
hedging activities. SFAS No. 133 requires that an entity recognize all
derivatives as either assets or liabilities in the statement of financial
position and measure those instruments at fair value. If certain conditions are
met, a derivative may be specifically designated as a "fair value hedge," a
"cash flow hedge," or a hedge of a foreign currency exposure of a net
investment in a foreign operation. The accounting for changes in the fair value
of a derivative (that is, gains and losses) depends on the intended use of the
derivative and the resulting designation. SFAS No. 133 is effective for all
fiscal quarters of fiscal years beginning after June 15, 1999. Management of the
Company does not expect that the adoption of SFAS No. 133 will have a material
impact on the Company's financial position, results of operation, or liquidity.
In October 1998, the Financial Accounting Standards Board issued SFAS No.
134, "Accounting for Mortgage-Backed Securities Retained after the
Securitization of Mortgage Loans Held for Sale by a Mortgage Banking
Enterprise." SFAS No. 134 further amends Statement 65, "Accounting for Certain
Mortgage Banking Activities, as amended by SFAS No. 115, "Accounting for
Certain Investments in Debt and Equity Securities," and SFAS No. 125,
"Accounting for Transfers and Servicing of Financial Assets and Extinguishments
of Liabilities," requires that after securitization of mortgage loans held for
sale, an entity engaged in mortgage banking activities classify the resulting
mortgage-backed securities or other retained interests based on its ability and
intent to sell or hold those investments. SFAS No. 134 is effective for the
first fiscal quarter beginning after December 15, 1998. Management of the
Company does not expect that the adoption of SFAS No. 134 will have a material
impact on the Company's financial position, results of operation, or liquidity.
COMMON STOCK AND DIVIDENDS
The Company had issued and outstanding 14,118,158 shares of $1.00 par value
Common Stock held by approximately 1,813 holders of record at March 19, 1999.
The book value of the stock at December 31, 1998 was $28.03 per share compared
with $26.32 per share, adjusted for stock dividends, one year ago.
11
<PAGE>
On August 28, 1995, the Common Stock began to trade on the OTC Bulletin
Board under the trading symbol IBNC; however, trading in the Common Stock of the
Company was not extensive and such trades could not be characterized as
amounting to an active trading market. As of March 4, 1998, the Common Stock was
listed on the Nasdaq National Market under the trading symbol IBOC.
The following table sets forth the approximate high and low bid prices in
the Company's Common Stock, adjusted for stock dividends during 1997 and 1998,
as quoted on the OTC Bulletin Board and as recorded by local brokerage firms or
from information in the Company's records for the periods prior to March 4, 1998
and as quoted on the Nasdaq National Market for the periods after March 4, 1998
for each of the quarters in the two year period ended December 31, 1998 and
1997. Some of the quotations reflect interdealer prices, without retail mark-up,
mark-down or commission and may not necessarily represent actual transactions.
<TABLE>
<CAPTION>
HIGH LOW
------ ------
<S> <C> <C>
1998:
First quarter...................... $64.00 $62.00
Second quarter..................... 67.80 63.60
Third quarter...................... 62.69 56.50
Fourth quarter..................... 54.88 50.63
<CAPTION>
HIGH LOW
------ ------
<S> <C> <C>
1997:
First quarter...................... $44.30 $38.40
Second quarter..................... 42.80 35.84
Third quarter...................... 51.20 40.40
Fourth quarter..................... 62.80 49.50
</TABLE>
The closing sales price of the Company's Common Stock was $46.75 per share
at March 19, 1999. The Company's Common Stock prices, because of the limited
market, do not necessarily represent the actual fair market value during the
above periods and, in the opinion of the Board of Directors, should not be
relied upon as representative of such market value.
The Company in 1998 paid a $5,683,000 and $5,655,000 or $0.50 and $0.40 per
share respectively, and in 1997 paid a $4,426,000, or $0.50 per share, special
cash dividends to the shareholders. In addition, the Company has issued stock
dividends during the last five year period as follows:
<TABLE>
<CAPTION>
STOCK
DATE DIVIDEND
- ------------------------------------- --------
<S> <C>
May 19, 1994......................... 25%
May 19, 1995......................... 25
May 17, 1996......................... 25
May 16, 1997......................... 25
May 22, 1998......................... 25
</TABLE>
The Company's principal source of funds to pay cash dividends on its Common
Stock is cash dividends from the bank subsidiaries. There are certain statutory
limitations on the payment of dividends from the subsidiary banks. For a
discussion of the limitations, please see Note 17 of notes to consolidated
financial statements.
RECENT SALES OF UNREGISTERED SECURITIES
No securities were sold by the Company during the fiscal year ended
December 31, 1998 that were not registered under the Securities Act of 1933.
On December 19, 1997, the Company issued 65,772 shares of Common Stock to
Federal National Mortgage Association for $76.02 per share for a total of
$5,000,000 in cash. The transaction was exempt from the registration
requirements of the Securities Act of 1933 pursuant to Section 4(2) of the Act.
12
<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, 1998 and 1997, and
the related consolidated statements of income, comprehensive income,
shareholders' equity, and cash flows for each of the years in the three-year
period ended December 31, 1998. These consolidated financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these consolidated financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit also includes assessing the accounting principles used
and significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of
International Bancshares Corporation and subsidiaries as of December 31, 1998
and 1997, and the results of their operations and their cash flows for each of
the years in the three-year period ended December 31, 1998, in conformity with
generally accepted accounting principles.
/s/ KPMG LLP
San Antonio, Texas
March 5, 1999
13
<PAGE>
INTERNATIONAL BANCSHARES CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CONDITION
DECEMBER 31, 1998 AND 1997
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
1998 1997
----------- -----------
<S> <C> <C>
ASSETS
Cash and due from banks.............. $ 94,594 $ 229,788
Federal funds sold................... 26,000 7,975
----------- -----------
Total cash and cash
equivalents............... 120,594 237,763
Time deposits with banks............. 1,373 1,587
Investment securities:
Held to maturity (Market value of
$2,505 on December 31, 1998 and
$2,705 on December 31, 1997)..... 2,508 2,710
Available for sale (Amortized cost
of $2,991,836 on December 31,
1998 and $2,547,545 on December
31, 1997)........................ 3,005,369 2,580,748
----------- -----------
Total investment
securities................ 3,007,877 2,583,458
Loans:
Commercial, financial and
agricultural.................... 896,060 800,964
Real estate -- mortgage.......... 215,689 188,122
Real estate -- construction...... 94,374 59,239
Consumer......................... 250,917 272,478
Foreign.......................... 166,324 130,401
----------- -----------
Total loans................. 1,623,364 1,451,204
Less unearned discounts.......... (8,025) (6,508)
----------- -----------
Loans, net of unearned
discounts................. 1,615,339 1,444,696
Less allowance for possible loan
losses.......................... (25,551) (24,516)
----------- -----------
Net loans................... 1,589,788 1,420,180
----------- -----------
Bank premises and equipment, net..... 137,568 129,621
Accrued interest receivable.......... 31,542 31,271
Intangible assets.................... 44,971 49,692
Other assets......................... 54,164 64,274
----------- -----------
Total assets................ $ 4,987,877 $ 4,517,846
=========== ===========
LIABILITIES AND SHAREHOLDERS' EQUITY
Liabilities:
Deposits:
Demand -- non-interest bearing... $ 414,412 $ 450,537
Savings and interest bearing
demand.......................... 947,408 819,759
Time............................. 2,007,817 1,905,264
----------- -----------
Total deposits.............. 3,369,637 3,175,560
Securities sold under repurchase
agreements...................... 135,700 478,409
Other borrowed funds............. 1,074,000 490,000
Other liabilities................ 38,257 32,633
----------- -----------
Total liabilities........... 4,617,594 4,176,602
----------- -----------
Shareholders' equity:
Common stock of $1.00 par value.
Authorized 40,000,000 shares;
issued 16,790,999 shares in 1998
and 13,196,469 shares in 1997... 16,791 13,196
Surplus.......................... 22,250 19,012
Retained earnings................ 341,025 301,988
Accumulated other comprehensive
income.......................... 8,797 21,582
----------- -----------
388,863 355,778
Less cost of shares in treasury,
2,670,927 shares in 1998 and
2,079,126 shares in 1997........... (18,580) (14,534)
----------- -----------
Total shareholders'
equity.................... 370,283 341,244
----------- -----------
Total liabilities and
shareholders' equity...... $ 4,987,877 $ 4,517,846
=========== ===========
</TABLE>
See accompanying notes to consolidated financial statements.
14
<PAGE>
INTERNATIONAL BANCSHARES CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
1998 1997 1996
-------------- -------------- --------------
<S> <C> <C> <C>
Interest income:
Loans, including fees........... $ 145,016 $ 127,348 $ 119,183
Time deposits with banks........ 89 47 53
Federal funds sold.............. 1,462 1,120 1,540
Investment securities:
Taxable.................... 179,030 146,820 99,411
Tax-exempt................. 241 90 1,292
Other........................... 336 307 300
-------------- -------------- --------------
Total interest
income............. 326,174 275,732 221,779
Interest expense:
Savings and interest bearing
demand deposits............... 26,419 22,152 18,390
Time deposits................... 101,823 89,413 69,717
Federal funds purchased and
securities sold under
repurchase agreements......... 13,396 15,754 12,151
Other borrowings................ 39,969 18,052 7,114
Other........................... 302 -- --
-------------- -------------- --------------
Total interest
expense............ 181,909 145,371 107,372
-------------- -------------- --------------
Net interest income... 144,265 130,361 114,407
Provision for possible loan losses... 8,571 7,740 6,630
-------------- -------------- --------------
Net interest income
after provision for
possible loan
losses............. 135,694 122,621 107,777
-------------- -------------- --------------
Non-interest income:
Service charges on deposit
accounts...................... 21,679 18,511 15,642
Other service charges,
commissions and fees.......... 9,352 8,295 6,780
Investment securities
transactions, net............. 3,893 484 31
Other income.................... 6,774 9,486 7,741
-------------- -------------- --------------
Total non-interest
income............. 41,698 36,776 30,194
-------------- -------------- --------------
Non-interest expense:
Employee compensation and
benefits...................... 39,733 33,431 28,882
Occupancy....................... 7,675 6,258 5,336
Depreciation of bank premises
and equipment................. 10,388 8,256 7,024
Regulatory and deposit insurance
fees.......................... 2,073 1,803 3,813
Legal expense including
settlements................... 1,388 2,036 2,043
Stationery and supplies......... 3,186 3,026 2,479
Amortization of intangible
assets........................ 3,936 2,949 1,802
Other........................... 30,668 27,986 22,078
-------------- -------------- --------------
Total non-interest
expense............ 99,047 85,745 73,457
-------------- -------------- --------------
Income before income
taxes.............. 78,345 73,652 64,514
Income taxes......................... 24,620 24,771 20,164
-------------- -------------- --------------
Net income............ $ 53,725 $ 48,881 $ 44,350
============== ============== ==============
Basic earnings per common share:
Net Income...................... $ 4.12 $ 3.84 $ 3.52
============== ============== ==============
Weighted average number of
shares outstanding............ 13,028,929 12,743,638 12,608,599
Diluted earnings per common share:
Net Income...................... $ 4.02 $ 3.70 $ 3.41
============== ============== ==============
Weighted average number of
shares outstanding............ 13,365,218 13,212,488 13,022,862
</TABLE>
See accompanying notes to consolidated financial statements.
15
<PAGE>
INTERNATIONAL BANCSHARES CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
YEARS ENDED DECEMBER 31, 1998, 1997, AND 1996
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
1998 1997 1996
--------- --------- ---------
<S> <C> <C> <C>
Net Income........................... $ 53,725 $ 48,881 $ 44,350
--------- --------- ---------
Other comprehensive income, net of
tax:
Unrealized holding gains
(losses) on securities
available for sale arising
during the year............... (9,021) 10,346 (1,759)
Reclassification adjustment for
(gains) losses on securities
available for sale included in
net income.................... (3,764) (152) (249)
--------- --------- ---------
Comprehensive income................. $ 40,940 $ 59,075 $ 42,342
========= ========= =========
</TABLE>
16
<PAGE>
INTERNATIONAL BANCSHARES CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
ACCUMULATED
OTHER
NUMBER COMMON RETAINED COMPREHENSIVE TREASURY
OF SHARES STOCK SURPLUS EARNINGS INCOME STOCK TOTAL
--------- ------- ------- --------- ---------------- -------- --------
<S> <C> <C> <C> <C> <C> <C> <C>
Balances at January 1, 1996.......... 8,160 $8,160 $10,637 $ 221,350 $ 13,396 $ (7,782) $245,761
Net income....................... -- -- -- 44,350 -- -- 44,350
Stock dividends:
Shares issued............... 2,059 2,059 -- (2,059) -- -- --
Cash dividends.............. -- -- -- (3,507) -- -- (3,507)
Purchase of treasury stock....... -- -- -- -- -- (2,261) (2,261)
Exercise of stock options........ 134 134 831 -- -- -- 965
Tax effect of non-qualified stock
options exercised.............. -- -- 467 -- -- -- 467
Other comprehensive income, net
of tax:
Net change in unrealized gains
(losses) on available for
sale securities, net of
reclassification adjustment.. -- -- -- -- (2,008) -- (2,008)
--------- ------- ------- --------- ---------------- -------- --------
Balances at December 31, 1996........ 10,353 $10,353 $11,935 $ 260,134 $ 11,388 $(10,043) $283,767
========= ======= ======= ========= ================ ======== ========
Net income....................... -- -- -- 48,881 -- -- 48,881
Stock dividends:
Shares issued............... 2,601 2,601 -- (2,601) -- -- --
Cash dividends.............. -- -- -- (4,426) -- -- (4,426)
Purchase of treasury stock....... -- -- -- -- -- (4,491) (4,491)
Exercise of stock options........ 176 176 1,602 -- -- -- 1,778
Sale of stock.................... 66 66 4,934 -- -- -- 5,000
Tax effect of non-qualified stock
options exercised.............. -- -- 541 -- -- -- 541
Other comprehensive income, net
of tax:
Net change in unrealized gains
(losses) on available for
sale securities, net of
reclassification adjustment.. -- -- -- -- 10,194 -- 10,194
--------- ------- ------- --------- ---------------- -------- --------
Balances at December 31, 1997........ 13,196 $13,196 $19,012 $ 301,988 $ 21,582 $(14,534) $341,244
========= ======= ======= ========= ================ ======== ========
Net income....................... -- -- -- 53,725 -- -- 53,725
Stock dividends:
Shares issued............... 3,350 3,350 -- (3,350) -- -- --
Cash dividends.............. -- -- -- (11,338) -- -- (11,338)
Purchase of treasury stock....... -- -- -- -- -- (4,046) (4,046)
Exercise of stock options........ 245 245 2,520 -- -- -- 2,765
Tax effect of non-qualified stock
options exercised.............. -- -- 718 -- -- -- 718
Other comprehensive income, net
of tax:
Net change in unrealized gains
(losses) on available for
sale securities, net of
reclassification adjustment.. -- -- -- -- (12,785) -- (12,785)
--------- ------- ------- --------- ---------------- -------- --------
Balances at December 31, 1998........ 16,791 $16,791 $22,250 $ 341,025 $ 8,797 $(18,580) $370,283
========= ======= ======= ========= ================ ======== ========
</TABLE>
See accompanying notes to consolidated financial statements.
17
<PAGE>
INTERNATIONAL BANCSHARES CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
1998 1997 1996
------------ ------------ ------------
<S> <C> <C> <C>
Operating activities:
Net income.......................... $ 53,725 $ 48,881 $ 44,350
Adjustments to reconcile net income
to net cash provided by operating
activities:
Provision for possible loan
losses....................... 8,571 7,740 6,630
Recoveries on charged-off
loans........................ 1,349 997 1,116
Net cost of operations for
other real estate owned...... 106 161 308
Lease asset expenses........... 948 931 931
Depreciation of bank premises
and equipment................ 10,388 8,256 7,024
Accretion of investment
securities discounts......... (10,708) (1,445) (1,382)
Amortization of investment
securities premiums.......... 14,260 10,017 6,762
Realized gain on investment
securities transactions,
net.......................... (3,893) (484) (31)
Gain on sale of bank premises
and equipment................ (1,715) (51) (115)
Increase in accrued interest
receivable................... (271) (7,145) (709)
Increase in other
liabilities.................. 13,953 12,676 1,996
------------ ------------ ------------
Net cash provided by
operating activities..... 86,713 80,534 66,880
------------ ------------ ------------
Investing activities:
Cash acquired in purchase
transactions...................... -- 102,664 284,395
Proceeds from maturities of
securities........................ 975 2,660 582
Proceeds from sales of available for
sale securities................... 541,362 229,287 441,151
Purchases of available for sale
securities........................ (1,967,527) (1,366,791) (1,038,351)
Principal collected on
mortgage-backed securities........ 976,706 355,675 285,822
Proceeds from matured time deposits
with banks........................ 1,290 198 2,295
Purchases of time deposits with
banks............................. (1,076) (603) (693)
Net increase in loans............... (179,528) (74,777) (15,003)
Net decrease (increase) in other
assets............................ 17,787 2,743 (6,829)
Purchases of bank premises and
equipment......................... (19,193) (24,626) (16,068)
Proceeds from sale of bank premise
and equipment..................... 2,573 101 545
------------ ------------ ------------
Net cash used in investing
activities............... (626,631) (773,469) (62,154)
------------ ------------ ------------
Financing activities:
Net (decrease) increase in
non-interest bearing demand
deposits.......................... $ (36,125) $ 57,137 $ 27,831
Net increase in savings and interest
bearing demand deposits........... 127,649 23,996 58,604
Net increase in time deposits....... 102,553 141,511 103,426
Net (decrease) increase in federal
funds purchased and securities
sold under repurchase
agreements........................ (342,709) 287,201 (314,119)
Proceeds from issuance of other
borrowed funds.................... 2,440,000 997,347 1,181,000
Principal payments on other borrowed
funds............................. (1,856,000) (746,347) (1,008,500)
Purchase of treasury stock.......... (4,046) (4,491) (2,261)
Proceeds from stock transactions.... 2,765 6,778 965
Payment of cash dividends........... (11,297) (4,400) (3,489)
Payments of cash dividends in lieu
of fractional shares.............. (41) (26) (18)
------------ ------------ ------------
Net cash provided by
financing activities..... 422,749 758,706 43,439
------------ ------------ ------------
(Decrease) increase in cash
and cash equivalents..... (117,169) 65,771 48,165
Cash and cash equivalents at beginning
of year............................... 237,763 171,992 123,827
------------ ------------ ------------
Cash and cash equivalents at end of
year.................................. $ 120,594 $ 237,763 $ 171,992
============ ============ ============
Supplemental cash flow information:
Interest paid....................... $ 185,402 $ 148,825 $ 107,187
Income taxes paid................... 21,691 23,815 19,059
Supplemental schedule of noncash
investing and financing activities
relating to various purchase
transactions:
Loans acquired...................... -- $ 140,112 $ 22,177
Investment securities and other
assets acquired................... -- 93,382 22,442
Deposit and other liabilities
assumed........................... -- 336,158 329,014
</TABLE>
See accompanying notes to consolidated financial statements.
18
<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.
INVESTMENT SECURITIES
The Company classifies debt and equity securities into one of these
categories: held-to-maturity, available-for-sale, or trading. Such
classifications are reassessed for appropriate classification at each reporting
date. Securities classified as "held-to-maturity" are carried at amortized
cost for financial statement reporting, while securities classified as
"available-for-sale" and "trading" are carried at their fair value.
Unrealized holding gains and losses are included in net income for those
securities classified as "trading", while unrealized holding gains and losses
related to those securities classified as "available-for-sale" are excluded
from net income and reported net of tax as other comprehensive income and as a
separate component of shareholders' equity until realized.
Mortgage-backed securities held at December 31, 1998 and 1997 represent
participating interests in pools of long-term first mortgage loans originated
and serviced by the issuers of the securities. Premiums and discounts are
amortized using the straight-line method over the contractual maturity of the
loans
19
<PAGE>
INTERNATIONAL BANCSHARES CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
adjusted for anticipated prepayments. Income recognized under the straight line
method is not materially different from income that would be recognized under
the level yield or "interest method". Mortgage-backed securities are either
issued or guaranteed by the U.S. Government or its agencies. Market interest
rate fluctuations can affect the prepayment speed of principal and the yield on
the security.
UNEARNED DISCOUNTS
Consumer loans are frequently made on a discount basis. The amount of the
discount is subsequently included in interest income ratably over the term of
the related loans under the sum-of-the-digits (Rule of 78's) method. Income
recognized under the sum-of-the-digits method is not materially different than
income that would be recognized under the level yield or "interest method".
PROVISION AND ALLOWANCE FOR POSSIBLE LOAN LOSSES
The allowance for possible loan losses is maintained at a level considered
adequate by management to provide for potential loan losses. The allowance is
increased by provisions charged to operating expense and reduced by net
charge-offs. The provision for possible loan losses is the amount which, in the
judgement of management, is necessary to establish the allowance for possible
loan losses at a level that is adequate to absorb known and inherent risks in
the loan portfolio.
Management believes that the allowance for possible loan losses is
adequate. While management uses available information to recognize losses on
loans, future additions to the allowance may be necessary based on changes in
economic conditions. In addition, various regulatory agencies, as an integral
part of their examination process, periodically review the Corporation's bank
subsidiaries allowances for possible loan losses. Such agencies may require the
Corporation's bank subsidiaries' to recognize additions or reductions to their
allowances based on their judgments of information available to them at the time
of their examination.
Impaired loans are measured based on (1) the present value of expected
future cash flows discounted at the loan's effective interest rate; (2) the
loan's observable market price; or (3) the fair value of the collateral if the
loan is collateral dependent.
NON-ACCRUAL LOANS
The non-accrual loan policy of the Corporation's bank subsidiaries is to
discontinue the accrual of interest on loans when management determines that it
is probable that future interest accruals will be uncollectible. Interest income
on non-accrual loans is recognized only to the extent payments are received or
when, in management's opinion, the creditor's financial condition warrants
reestablishment of interest accruals.
OTHER REAL ESTATE OWNED
Other real estate owned is comprised of real estate acquired by foreclosure
and deeds in lieu of foreclosure. Other real estate is carried at the lower of
the recorded investment in the property or its fair value less estimated costs
to sell such property (as determined by independent appraisal). Prior to
foreclosure, the value of the underlying loan is written down to the fair value
of the real estate to be acquired by a charge to the allowance for loan losses
if necessary. Any subsequent write-downs are charged against other non-interest
expenses. Operating expenses of such properties and gains and losses on their
disposition are included in other non-interest expenses.
BANK PREMISES AND EQUIPMENT
Bank premises and equipment are stated at cost less accumulated
depreciation. Depreciation is computed on straight-line and accelerated methods
over the estimated useful lives of the assets. Repairs and
20
<PAGE>
INTERNATIONAL BANCSHARES CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
maintenance are charged to operations as incurred and expenditures for renewals
and betterments are capitalized.
INCOME TAXES
The Company recognizes certain income and expenses in different time
periods for financial reporting and income tax purposes. The provision for
deferred income taxes is based on the asset and liability method and represents
the change in the deferred income tax accounts during the year, including the
effect of enacted tax rate changes.
STOCK OPTIONS
Prior to January 1, 1996, the Company accounted for its stock option plan
in accordance with the provisions of Accounting Principles Board ("APB")
Opinion No. 25, "Accounting for Stock Issued to Employees," and related
interpretations. As such, compensation expense would be recorded on the date of
grant only if the current market price of the underlying stock exceeded the
exercise price. In October 1995, the Financial Accounting Standards Board issued
SFAS No. 123, "Accounting for Stock-Based Compensation," which permits
entities to recognize as expense over the vesting period the fair value of all
stock-based awards on the date of grant. Alternatively, SFAS No. 123 also allows
entities to continue to apply the provisions of APB Opinion No. 25 and provide
pro forma net income and pro forma earnings per share disclosures for employee
stock option grants made in 1995 and future years as if the fair-value-based
method defined in SFAS No. 123 had been applied. The Company has elected to
continue to apply the provisions of APB Opinion No. 25 and provide the pro forma
disclosure provisions of SFAS No. 123.
NET INCOME PER SHARE
In February 1997, the Financial Accounting Standards Board issued SFAS No.
128, "Earnings per Share." SFAS No. 128 specifies the computation,
presentation, and disclosure requirements for earnings per share (EPS) for
entities with publicly held common stock or potential common stock. SFAS No. 128
replaces primary EPS and fully diluted EPS on the face of the income statement
for all entities with complex capital structures and requires a reconciliation
of basic EPS to diluted EPS. Basic EPS is calculated by dividing net income
available to common shareholders, by the weighted average number of common
shares outstanding. The computation of diluted EPS assumes the issuance of
common shares for all dilutive potential common shares outstanding during the
reporting period. The dilutive effect of stock options is considered in earnings
per share calculations if dilutive, using the treasury stock method. SFAS No.
128 is effective for financial statements issued for periods ending after
December 15, 1997, including interim periods. The Company adopted SFAS No. 128
in 1997, accordingly, all prior-period earnings per share data presented in the
accompanying consolidated financial statements has been restated to conform to
the requirements of SFAS No. 128.
CAPITAL STRUCTURE
In February 1997, the Financial Accounting Standards Board issued SFAS No.
129, "Disclosure of Information about Capital Structure." SFAS No. 129 lists
required disclosures about capital structure that had been included in a number
of previously existing separate statements and opinions. It applies to all
entities, public and nonpublic. SFAS No. 129 is effective for financial
statements issued for periods ending after December 15, 1997. The adoption of
this Statement did not have a material impact or significantly alter the
Company's consolidated financial statements.
ACQUISITIONS AND AMORTIZATION OF INTANGIBLES
Operations of companies acquired in purchase transactions are included in
the consolidated statements of income from the respective dates of acquisition.
The excess of the purchase price over net identifiable
21
<PAGE>
INTERNATIONAL BANCSHARES CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
assets acquired (goodwill) and core deposit intangibles are included in other
assets and are being amortized over varying remaining lives not exceeding 15
years.
IMPAIRMENT OF LONG-LIVED ASSETS AND LONG-LIVED ASSETS TO BE DISPOSED OF
The Company adopted SFAS No. 121, "Accounting for the Impairment of
Long-Lived Assets and for Long-Lived Assets to Be Disposed Of", effective
January 1, 1996. This Statement established accounting standards for the
impairment of long-lived assets, certain identifiable intangibles, and goodwill
related to those assets to be held and used and for long-lived assets and
certain identifiable intangibles which must be disposed. Long-lived assets and
certain identifiable intangibles to be disposed of must be reported at the lower
of carrying amount or fair value less cost to sell, except for assets that are
covered by APB Opinion No. 30. The adoption of this Statement did not have a
material impact on the Company's consolidated financial position, results of
operations, or liquidity.
CONSOLIDATED STATEMENT OF CASH FLOWS
For purposes of the statement of cash flows, the Company considers all
short-term investments with a maturity at date of purchase of three months or
less to be cash equivalents. Also, the Company reports transactions related to
deposits with other financial institutions, customer time deposits and loans to
customers on a net basis.
ENVIRONMENTAL REMEDIATION
Effective January 1, 1996, the Company adopted the American Institute of
Certified Public Accountants Statement Of Position ("SOP") 96-1,
"Environmental Remediation Liabilities." SOP 96-1 requires, among other
things, environmental remediation liabilities to be accrued when the criteria of
SFAS No. 5, "Accounting for Contingencies," have been met and also provides
guidance with respect to the measurement of remediation liabilities. Such
accounting is consistent with the Company's previous method of accounting for
environmental remediation costs and therefore, adoption of this Statement did
not have a material impact on the Company's consolidated financial position,
results of operations, or liquidity.
ACCOUNTING FOR TRANSFERS AND SERVICING OF FINANCIAL ASSETS
In June 1996, the Financial Accounting Standards Board issued SFAS No. 125,
"Accounting for Transfers and Servicing of Financial Assets and Extinguishments
of Liabilities". SFAS No. 127, "Deferral of the Effective Date of Certain
Provisions of FASB Statement No. 125" was issued in December 1996. SFAS No. 127
defers portions of SFAS No. 125 to be effective for transfers and servicing of
financial assets and extinguishments of liabilities occurring after December 31,
1997. These Statements are to be applied prospectively. SFAS No. 125 provides
accounting and reporting standards for transfers and servicing of financial
assets and extinguishments of liabilities based on consistent application of a
financial-components approach that focuses on control. It distinguishes
transfers of financial assets that are sales from transfers that are secured
borrowings. The adoption of this Statement did not have a material impact on the
Company's consolidated financial position, results of operations, or liquidity.
COMPREHENSIVE INCOME
In June 1997, the Financial Accounting Standards Board issued SFAS No. 130,
"Reporting Comprehensive Income." SFAS No. 130 establishes standards for
reporting and display of comprehensive income and its components (revenues,
expenses, gains, and losses) in a full set of general-purpose financial
statements. SFAS No. 130 requires that an enterprise (a) classify items of other
comprehensive income by their nature in a financial statement and (b) display
the accumulated balance of other comprehensive income separately from retained
earnings and additional paid-in capital in the equity section of a statement of
financial position. SFAS No. 130 is effective for fiscal years beginning after
December 15, 1997. The
22
<PAGE>
INTERNATIONAL BANCSHARES CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
adoption of this Statement did not have a material impact on the Company's
consolidated financial position, results of operation, or liquidity.
SEGMENTS OF AN ENTERPRISE AND RELATED INFORMATION
In June 1997, the Financial Accounting Standards Board issued SFAS No. 131,
"Disclosures about Segments of an Enterprise and Related Information." SFAS
131 establishes standards for the way that public business enterprises report
information about operation segments in annual financial statements and requires
that those enterprises report selected information about operation segments in
interim financial reports issued to shareholders. SFAS No. 131 also establishes
standards for related disclosures about products and services, geographic areas,
and major customers. Management of the Company believes that it does not have
separate reportable operating segments under the provision of SFAS No. 131. The
provisions of SFAS No. 131 are effective for financial statements for periods
beginning after December 15, 1997.
(2) ACQUISITIONS
Effective February 19, 1999, IBC purchased certain assets and assumed
certain liabilities of the Laredo branch of Pacific Southwest Bank, Corpus
Christi, Texas. IBC purchased loans of approximately $4,590,000 and assumed
deposits of approximately $28,399,000 and received cash and other assets in the
amount of approximately $23,809,000. The acquisition was accounted for as a
purchase transaction. IBC recorded intangible assets, goodwill and core deposit
premium totaling $2,525,000 which are being amortized on a straight line basis
over a fifteen year period.
Effective November 5, 1997, University Bank, Houston, Texas a state bank
organized under the laws of the state of Texas, was merged with and into IBC. At
the date of closing, total assets acquired were approximately $250,978,000. The
acquisition was accounted for as a purchase transaction. IBC recorded intangible
assets, goodwill and core deposit premium totaling $17,613,000 which are being
amortized on a straight line basis over a fifteen year period.
Effective March 7, 1997, IBC purchased certain assets and assumed certain
liabilities of five branches of Bank of America Texas, N. A., Irving, Texas. IBC
purchased loans of approximately $381,000 and assumed deposits of approximately
$84,834,000 and received cash or other assets in the amount of approximately
$84,799,000. The acquisition was accounted for as a purchase transaction. IBC
recorded intangible assets, goodwill and core deposit premium totaling
$3,705,000 which are being amortized on a straight line basis over a fifteen
year period.
Effective November 21, 1996, IBC purchased certain assets and assumed
certain liabilities of three branches of Home Savings of America F.S.B.,
Irwindale, California. IBC purchased loans of approximately $769,000 and assumed
deposits of approximately $196,813,000 and received cash and other assets in the
amount of approximately $196,081,000. The acquisition was accounted for as a
purchase transaction. IBC recorded intangible assets, goodwill and core deposit
premium totaling $9,670,000 which are being amortized on a straight line basis
over a fifteen year period.
Effective June 27, 1996, IBC purchased certain assets and assumed certain
liabilities of River Valley Bank, F.S.B., in Weslaco, Texas, a federal savings
bank organized under the laws of the United States. At the date of closing,
total loans acquired were approximately $21,408,000, deposits assumed were
approximately $132,133,000 and cash and other assets received were in the amount
of approximately $110,756,000. The acquisition was accounted for as a purchase
transaction. IBC recorded intangible assets, goodwill and core deposit premium
totaling $6,599,000 which are being amortized on a straight line basis over a
fifteen year period.
23
<PAGE>
INTERNATIONAL BANCSHARES CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(3) INVESTMENT SECURITIES
The amortized cost and estimated market value by type of investment
security at December 31, 1998 are as follows:
<TABLE>
<CAPTION>
HELD TO MATURITY
-------------------------------------------------------------------
GROSS GROSS ESTIMATED
AMORTIZED UNREALIZED UNREALIZED MARKET CARRYING
COST GAINS LOSSES VALUE VALUE
---------- ----------- ----------- ---------- ---------
<S> <C> <C> <C> <C> <C>
(DOLLARS IN THOUSANDS)
Obligations of states and political
subdivisions....................... $ 518 $-- $ (3) $ 515 $ 518
Other securities..................... 1,990 -- -- 1,990 1,990
---------- ----------- ----------- ---------- ---------
Total investment securities..... $2,508 $-- $ (3) $2,505 $ 2,508
========== =========== =========== ========== =========
</TABLE>
<TABLE>
<CAPTION>
AVAILABLE FOR SALE
--------------------------------------------------------------------
GROSS GROSS ESTIMATED
AMORTIZED UNREALIZED UNREALIZED MARKET CARRYING
COST GAINS LOSSES VALUE VALUE
---------- ----------- ----------- ---------- ----------
<S> <C> <C> <C> <C> <C>
(DOLLARS IN THOUSANDS)
U.S. Treasury securities............. $ 207,543 $ 145 $-- $ 207,688 $ 207,688
Mortgage-backed securities........... 2,534,867 19,747 (3,219) 2,551,395 2,551,395
Obligations of states and political
subdivisions....................... 28,234 -- (34) 28,200 28,200
Other securities..................... 158,916 628 (4,453) 155,091 155,091
Equity securities.................... 62,276 719 -- 62,995 62,995
---------- ----------- ----------- ---------- ----------
Total investment securities..... $2,991,836 $21,239 $(7,706) $3,005,369 $3,005,369
========== =========== =========== ========== ==========
</TABLE>
The amortized cost and estimated market value of investment securities at
December 31, 1998, by contractual maturity, are shown below. Expected maturities
will differ from contractual maturities because borrowers may have the right to
prepay obligations with or without prepayment penalties.
<TABLE>
<CAPTION>
HELD TO MATURITY AVAILABLE FOR SALE
-------------------------- --------------------------
ESTIMATED ESTIMATED
AMORTIZED MARKET AMORTIZED MARKET
COST VALUE COST VALUE
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
(DOLLARS IN THOUSANDS)
Due in one year or less.............. $-- $-- $ 1,490 $ 1,500
Due after one year through five
years.............................. 2,348 2,345 538 537
Due after five years through ten
years.............................. 160 160 5,479 5,490
Due after ten years.................. -- -- 387,186 383,452
Mortgage-backed securities........... -- -- 2,534,867 2,551,395
Equity securities.................... -- -- 62,276 62,995
---------- ---------- ---------- ----------
Total investment securities..... $2,508 $2,505 $2,991,836 $3,005,369
========== ========== ========== ==========
</TABLE>
24
<PAGE>
INTERNATIONAL BANCSHARES CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The amortized cost and estimated market value by type of investment
security at December 31, 1997 are as follows:
<TABLE>
<CAPTION>
HELD TO MATURITY
--------------------------------------------------------------
GROSS GROSS ESTIMATED
AMORTIZED UNREALIZED UNREALIZED MARKET CARRYING
COST GAINS LOSSES VALUE VALUE
--------- ---------- ---------- --------- --------
<S> <C> <C> <C> <C> <C>
(DOLLARS IN THOUSANDS)
Obligations of states and political
subdivisions....................... $ 695 $-- $ (5) $ 690 $ 695
Other securities..................... 2,015 -- -- 2,015 2,015
--------- ---------- ---------- --------- --------
Total investment securities..... $ 2,710 $-- $ (5) $ 2,705 $2,710
========= ========== ========== ========= ========
</TABLE>
<TABLE>
<CAPTION>
AVAILABLE FOR SALE
--------------------------------------------------------------------
GROSS GROSS ESTIMATED
AMORTIZED UNREALIZED UNREALIZED MARKET CARRYING
COST GAINS LOSSES VALUE VALUE
---------- ----------- ----------- ---------- ----------
<S> <C> <C> <C> <C> <C>
(DOLLARS IN THOUSANDS)
U.S. Treasury securities............. $ 201,906 $ 218 $ (1) $ 202,123 $ 202,123
Mortgage-backed securities........... 2,315,455 32,367 (100) 2,347,722 2,347,722
Obligations of states and political
subdivisions....................... 555 5 (40) 520 520
Equity securities.................... 29,629 754 -- 30,383 30,383
---------- ----------- ----------- ---------- ----------
Total investment securities..... $2,547,545 $33,344 $ (141) $2,580,748 $2,580,748
========== =========== =========== ========== ==========
</TABLE>
Mortgage-backed securities are primarily securities issued by the Federal
Home Loan Mortgage Corporation ("Freddie Mac") and the Federal National
Mortgage Association ("Fannie Mae").
The amortized cost and fair market value of investment securities pledged
to qualify for fiduciary powers and to secure public monies as required by law
and for repurchase agreements was $1,740,976,000 and $1,753,435,000,
respectively, at December 31, 1998.
Proceeds from the sale of securities available-for-sale were $541,362,000,
$229,287,000 and $441,151,000 during 1998, 1997 and 1996, respectively. Gross
gains of $4,374,000 and gross losses of $481,000 were realized in 1998 primarily
from the sale of available-for-sale mortgage-backed securities. Gross gains and
losses of $619,000 and $135,000 and $1,953,000 and $1,922,000 were realized in
1997 and 1996, respectively.
The Company maintains the required level of stock at the Federal Home Loan
Bank of Dallas, Texas (the "FHLB"). The FHLB stock is included in equity
securities and is recorded at cost and totaled $60,848,000 at December 31, 1998.
(4) ALLOWANCE FOR POSSIBLE LOAN LOSSES
A summary of the transactions in the allowance for possible loan losses for
the years ended December 31, 1998, 1997 and 1996 is as follows:
<TABLE>
<CAPTION>
1998 1997 1996
--------- --------- ---------
<S> <C> <C> <C>
(DOLLARS IN THOUSANDS)
Balance at January 1................. $ 24,516 $ 21,036 $ 18,455
--------- --------- ---------
Losses charged to allowance..... (8,885) (6,336) (5,165)
Recoveries credited to
allowance..................... 1,349 997 1,116
--------- --------- ---------
Net losses charged to
allowance..................... (7,536) (5,339) (4,049)
Provision charged to
operations.................... 8,571 7,740 6,630
--------- --------- ---------
Allowances acquired in purchase
transactions.................. -- 1,079 --
--------- --------- ---------
Balance at December 31............... $ 25,551 $ 24,516 $ 21,036
========= ========= =========
</TABLE>
Loans accounted for on a non-accrual basis at December 31, 1998, 1997 and
1996 amounted to $5,538,000, $5,742,000 and $4,425,000, respectively. The effect
of such non-accrual loans reduced interest
25
<PAGE>
INTERNATIONAL BANCSHARES CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
income by $708,000, $602,000 and $644,000 for the years ended December 31, 1998,
1997 and 1996, respectively. Amounts received on non-accruals are applied, for
financial accounting purposes, first to principal and then to interest after all
principal has been collected.
Impaired loans are those loans where it is probable that all amounts due
according to contractual terms of the loan agreement will not be collected. The
Company has identified these loans through its normal loan review procedures.
Impaired loans included (1) all non-accrual loans, (2) loans which are 90 days
or more past due, unless they are well secured (i.e. the collateral value is
sufficient to cover principal and accrued interest) and are in the process of
collection, and (3) other loans which management believes are impaired.
Substantially all of the Company's impaired loans are measured at the fair value
of the collateral. In limited cases the Company may use other methods to
determine the level of impairment of a loan if such loan is not collateral
dependent.
Impaired loans were $8,440,000 at December 31, 1998, $12,854,000 at
December 31, 1997 and $10,927,000 at December 31, 1996. The average recorded
investment in impaired loans during 1998, 1997, and 1996 was $8,962,000,
$12,507,000 and $10,940,000, respectively. The total allowance for possible loan
losses related to these loans was $1,384,000, $1,144,000 and $972,000 at
December 31, 1998, 1997 and 1996, respectively. Interest income on impaired
loans of $443,000, $777,000 and $566,000 was recognized for cash payments
received in 1998, 1997 and 1996, respectively.
Management of the Company recognizes the risks associated with these
impaired loans. However, management's decision to place loans in this category
does not necessarily mean that the Company expects losses to occur.
The bank subsidiaries charge off that portion of any loan which management
considers to represent a loss as well as that portion of any other loan which is
classified as a "loss" by bank examiners. Commercial and industrial or real
estate loans are generally considered by management to represent a loss, in
whole or part, when an exposure beyond any collateral coverage is apparent and
when no further collection of the loss portion is anticipated based on the
borrower's financial condition and general economic conditions in the borrower's
industry. Generally, unsecured consumer loans are charged-off when 90 days past
due.
While management of the Company considers that it is generally able to
identify borrowers with financial problems reasonably early and to monitor
credit extended to such borrowers carefully, there is no precise method of
predicting loan losses. The determination that a loan is likely to be
uncollectible and that it should be wholly or partially charged-off as a loss,
is an exercise of judgment. Similarly, the determination of the adequacy of the
allowance for possible loan losses can be made only on a subjective basis. It is
the judgment of the Company's management that the allowance for possible loan
losses at December 31, 1998 was adequate to absorb possible losses from loans in
the portfolio at that date.
26
<PAGE>
INTERNATIONAL BANCSHARES CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(5) BANK PREMISES AND EQUIPMENT
A summary of bank premises and equipment, by asset classification, at
December 31, 1998 and 1997 follows:
<TABLE>
<CAPTION>
ESTIMATED
USEFUL LIVES 1998 1997
------------ ---------- ----------
<S> <C> <C> <C>
(DOLLARS IN THOUSANDS)
Bank buildings and improvements...... 5 - 40 years $ 98,986 $ 91,971
Less: accumulated depreciation....... (17,174) (14,336)
---------- ----------
81,812 77,635
---------- ----------
Furniture, equipment and vehicles.... 1 - 20 years 67,691 60,408
Less: accumulated depreciation....... (39,119) (32,693)
---------- ----------
28,572 27,715
---------- ----------
Land................................. 25,908 22,944
---------- ----------
Real estate held for future
expansion:
Land, building, furniture, fixture
and equipment...................... 7 - 27 years 2,215 2,215
Less: accumulated depreciation....... (939) (888)
---------- ----------
1,276 1,327
---------- ----------
Bank premises and equipment, net.......... $ 137,568 $ 129,621
========== ==========
</TABLE>
(6) DEPOSITS
Deposits as of December 31, 1998 and 1997 and related interest expense for
the years ended December 31, 1998, 1997 and 1996 were as follows:
<TABLE>
<CAPTION>
1998 1997
------------ ------------
<S> <C> <C>
(DOLLARS IN THOUSANDS)
Deposits:
Demand -- non-interest bearing
Domestic........................ $ 364,954 $ 388,851
Foreign......................... 49,458 61,686
------------ ------------
Total demand non-interest
bearing......................... 414,412 450,537
------------ ------------
Savings and interest bearing demand
Domestic........................ 729,275 650,806
Foreign......................... 218,133 168,953
------------ ------------
Total savings and interest bearing
demand.......................... 947,408 819,759
------------ ------------
Time, certificates of deposit
$100,000 or more
Domestic........................ 460,946 446,038
Foreign......................... 746,994 655,957
Less than $100,000
Domestic........................ 530,732 567,853
Foreign......................... 269,145 235,416
------------ ------------
Total time, certificates of
deposit......................... 2,007,817 1,905,264
============ ============
Total deposits..................... $ 3,369,637 $ 3,175,560
============ ============
</TABLE>
27
<PAGE>
INTERNATIONAL BANCSHARES CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
<TABLE>
<CAPTION>
1998 1997 1996
----------- --------- ---------
<S> <C> <C> <C>
(DOLLARS IN THOUSANDS)
Interest Expense:
Savings and interest bearing demand
Domestic........................ $ 21,580 $ 17,559 $ 14,079
Foreign......................... 4,839 4,593 4,311
----------- --------- ---------
Total savings and interest bearing
demand.......................... $ 26,419 $ 22,152 $ 18,390
=========== ========= =========
Time, certificates of deposit
$100,000 or more
Domestic........................ $ 24,484 $ 19,256 $ 14,193
Foreign......................... 36,865 32,532 28,561
Less than $100,000
Domestic........................ 28,746 27,200 17,872
Foreign......................... 11,728 10,425 9,091
----------- --------- ---------
Total time, certificates of
deposit......................... $ 101,823 $ 89,413 $ 69,717
=========== ========= =========
</TABLE>
(7) SECURITIES SOLD UNDER REPURCHASE AGREEMENTS
The Company's bank subsidiaries have entered into repurchase agreements
with the FHLB, FNMA, FHLMC and individual customers of the bank subsidiaries.
The purchasers have agreed to resell to the bank subsidiaries identical
securities upon the maturities of the agreements. Securities sold under
repurchase agreements were mortgage-backed book entry securities and averaged
$257,589,000, $301,511,000 and $236,223,000 during 1998, 1997 and 1996,
respectively, and the maximum amount outstanding at any month end during 1998,
1997 and 1996 was $518,450,000, $540,370,000 and $477,874,000, respectively.
Further information related to repurchase agreements (securities sold under
agreements to repurchase) at December 31, 1998 and 1997 is set forth in the
following table:
<TABLE>
<CAPTION>
COLLATERAL SECURITIES REPURCHASE BORROWING
--------------------------------- -----------------------------
BOOK VALUE OF MARKET VALUE OF BALANCE OF WEIGHTED AVERAGE
SECURITIES SOLD SECURITIES SOLD LIABILITY INTEREST RATE
--------------- --------------- ---------- ----------------
<S> <C> <C> <C> <C>
(DOLLARS IN THOUSANDS)
December 31, 1998 Term:
Overnight agreements............... $ 56,172 $ 58,802 $ 41,130 4.60%
1 to 29 days....................... 15,416 15,634 6,128 5.11%
30 to 90 days...................... 37,867 38,330 28,211 5.22%
Over 90 days....................... 89,162 90,412 60,231 4.61%
--------------- --------------- ---------- -----
Total......................... $ 198,617 $ 203,178 $ 135,700 4.76%
=============== =============== ========== =====
December 31, 1997 Term:
Overnight agreements............... $ 54,648 $ 55,769 $ 30,355 5.28%
1 to 29 days....................... 399,737 403,951 378,988 5.88%
30 to 90 days...................... 24,878 25,552 16,325 5.41%
Over 90 days....................... 64,738 66,271 52,741 5.39%
--------------- --------------- ---------- -----
Total......................... $ 544,001 $ 551,543 $ 478,409 5.77%
=============== =============== ========== =====
</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.
28
<PAGE>
INTERNATIONAL BANCSHARES CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(8) OTHER BORROWED FUNDS
Other borrowed funds at December 31, 1998 and 1997 are $974,000,000 and
$390,000,000, respectively, of short-term fixed borrowings with the Federal Home
Loan Bank of Dallas at the market price offered at the time of funding. The
weighted average interest rate on the short-term fixed borrowings outstanding at
December 31, 1998 and 1997 was 5.03% and 5.91%, respectively, and the weighted
average interest rate for the year 1998 and 1997 was 5.48% and 5.72%,
respectively. The average daily balance on short-term fixed borrowings was
$34,705,000 and $241,407,000 during 1998 and 1997, respectively, and the maximum
amount outstanding at any month end during 1998 and 1997 was $1,004,000,000 and
$390,000,000, respectively.
At December 31, 1998, the Company had two long-term fixed rate certificates
of indebtedness outstanding each in the amounts of $50,000,000 payable to the
FHLB at a ten year Treasury rate minus forty-five basis points and mature on
June 9, 2008 and July 7, 2008. At December 31, 1997, the Company had two
long-term certificates of indebtedness outstanding each in the amounts of
$50,000,000 payable to the FHLB at a three month Libor floating rate minus
fifteen basis points that mature on June 7, 1998 and July 3, 1998. These
borrowings are secured by a blanket lien of $133,000,000 of 1-4 family first
lien mortgage loans at both December 31, 1998 and 1997.
(9) EARNINGS PER SHARE
Basic EPS is calculated by dividing net income available to common
shareholders, by the weighted average number of common shares outstanding. The
computation of diluted EPS assumes the issuance of common shares for all
dilutive potential common shares outstanding during the reporting period. The
calculation of the basic EPS and the diluted EPS at December 31, 1998, 1997, and
1996 is set forth in the following table:
<TABLE>
<CAPTION>
INCOME SHARES PER-SHARE
(NUMERATOR) (DENOMINATOR) AMOUNT
----------- ------------- ---------
<S> <C> <C> <C>
(DOLLARS IN THOUSANDS, EXCEPT
PER SHARE AMOUNTS)
December 31, 1998:
Basic EPS
Income available to common
stockholders.................. $53,725 13,028,929 $4.12
Potential dilutive common
shares........................ 336,289
----------- -------------
Diluted EPS.......................... $53,725 13,365,218 $4.02
=========== =============
December 31, 1997:
Basic EPS
Income available to common
stockholders.................. $48,881 12,743,638 $3.84
Potential dilutive common
shares........................ 468,850
----------- -------------
Diluted EPS.......................... $48,881 13,212,488 $3.70
=========== =============
December 31, 1996:
Basic EPS
Income available to common
stockholders.................. $44,350 12,608,599 $3.52
Potential dilutive common
shares........................ 414,263
----------- -------------
Diluted EPS.......................... $44,350 13,022,862 $3.41
=========== =============
</TABLE>
(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
29
<PAGE>
INTERNATIONAL BANCSHARES CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
among officers' and employees' accounts is based on length of service and amount
of salary earned. Profit sharing costs of $1,546,700, $1,161,000 and $939,000
were charged to income for the years ended December 31, 1998, 1997, and 1996,
respectively.
(11) INTERNATIONAL OPERATIONS
The Corporation provides international banking services for its customers
through its bank subsidiaries. Neither the Corporation nor its bank subsidiaries
have facilities located outside the United States. International operations are
distinguished from domestic operations on the basis of the domicile of the
customer.
Because the resources employed by the Company are common to both
international and domestic operations, it is not practical to determine net
income generated exclusively from international activities.
A summary of assets attributable to international operations at December
31, 1998 and 1997 are as follows:
<TABLE>
<CAPTION>
1998 1997
---------- ----------
<S> <C> <C>
(DOLLARS IN THOUSANDS)
Loans:
Commercial...................... $ 135,328 $ 91,945
Others.......................... 30,996 38,456
---------- ----------
166,324 130,401
Less allowance for possible loan
losses........................ (1,124) (1,184)
---------- ----------
Net loans.................. $ 165,200 $ 129,217
========== ==========
Accrued interest receivable.......... $ 1,327 $ 1,198
========== ==========
</TABLE>
At December 31, 1998, the Company had $6,999,000 in outstanding
international commercial letters of credit to facilitate trade activities. The
letters of credit are issued primarily in conjunction with credit facilities
which are available to various Mexican banks doing business with the Company.
Income directly attributable to international operations was $11,795,000,
$11,821,000 and $10,331,000 for the years ended December 31, 1998, 1997 and
1996, respectively.
(12) INCOME TAXES
The Company files a consolidated U.S. Federal income tax return. The
current and deferred portions of income tax expense (benefit) included in the
consolidated statements of income are presented below for the years ended
December 31:
<TABLE>
<CAPTION>
1998 1997 1996
--------- --------- ---------
<S> <C> <C> <C>
(DOLLARS IN THOUSANDS)
Current
U.S............................. $ 22,443 $ 23,565 $ 19,643
Foreign......................... 55 67 80
--------- --------- ---------
Total current taxes........ 22,498 23,632 19,723
Deferred............................. 2,122 1,139 441
--------- --------- ---------
Total income taxes......... $ 24,620 $ 24,771 $ 20,164
========= ========= =========
</TABLE>
30
<PAGE>
INTERNATIONAL BANCSHARES CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Total income tax expense differs from the amount computed by applying the
U.S. Federal income tax rate of 35% for 1998, 1997 and 1996 to income before
income taxes. The reasons for the differences for the years ended December 31
are as follows:
<TABLE>
<CAPTION>
1998 1997 1996
--------- --------- ---------
<S> <C> <C> <C>
(DOLLARS IN THOUSANDS)
Computed expected tax expense........ $ 27,416 $ 25,846 $ 22,580
Change in taxes resulting from:
Tax-exempt interest income...... (151) (111) (481)
Lease financing................. (2,309) (1,397) (1,792)
Other........................... (336) 433 (143)
--------- --------- ---------
Actual tax expense......... $ 24,620 $ 24,771 $ 20,164
========= ========= =========
</TABLE>
The tax effects of temporary differences that give rise to significant
portions of the deferred tax assets and deferred tax liabilities at December 31,
1998 and 1997 are reflected below:
<TABLE>
<CAPTION>
1998 1997
---------- ----------
<S> <C> <C>
(DOLLARS IN THOUSANDS)
Deferred tax assets:
Loans receivable, principally
due to the allowance for
possible loan losses.......... $ 8,042 $ 8,147
Other real estate owned......... 516 512
Accrued expenses................ 1,286 1,181
Other........................... 523 475
---------- ----------
Total deferred tax assets....... 10,367 10,315
---------- ----------
Deferred tax liabilities:
Lease financing receivable...... (4,964) (2,423)
Bank premises and equipment,
principally due to differences
in depreciation............... (2,175) (2,078)
Net unrealized gains on
available for sale investment
securities.................... (4,733) (11,614)
Purchase accounting
adjustment.................... -- (460)
Other........................... (1,347) (1,351)
---------- ----------
Total deferred tax
liabilities................... (13,219) (17,926)
---------- ----------
Net deferred tax
liability............... $ (2,852) $ (7,611)
========== ==========
</TABLE>
The Company did not record a valuation allowance against deferred tax
assets at December 31, 1998 and 1997 because management has concluded it is more
likely than not the Company will have future taxable earnings in excess of the
future tax deductions.
31
<PAGE>
INTERNATIONAL BANCSHARES CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(13) STOCK OPTIONS
On April 3, 1996, the Board of Directors adopted the 1996 International
Bancshares Corporation Stock Option Plan (the "1996 Plan"). The 1996 Plan
replaced the 1987 International Bancshares Corporation Key Contributor Stock
Option Plan (the "1987 Plan"). Under the 1987 Plan and the 1996 Plan both
qualified incentive stock options ("ISOs") and nonqualified stock options
("NQSOs") may be granted. Options granted may be exercisable for a period of
up to 10 years from the date of grant, excluding ISOs granted to 10%
shareholders, which may be exercisable for a period of up to only five years.
The following schedule summarizes the pertinent information (adjusted for stock
distributions) with regard to stock options from January 1, 1996 through
December 31, 1998 which were granted by the Company under the 1987 Plan or the
1996 Plan.
<TABLE>
<CAPTION>
OPTION PRICE OPTIONS
PER SHARE OUTSTANDING
--------------- -----------
<S> <C> <C>
Balance at January 1, 1996.............. 885,706
Terminated......................... $8.54 - 26.18 (25,676)
Granted............................ 24.32 - 29.76 2,812
Exercised.......................... 4.28 - 24.58 (134,013)
-----------
Balance at December 31, 1996............ 728,829
Terminated......................... $6.01 - 24.60 (13,897)
Granted............................ 37.12 - 52.00 399,193
Exercised.......................... 6.01 - 24.60 (176,424)
-----------
Balance at December 31, 1997............ 937,701
Terminated......................... $6.83 - 37.82 (40,445)
Granted............................ 48.00 - 49.75 14,750
Exercised.......................... 6.83 - 37.82 (244,753)
-----------
Balance at December 31, 1998............ 667,253
===========
</TABLE>
At December 31, 1998 and 1997, 201,419 and 274,861 options were
exercisable, respectively, and as of December 31, 1998, 153,784 shares were
available for future grants under the 1996 Plan. All options granted under the
1987 Plan and the 1996 Plan had an option price of not less than the fair market
value of the Company's common stock at the date of grant and a vesting period of
five years.
The following table summarizes information about stock options outstanding
at December 31, 1998:
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING
--------------------------------------- OPTIONS EXERCISABLE
WEIGHTED- -------------------------
AVERAGE WEIGHTED- WEIGHTED-
NUMBER REMAINING AVERAGE NUMBER AVERAGE
RANGE OF OUTSTANDING CONTRACTUAL EXERCISE EXERCISABLE EXERCISE
EXERCISE PRICES AT 12/31/98 LIFE PRICE AT 12/31/98 PRICE
- -------------------- ----------- ----------- --------- ------------ ---------
<S> <C> <C> <C> <C> <C>
$10.24 - 13.47...... 8,083 .9 years $ 12.25 8,083 $ 12.25
20.90............... 5,858 1.1 years 20.90 4,392 20.90
19.67............... 236,557 2.5 years 19.67 111,081 19.67
24.32 - 29.76....... 2,812 2.8 years 27.37 936 27.04
37.12 - 52.00....... 399,193 4.5 years 38.11 76,927 38.08
48.00 - 49.75....... 14,750 5.8 years 48.30 -- 48.30
----------- ------------
$10.24 - 52.00...... 667,253 201,419
=========== ============
</TABLE>
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
32
<PAGE>
INTERNATIONAL BANCSHARES CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Employees," and related interpretations. As such, compensation expense would be
recorded on the date of grant only if the current market price of the underlying
stock exceeded the exercise price. In October 1995, the Financial Accounting
Standards Board issued SFAS No. 123, "Accounting for Stock-Based
Compensation," which permits entities to recognize as expense over the vesting
period the fair value of all stock-based awards on the date of grant.
Alternatively, SFAS No. 123 also allows entities to continue to apply the
provisions of APB Opinion No. 25 and provide pro forma net income and pro forma
earnings per share disclosures for employee stock option grants made in 1995 and
future years as if the fair-value-based method defined in SFAS No. 123 had been
applied. The Company has elected to continue to apply the provisions of APB
Opinion No. 25 and provide the pro forma disclosure provisions of SFAS No. 123.
The fair values of options at date of grant was estimated using the
Black-Scholes option pricing model with the following weighted-average
assumptions:
<TABLE>
<CAPTION>
1998 1997 1996
--------- --------- ---------
<S> <C> <C> <C>
Expected life (years)................ 6 6 6
Interest rate........................ 4.46% 6.62% 6.53%
Volatility........................... 36.40% 30.08% 41.00%
</TABLE>
The following schedule shows total net income as reported and the pro forma
results:
<TABLE>
<CAPTION>
1998 1997 1996
--------- --------- ---------
<S> <C> <C> <C> <C>
Net income........................... As reported $ 53,725 $ 48,881 $ 44,350
Pro forma 52,123 47,667 43,782
Basic earnings....................... As reported $ 4.12 $ 3.84 $ 3.52
Pro forma 4.00 3.74 3.47
Diluted earnings..................... As reported $ 4.02 $ 3.70 $ 3.41
Pro forma 3.90 3.61 3.36
</TABLE>
The Company does not have a formal stock repurchase program; however, the
Company occasionally repurchases shares of Common Stock including repurchases
related to the exercise of stock options through the surrender of other shares
of Common Stock of the Company owned by the option holders. Stock repurchases
are presented quarterly at the Company's Board of Director meetings and the
Board of Directors has stated that they will not permit purchases of more than a
total of $21,000,000 of stock. In the past, the Board has increased previous
caps once they were met, but there are no assurances that an increase of the
$21,000,000 cap will occur in the future.
(14) COMMITMENTS AND CONTINGENT LIABILITIES
The Company is involved in various legal proceedings that are in various
stages of litigation. Some of these actions allege "lender liability" claims
on a variety of theories and claim substantial actual and punitive damages. The
Company has determined, based on discussions with its counsel, that any material
loss in such actions, individually or in the aggregate, is remote or the damages
sought, even if fully recovered, would not be considered material. However, many
of these matters are in various stages of proceedings and further developments
could cause Management to revise its assessment of these matters.
The Company leases portions of its banking premises and equipment under
operating leases. Total rental expense for the years ended December 31, 1998,
1997 and 1996 and noncancellable lease commitments at December 31, 1998 were not
significant.
Cash of approximately $25,434,000 and $58,710,000 at December 31, 1998 and
1997, respectively, was maintained to satisfy regulatory reserve requirements.
The Company's lead bank subsidiary has invested in several lease financing
transactions. Two of the lease financing transactions have been examined by the
Internal Revenue Service ("IRS"). In both
33
<PAGE>
INTERNATIONAL BANCSHARES CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
transactions, a subsidiary of the lead bank is the owner of a ninety-nine
percent (99%) limited partnership interest. The IRS has issued a Notice of
Proposed Adjustments to Affected Items of a partnership for one of the
transactions and the affected partnership has submitted a Protest contesting the
adjustments. The Company has been advised that the IRS intends to issue a Notice
of Proposed Adjustments to Affected Items of a Partnership for the other
transaction and that the partnership intends to file a Protest contesting the
proposed adjustments. No reliable prediction can be made at this time as to the
likely outcome of the Protests; however, if the Protests are decided adversely
to the partnerships, all or a portion of the $12 million in tax benefits
previously recognized by the Company in connection with these lease financing
transactions would be in question.
(15) TRANSACTIONS WITH RELATED PARTIES
In the ordinary course of business, the Corporation and its subsidiaries
make loans to directors and executive officers of the Corporation, including
their affiliates, families and companies in which they are principal owners. In
the opinion of management, these loans are made on substantially the same terms,
including interest rates and collateral, as those prevailing at the time for
comparable transactions with other persons and do not involve more than normal
risk of collectibility or present other unfavorable features. The aggregate
amounts receivable from such related parties amounted to approximately
$42,782,000 and $36,913,000 at December 31, 1998 and 1997, respectively. During
1998, $23,136,000 of new loans were made and repayments totaled $17,267,000.
(16) FINANCIAL INSTRUMENTS WITH OFF-BALANCE SHEET RISK AND CONCENTRATIONS OF
CREDIT RISK
In the normal course of business, the bank subsidiaries are party to
financial instruments with off-balance sheet risk to meet the financing needs of
their customers. These financial instruments include commitments to their
customers. These financial instruments involve, to varying degrees, elements of
credit risk in excess of the amounts recognized in the balance sheet. The
contract amounts of these instruments reflect the extent of involvement the bank
subsidiaries have in particular classes of financial instruments. At December
31, 1998, the following financial instruments, whose contract amounts represent
credit risks, were outstanding:
<TABLE>
<S> <C>
Commitments to extend credit......... $ 415,854,000
Credit card lines.................... 540,437,000
Letters of credit.................... 41,859,000
</TABLE>
The bank subsidiaries' exposure to credit loss in the event of
nonperformance by the other party to the above financial instruments is
represented by the contractual amounts of the instruments. The bank subsidiaries
use the same credit policies in making commitments and conditional obligations
as they do for on-balance sheet instruments. The bank subsidiaries control the
credit risk of these transactions through credit approvals, limits and
monitoring procedures. Commitments to extend credit are agreements to lend to a
customer as long as there is no violation of any condition established in the
contract. Commitments generally have fixed expiration dates normally less than
one year or other termination clauses and may require the payment of a fee.
Since many of the commitments are expected to expire without being drawn upon,
the total commitment amounts do not necessarily represent future cash
requirements. The bank subsidiaries evaluate each customer's credit-worthiness
on a case-by-case basis. The amount of collateral obtained, if deemed necessary
by the subsidiary banks upon extension of credit, is based on management's
credit evaluation of the customer. Collateral held varies, but may include
residential and commercial real estate, bank certificates of deposit, accounts
receivable and inventory.
Letters of credit are written conditional commitments issued by the bank
subsidiaries to guarantee the performance of a customer to a third party. The
credit risk involved in issuing letters of credit is essentially the same as
that involved in extending loan facilities to customers.
34
<PAGE>
INTERNATIONAL BANCSHARES CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The bank subsidiaries make commercial, real estate and consumer loans to
customers principally located in Webb, Bexar, Hidalgo, Cameron, Starr and Zapata
counties in South Texas as well as Matagorda, Brazoria, Galveston, Fort Bend,
Calhoun, and Harris counties in Southeast Texas. Although the loan portfolio is
diversified, a substantial portion of its debtors' ability to honor their
contracts is dependent upon the economic conditions in these areas, especially
in the real estate and commercial business sectors.
To date, the Company has not experienced a material adverse impact related
to the 1994 devaluation of the peso in Mexico. Although the economic conditions
have improved in Mexico, the Company will continue to monitor Mexico's economic
progress.
(17) DIVIDEND RESTRICTIONS AND CAPITAL REQUIREMENTS
Bank regulatory agencies limit the amount of dividends which the bank
subsidiaries can pay the Corporation, through IBC Subsidiary Corporation,
without obtaining prior approval from such agencies. At December 31, 1998, the
aggregate amount legally available to be distributed to the Corporation from
bank subsidiaries as dividends was approximately $38,208,000, assuming that each
subsidiary bank continues to be classified as "well capitalized" pursuant to
the applicable regulations. The restricted capital of the bank subsidiaries was
approximately $292,574,000. The undivided profits of the bank subsidiaries was
$140,653,000. In addition to legal requirements, regulatory authorities also
consider the adequacy of the bank subsidiaries' total capital in relation to
their deposits and other factors. These capital adequacy considerations also
limit amounts available for payment of dividends. The Corporation historically
has not allowed any subsidiary bank to pay dividends in such a manner as to
impair its capital adequacy.
The Corporation and the bank subsidiaries are subject to various regulatory
capital requirements administered by the federal banking agencies. Failure to
meet minimum capital requirements can initiate certain mandatory and possibly
additional discretionary actions by regulators that, if undertaken, could have a
direct material effect on the Company's financial statements. Under capital
adequacy guidelines and the regulatory framework for prompt corrective action,
the Company must meet specific capital guidelines that involve quantitative
measures of the Company's assets, liabilities, and certain off-balance sheet
items as calculated under regulatory accounting practices. The Company's capital
amounts and classification are also subject to qualitative judgments by the
regulators about components, risk weightings, and other factors.
Quantitative measures established by regulation to ensure capital adequacy
require the Company to maintain minimum amounts and ratios (set forth in the
table on the following page) of total and Tier 1 capital to risk-weighted assets
and of Tier 1 capital to average assets. Management believes, as of December 31,
1998, that the Corporation and the bank subsidiaries met all capital adequacy
requirements to which it is subject.
As of December 31, 1998, the most recent notification from the Federal
Deposit Insurance Corporation categorized all the bank subsidiaries as well
capitalized under the regulatory framework for prompt corrective action. To be
categorized as "well capitalized" the Corporation and the bank subsidiaries
must maintain minimum total risk-based, Tier 1 risk-based, and Tier 1 leverage
ratios as set forth in the table. There are no conditions or events since that
notification that management believes have changed the categorization of the
Corporation or any of the bank subsidiaries as well capitalized.
35
<PAGE>
INTERNATIONAL BANCSHARES CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The Corporation's and the bank subsidiaries' actual capital amounts and
ratios for 1998 are also presented in the table.
<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, 1998:
Total Capital (to Risk Weighted Assets):
Consolidated....................... $ 343,669 14.45% $ 190,239 8.00% $ 237,798 10.00%
International Bank of Commerce,
Laredo........................... 248,814 12.03 165,426 8.00 206,783 10.00
International Bank of Commerce,
Brownsville...................... 30,436 18.20 13,375 8.00 16,719 10.00
International Bank of Commerce,
Zapata........................... 14,404 28.18 4,089 8.00 5,112 10.00
Commerce Bank...................... 18,768 24.18 6,208 8.00 7,760 10.00
Tier 1 Capital (to Risk Weighted
Assets):
Consolidated....................... $ 317,794 13.36% $ 95,119 4.00% $ 142,679 6.00%
International Bank of Commerce,
Laredo........................... 226,595 10.96 82,713 4.00 124,070 6.00
International Bank of Commerce,
Brownsville...................... 28,806 17.23 6,688 4.00 10,031 6.00
International Bank of Commerce,
Zapata........................... 13,893 27.18 2,045 4.00 3,067 6.00
Commerce Bank...................... 17,795 22.93 3,104 4.00 4,656 6.00
Tier 1 Capital (to Average Assets):
Consolidated....................... $ 317,794 6.50% $ 195,546 4.00% $ 244,433 5.00%
International Bank of Commerce,
Laredo........................... 226,595 5.46 166,115 4.00 207,644 5.00
International Bank of Commerce,
Brownsville...................... 28,806 6.98 16,508 4.00 20,634 5.00
International Bank of Commerce,
Zapata........................... 13,893 9.38 5,924 4.00 7,404 5.00
Commerce Bank...................... 17,795 10.12 7,037 4.00 8,796 5.00
</TABLE>
36
<PAGE>
INTERNATIONAL BANCSHARES CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The Corporation's and the bank subsidiaries' actual capital amounts and
ratios for 1997 are also presented in the table.
<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>
(18) FAIR VALUE OF FINANCIAL INSTRUMENTS
The fair value estimates, methods, and assumptions for the Company's
financial instruments at December 31, 1998 and 1997 are outlined below.
CASH, DUE FROM BANKS AND FEDERAL FUNDS SOLD
For these short-term instruments, the carrying amount is a reasonable
estimate of fair value.
37
<PAGE>
INTERNATIONAL BANCSHARES CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
TIME DEPOSITS WITH BANKS
As the contract interest rates are comparable to current market rates, the
carrying amount approximates fair market value.
INVESTMENT SECURITIES
For investment securities, which include U. S. Treasury securities,
obligations of other U. S. government agencies, obligations of states and
political subdivisions and mortgage pass through and related securities, fair
values are based on quoted market prices or dealer quotes. Fair values are based
on the value of one unit without regard to any premium or discount that may
result from concentrations of ownership of a financial instrument, possible tax
ramifications, or estimated transaction costs. See disclosures of fair value of
investment securities in Note 3.
LOANS
Fair values are estimated for portfolios of loans with similar financial
characteristics. Loans are segregated by type such as commercial, real estate
and consumer loans as outlined by regulatory reporting guidelines. Each category
is segmented into fixed and variable interest rate terms and by performing and
non-performing categories.
For variable rate performing loans, the carrying amount approximates the
fair value. For fixed rate performing loans, except residential mortgage loans,
the fair value is calculated by discounting scheduled cash flows through the
estimated maturity using estimated market discount rates that reflect the credit
and interest rate risk inherent in the loan. For performing residential mortgage
loans, fair value is estimated by discounting contractual cash flows adjusted
for prepayment estimates using discount rates based on secondary market sources
or the primary origination market.
Fair value for significant non-performing loans is based on recent external
appraisals. If appraisals are not available, estimated cash flows are discounted
using a rate commensurate with the risk associated with the estimated cash
flows. Assumptions regarding credit risk, cash flows and discount rates are
judgementally determined using available market and specific borrower
information. As of December 31, 1998 and 1997, the carrying amount of net loans
was a reasonable estimate of the fair value.
DEPOSITS
The fair value of deposits with no stated maturity, such as non-interest
bearing demand deposit accounts, savings accounts and interest bearing demand
deposit accounts, was equal to the amount payable on demand as of December 31,
1998 and 1997. The fair value of time deposits is based on the discounted value
of contractual cash flows. The discount rate is based on currently offered
rates. As of December 31, 1998 and 1997, the carrying amount of time deposits
was a reasonable estimate of the fair value.
FEDERAL FUNDS PURCHASED AND SECURITIES SOLD UNDER REPURCHASE AGREEMENTS, OTHER
BORROWED FUNDS AND SUBORDINATED DEBT
Due to the contractual terms of these financial instruments, the carrying
amounts approximated fair value at December 31, 1998 and 1997.
COMMITMENTS TO EXTEND CREDIT AND LETTERS OF CREDIT
For commitments to extend credit and letters of credit, the carrying amount
is based on the notional amount of the agreements and fair value is based on the
discounted value of fees charged.
Fair value estimates are made at a point in time, based on relevant market
information and information about the financial instrument. These estimates do
not reflect any premium or discount that could result from offering for sale at
one time the Company's entire holdings of a particular financial instrument.
Because no market exists for a significant portion of the Company's financial
instruments, fair value
38
<PAGE>
INTERNATIONAL BANCSHARES CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
estimates are based on judgments regarding future expected loss experience,
current economic conditions, risk characteristics of various financial
instruments and other factors. These estimates are subjective in nature and
involve uncertainties and matters of significant judgment and therefore cannot
be determined with precision. Changes in assumptions could significantly affect
the estimates.
Fair value estimates are based on existing on-and off-balance sheet
financial instruments without attempting to estimate the value of anticipated
future business and the value of assets and liabilities that are not considered
financial instruments. Other significant assets and liabilities that are not
considered financial assets or liabilities include the bank premises and
equipment and core deposit value. In addition, the tax ramifications related to
the effect of fair value estimates have not been considered in the above
estimates.
(19) INTERNATIONAL BANCSHARES CORPORATION (PARENT COMPANY ONLY) FINANCIAL
INFORMATION
STATEMENTS OF CONDITION
(PARENT COMPANY ONLY)
DECEMBER 31, 1998 AND 1997
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
1998 1997
---------- ----------
<S> <C> <C>
ASSETS
Cash................................. $ 97 $ 350
Repurchase agreements................ 1,600 7,500
Other investments.................... 10,708 2,021
Notes receivable..................... 49,925 57,209
Investment in subsidiaries........... 296,422 251,002
Other assets......................... 12,244 23,393
---------- ----------
Total assets............... 370,996 341,475
========== ==========
LIABILITIES AND SHAREHOLDERS' EQUITY
Liabilities:
Other liabilities............... 713 231
---------- ----------
Total liabilities.......... 713 231
---------- ----------
Shareholders' equity:
Common stock.................... 16,791 13,196
Surplus......................... 22,250 19,012
Retained earnings............... 341,025 301,988
Net unrealized holding gains on
available for sale securities,
net of deferred income taxes... 8,797 21,582
---------- ----------
388,863 355,778
Less cost of shares in treasury...... (18,580) (14,534)
---------- ----------
Total shareholders'
equity.................. 370,283 341,244
---------- ----------
Total liabilities and
shareholders' equity.... $ 370,996 $ 341,475
========== ==========
</TABLE>
39
<PAGE>
INTERNATIONAL BANCSHARES CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
STATEMENTS OF INCOME
(PARENT COMPANY ONLY)
YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
1998 1997 1996
--------- --------- ---------
<S> <C> <C> <C>
Income:
Dividends from subsidiaries..... $ 3,455 $ 17,035 $ 7,250
Interest income on notes
receivable.................... 5,202 6,134 6,944
Interest income on
investments................... 745 36 15
Other interest income........... 289 307 299
Other........................... (1,377) 4,517 4,603
--------- --------- ---------
Total income............... 8,314 28,029 19,111
--------- --------- ---------
Expenses:
Interest expense on notes
payable....................... -- 142 158
Other........................... 695 380 338
--------- --------- ---------
Total expenses............. 695 522 496
--------- --------- ---------
Income before federal
income taxes and equity
in undistributed net
income of
subsidiaries............ 7,619 27,507 18,615
Federal income tax expense........... (277) 1,785 1,847
--------- --------- ---------
Income before equity in
undistributed net income
of subsidiaries......... 7,896 25,722 16,768
Equity in undistributed net income of
subsidiaries....................... 45,829 23,159 27,582
--------- --------- ---------
Net income................. $ 53,725 $ 48,881 $ 44,350
========= ========= =========
</TABLE>
40
<PAGE>
INTERNATIONAL BANCSHARES CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
STATEMENTS OF CASH FLOWS
(PARENT COMPANY ONLY)
YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
1998 1997 1996
---------- ---------- ----------
<S> <C> <C> <C>
Operating activities:
Net income................................ $ 53,725 $ 48,881 $ 44,350
Adjustments to reconcile net income to net
cash provided by operating activities:
Gain on sale of other real estate.... -- (113) --
Increase (decrease) in other
liabilities....................... 482 197 (340)
Equity in undistributed net income of
subsidiaries...................... (45,829) (23,159) (27,582)
---------- ---------- ----------
Net cash provided by operating
activities................... 8,378 25,806 16,428
---------- ---------- ----------
Investing activities:
Contributions to subsidiaries............. (11,648) (18,656) (15,625)
Repayment from subsidiaries............... -- 166 --
Purchase of time deposits with banks...... -- (2,900) --
Proceeds from time deposits with banks.... -- 2,900 --
Purchase of repurchase agreement with
banks.................................. (3,550) (7,500) --
Proceeds from repurchase agreement with
banks.................................. 9,450 -- --
Purchase of available for sale other
securities............................. (10,036) (1,156) (375)
Principal collected on mortgage-backed
securities............................. 1,339 -- --
Net decrease in notes receivable.......... 7,284 10,192 8,677
Decrease (increase) in other assets....... 11,149 (5,364) (3,617)
Proceeds from sale of other real estate... -- 665 --
---------- ---------- ----------
Net cash provided (used) in
investing activities......... 3,988 (21,653) (10,940)
---------- ---------- ----------
Financing activities:
Proceeds from issuance of other borrowed
funds.................................. -- 6,333 --
Principal payments on notes payable....... -- (8,333) (500)
Proceeds from stock transactions.......... 2,765 6,778 965
Payments of cash dividends................ (11,297) (4,400) (3,489)
Payments of cash dividends in lieu of
fractional shares...................... (41) (26) (18)
Purchase of treasury stock................ (4,046) (4,491) (2,261)
---------- ---------- ----------
Net cash used in financing
activities................... (12,619) (4,139) (5,303)
---------- ---------- ----------
(Decrease) increase in cash and
cash equivalents............. (253) 14 185
Cash at beginning of year................... 350 336 151
---------- ---------- ----------
Cash at end of year......................... $ 97 $ 350 $ 336
========== ========== ==========
Supplemental cash flow information:
Interest paid............................. $ -- $ 131 $ 117
</TABLE>
41
<PAGE>
INTERNATIONAL BANCSHARES CORPORATION
OFFICERS AND DIRECTORS
OFFICERS
DENNIS E. NIXON
Chairman of the Board and President
ROY JENNINGS, JR.
Vice Chairman of the Board
R. DAVID GUERRA
Vice President
LEONARDO SALINAS
Vice President
RICHARD CAPPS
Vice President
EDUARDO J. FARIAS
Vice President
ARNOLDO CISNEROS
Vice President
IMELDA NAVARRO
Treasurer
WILLIAM CUELLAR
Auditor
LUISA D. BENAVIDES
Secretary
MARISA V. SANTOS
Assistant Secretary
DIRECTORS
DENNIS E. NIXON
President
International Bank of Commerce
ROY JENNINGS, JR.
Investments
LESTER AVIGAEL
Retail Merchant
Chairman of the Board
International Bank of Commerce
LEONARDO SALINAS
Senior Executive Vice President
International Bank of Commerce
IRVING GREENBLUM
Retail Merchant
RICHARD E. HAYNES
Attorney at Law; Real
Estate Investments
SIOMA NEIMAN
An International Entrepreneur
R. DAVID GUERRA
President
International Bank of Commerce
Branch in McAllen, Texas
ANTONIO R. SANCHEZ, JR.
Chairman of the Board of Sanchez
O'Brien Oil & Gas Corporation;
Investments
PEGGY J. NEWMAN
Investments
"EXHIBIT 21"
LIST OF SUBSIDIARIES
Subsidiaries of International Bancshares Corporation
NAME BUSINESS % OF OWNERSHIP
-------- -------- --------------
IBC Subsidiary Corporation Bank Holding Company 100%
IBC Life Insurance Company Credit Life Insurance 100%
IBC Trading Company Export Trading 100%
IBC Capital Corporation Investments 100%
Subsidiaries of IBC Subsidiary Corporation
NAME BUSINESS % OF OWNERSHIP
-------- -------- --------------
International Bank of Commerce State Bank 100%
Commerce Bank State Bank 100%
International Bank of Commerce,
Zapata State Bank 100%
International Bank of Commerce,
Brownsville State Bank 100%
130
"EXHIBIT 23"
ACCOUNTANTS' CONSENT
The Board of Directors
International Bancshares Corporation:
We consent to incorporation by reference in Registration Statement No. 33-15655
on Form S-8 of International Bancshares Corporation of our report dated March 5,
1999 relating to the consolidated statements of condition of International
Bancshares Corporation and subsidiaries as of December 31, 1998 and 1997, and
the related consolidated statements of income, comprehensive income,
shareholders' equity and cash flows for each of the years in the three-year
period ended December 31, 1998, which report is incorporated by reference in the
December 31, 1998 annual report on Form 10-K of International Bancshares
Corporation.
/s/ KPMG LLP
San Antonio, Texas
March 5, 1999
131
<TABLE> <S> <C>
<ARTICLE> 9
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-END> DEC-31-1998
<CASH> 94,594
<INT-BEARING-DEPOSITS> 1,373
<FED-FUNDS-SOLD> 26,000
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 3,005,369
<INVESTMENTS-CARRYING> 2,508
<INVESTMENTS-MARKET> 2,505
<LOANS> 1,623,364
<ALLOWANCE> 25,551
<TOTAL-ASSETS> 4,987,877
<DEPOSITS> 3,369,637
<SHORT-TERM> 974,000
<LIABILITIES-OTHER> 38,257
<LONG-TERM> 100,000
0
0
<COMMON> 16,791
<OTHER-SE> 353,492
<TOTAL-LIABILITIES-AND-EQUITY> 4,987,877
<INTEREST-LOAN> 145,016
<INTEREST-INVEST> 180,822
<INTEREST-OTHER> 336
<INTEREST-TOTAL> 326,174
<INTEREST-DEPOSIT> 128,242
<INTEREST-EXPENSE> 181,909
<INTEREST-INCOME-NET> 144,265
<LOAN-LOSSES> 8,571
<SECURITIES-GAINS> 3,893
<EXPENSE-OTHER> 99,047
<INCOME-PRETAX> 78,345
<INCOME-PRE-EXTRAORDINARY> 78,345
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 53,725
<EPS-PRIMARY> 4.12
<EPS-DILUTED> 4.02
<YIELD-ACTUAL> 0
<LOANS-NON> 5,538
<LOANS-PAST> 8,785
<LOANS-TROUBLED> 592
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 24,516
<CHARGE-OFFS> 8,885
<RECOVERIES> 1,349
<ALLOWANCE-CLOSE> 25,551
<ALLOWANCE-DOMESTIC> 24,427
<ALLOWANCE-FOREIGN> 1,124
<ALLOWANCE-UNALLOCATED> 0
</TABLE>
