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, 1999 0-9439
INTERNATIONAL BANCSHARES CORPORATION
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(Exact Name of Registrant as Specified in its Charter)
TEXAS 74-2157138
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(State of Incorporation) (I.R.S. Employer Identification No.)
1200 San Bernardo Avenue
Laredo, Texas 78042-1359 Area Code (956) 722-7611
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(Address of principal executive (Registrant's telephone number)
office and Zip Code)
Securities registered pursuant to Section 12(b) of the Act:
Name of Each Exchange on
Title of Each Class Which Registered
- ------------------------------------ -------------------------------
None None
Securities Registered Pursuant to Section 12(g) of the Act:
COMMON STOCK ($1.00 PAR VALUE)
-----------------------------
(Title of Class)
Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the Registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes [X] No [ ].
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of Registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K.[X]
The aggregate market value of the voting stock held by non-affiliates of the
Registrant as of March 20, 2000 was $407,924,478 based on the closing sales
price of the stock on such date.
As of March 20, 2000, there were 17,226,715 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, 1999 (in Parts I and II) and (b) Proxy
Statement dated April 14, 2000 (in Part III).
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CONTENTS
PART I
PAGE
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 over 90 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, 1999 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, 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, 1999 stands at 49% 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 1999, net loans increased 18% over the corresponding 1998 period.
During the last several years, IBC, as defined below, has been an 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 84% 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 $1,845,971,000 in
assets and assumed $1,762,051,000 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 $4,503,000 and assumed
deposits of approximately $27,873,000 and received cash and other assets in the
amount of approximately $23,432,000. 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
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$84,799,000. The acquisition was accounted for as a purchase transaction. IBC
recorded intangible assets, goodwill and core deposit premium totaling
$3,705,000 which are being amortized on a straight line basis over a fifteen
year period.
For more information regarding the acquisition transactions of the Company
during the last three years, see note 2 of notes to Consolidated Financial
Statements of the Company located on page 20 of the 1999 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 176
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, 34 grocery store branches have been opened.
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The Company owns U.S. service mark registrations for "INTERNATIONAL BANK
OF COMMERCE," "WALL STREET INTERNATIONAL," "INTERNATIONAL BANK OF COMMERCE
CENTRE," "OVERDRAFT COURTESY," and "IT'S A BRIGHTER CHRISTMAS" as well as the
design mark depicting the United States and Mexico and the design mark depicting
"WALL STREET INTERNATIONAL." In addition, the Company owns Texas service mark
registrations for "WALL STREET INTERNATIONAL," "INTERNATIONAL BANK OF COMMERCE"
and the design marks depicting "CHECK'N SAVE" and "WALL STREET INTERNATIONAL,"
as well as the design mark 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, 1999 the Company and its subsidiaries employed
approximately 1,332 persons full-time and 214 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 and stable
portion of the deposit base of the Company's bank subsidiaries. Such deposits
comprised approximately 41%, 38% and 35% of the Company's bank subsidiaries'
total deposits as of December 31, 1999, 1998 and 1997, respectively.
Under the Gramm-Leach-Bliley Act ("GLBA"), effective March 11, 2000,
banks, securities firms and insurance companies may affiliate under an entity to
be known as a financial holding company which could then serve its customers'
varied financial needs through a single corporate structure. The GLBA may
significantly change the competitive environment in which the Company and its
subsidiaries conduct business. The financial services industry is also likely to
become even more competitive as further technological advances enable more
companies to provide financial services. These technological advances may
diminish the importance of depository institutions and other financial
intermediaries in the transfer of funds between parties.
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SUPERVISION AND REGULATION
GENERAL - THE COMPANY. In addition to the generally applicable state and
Federal laws governing businesses and employers, the Company and its bank
subsidiaries are further extensively regulated by special Federal and state laws
governing financial institutions. These laws comprehensively regulate the
operations of the Company's bank subsidiaries and include, among other matters,
requirements to maintain reserves against deposits; restrictions on the nature
and amount of loans that may be made and the interest that may be charged
thereon; restrictions on the amounts, terms and conditions of loans to
directors, officers, large shareholders and their affiliates; restrictions
related to investments in activities other than banking; and minimum capital
requirements. With few exceptions, state and Federal banking laws have as their
principal objective either the maintenance of the safety and soundness of the
Federal deposit insurance system or the protection of consumers, rather than the
specific protection of shareholders of the Company. Further, the earnings of the
Company are affected by the fiscal and monetary policies of the Federal Reserve
System, which regulates the national money supply in order to mitigate
recessionary and inflationary pressures. These monetary policies influence to a
significant extent the overall growth of bank loans, investments and deposits
and the interest rates charged on loans or paid on time and savings deposits.
The nature of future monetary policies and the effect of such policies on the
future earnings and business of the Company cannot be predicted.
FRB APPROVALS. The Company is a registered bank holding company within the
meaning of the Bank Holding Company Act of 1956, as amended ("BHCA"), and is
subject to supervision by the FRB and to a certain extent the Texas Department
of Banking (the "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 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").
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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.
FINANCIAL MODERNIZATION. On November 12, 1999, President Clinton signed
into law GLBA. This comprehensive legislation eliminates the barriers to
affiliations among banks, securities firms, insurance companies and other
financial service providers. GLBA provides for a new type of financial holding
company structure under which affiliations among these entities may occur,
subject to the "umbrella" regulation of the FRB and regulation of affiliates by
the functional regulators, including the Securities and Exchange Commission
("SEC") and state insurance regulators. Under GLBA, a financial holding company
may engage in a broad list of financial activities and any non-financial
activity that the FRB determines is complementary to a financial activity and
poses no substantial risk to the safety and soundness of depository institutions
or the financial system. Addition, GLBA permits certain non-banking financial
and financially related activities to be conducted by financial subsidiaries of
a national bank. Additionaly, GLBA imposes strict new privacy disclosure and
opt-out requirements regarding the ability of financial institutions to share
personal non-public customer information with third parties.
Under the GLBA, a bank holding company may become certified as a financial
holding company by filing a declaration with the FRB, together with a
certification that each of its subsidiary banks is well capitalized, is well
managed, and has at least a satisfactory rating under the Community Reinvestment
Act of 1977 ("CRA"). The Company has elected to become a financial holding
company under GLBA and the election was made effective by the FRB as of March
13, 2000. To date, the Company has not engaged in any additional financial
activities permitted by GLBA.
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.
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
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DOB determined that the Texas opt-out statute was not effective and the Texas
DOB began accepting applications for interstate branching transactions. During
1999, legislation implementing interstate branching was adopted by the Texas
legislature. No accurate prediction can be made at this time as to how this
legislation will affect the Company and/or its bank subsidiaries.
FRB ENFORCEMENT POWERS. The FRB has certain cease-and-desist and
divestiture powers over bank holding companies and non-banking subsidiaries
where their actions would constitute a serious threat to the safety, soundness
or stability of a subsidiary bank. These powers may be exercised through the
issuance of cease-and-desist orders or other actions. In the event a bank
subsidiary experiences either a significant loan loss or rapid growth of loans
or deposits, the Company may be compelled by the FRB to invest additional
capital in the bank subsidiary. Further, the Company would be required to
guaranty performance of the capital restoration plan of any undercapitalized
bank subsidiary. The FRB is also empowered to assess civil money penalties
against companies or individuals who violate the BHCA in amounts up to
$1,000,000 per day, to order termination of non-banking activities of
non-banking subsidiaries of bank holding companies and to order termination of
ownership and control of a non-banking subsidiary. Under certain circumstances
the Texas Banking Commissioner may bring enforcement proceedings against a bank
holding company in Texas.
COMPANY DIVIDENDS. The FRB's policy discourages the payment of dividends
from borrowed funds and discourages payments that would affect capital adequacy.
The FRB has issued policy statements which generally state that bank holding
companies should serve as a source of financial and managerial strength to their
bank subsidiaries, and generally should not pay dividends except out of current
earnings, and should not borrow to pay dividends if the bank holding company is
experiencing capital or other financial problems.
CROSS-GUARANTEE PROVISIONS. The Financial Institutions Reform Recovery and
Enforcement Act of 1989 ("FIRREA") contains a "cross-guarantee" provision which
generally makes commonly controlled insured depository institutions liable to
the FDIC for any losses incurred in connection with the failure of a commonly
controlled depository institution.
AUDIT REPORTS. Insured institutions with total assets of $500 million or
more must submit annual audit reports prepared by independent auditors to
federal and state regulators. In some instances, the audit report of the
institution's holding company can be used to satisfy this requirement. Auditors
must receive examination reports and examination related correspondence. In
addition, financial statements prepared in accordance with generally accepted
accounting principles, management's certifications concerning responsibility for
the financial statements, internal controls and compliance with legal
requirements designated by the FDIC, and an attestation by the auditor regarding
the statements of management relating to the internal controls must be submitted
to federal and state regulators. 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. During 1999,
the SEC adopted new
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rules, which will become effective during 2000, to improve the function of
corporate audit committees. The new rules require, among other things, that
independent auditors review public companies' interim financial information
prior to filing with the SEC and that companies include in their proxy
statements certain information about their audit committees.
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. BIF and Savings
Association Insurance Fund payers are 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,
1999 the Company's ratio of total capital-to-risk-weighted assets was 14.46%.
The guidelines make regulatory capital requirements more sensitive to
differences in risk profiles among banking organizations, consider off-balance
sheet exposure in assessing capital adequacy, and encourage the holding of
liquid, low-risk assets. At least one-half of the minimum total capital must be
comprised of Tier 1 Capital elements. Tier 1 Capital of the Company is comprised
of common shareholders' equity. The core deposit intangibles and goodwill of
$42,568,000 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, 1999 was 6.58 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.
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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, 1999. 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, 1999, the Company and each
of the bank subsidiaries were classified as "well capitalized" under the
applicable regulations.
In 1995, in accordance with FDICIA, the FDIC modified its risk-based
capital adequacy guidelines to explicitly include a bank's exposure to declines
in the economic value of its capital due to changes in interest rates as a
factor that it will consider in evaluating a bank's capital adequacy. In 1996
the bank regulatory agencies introduced risk-based examination procedures.
Effective January 1, 1997, the federal banking agencies jointly adopted
regulations that amend the risk-based capital standards to incorporate measures
for market risk. Applicable banking institutions will be required to adjust
their risk-based capital ratio to reflect market risk. On December 19, 1996, the
FFIEC revised the Uniform Financial Institutions Rating System commonly referred
to as the CAMEL rating system. A sixth component addressing sensitivity to
market risk was added. Sensitivity to market risk reflects the degree to which
changes in interest rates, foreign exchange rates, commodity prices or equity
prices can adversely affect a financial institution's earnings or economic
capital.
STATE ENFORCEMENT POWERS. The Banking Commissioner of Texas may determine
to close a Texas state bank when she finds that the interests of depositors and
creditors of a state bank are jeopardized through its insolvency or imminent
insolvency and that it is in the best interest of such depositors and creditors
that the bank be closed. The Texas DOB also has broad enforcement powers over
the Bank, including the power to impose orders, remove officers and directors,
impose fines and appoint supervisors and conservators.
DEPOSITOR PREFERENCE. Because the Company is a legal entity separate and
distinct from its bank subsidiaries, its right to participate in the
distribution of assets of any subsidiary upon the subsidiary's liquidation or
reorganization will be subject to the prior claims of the subsidiary's
creditors. In the event of a liquidation or other resolution of a subsidiary
bank, the claims of depositors and other general or subordinated creditors of
the bank are entitled to a priority of payment over the claims of holders of any
obligation of the institution to its
11
<PAGE>
shareholders, including any depository institution holding company (such as the
Company) or any shareholder or creditor thereof.
TEXAS LAW. Effective September 1, 1995, the new Texas Banking Act ("Act")
became effective and the Texas Banking Code of 1943 was repealed. The purpose of
the Act was to modernize and streamline the Texas banking laws. One of the many
significant provisions of the Act adopts by reference the Texas Business
Corporation Act, subject to modification by the Banking Commissioner. Among
other matters, these corporate provisions will permit Texas state banks to merge
with non-banking business entities, while national banks are only permitted to
merge with banking entities. During 1997, the Texas Constitution was amended to
permit home equity lending in Texas effective January 1, 1998 and the Company's
bank subsidiaries are currently offering home equity loans.
CRA. Under the Community Reinvestment Act ("CRA"), the FDIC is required to
assess the record of each bank subsidiary to determine if the bank meets the
credit needs of its entire community, including low and moderate-income
neighborhoods served by the institution, and to take that record into account in
its evaluation of any application made by the bank for, among other things,
approval of the acquisition or establishment of a branch or other deposit
facility, an office relocation, a merger, or the acquisition of shares of
capital stock of another financial institution. The FDIC prepares a written
evaluation of an institution's record of meeting the credit needs of its entire
community and assigns a rating. FIRREA requires federal banking agencies to make
public a rating of a bank's performance under the CRA. Each bank subsidiary
received either an "outstanding" or "satisfactory" CRA rating in its most
recently completed examination. Further, there are fair lending laws which
prohibit discrimination in connection with lending decisions.
CONSUMER LAWS. In addition to the laws and regulations discussed herein,
the Bank is also subject to certain consumer laws and regulations that are
designed to protect consumers in transactions with banks. While the list set
forth herein is not exhaustive, these laws and regulations include the Truth in
Lending Act, the Truth in Savings Act, the Electronic Funds Transfer Act, the
Expedited Funds Availability Act, the Equal Credit Opportunity Act, and the Fair
Housing Act, among others. These laws and regulations mandate certain disclosure
requirements and regulate the manner in which financial institutions must deal
with customers when taking deposits or making loans to such customers. The Bank
must comply with the applicable provisions of these consumer protection laws and
regulations as part of their ongoing customer relations.
AFFILIATE TRANSACTIONS. The Company, IBC and the other bank subsidiaries
of the Company are "affiliates" within the meaning of Section 23A of the Federal
Reserve Act which sets forth certain restrictions on loans and extensions of
credit between a bank subsidiary and affiliates, on investments in an
affiliate's stock or other securities, and on acceptance of such stock or other
securities as collateral for loans. Such restrictions prevent a bank holding
company from borrowing from any of its bank subsidiaries unless the loans are
secured by specific obligations. Further, such secured loans and investments by
a bank subsidiary are limited in amount, as to a bank holding company or any
other affiliate, to 10% of such bank subsidiary's capital and surplus and, as to
the bank holding company and its affiliates, to an aggregate of 20% of such bank
subsidiary's capital and surplus. Certain restrictions do not apply to 80% or
more owned sister banks of bank holding companies. Each bank subsidiary of the
12
<PAGE>
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, 1999 there was an aggregate of approximately $58,641,000 available
for the payment of dividends to the Company, by IBC, Commerce Bank, IBC Zapata
and IBC Brownsville under the applicable restrictions, assuming that each of
such banks continues to be classified as "well capitalized". Further, the
Company could expend the entire $58,641,000 and continue to be classified as
"well capitalized". Note 17 of notes to Consolidated Financial Statements of the
Company located on page 33 of the 1999 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 1999, a super parity
provision was added to the Texas Finance Code which established procedures for
state banks to notify the Banking Commissioner if the bank intends to conduct
any activity permitted for any depository institution in the United States. The
Banking Commissioner has thirty (30) days to prohibit the activity.
FINANCIAL SUBSIDIARIES. Under GLBA, a national bank may establish a
financial subsidiary and engage, subject to limitations on investment, in
activities that are
13
<PAGE>
financial in nature, other than insurance underwriting as principal, insurance
company portfolio investment, real estate development, real estate investment
and annuity issuance. To do so, a bank must be well capitalized, well managed
and have a CRA rating of satisfactory or better. Subsidiary banks of a financial
holding company or national banks with financial subsidiaries must remain well
capitalized and well managed in order to continue to engage in activities that
are financial in nature without regulatory actions or restrictions, which could
include divestiture of the financial in nature subsidiary or subsidiaries. In
addition, a bank may not acquire a company that is engaged in activities that
are financial in nature unless the bank and each affiliated bank has a CRA
rating of satisfactory or better.
The powers of state-chartered banks that are not members of the Federal
Reserve System were not directly addressed by GLBA. However, Texas state
nonmember banks should indirectly benefit from the enhanced powers made
available to financial subsidiaries of national banks by GLBA through the Texas
parity statute, which authorizes state-chartered banks to engage in powers
available for national banks, subject to certain state and federal law
restrictions.
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
GLBA will have or the effect that potential legislation, if enacted, or
implementing regulations with respect thereto, would have upon the financial
condition or results of operations of the Company or its subsidiaries.
YEAR 2000
This section contains forward-looking statements that have been prepared
on the basis of the Company's best judgments and currently available
information. These forward-looking statements are inherently subject to
significant business, third party, and regulatory uncertainties and other
contingencies, many of which are beyond the control of the Company.
The Company successfully completed its transition to the Year 2000 with no
impact to the Company's results of operations or financial condition other than
the cost of the project. In addition, management is not aware of any vendor or
provider used by the Company for data processing or related services which
experienced a material failure of its product or service due to a Year 2000
related problem. The Company is also subject to risks associated with Year 2000
noncompliance by its customers. Management is not aware of any customer which
suffered losses related to a Year 2000 problem which would adversely affect that
customer's financial condition or its ability to repay any outstanding loan it
has with the Company.
As of February 15, 2000, the Company incurred expenses to remediate the
Year 2000 issue in the amount of $695,000, which amount includes expenses in
years 1998, 1999 and 2000. These costs are being expensed as incurred. While the
Company believes that it will incur no additional material expenses related to
the Year 2000 issue, there can be no assurance that the Company will not be
impacted by a Year 2000 related problem
14
<PAGE>
which occurs after the date hereof or by the failure of a third party to achieve
proper Year 2000 compliance.
Although many of the critical dates related to potential Year 2000 related
problems have passed, experts predict that Year 2000 related failures could
occur throughout the year, such as December 31, 2000. Accordingly, the Company's
Year 2000 project team will continue to monitor the Company's programs and
systems and attempt to identify any potential problems during the course of the
year. In addition, the Company will continue to monitor the Year 2000 compliance
of the third parties with which the Company transacts business.
The Company continues to maintain its contingency plans with respect to
Year 2000 issues. 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.
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, 1999, 1998 and 1997 (Dollars in
Thousands) (Note 1). Nonaccrual loans have been included in assets for the
purpose of this analysis:
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
-----------------------------------------------------------------------
1999 1998
--------------------------------- ---------------------------------
AVERAGE AVERAGE AVERAGE AVERAGE
BALANCE INTEREST RATE/COST BALANCE INTEREST RATE/COST
----------- -------- --------- ----------- -------- ---------
<S> <C> <C> <C> <C> <C> <C>
ASSETS
Interest earning assets:
Loans, net of unearned discounts:
Domestic ...................... $ 1,540,536 $144,788 9.40% $ 1,351,796 $133,221 9.86%
Foreign ....................... 191,105 15,317 8.01 141,869 11,795 8.31
Investment securities:
Taxable ....................... 2,762,895 175,042 6.34 2,771,927 179,030 6.46
Tax-exempt .................... 87,744 4,432 5.05 4,824 241 5.00
Time deposits with banks ........ 1,640 104 6.34 1,005 89 8.86
Federal funds sold .............. 14,148 710 5.02 22,738 1,462 6.43
Other ........................... 2,744 343 12.50 2,686 336 12.51
----------- -------- --------- ----------- -------- ---------
Total interest-earning assets . $ 4,600,812 $340,736 7.41 $ 4,296,845 $326,174 7.59
Non-interest earning assets:
Cash and due from banks ......... $ 110,704 $ 131,539
Bank premises and equipment, net 142,098 134,152
Other assets .................... 219,041 132,620
Less allowance for possible
loan losses ................... (26,797) (25,837)
----------- -----------
Total ......................... $ 5,045,858 $ 4,669,319
=========== ===========
LIABILITIES AND
SHAREHOLDERS' EQUITY
Interest bearing liabilities:
Savings and interest bearing
demand deposits ............... $ 937,322 $ 27,182 2.90% $ 867,594 $ 26,419 3.05%
Time deposits:
Domestic ...................... 929,627 46,948 5.05 1,009,000 53,230 5.28
Foreign ....................... 1,134,484 50,678 4.47 964,459 48,593 5.04
Securities sold under
repurchase agreements and
federal funds purchased ....... 105,039 6,047 5.76 257,589 13,396 5.20
Other borrowings ................ 1,064,307 54,340 5.11 751,628 39,969 5.32
Other ........................... -- 10 -- 2,664 302 11.34
----------- -------- --------- ----------- -------- ---------
Total interest bearing
liabilities ................. $ 4,170,779 185,205 4.44 $ 3,852,934 $181,909 4.72
Non-interest bearing liabilities:
Demand deposits ................. 462,510 433,863
Other liabilities ............... 42,016 35,532
Shareholders' equity ............... 370,553 346,990
----------- -----------
Total ......................... $ 5,045,858 $ 4,669,319
=========== ===========
Net interest income ...... $155,531 $144,265
======== ========
Net yield on interest
earning assets ......... 3.38% 3.36%
========= =========
<PAGE>
<CAPTION>
YEARS ENDED DECEMBER 31,
---------------------------------
1997
---------------------------------
AVERAGE AVERAGE
BALANCE INTEREST RATE/COST
----------- -------- ---------
<S> <C> <C> <C>
ASSETS
Interest earning assets:
Loans, net of unearned discounts:
Domestic ...................... $ 1,152,566 $115,527 10.02%
Foreign ....................... 128,923 11,821 9.17
Investment securities:
Taxable ....................... 2,121,927 146,820 6.92
Tax-exempt .................... 1,348 90 6.68
Time deposits with banks ........ 404 47 11.63
Federal funds sold .............. 14,906 1,120 7.51
Other ........................... 2,565 307 11.97
----------- -------- ---------
Total interest-earning assets . $ 3,422,639 $275,732 8.06
Non-interest earning assets:
Cash and due from banks ......... $ 144,573
Bank premises and equipment, net 105,800
Other assets .................... 117,381
Less allowance for possible
loan losses ................... (23,075)
-----------
Total ......................... $ 3,767,318
===========
LIABILITIES AND
SHAREHOLDERS' EQUITY
Interest bearing liabilities:
Savings and interest bearing
demand deposits ............... $ 722,559 $ 22,152 3.07%
Time deposits:
Domestic ...................... 905,157 46,456 5.13
Foreign ....................... 821,214 42,957 5.23
Securities sold under
repurchase agreements and
federal funds purchased ....... 301,511 15,754 5.23
Other borrowings ................ 331,308 18,052 5.45
Other ........................... -- -- --
----------- -------- ---------
Total interest bearing
liabilities ................. $ 3,081,749 $145,371 4.72
Non-interest bearing liabilities:
Demand deposits ................. 361,379
Other liabilities ............... 26,261
Shareholders' equity ............... 297,929
-----------
Total ......................... $ 3,767,318
===========
Net interest income ...... $130,361
========
Net yield on interest
earning assets ......... 3.81%
=========
</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 1999
and 1998 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>
1999 COMPARED TO 1998 1998 COMPARED TO 1997
------------------------------ ------------------------------
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 ...................... $ 17,992 $ (6,425) $ 11,567 $ 19,574 $ (1,880) $ 17,694
Foreign ....................... 3,961 (439) 3,522 1,133 (1,159) (26)
Investment securities:
Taxable ....................... (595) (3,393) (3,988) 42,507 (10,297) 32,210
Tax-exempt .................... 4,189 2 4,191 179 (28) 151
Time deposits with banks ........ 45 (30) 15 55 (13) 42
Federal funds sold .............. (476) (276) (752) 521 (179) 342
Other ........................... 7 -- 7 15 14 29
-------- -------- -------- -------- -------- --------
Total interest income ........... $ 25,123 $(10,561) $ 14,562 $ 63,984 $(13,542) $ 50,442
-------- -------- -------- -------- -------- --------
Interest incurred on:
Savings and interest
bearing demand deposits........ $ 2,088 $ (1,325) $ 763 $ 4,413 $ (146) $ 4,267
Time deposits:
Domestic ...................... (4,043) (2,239) (6,282) 5,398 1,376 6,774
Foreign ....................... 7,968 (5,883) 2,085 7,247 (1,611) 5,636
Securities sold under
repurchase agreements and
federal funds purchased ....... (8,659) 1,310 (7,349) (2,269) (89) (2,358)
Other borrowings ................ 16,009 (1,638) 14,371 22,358 (441) 21,917
Other ........................... (292) -- (292) 302 -- 302
-------- -------- -------- -------- -------- --------
Total interest expense .......... $ 13,071 $ (9,775) $ 3,296 $ 37,449 $ (911) $ 36,538
-------- -------- -------- -------- -------- --------
Net interest income ............... $ 12,052 $ (786) $ 11,266 $ 26,535 $(12,631) $ 13,904
======== ======== ======== ======== ======== ========
</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, 1999 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, 1999 3 MONTHS OVER 3 MONTHS OVER 1 YEAR OVER
(Dollars in Thousands) OR LESS TO 1 YEAR TO 5 YEARS 5 YEARS TOTAL
=========================================================================================================
SECTION A
---------------------------------------------------------------------------------------------------------
RATE SENSITIVE ASSETS
<S> <C> <C> <C> <C> <C>
FEDERAL FUNDS SOLD $ 13,300 - - - $ 13,300
DUE FROM BANK INTEREST EARNING 491 1,386 - - 1,877
INVESTMENT SECURITIES 231,480 501,266 1,997,559 265,412 2,995,717
LOANS, NET OF NON-ACCRUALS 1,323,540 149,393 284,764 146,520 1,904,217
---------------------------------------------------------------------------------------------------------
TOTAL EARNING ASSETS $ 1,568,811 $ 652,045 $ 2,282,323 $ 411,932 $ 4,915,111
---------------------------------------------------------------------------------------------------------
CUMULATIVE EARNING ASSETS $ 1,568,811 $ 2,220,856 $ 4,503,179 $ 4,915,111
=========================================================================================================
SECTION B
---------------------------------------------------------------------------------------------------------
RATE SENSITIVE LIABILITIES
TIME DEPOSITS $ 1,073,440 $ 829,896 $ 195,853 $ 199 $ 2,099,388
OTHER INTEREST BEARING DEPOSITS 928,455 - - - 928,455
FED FUNDS PURCHASED AND REPOS 37,995 82,985 2,772 - 123,752
OTHER BORROWINGS 1,380,000 - - - 1,380,000
---------------------------------------------------------------------------------------------------------
TOTAL INTEREST BEARING LIABILITIES $ 3,419,890 $ 912,881 $ 198,625 $ 199 $ 4,531,595
---------------------------------------------------------------------------------------------------------
CUMULATIVE SENSITIVE LIABILITIES $ 3,419,890 $ 4,332,771 $ 4,531,396 $ 4,531,595
=========================================================================================================
SECTION C
---------------------------------------------------------------------------------------------------------
REPRICING GAP $(1,851,079) $ (260,836) $ 2,083,698 $ 411,733 $ 383,516
CUMULATIVE REPRICING GAP (1,851,079) (2,111,915) (28,217) 383,516 383,516
RATIO OF INTEREST-SENSITIVE
ASSETS TO LIABILITIES .46 .71 11.49 - 1.09
RATIO OF CUMULATIVE, INTEREST-
SENSITIVE ASSETS TO LIABILITIES .46 .51 .99 1.09
=========================================================================================================
</TABLE>
18
<PAGE>
INVESTMENT SECURITIES
The following table sets forth the carrying value of investment securities
as of December 31, 1999, 1998 and 1997:
YEARS ENDED DECEMBER 31,
----------------------------------------
1999 1998 1997
---------- ---------- ----------
(Dollars in Thousands)
U.S. Treasury securities
Available for sale .............. $ 260,980 $ 207,688 $ 202,123
Mortgage-backed securities
Available for sale .............. 2,491,963 2,551,395 2,347,722
Obligations of states and
political subdivisions
Held to maturity ................ 321 518 695
Available for sale .............. 90,416 28,200 520
Equity securities
Available for sale .............. 75,798 62,995 30,383
Other securities
Held to maturity ................ 2,085 1,990 2,015
Available for sale .............. 74,154 155,091 --
---------- ---------- ----------
Total ....................... $2,995,717 $3,007,877 $2,583,458
========== ========== ==========
The following tables set forth the contractual maturities of investment
securities at December 31, 1999 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> <C>
U.S. Treasury and
obligations of
other U.S. Govern-
agencies .......... $ 10,495 6.87% $ 249 5.00% $ 10,000 7.00% $ 241,236 7.89%
Mortgage-backed
securities ........ 25,707 6.64 182,102 6.90 226,282 7.60 2,100,370 6.92
Obligations of states
and political
subdivisions ...... 312 5.75 543 7.50 -- -- 101,355 4.51
Other securities .... -- -- -- -- -- -- 76,212 7.56
Equity securities ... 75,236 5.75 -- -- -- -- -- --
-------- -------- -------- -------- -------- -------- ---------- --------
Total ..... $111,750 6.06% $182,894 6.90% $236,282 7.57% $2,519,173 6.93%
======== ======== ======== ======== ======== ======== ========== ========
</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 ...... $ 260 8.30% $ 61 7.70% $ -- -% $ -- -%
Other securities .... -- -- 1,825 7.79 260 7.07 -- --
-------- -------- -------- -------- -------- -------- -------- --------
Total ...... $ 260 8.30% $ 1,886 7.79% $ 260 7.07% $ -- - %
======== ======== ======== ======== ======== ======== ======== ========
</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, 1999,
1998, 1997, 1996 and 1995 are shown in the following table:
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
-------------------------------------------------------------------
1999 1998 1997 1996 1995
----------- ----------- ----------- ----------- -----------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C>
Commercial, financial
and agricultural ..... $ 1,115,511 $ 896,060 $ 800,964 $ 723,061 $ 722,274
Real estate-mortgage ... 278,819 215,689 188,122 193,101 200,998
Real estate-construction 129,813 94,374 59,239 32,610 39,527
Consumer ............... 171,104 250,917 272,478 161,594 124,843
Foreign ................ 216,632 166,324 130,401 128,932 120,748
----------- ----------- ----------- ----------- -----------
Total loans ....... 1,911,879 1,623,364 1,451,204 1,239,298 1,208,390
Unearned discount ...... (8,355) (8,025) (6,508) (3,303) (3,479)
----------- ----------- ----------- ----------- -----------
Loans, net of
unearned discount . $ 1,903,524 $ 1,615,339 $ 1,444,696 $ 1,235,995 $ 1,204,911
=========== =========== =========== =========== ===========
</TABLE>
The table on the following page shows the amounts of loans (excluding real
estate mortgages and consumer loans) outstanding as of December 31, 1999 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 ................... $362,297 $ 617,105 $ 136,109 $1,115,511
Real estate - construction ....... 58,561 64,393 6,859 129,813
Foreign .......................... 107,878 96,319 12,435 216,632
-------- ---------- ---------- ----------
Total .................. $528,736 $ 777,817 $ 155,403 $1,461,956
======== ========== ========== ==========
INTEREST SENSITIVITY
-----------------------
Fixed Variable
RATE RATE
-------- --------
(Dollars in Thousands)
Due after one but within five years .............. $186,161 $591,656
Due after five years ............................. 75,936 79,467
-------- --------
Total .................................. $262,097 $671,123
======== ========
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,
-------------------------------------------
1999 1998 1997 1996 1995
------- ------ ------ ------ ------
(Dollars in Thousands)
Loans accounted for on
a non-accrual basis ............ $ 7,234 $4,868 $5,014 $3,363 $5,291
Loans contractually
past due ninety days
or more as to interest
or principal payments .......... 13,758 8,543 9,700 5,075 7,954
Loans accounted for
as "troubled debt
restructuring" ................. 543 592 363 1,462 2,742
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,
----------------------------------------
1999 1998 1997 1996 1995
---- ---- ------ ------ ----
(Dollars in Thousands)
Loans accounted for on
a non-accrual basis .............. $428 $670 $ 728 $1,062 $942
Loans contractually
past due ninety days
or more as to interest
or principal payments ............ 490 242 2,096 1,321 944
21
<PAGE>
The gross income that would have been recorded during 1999 on non-accrual
and restructured loans in accordance with their original contract terms was
$777,000 on domestic loans and $97,000 on foreign loans. The amount of interest
income on such loans that was recognized in 1999 was $9,000 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,
-----------------------------------
1999 1998 1997
--------- --------- ---------
(Dollars in Thousands)
Loans:
Commercial, financial, industrial
and agricultural .................... $ 184,129 $ 135,328 $ 91,945
Real estate-mortgage .................. 9,388 8,133 18,416
Consumer .............................. 23,115 22,863 20,040
--------- --------- ---------
216,632 166,324 130,401
Less allowance for possible
loan losses ......................... (1,322) (1,124) (1,184)
--------- --------- ---------
Net loans .................... $ 215,310 $ 165,200 $ 129,217
========= ========= =========
Accrued interest receivable ............. $ 1,725 $ 1,327 $ 1,198
========= ========= =========
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,
----------------------------------------------------------------------
1999 1998 1997 1996 1995
----------- ----------- ----------- ----------- -----------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C>
Loans, net of unearned discounts,
outstanding at December 31, ... $ 1,898,549 $ 1,615,339 $ 1,444,696 $ 1,235,995 $ 1,204,911
=========== =========== =========== =========== ===========
Average loans outstanding during
the year (Note 1) ............. $ 1,731,640 $ 1,493,664 $ 1,281,489 $ 1,199,591 $ 1,202,136
=========== =========== =========== =========== ===========
Balance of allowance
at January 1, ................. $ 25,551 $ 24,516 $ 21,036 $ 18,455 $ 17,025
Provision charged to expense .... 6,379 8,571 7,740 6,630 5,150
----------- ----------- ----------- ----------- -----------
Loans charged-off:
Domestic:
Commercial, financial
and agricultural ............. (1,634) (2,180) (1,503) (1,518) (2,248)
Real estate-mortgage .......... (227) (157) (279) (261) (619)
Consumer ...................... (4,688) (6,483) (4,552) (3,363) (1,849)
Foreign ....................... -- (65) (2) (23) (48)
----------- ----------- ----------- ----------- -----------
Total loans charged-off ......... (6,549) (8,885) (6,336) (5,165) (4,764)
----------- ----------- ----------- ----------- -----------
Recoveries credited to allowance:
Domestic:
Commercial, financial
and agricultural ............ 735 795 270 305 190
Real estate mortgage .......... 89 18 382 51 80
Consumer ...................... 564 531 250 755 229
Foreign ....................... 1 5 95 5 110
----------- ----------- ----------- ----------- -----------
Total recoveries ................ 1,389 1,349 997 1,116 609
----------- ----------- ----------- ----------- -----------
Net loans charged-off: .......... (5,160) (7,536) (5,339) (4,049) (4,155)
----------- ----------- ----------- ----------- -----------
Allowance acquired in purchase
transactions .................. -- -- 1,079 -- 435
----------- ----------- ----------- ----------- -----------
Balance of allowance
at December 31, ............... $ 26,770 $ 25,551 $ 24,516 $ 21,036 $ 18,455
=========== =========== =========== =========== ===========
Ratio of net loans charged-off
during the year to average
loans outstanding during
the year (Note 1) ............. .30% .50% .42% .34% .35%
=========== =========== =========== =========== ===========
Ratio of allowance to loans, net
of unearned discounts, out-
standing at December 31, ...... 1.41% 1.58% 1.70% 1.70% 1.53%
=========== =========== =========== =========== ===========
</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 1.41% and 1.58% of total loans of bank subsidiaries, net of
unearned income, for December 31, 1999 and 1998, respectively.
The amount charged against 1999 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,
--------------------------------------------------------------------------------------------------------------
1999 1998 1997 1996 1995
------------------ ------------------ ------------------- ------------------ ------------------
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 $ 16,745 58.4% $ 15,022 55.2% $ 14,149 55.2% $ 12,981 58.3% $ 11,569 59.7%
Real estate
mortgage 4,185 14.6 3,616 13.3 3,323 12.9 3,467 15.6 3,219 16.6
Real estate
construction 1,949 6.8 1,582 5.8 1,047 4.1 586 2.6 633 3.3
Consumer 2,569 8.9 4,207 15.5 4,813 18.8 2,901 13.1 1,999 10.4
Foreign 1,322 11.3 1,124 10.2 1,184 9.0 1,101 10.4 1,035 10.0
------ ----- ------ ----- ------ ----- ------ ----- ------ -----
$ 26,770 100.0% $ 25,551 100.0% $ 24,516 100.0% $ 21,036 100.0% $ 18,455 100.0%
====== ===== ====== ===== ====== ===== ====== ===== ====== =====
</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:
<TABLE>
<CAPTION>
FOR THE YEARS ENDED DECEMBER 31,
----------------------------------
1999 1998 1997
---------- ---------- ----------
(Dollars in Thousands)
<S> <C> <C> <C>
Deposits:
Demand - non-interest bearing
Domestic .............................. $ 402,738 $ 377,084 $ 317,759
Foreign ............................... 59,772 56,779 43,620
---------- ---------- ----------
Total demand non-interest
bearing ............................. 462,510 433,863 361,379
---------- ---------- ----------
Savings and interest bearing demand
Domestic .............................. 724,321 660,870 560,956
Foreign ............................... 213,001 206,724 161,603
---------- ---------- ----------
Total savings and interest
bearing demand ...................... 937,322 867,594 722,559
---------- ---------- ----------
Time certificates of deposit $100,000 or more:
Domestic .............................. 466,384 465,789 363,471
Foreign ............................... 840,059 713,060 602,170
Less than $100,000:
Domestic .............................. 463,243 543,211 541,686
Foreign ............................... 294,425 251,399 219,044
---------- ---------- ----------
Total time, certificates of
deposit .................................. 2,064,111 1,973,459 1,726,371
---------- ---------- ----------
Total deposits ............................... $3,463,943 $3,274,916 $2,810,309
========== ========== ==========
Interest Expense:
Savings and interest bearing demand
Domestic .............................. $ 21,678 $ 21,580 $ 17,559
Foreign ............................... 5,504 4,839 4,593
---------- ---------- ----------
Total savings and interest
bearing demand ............................. $ 27,182 $ 26,419 $ 22,152
---------- ---------- ----------
Time, certificates of deposit
$100,000 or more
Domestic .............................. $ 22,790 $ 24,484 $ 19,256
Foreign ............................... 38,497 36,865 32,532
Less than $100,000
Domestic .............................. 24,158 28,746 27,200
Foreign ............................... 12,181 11,728 10,425
---------- ---------- ----------
Total time, certificates
of deposit .......................... $ 97,626 $ 101,823 $ 89,413
---------- ---------- ----------
Total interest expense on deposits ........... $ 124,808 $ 128,242 $ 111,565
========== ========== ==========
</TABLE>
25
<PAGE>
Maturities of time certificates of deposit outstanding at December 31, 1999
are summarized as follows:
DECEMBER 31, 1999
-------------------
$100,000 OR MORE LESS THAN $100,000
---------------- ------------------
(Dollars in Thousands)
3 months or less $ 703,091 $ 370,349
Over 3 but through 12 months 527,673 302,223
Over 12 months 98,007 98,045
----------- -----------
Total $ 1,328,771 $ 770,617
=========== ===========
RETURN ON EQUITY AND ASSETS
Certain key ratios for the Company for the years ended December 31, 1999,
1998 and 1997 follows (Note 1):
YEARS ENDED DECEMBER 31,
---------------------------
1999 1998 1997
---- ---- ----
Percentage of net income to:
Average shareholders' equity 17.88% 15.48% 16.41%
Average total assets 1.31 1.15 1.30
Percentage of average shareholders'
equity to average total assets 7.34 7.43 7.91
Percentage of cash dividends per share
to net income per share 28.63 23.65 11.37
(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 27 of the 1999 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 1999 Annual Meeting of Shareholders of the Company held on May
20, 1999, 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
NAME AGE POSITION OF OFFICE COMPANY OR IBC SINCE
<S> <C> <C>
Dennis E. Nixon 57 Chairman of the Board and 1979
President of the Company,
Chief Executive Officer of IBC
Leonardo Salinas 66 Vice President of the Company 1982
and Senior Executive Vice
President of IBC
R. David Guerra 47 Vice President of the Company 1986
and President of IBC McAllen
Branch
Imelda Navarro 42 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 10 of Registrant's 1999 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 1999 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 10 of Registrant's 1999 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 through 7 of the Registrant's 1999 Annual Report
is incorporated herein by reference.
Item 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The consolidated financial statements located on pages 12 through 16 of
Registrant's 1999 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 14, 2000 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 14, 2000 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 14, 2000 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 14, 2000 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 1999 Annual Report to Shareholders filed as an
exhibit hereto and they include:
Independent Auditors' Report
Consolidated:
Statements of Condition as of December 31, 1999 and 1998
Statements of Income for the years ended December 31, 1999, 1998
and 1997
Statements of Comprehensive Income for the years ended December 31,
1999, 1998 and 1997
Statements of Shareholders' Equity for the years ended December 31,
1999, 1998 and 1997
Statements of Cash Flows for the years ended December 31, 1999, 1998
and 1997
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 1999 Annual Report
31
<PAGE>
(21) -List of Subsidiaries of International Bancshares Corporation
as of March 30, 2000
(23) -Accountants' Consent
(27) -Financial Data Schedule
* Previously filed
** Deemed filed only with respect to those portions thereof
incorporated herein by reference
+ Executive Compensation Plans and Arrangements
(b) REPORTS ON FORM 8-K
Registrant filed a current report on Form 8-K on January 11, 2000,
covering Item 5 - Other Events and Item 7 - Financial Statements and
Exhibits in connection with the announcement of the expansion of the
Company's stock repurchase program.
Registrant filed a current report on Form 8-K on March 2, 2000, covering
Item 5 - Other Events and Item 7 - Financial Statements and Exhibits in
connection with the announcement of the Company's Annual 1999 Earnings.
Registrant filed a current report on Form 8-K on March 20, 2000,
covering Item 5 - Other Events and Item 7 - Financial Statements and
Exhibits in connection with the announcement of a cash dividend by the
Company.
Registrant filed a current report on Form 8-K on March 23, 2000,
covering Item 5 - Other Events and Item 7 - Financial Statements and
Exhibits in connection with the announcement of the Company's election
to become a Financial Holding Company.
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 30, 2000
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 30, 2000
Dennis E. Nixon (Principal Executive Officer)
/S/ IMELDA NAVARRO Treasurer MARCH 30, 2000
Imelda Navarro (Principal Financial Officer)
/S/ LEONARDO SALINAS Vice President and MARCH 30, 2000
Leonardo Salinas Director
/S/ LESTER AVIGAEL Director MARCH 30, 2000
Lester Avigael
/S/ IRVING GREENBLUM Director MARCH 30, 2000
Irving Greenblum
/S/ R. DAVID GUERRA Director MARCH 30, 2000
R. David Guerra
/S/ RICHARD E. HAYNES Director MARCH 30, 2000
Richard E. Haynes
__________________________ Director ________________
Sioma Neiman
/S/ ANTONIO R. SANCHEZ JR. Director MARCH 30, 2000
Antonio R. Sanchez Jr.
/S/ PEGGY J. NEWMAN Director MARCH 30, 2000
Peggy J. Newman
33
<PAGE>
EXHIBIT INDEX
Exhibit 13 - International Bancshares Corporation 1999 Annual Report, Exhibit
13, page 1
Exhibit 21 - List of Subsidiaries of International Bancshares Corporation as
of March 30, 2000, page 130
Exhibit 23 - Accountants' Consent, page 131
Exhibit 27 - Financial Data Schedule, page 132
34
EXHIBIT 13
INTERNATIONAL BANCSHARES CORPORATION AND SUBSIDIARIES
(CONSOLIDATED)
SELECTED FINANCIAL DATA
<TABLE>
<CAPTION>
AT OR FOR THE YEARS ENDED DECEMBER 31,
--------------------------------------------------------------------
1999 1998 1997 1996 1995
------------ ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C>
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
BALANCE SHEET
Assets.......................... $ 5,421,804 $ 4,987,877 $ 4,517,846 $ 3,351,231 $ 2,935,606
Net loans....................... 1,876,754 1,589,788 1,420,180 1,214,959 1,186,456
Deposits........................ 3,527,212 3,369,637 3,175,560 2,662,153 2,143,346
Other borrowed funds............ 1,380,000 1,074,000 490,000 239,000 66,500
Shareholders' equity............ 353,436 370,283 341,244 283,767 245,761
INCOME STATEMENT
Interest income................. $ 340,736 $ 326,174 $ 275,732 $ 221,779 $ 218,867
Interest expense................ 185,205 181,909 145,371 107,372 112,361
------------ ------------ ------------ ------------ ------------
Net interest income............. 155,531 144,265 130,361 114,407 106,506
Provision for possible loan
losses........................ 6,379 8,571 7,740 6,630 5,150
Non-interest income............. 60,966 41,698 36,776 30,194 26,009
Non-interest expense............ 106,983 99,047 85,745 73,457 68,989
------------ ------------ ------------ ------------ ------------
Income before income taxes...... 103,135 78,345 73,652 64,514 58,376
Income taxes.................... 36,887 24,620 24,771 20,164 18,315
------------ ------------ ------------ ------------ ------------
Net income...................... $ 66,248 $ 53,725 $ 48,881 $ 44,350 $ 40,061
============ ============ ============ ============ ============
Per common share:
Basic...................... $ 4.11 $ 3.30 $ 3.07 $ 2.81 $ 2.57
Diluted.................... $ 4.03 $ 3.22 $ 2.96 $ 2.72 $ 2.46
Cash dividends per share........ $ 1.10 $ .90 $ .50 $ 0.50 $ .50
</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 1999 and 1997.
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, 1999. 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, 1999, and the Selected
Financial Data and Consolidated Financial Statements included elsewhere herein.
RESULTS OF OPERATIONS
Net income for 1999 was $66,248,000 or $4.11 per share -- basic ($4.03 per
share -- diluted) compared with $53,725,000 or $3.30 per share -- basic ($3.22
per share -- diluted) in 1998 and $48,881,000 or $3.07 per share -- basic ($2.96
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. "Income before goodwill charges"
reflects 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 the 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 income before goodwill charges table below. The table
reconciles reported earnings to net income excluding intangible amortization
("income before goodwill charges") to help facilitate peer group comparisons.
YEARS ENDED DECEMBER 31,
-------------------------------
1999 1998 1997
--------- --------- ---------
(DOLLARS IN THOUSANDS, EXCEPT
PER SHARE DATA)
Reported net income.................. $ 66,248 $ 53,725 $ 48,881
Amortization of intangible assets.... 3,898 3,936 2,949
Income tax adjustment................ (309) (322) (645)
--------- --------- ---------
Income before goodwill charges....... $ 69,837 $ 57,339 $ 51,185
========= ========= =========
Income before goodwill charges per
common share:
Basic........................... $ 4.33 $ 3.52 $ 3.21
Diluted......................... 4.25 3.43 3.10
Total assets at December 31, 1999 grew 9% to $5,421,804,000 from
$4,987,877,000 at December 31, 1998 while net loans increased 18% to
$1,876,754,000 at December 31, 1999 from $1,589,788,000 at December 31, 1998.
Deposits at December 31, 1999 were $3,527,212,000, an increase of 5% over the
$3,369,637,000 at December 31, 1998, an increase of 6% over the $3,175,560,000
at December 31, 1997. 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. The increase in assets and deposits during 1999 reflects
growth opportunities in the Company's market through its branch system. The
aggregate amount of certificates of indebtedness with the Federal Home Loan Bank
of Dallas ("FHLB") increased to $1,380,000,000 at December 31, 1999 from the
$1,074,000,000 at December 31, 1998. Such funds were used to fund the earning
asset base of the Company.
Net interest income in 1999 increased by $11,266,000, or 8%, over that in
1998. The net yield on average interest earning assets increased by .02% from
3.36% in 1998 to 3.38% in 1999. The net yield on average interest earning assets
decreased by .45% in 1998 to 3.36% from 3.81% in 1997 while net interest
2
<PAGE>
income increased by $13,904,000 or 11% over 1997. A 7.1% increase in average
interest earning assets from $4,296,845,000 in 1998 to $4,600,812,000 in 1999
and a 25.5% increase from $3,422,639,000 in 1997 to $4,296,845,000 in 1998
contributed to the continued increase in net interest income for 1999 and 1998,
respectively. The Company experienced a .18% decrease in the yield on average
interest earning assets to 7.41% in 1999 from 7.59% in 1998 and a .28% decrease
was reflected on the rates paid on average interest bearing liabilities to 4.44%
in 1999 from 4.72% in 1998. In 1998 a .47% decrease was reflected in the yield
on average interest earning assets to 7.59% from 8.06% in 1997 and there was no
change reflected on the rates paid on average interest bearing liabilities of
4.72% in 1998 and 1997.
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 46% in 1999 to $60,966,000 over $41,698,000
in 1998 and increased 13% over $36,776,000 in 1997. The 1999 and 1998 increases
in non-interest income were due to the increases in service charge income and
the $6,530,000 gain recognition on the 1999 sale of $62,400,000 of credit card
receivables and the premium paid on the related transfer of $87,454,000 of
deposits in the third quarter. The increase in service charges was attributable
to the amount of account transaction fees received as a result of the deposit
growth, new deposit products and increased collection efforts.
Expense control is an essential element in the Company's profitability.
This is achieved through maintaining optimum staffing levels, an effective
budgeting process, and internal consolidation of bank functions. 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 8% in 1999 to $106,983,000 from
$99,047,000 in 1998 and increased 16% from $85,745,000 in 1997. The 1999 and
1998 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.
The efficiency ratio, a measure of non-interest expense to net interest
income plus non-interest income was 49% for the year ended December 31, 1999,
compared to the year ago ratio of 53%. The Company's efficiency ratio has been
under 53% for each of the last five years, which the Company believes is below
national peer group ratios.
Most of the Company's lending activities involve commercial (domestic and
foreign), consumer and real estate mortgage financing. In 1999, the Company's
efforts to increase its loan volume resulted in an increase of 14% in average
domestic loans and an increase of 35% in average foreign loans for an increase
in total average loans of 16% over 1998. The average yield for these loans
decreased .46% for domestic
3
<PAGE>
loans and decreased by .30% for foreign loans in 1999 as compared to 1998. The
Company experienced an increase of 17% in average domestic loans and a 10%
increase in average foreign loans in 1998 as compared to 1997. The 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 a decrease of .33% in average balances of taxable
investment securities from $2,771,927,000 for 1998 to $2,762,895,000 for 1999
and an increase of 31% from $2,121,927,000 for 1997 to $2,771,927,000 for 1998.
The slight decrease reflected in 1999 is primarily from the impact of carrying
the available for sale securities at fair value.
The allowance for possible loan losses increased 5% from $25,551,000 at
December 31, 1998 to $26,770,000 at December 31, 1999 and increased 4% from
$24,516,000 at December 31, 1997 to $25,551,000 at December 31, 1998. The
provision for possible loan losses charged to expense decreased 26% from
$8,571,000 in 1998 to $6,379,000 in 1999 and increased 11% from $7,740,000 in
1997 to $8,571,000 in 1998. The decrease in the provision for possible loan
losses was largely due to the sale of the credit card receivables in the third
quarter. The allowance for possible loan losses was 1.40% of total loans at
December 31, 1999 compared to 1.57% at 1998 and 1.69% at 1997. Non-performing
assets as a percentage of total loans and total assets were 1.17% and .41%,
respectively, at December 31, 1999, and .92% and .30% at December 31, 1998,
respectively. Loans accounted for on a non-accrual basis increased 38% from
$5,538,000 at December 31, 1998 to $7,662,000 at December 31, 1999. As loans are
placed on non-accrual status, interest previously accrued and recorded is
reversed unless the loan is well secured and in the process of collection. The
increase in non-performing loans was primarily due to consumer credit problems
and other credit problems that a financial institution faces in the normal
course of business. Foreclosed assets decreased 27% from $3,129,000 at December
31, 1998 to $2,285,000 at December 31, 1999. The decrease in foreclosed assets
were primarily due to the sale of foreclosed assets. In 1998, non-accruals
decreased 4% from $5,742,000 at December 31, 1997 to $5,538,000 at December 31,
1998 and foreclosed assets decreased 43% from $5,510,000 at December 31, 1997 to
$3,129,000 at December 31, 1998.
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
4
<PAGE>
basis. It is the judgment of the Company's management that the allowance for
possible loan losses at December 31, 1999 was adequate to absorb possible losses
from loans in the portfolio at that date.
On December 31, 1999, the Company had $5,421,804,000 of consolidated assets
of which approximately $216,632,000 or 4% 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, 1999 is presented below.
RELATED
AMOUNT OF ALLOWANCE FOR
LOANS POSSIBLE LOSSES
--------- ---------------
(DOLLARS IN THOUSANDS)
Secured by certificates of deposit in
United States banks................ $ 85,415 $ 43
Secured by United States real
estate............................. 33,073 321
Secured by other United States
collateral (securities, gold,
silver, etc.)...................... 10,755 142
Direct unsecured Mexican sovereign
debt (principally former FICORCA
debt).............................. 1,346 42
Other................................ 86,043 774
--------- ---------------
$ 216,632 $ 1,322
========= ===============
The transactions for the year ended December 31, 1999 in that portion of
the allowance for possible loan losses related to Mexican debt were as follows:
(DOLLARS IN THOUSANDS)
Balance at January 1, 1999........... $1,124
Recoveries........................... 1
Provision charged to operations...... 197
--------
Balance at December 31, 1999......... $1,322
========
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. 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 41%, 38% and 35% of the
Company's bank subsidiaries' total deposits as of December 31, 1999, 1998 and
1997, respectively. Other important funding sources for the Company's bank
subsidiaries during 1999 and 1998 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 has as its primary focus the
measurement and management of the banks' earnings at risk in the face of rising
and falling interest rate forecasts. The earliest and most simplistic concept of
earnings at risk measurement is the gap report, which is used to generate a
rough
5
<PAGE>
estimate of the vulnerability of net interest income to changes in market rates
as implied by the relative repricings of assets and liabilities. The gap report
calculates the difference between the amounts of assets and liabilities
repricing across a series of intervals in time, with emphasis typically placed
on the one-year period. This difference, or gap, is usually expressed as a
percentage of total assets.
If an excess of liabilities over assets matures or reprices within the
one-year period, the balance sheet is said to be negatively gapped. This
condition is sometimes interpreted to suggest that an institution is
liability-sensitive, indicating that earnings would suffer from rising rates and
benefit from falling rates. If a surplus of assets over liabilities occurs in
the one-year time frame, the balance sheet is said to be positively gapped,
suggesting a condition of asset sensitivity in which earnings would benefit from
rising rates and suffer from falling rates.
The gap report thus consists of an inventory of dollar amounts of assets
and liabilities that have the potential to mature or reprice within a particular
period. The flaw in drawing conclusions about interest rate risk from the gap
report is that it takes no account of the probability that potential maturities
or repricings of interest-rate-sensitive accounts will occur, or at what
relative magnitudes. Because simplicity, rather than utility, is the only virtue
of gap analysis, financial institutions increasingly have either abandoned gap
analysis or accorded it a distinctly secondary role in managing their
interest-rate risk exposure. See page 18 of the Company's Form 10-K for the
table that summarizes interest rate sensitive assets and liabilities by their
repricing dates at December 31, 1999.
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, 1999, 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 2000 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, 1999, the aggregate
amount legally available to be distributed to the Company from bank subsidiaries
as dividends was approximately $58,641,000, 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
$306,263,000 as
6
<PAGE>
of December 31, 1999. The undivided profits of the bank subsidiaries were
approximately $152,078,000 as of December 31, 1999.
As of December 31, 1999, the Company has outstanding $1,380,000,000 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, 1999, shareholders' equity
was $353,436,000 compared to $370,283,000 at December 31, 1998, a decrease of
$16,847,000 or 5%. The decrease in shareholders' equity resulted from the stock
repurchase program and the negative impact of comprehensive income. An
accounting standard relating to comprehensive income requires that unrealized
losses on securities held available for sale, net of tax, be deducted from
shareholders' equity.
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 6.58% at December 31, 1999 and 6.50% at December
31, 1998. The core deposit intangibles and goodwill of $42,568,000 as of
December 31, 1999, 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 13.41% and 13.36% and risk weighted total capital ratios of 14.46% and
14.45% for December 31, 1999 and 1998, 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 announced a new formal stock repurchase program on June 22,
1999 and announced it expanded the stock repurchase program on July 16, 1999 and
on January 11, 2000. Under the stock repurchase program, the Company is
authorized to repurchase up to $35,000,000 of its common stock through June
2000. Stock repurchases may be made from time to time, on the open market or
through private transactions. Shares repurchased in this program will be held in
treasury for reissue for various corporate purposes, including employee stock
option plans. As of March 20, 2000 a total of 487,865 shares had been
repurchased under this program at a cost of $21,224,000. Stock repurchases are
presented quarterly at the Company's Board of Directors meetings and the Board
of Directors has stated that the aggregate investment in treasury stock should
not exceed $60,000,000. In the past, the board has increased previous caps on
treasury stock once they were met, but there are no assurances that an increase
of the $60,000,000 cap will occur in the future. As of March 20, 2000 the
Company has approximately $42,197,000 invested in treasury shares, which amount
has been accumulated since the inception of the Company.
During the past few years the Company has expanded its banking facilities.
Among the activities and commitments the Company funded during 1999 and 1998
were certain capital expenditures relating to the modernization and improvement
of several existing bank facilities and the expansion of the bank branch
network.
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
7
<PAGE>
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 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, and (V) 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
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
8
<PAGE>
had been included in a number of previously existing separate statements and
opinions. It applies to all entities, public and nonpublic. SFAS No. 129 is
effective for financial statements issued for periods ending after December 15,
1997. The adoption of this Statement did not have a material impact on the
Company's consolidated financial statements.
In June 1997, the Financial Accounting Standards Board issued SFAS No. 130,
"Reporting Comprehensive Income." SFAS No. 130 establishes standards for
reporting and display of comprehensive income and its components (revenues,
expenses, gains, and losses) in a full set of general-purpose financial
statements. SFAS No. 130 requires that an enterprise (a) classify items of other
comprehensive income by their nature in a financial statement and (b) display
the accumulated balance of other comprehensive income separately from retained
earnings and additional paid-in capital in the equity section of a statement of
financial position. SFAS No. 130 is effective for fiscal years beginning after
December 15, 1997. The adoption of this Statement did not have a material impact
on the Company's consolidated financial position, results of operations, or
liquidity.
In June 1997, the Financial Accounting Standards Board issued SFAS No. 131,
"Disclosures about Segments of an Enterprise and Related Information." SFAS
No. 131 establishes standards for the way that public business enterprises
report information about operation segments in annual financial statements and
requires that those enterprises report selected information about operation
segments in interim financial reports issued to shareholders. SFAS No. 131 also
establishes standards for related disclosures about products and services,
geographic areas, and major customers. Management of the Company believes that
it does not have separate reportable operating segments under the provision of
SFAS No. 131. The provisions of SFAS No. 131 are effective for financial
statements for periods beginning after December 15, 1997.
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. The adoption of this
Statement did not have a material impact on the Company's consolidated financial
position, results of operation, or liquidity.
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, 2000. Management of the
Company does not expect that the adoption of SFAS No. 133 will have a material
impact on the Company's consolidated financial position, results of operation,
or liquidity.
COMMON STOCK AND DIVIDENDS
The Company had issued and outstanding 17,226,715 shares of $1.00 par value
Common Stock held by approximately 1,918 holders of record at March 20, 2000.
The book value of the stock at December 31, 1999 was $22.05 per share compared
with $22.42 per share, adjusted for stock dividends, one year ago.
9
<PAGE>
The decrease in the book value of the stock resulted primarily from the negative
impact of the comprehensive income reporting requirements.
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 1998 and 1999,
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, 1999 and
1998. Some of the quotations reflect inter-dealer prices, without retail
mark-up, mark-down or commission and may not necessarily represent actual
transactions. The closing sales price of the Company's Common Stock was $39.88
per share at March 20, 2000.
HIGH LOW
--------- ---------
1999:
First quarter................... $ 41.80 $ 34.20
Second quarter.................. 42.50 35.40
Third quarter................... 47.50 41.19
Fourth quarter.................. 48.00 41.59
HIGH LOW
--------- ---------
1998:
First quarter................... $ 51.20 $ 49.60
Second quarter.................. 54.24 50.88
Third quarter................... 50.15 45.20
Fourth quarter.................. 43.90 40.50
The Company in 1999 paid a $8,499,000 and $8,628,000 or $0.60 and $0.50 per
share respectively, and in 1998 paid a $5,683,000 and $5,655,000 or $0.50 and
$.40 per share respectively, special cash dividends to the shareholders. In
addition, the Company has issued stock dividends during the last five year
period as follows:
STOCK
DATE DIVIDEND
- ------------------------------------- --------
May 19, 1995......................... 25%
May 17, 1996......................... 25
May 16, 1997......................... 25
May 22, 1998......................... 25
May 20, 1999......................... 25
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, 1999 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.
10
<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, 1999 and 1998, 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, 1999. 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 includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. 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, 1999
and 1998, and the results of their operations and their cash flows for each of
the years in the three-year period ended December 31, 1999, in conformity with
generally accepted accounting principles.
/s/ KPMG LLP
San Antonio, Texas
March 15, 2000
11
<PAGE>
INTERNATIONAL BANCSHARES CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CONDITION
DECEMBER 31, 1999 AND 1998
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
1999 1998
----------- -----------
ASSETS
Cash and due from banks.............. $ 121,695 $ 94,594
Federal funds sold................... 13,300 26,000
----------- -----------
Total cash and cash
equivalents................... 134,995 120,594
Time deposits with banks............. 1,877 1,373
Investment securities:
Held to maturity (Market value of
$2,405 on December 31, 1999 and
$2,505 on December 31, 1998)....... 2,406 2,508
Available for sale (Amortized cost
of $3,050,099 on December 31, 1999
and $2,991,836 on December 31,
1998).............................. 2,993,311 3,005,369
----------- -----------
Total investment
securities.................... 2,995,717 3,007,877
Loans:
Commercial, financial and
agricultural..................... 1,115,511 896,060
Real estate -- mortgage............ 278,819 215,689
Real estate -- construction........ 129,813 94,374
Consumer........................... 171,104 250,917
Foreign............................ 216,632 166,324
----------- -----------
Total loans................. 1,911,879 1,623,364
Less unearned discounts............ (8,355) (8,025)
----------- -----------
Loans, net of unearned
discounts................. 1,903,524 1,615,339
Less allowance for possible loan
losses........................... (26,770) (25,551)
----------- -----------
Net loans................... 1,876,754 1,589,788
----------- -----------
Bank premises and equipment, net..... 145,342 137,568
Accrued interest receivable.......... 34,827 31,542
Other investments.................... 130,089 16,026
Intangible assets.................... 43,598 44,971
Other assets......................... 58,605 38,138
----------- -----------
Total assets................ $ 5,421,804 $ 4,987,877
=========== ===========
LIABILITIES AND SHAREHOLDERS' EQUITY
Liabilities:
Deposits:
Demand -- non-interest bearing... $ 499,369 $ 414,412
Savings and interest bearing
demand.......................... 928,455 947,408
Time............................. 2,099,388 2,007,817
----------- -----------
Total deposits.............. 3,527,212 3,369,637
Securities sold under repurchase
agreements...................... 123,752 135,700
Other borrowed funds............. 1,380,000 1,074,000
Other liabilities................ 37,404 38,257
----------- -----------
Total liabilities........... 5,068,368 4,617,594
----------- -----------
Shareholders' equity:
Common stock of $1.00 par value.
Authorized 40,000,000 shares;
issued 21,091,754 shares in
1999 and 16,790,999 shares in
1998............................ 21,092 16,791
Surplus.......................... 24,050 22,250
Retained earnings................ 385,942 341,025
Accumulated other comprehensive
income (loss)................... (36,912) 8,797
----------- -----------
394,172 388,863
Less cost of shares in treasury,
3,851,844 shares in 1999 and
2,670,927 shares in 1998........... (40,736) (18,580)
----------- -----------
Total shareholders'
equity........................ 353,436 370,283
----------- -----------
Total liabilities and
shareholders' equity.......... $ 5,421,804 $ 4,987,877
=========== ===========
See accompanying notes to consolidated financial statements.
12
<PAGE>
INTERNATIONAL BANCSHARES CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
1999 1998 1997
-------------- -------------- --------------
<S> <C> <C> <C>
Interest income:
Loans, including fees........... $ 160,105 $ 145,016 $ 127,348
Time deposits with banks........ 104 89 47
Federal funds sold.............. 710 1,462 1,120
Investment securities:
Taxable.................... 175,042 179,030 146,820
Tax-exempt................. 4,432 241 90
Other........................... 343 336 307
-------------- -------------- --------------
Total interest
income............. 340,736 326,174 275,732
-------------- -------------- --------------
Interest expense:
Savings and interest bearing
demand deposits............... 27,182 26,419 22,152
Time deposits................... 97,626 101,823 89,413
Federal funds purchased and
securities sold under
repurchase agreements......... 6,047 13,396 15,754
Other borrowings................ 54,340 39,969 18,052
Other........................... 10 302 --
-------------- -------------- --------------
Total interest
expense............ 185,205 181,909 145,371
-------------- -------------- --------------
Net interest income... 155,531 144,265 130,361
Provision for possible loan losses... 6,379 8,571 7,740
-------------- -------------- --------------
Net interest income
after provision for
possible loan
losses............. 149,152 135,694 122,621
-------------- -------------- --------------
Non-interest income:
Service charges on deposit
accounts...................... 30,629 21,679 18,511
Other service charges,
commissions and fees.......... 9,129 9,352 8,295
Investment securities
transactions, net............. 13 3,893 484
Other investments............... 6,441 (1,391) 4,474
Gain on sale of loans........... 6,449 178 157
Other income.................... 8,305 7,987 4,855
-------------- -------------- --------------
Total non-interest
income............. 60,966 41,698 36,776
-------------- -------------- --------------
Non-interest expense:
Employee compensation and
benefits...................... 42,857 39,733 33,431
Occupancy....................... 7,537 7,675 6,258
Depreciation of bank premises
and equipment................. 11,700 10,388 8,256
Professional fees............... 4,953 3,461 3,839
Stationery and supplies......... 3,157 3,186 3,026
Amortization of intangible
assets........................ 3,898 3,936 2,949
Other........................... 32,881 30,668 27,986
-------------- -------------- --------------
Total non-interest
expense............ 106,983 99,047 85,745
-------------- -------------- --------------
Income before income
taxes.............. 103,135 78,345 73,652
Income taxes......................... 36,887 24,620 24,771
-------------- -------------- --------------
Net income............ $ 66,248 $ 53,725 $ 48,881
============== ============== ==============
Basic earnings per common share:
Net Income...................... $ 4.11 $ 3.30 $ 3.07
============== ============== ==============
Weighted average number of
shares outstanding............ 16,118,661 16,286,161 15,929,548
Diluted earnings per common share:
Net Income...................... $ 4.03 $ 3.22 $ 2.96
============== ============== ==============
Weighted average number of
shares outstanding............ 16,422,774 16,706,522 16,515,611
</TABLE>
See accompanying notes to consolidated financial statements.
13
<PAGE>
INTERNATIONAL BANCSHARES CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
YEARS ENDED DECEMBER 31, 1999, 1998, AND 1997
(DOLLARS IN THOUSANDS)
1999 1998 1997
--------- --------- ---------
Net Income........................... $ 66,248 $ 53,725 $ 48,881
--------- --------- ---------
Other comprehensive income, net of
tax:
Unrealized holding gains
(losses) on securities
available for sale arising
during the year............... (48,751) (9,021) 10,346
Reclassification adjustment for
(gains) losses on securities
available for sale included in
net income.................... 3,042 (3,764) (152)
--------- --------- ---------
Comprehensive income................. $ 20,539 $ 40,940 $ 59,075
========= ========= =========
14
<PAGE>
INTERNATIONAL BANCSHARES CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997
(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, 1997.......... 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
========= ======= ======= ========= ================ ======== ========
Net income....................... -- -- -- 66,248 -- -- 66,248
Stock dividends:
Shares issued............... 4,204 4,204 -- (4,204) -- -- --
Cash dividends.............. -- -- -- (17,127) -- -- (17,127)
Purchase of treasury stock....... -- -- -- -- -- (22,156) (22,156)
Exercise of stock options........ 97 97 1,800 -- -- -- 1,897
Other comprehensive income, net
of tax:
Net change in unrealized gains
(losses) on available for
sale securities, net of
reclassification
adjustment.................. -- -- -- -- (45,709) -- (45,709)
--------- ------- ------- --------- ---------------- -------- --------
Balances at December 31, 1999........ 21,092 $21,092 $24,050 $ 385,942 $(36,912) $(40,736) $353,436
========= ======= ======= ========= ================ ======== ========
</TABLE>
See accompanying notes to consolidated financial statements.
15
<PAGE>
INTERNATIONAL BANCSHARES CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
1999 1998 1997
------------ ------------ ------------
<S> <C> <C> <C>
Operating activities:
Net income.......................... $ 66,248 $ 53,725 $ 48,881
Adjustments to reconcile net income
to net cash provided by operating
activities:
Provision for possible loan
losses....................... 6,379 8,571 7,740
Recoveries on charged-off
loans........................ 1,389 1,349 997
Net cost of operations of other
real estate owned............ 509 106 161
Write down of credit card
receivables to net realizable
value........................ 2,766 -- --
Gain on sale of loans.......... (6,449) (178) (157)
Depreciation of bank premises
and equipment................ 11,700 10,388 8,256
Depreciation and amortization
of leasing assets............ 1,796 948 931
Accretion of investment
securities discounts......... (15,460) (10,708) (1,445)
Amortization of investment
securities premiums.......... 12,611 14,260 10,017
Realized gain on investment
securities transactions,
net.......................... (13) (3,893) (484)
Gain on sale of bank premises
and equipment................ (45) (1,715) (51)
Deferred tax expense........... 4,372 2,122 1,139
Increase in accrued interest
receivable................... (3,261) (271) (7,145)
(Decrease) increase other
liabilities.................. (5,287) 11,831 11,537
------------ ------------ ------------
Net cash provided by
operating activities..... 77,255 86,535 80,377
------------ ------------ ------------
Investing activities:
Cash acquired in purchase
transactions...................... 20,320 -- 102,664
Proceeds from maturities of
securities........................ 2,350 975 2,660
Proceeds from sales of available for
sale securities................... 616,080 541,362 229,287
Purchases of available for sale
securities........................ (1,325,652) (1,967,527) (1,366,791)
Principal collected on
mortgage-backed securities........ 676,535 976,706 355,675
Proceeds from matured time deposits
with banks........................ 684 1,290 198
Purchases of time deposits with
banks............................. (1,188) (1,076) (603)
Net increase in loans............... (286,548) (179,350) (74,620)
Net (increase) decrease in other
assets............................ (132,896) 17,787 2,743
Purchases of bank premises and
equipment......................... (18,983) (19,193) (24,626)
Proceeds from sale of bank premises
and equipment..................... 76 2,573 101
------------ ------------ ------------
Net cash used in investing
activities............... (449,222) (626,453) (773,312)
------------ ------------ ------------
Financing activities:
Net increase (decrease) in
non-interest bearing demand
deposits.......................... $ 84,031 $ (36,125) $ 57,137
Net (decrease) increase in savings
and interest bearing demand
deposits.......................... (27,177) 127,649 23,996
Net increase in time deposits....... 72,848 102,553 141,511
Net (decrease) increase in federal
funds purchased and securities
sold under repurchase
agreements........................ (11,948) (342,709) 287,201
Proceeds from issuance of other
borrowed funds.................... 2,045,000 2,440,000 997,347
Principal payments on other borrowed
funds............................. (1,739,000) (1,856,000) (746,347)
Purchase of treasury stock.......... (22,156) (4,046) (4,491)
Proceeds from stock transactions.... 1,897 2,765 6,778
Payments of cash dividends.......... (17,101) (11,297) (4,400)
Payments of cash dividends in lieu
of fractional shares.............. (26) (41) (26)
------------ ------------ ------------
Net cash provided by
financing activities..... 386,368 422,749 758,706
------------ ------------ ------------
Increase (decrease) in cash
and cash equivalents..... 14,401 (117,169) 65,771
Cash and cash equivalents at beginning
of year............................... 120,594 237,763 171,992
------------ ------------ ------------
Cash and cash equivalents at end of
year.................................. $ 134,995 $ 120,594 $ 237,763
============ ============ ============
Supplemental cash flow information:
Interest paid....................... $ 189,137 $ 185,402 $ 148,825
Income taxes paid................... 26,753 21,691 23,815
Supplemental schedule of noncash
investing and financing activities
relating to various purchase
transactions:
Loans acquired...................... 4,503 $ -- $ 140,112
Investment securities and other
assets acquired................... 3,112 -- 93,382
Deposit and other liabilities
assumed........................... 27,935 -- 336,158
</TABLE>
See accompanying notes to consolidated financial statements.
16
<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 judgments 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, 1999 and 1998 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
17
<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 to approximate the effective 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
judgment 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.
NON-ACCRUAL LOANS
The non-accrual loan policy of the Corporation's bank subsidiaries is to
discontinue the accrual of interest on loans when management determines that it
is probable that future interest accruals will be uncollectible. Interest income
on non-accrual loans is recognized only to the extent payments are received or
when, in management's opinion, the creditor's financial condition warrants
reestablishment of interest accruals.
OTHER REAL ESTATE OWNED
Other real estate owned is comprised of real estate acquired by foreclosure
and deeds in lieu of foreclosure. Other real estate is carried at the lower of
the recorded investment in the property or its fair value less estimated costs
to sell such property (as determined by independent appraisal). Prior to
foreclosure, the value of the underlying loan is written down to the fair value
of the real estate to be acquired by a charge to the allowance for loan losses
if necessary. Any subsequent write-downs are charged against other non-interest
expenses. Operating expenses of such properties and gains and losses on their
disposition are included in other non-interest expenses.
BANK PREMISES AND EQUIPMENT
Bank premises and equipment are stated at cost less accumulated
depreciation. Depreciation is computed on straight-line and accelerated methods
over the estimated useful lives of the assets. Repairs and maintenance are
charged to operations as incurred and expenditures for renewals and betterments
are capitalized.
INCOME TAXES
The Company recognizes certain income and expenses in different time
periods for financial reporting and income tax purposes. The provision for
deferred income taxes is based on the asset and liability method
18
<PAGE>
INTERNATIONAL BANCSHARES CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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 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
Long-lived assets and certain identifiable intangibles to be disposed of
are 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.
19
<PAGE>
INTERNATIONAL BANCSHARES CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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
Environmental remediation liabilities are accrued when the criteria of SFAS
No. 5, "Accounting for Contingencies," have been met.
ACCOUNTING FOR TRANSFERS AND SERVICING OF FINANCIAL ASSETS
The Company accounts for transfers and servicing of financial assets and
extinguishments of liabilities based on the application of a
financial-components approach that focuses on control. After a transfer of
financial assets, the Company recognizes the financial and servicing assets it
controls and liabilities it has incurred, derecognizes financial assets when
control has been surrendered and derecognizes liabilities when extinguished.
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 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 $4,503,000 and assumed
deposits of approximately $27,873,000 and received cash and other assets in the
amount of approximately $23,432,000. 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
20
<PAGE>
INTERNATIONAL BANCSHARES CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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.
(3) INVESTMENT SECURITIES
The amortized cost and estimated market value by type of investment
security at December 31, 1999 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....................... $ 321 $-- $ (1) $ 320 $ 321
Other securities..................... 2,085 -- -- 2,085 2,085
---------- ----------- ----------- ---------- ---------
Total investment securities..... $2,406 $-- $ (1) $2,405 $ 2,406
========== =========== =========== ========== =========
</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............. $ 261,980 $ -- $ (1,000) $ 260,980 $ 260,980
Mortgage-backed securities........... 2,534,461 4,695 (47,193) 2,491,963 2,491,963
Obligations of states and political
subdivisions....................... 102,210 2 (11,796) 90,416 90,416
Other securities..................... 76,212 45 (2,103) 74,154 74,154
Equity securities.................... 75,236 603 (41) 75,798 75,798
---------- ----------- ----------- ---------- ----------
Total investment securities..... $3,050,099 $ 5,345 $ (62,133) $2,993,311 $2,993,311
========== =========== =========== ========== ==========
</TABLE>
21
<PAGE>
INTERNATIONAL BANCSHARES CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The amortized cost and estimated market value of investment securities at
December 31, 1999, 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.............. $ 260 $ 260 $ 807 $ 808
Due after one year through five
years.............................. 1,886 1,885 792 794
Due after five years through ten
years................................ 260 260 10,000 9,600
Due after ten years.................. -- -- 428,803 414,348
Mortgage-backed securities........... -- -- 2,534,461 2,491,963
Equity securities.................... -- -- 75,236 75,798
---------- ---------- ---------- ----------
Total investment securities..... $2,406 $2,405 $3,050,099 $2,993,311
========== ========== ========== ==========
</TABLE>
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>
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, to secure public monies as required by law,
repurchase agreements and short-term fixed borrowings was $2,450,133,000 and
$2,405,878,000, respectively, at December 31, 1999.
Proceeds from the sale of securities available-for-sale were $616,080,000,
$541,362,000 and $229,287,000 during 1999, 1998 and 1997, respectively. Gross
gains of $2,639,000 and gross losses of $2,626,000 were realized in 1999
primarily from the sale of available-for-sale mortgage-backed securities.
22
<PAGE>
INTERNATIONAL BANCSHARES CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Gross gains and losses of $4,374,000 and $481,000 and $619,000 and $135,000 were
realized in 1998 and 1997, 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 $73,808,000 at December 31, 1999.
(4) ALLOWANCE FOR POSSIBLE LOAN LOSSES
A summary of the transactions in the allowance for possible loan losses for
the years ended December 31, 1999, 1998 and 1997 is as follows:
1999 1998 1997
--------- --------- ---------
(DOLLARS IN THOUSANDS)
Balance at January 1, 1999........... $ 25,551 $ 24,516 $ 21,036
--------- --------- ---------
Losses charged to allowance..... (6,549) (8,885) (6,336)
Recoveries credited to
allowance..................... 1,389 1,349 997
--------- --------- ---------
Net losses charged to
allowance..................... (5,160) (7,536) (5,339)
Provision charged to
operations.................... 6,379 8,571 7,740
--------- --------- ---------
Allowances acquired in purchase
transactions.................. -- -- 1,079
--------- --------- ---------
Balance at December 31, 1999......... $ 26,770 $ 25,551 $ 24,516
========= ========= =========
Loans accounted for on a non-accrual basis at December 31, 1999, 1998 and
1997 amounted to $7,662,000, $5,538,000 and $5,742,000, respectively. The effect
of such non-accrual loans reduced interest income by $874,000, $708,000 and
$602,000 for the years ended December 31, 1999, 1998 and 1997, 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 include (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. 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. 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 $7,738,000 at December 31, 1999, $8,440,000 at December
31, 1998 and $12,854,000 at December 31, 1997. The average recorded investment
in impaired loans during 1999, 1998, and 1997 was $8,028,000, $8,962,000 and
$12,507,000, respectively. The total allowance for possible loan losses related
to these loans was $882,000, $1,384,000 and $1,144,000 at December 31, 1999,
1998 and 1997, respectively. Interest income on impaired loans of $371,000,
$443,000 and $777,000 was recognized for cash payments received in 1999, 1998
and 1997, 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
23
<PAGE>
INTERNATIONAL BANCSHARES CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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, 1999 was adequate to absorb possible losses from loans in
the portfolio at that date.
(5) BANK PREMISES AND EQUIPMENT
A summary of bank premises and equipment, by asset classification, at
December 31, 1999 and 1998 were as follows:
ESTIMATED
USEFUL LIVES 1999 1998
------------ ---------- ----------
(DOLLARS IN THOUSANDS)
Bank buildings and improvements...... 5 - 40 years $ 108,165 $ 98,986
Furniture, equipment and vehicles.... 1 - 20 years 76,199 67,691
Land................................. 27,270 25,908
Real estate held for future
expansion:
Land, building, furniture, fixture
and equipment...................... 7 - 27 years 2,215 2,215
Less: accumulated depreciation....... (68,507) (57,232)
---------- ----------
Bank premises and equipment, net.......... $ 145,342 $ 137,568
========== ==========
24
<PAGE>
INTERNATIONAL BANCSHARES CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(6) DEPOSITS
Deposits as of December 31, 1999 and 1998 and related interest expense for
the years ended December 31, 1999, 1998 and 1997 were as follows:
1999 1998
------------ ------------
(DOLLARS IN THOUSANDS)
Deposits:
Demand -- non-interest bearing
Domestic........................ $ 438,028 $ 364,954
Foreign......................... 61,341 49,458
------------ ------------
Total demand non-interest
bearing......................... 499,369 414,412
------------ ------------
Savings and interest bearing demand
Domestic........................ 709,104 729,275
Foreign......................... 219,351 218,133
------------ ------------
Total savings and interest bearing
demand.......................... 928,455 947,408
------------ ------------
Time, certificates of deposit
$100,000 or more
Domestic........................ 469,607 460,946
Foreign......................... 859,164 746,994
Less than $100,000
Domestic........................ 472,217 530,732
Foreign......................... 298,400 269,145
------------ ------------
Total time, certificates of
deposit......................... 2,099,388 2,007,817
============ ============
Total deposits..................... $ 3,527,212 $ 3,369,637
============ ============
1999 1998 1997
----------- ---------- ----------
(DOLLARS IN THOUSANDS)
Interest Expense:
Savings and interest bearing demand
Domestic........................ $ 21,678 $ 21,580 $ 17,559
Foreign......................... 5,504 4,839 4,593
----------- ---------- ----------
Total savings and interest bearing
demand.......................... $ 27,182 $ 26,419 $ 22,152
=========== ========== ==========
Time, certificates of deposit
$100,000 or more
Domestic........................ $ 22,790 $ 24,484 $ 19,256
Foreign......................... 38,497 36,865 32,532
Less than $100,000
Domestic........................ 24,158 28,746 27,200
Foreign......................... 12,181 11,728 10,425
----------- ---------- ----------
Total time, certificates of
deposit......................... $ 97,626 $ 101,823 $ 89,413
=========== ========== ==========
Total interest expense on
deposits........................ $ 124,808 $ 128,242 $ 111,565
=========== ========== ==========
25
<PAGE>
INTERNATIONAL BANCSHARES CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(7) SECURITIES SOLD UNDER REPURCHASE AGREEMENTS
The Company's bank subsidiaries have entered into repurchase agreements
with the FHLB 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 $124,276,000, $257,589,000
and $301,511,000 during 1999, 1998 and 1997, respectively, and the maximum
amount outstanding at any month end during 1999, 1998 and 1997 was $136,066,000,
$518,450,000 and $540,370,000, respectively.
Further information related to repurchase agreements (securities sold under
agreements to repurchase) at December 31, 1999 and 1998 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, 1999 Term:
Overnight agreements............... $ 37,091 $ 36,040 $ 21,799 4.65%
1 to 29 days....................... 8,776 8,173 6,249 4.77%
30 to 90 days...................... 37,370 35,439 34,469 5.03%
Over 90 days....................... 62,178 57,219 61,235 5.30%
--------------- --------------- ---------- -----
Total......................... $ 145,415 $ 136,871 $ 123,752 5.09%
=============== =============== ========== =====
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%
=============== =============== ========== =====
</TABLE>
The book value and market value of securities sold includes the entire book
value and market value of securities partially or fully pledged under repurchase
agreements.
(8) OTHER BORROWED FUNDS
Other borrowed funds at December 31, 1999 and 1998 are $1,330,000,000 and
$974,000,000, respectively, of short-term fixed borrowings with the Federal Home
Loan Bank of Dallas at the market price offered at the time of funding. These
borrowings are secured by mortgage-backed investment securities. The weighted
average interest rate on the short-term fixed borrowings outstanding at December
31, 1999 and 1998 was 5.86% and 5.03%, respectively, and the weighted average
interest rate for the year 1999 and 1998 was 5.27% and 5.48%, respectively. The
average daily balance on short-term fixed borrowings was $948,446,000 and
$633,167,000 during 1999 and 1998, respectively, and the maximum amount
outstanding at any month end during 1999 and 1998 was $1,335,000,000 and
$1,004,000,000, respectively.
At December 31, 1999, the Company had a $50,000,000 long-term fixed rate
certificate of indebtedness outstanding payable to the FHLB at a ten year
Treasury rate minus forty-five basis points, maturing December 8, 2009. At
December 31, 1998, the Company had two long-term 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, maturing June 9, 2008 and July
7, 2008. Both certificates were called by the FHLB in 1999. These borrowings are
secured by a blanket lien of 1-4 family first lien mortgage loans.
26
<PAGE>
INTERNATIONAL BANCSHARES CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(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, 1999, 1998, and
1997 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, 1999:
Basic EPS
Income available to common
stockholders.................. $66,248 16,118,661 $4.11
Potential dilutive common
shares........................ 304,113
----------- -------------
Diluted EPS.......................... $66,248 16,422,774 $4.03
=========== =============
December 31, 1998:
Basic EPS
Income available to common
stockholders.................. $53,725 16,286,161 $3.30
Potential dilutive common
shares........................ 420,361
----------- -------------
Diluted EPS $53,725 16,706,522 $3.22
=========== =============
December 31, 1997:
Basic EPS
Income available to common
stockholders.................. $48,881 15,929,548 $3.07
Potential dilutive common
shares........................ 586,063
----------- -------------
Diluted EPS.......................... $48,881 16,515,611 $2.96
=========== =============
</TABLE>
(10) EMPLOYEES' PROFIT SHARING PLAN
The Company has a deferred profit sharing plan for full-time employees with
a minimum of one year of continuous employment. The Company's annual
contribution to the plan is based on a percentage, as determined by the Board of
Directors, of income before income taxes, as defined, for the year. Allocation
of the contribution among officers' and employees' accounts is based on length
of service and amount of salary earned. Profit sharing costs of $1,722,600,
$1,546,700 and $1,161,000 were charged to income for the years ended December
31, 1999, 1998, and 1997, 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 based upon 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.
27
<PAGE>
INTERNATIONAL BANCSHARES CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
A summary of assets attributable to international operations at December
31, 1999 and 1998 are as follows:
1999 1998
---------- ----------
(DOLLARS IN THOUSANDS)
Loans:
Commercial...................... $ 184,129 $ 135,328
Others.......................... 32,503 30,996
---------- ----------
216,632 166,324
Less allowance for possible loan
losses........................ (1,322) (1,124)
---------- ----------
Net loans.................. $ 215,310 $ 165,200
========== ==========
Accrued interest receivable.......... $ 1,725 $ 1,327
========== ==========
At December 31, 1999, the Company had $6,865,000 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 $15,317,000,
$11,795,000 and $11,821,000 for the years ended December 31, 1999, 1998 and
1997, 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:
1999 1998 1997
--------- --------- ---------
(DOLLARS IN THOUSANDS)
Current
U.S. $ 32,413 $ 22,443 $ 23,565
Foreign......................... 102 55 67
--------- --------- ---------
Total current taxes........ 32,515 22,498 23,632
Deferred............................. 4,372 2,122 1,139
--------- --------- ---------
Total income taxes......... $ 36,887 $ 24,620 $ 24,771
========= ========= =========
Total income tax expense differs from the amount computed by applying the
U.S. Federal income tax rate of 35% for 1999, 1998 and 1997 to income before
income taxes. The reasons for the differences for the years ended December 31
are as follows:
1999 1998 1997
--------- --------- ---------
(DOLLARS IN THOUSANDS)
Computed expected tax expense........ $ 36,097 $ 27,416 $ 25,846
Change in taxes resulting from:
Tax-exempt interest income...... (1,397) (151) (111)
Lease financing................. 3,193 (2,309) (1,397)
Employee benefits............... (1,609) -- --
Other........................... 603 (336) 433
--------- --------- ---------
Actual tax expense......... $ 36,887 $ 24,620 $ 24,771
========= ========= =========
28
<PAGE>
INTERNATIONAL BANCSHARES CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The tax effects of temporary differences that give rise to significant
portions of the deferred tax assets and deferred tax liabilities at December 31,
1999 and 1998 are reflected below:
1999 1998
------------ ----------
(DOLLARS IN THOUSANDS)
Deferred tax assets:
Loans receivable, principally
due to the allowance for
possible loan losses.......... $ 8,561 $ 8,042
Other real estate owned......... 766 516
Accrued expenses................ 1,466 1,286
Net unrealized losses on
available for sale investment
securities.................... 19,876 --
Other........................... 284 1,701
------------ ----------
Total deferred tax assets....... 30,953 11,545
Deferred tax liabilities:
Lease financing receivable...... (8,772) (4,964)
Bank premises and equipment,
principally due to differences
in depreciation............... (1,684) (2,175)
Net unrealized gains on
available for sale investment
securities.................... -- (4,733)
FHLB stock...................... (2,842) (2,046)
Other........................... (267) (479)
------------ ----------
Total deferred tax
liabilities................... (13,565) (14,397)
------------ ----------
Net deferred tax asset
(liability) $ 17,388 $ (2,852)
============ ==========
The Company did not record a valuation allowance against deferred tax
assets at December 31, 1999 and 1998 because management has concluded it is more
likely than not the Company will have future taxable earnings in excess of
future tax deductions.
29
<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, 1997 through
December 31, 1999 which were granted by the Company under the 1987 Plan or the
1996 Plan.
OPTION PRICE OPTIONS
PER SHARE OUTSTANDING
--------------- -----------
Balance at January 1, 1997.............. 837,386
Terminated......................... $6.01 - 24.60 (13,897)
Granted............................ 29.70 - 41.60 440,833
Exercised.......................... 6.01 - 24.60 (176,424)
-----------
Balance at December 31, 1997............ 1,087,898
Terminated......................... $6.83 - 37.82 (40,445)
Granted............................ 38.40 - 39.80 17,813
Exercised.......................... 6.83 - 37.82 (244,753)
-----------
Balance at December 31, 1998............ 820,513
Terminated......................... $15.00 - 43.00 (50,610)
Granted............................ 36.80 - 43.00 193,900
Exercised.......................... 15.74 - 30.23 (96,504)
-----------
Balance at December 31, 1999............ 867,299
===========
At December 31, 1999 and 1998, 316,698 and 201,419 options were
exercisable, respectively, and as of December 31, 1999, 39,622 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, 1999:
<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 12/31/99 LIFE PRICE AT 12/31/99 PRICE
- -------------------- ----------- ----------- --------- ------------ ---------
<S> <C> <C> <C> <C> <C>
$16.72.............. 5,492 .11 years $ 16.72 5,492 $ 16.72
15.74............... 212,102 3.5 years 15.74 145,400 15.74
19.44............... 784 4.8 years 19.44 -- 19.44
30.23 - 41.60....... 440,833 5.4 years 30.54 162,182 30.54
38.40 - 39.80....... 17,813 7.1 years 38.60 3,624 38.60
36.80 - 43.00....... 190,275 8.3 years 38.13 -- 38.13
----------- ------------
$15.74 - 43.00...... 867,299 316,698
=========== ============
</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
30
<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:
1999 1998 1997
--------- --------- ---------
Expected life (years)................ 6 6 6
Interest rate........................ 5.54% 4.46% 6.62%
Volatility........................... 33.68% 36.40% 30.08%
The following schedule shows total net income as reported and the pro forma
results:
<TABLE>
<CAPTION>
1999 1998 1997
--------- --------- ---------
<S> <C> <C> <C> <C>
Net income........................... As reported $ 66,248 $ 53,725 $ 48,881
Pro forma.... 64,478 52,123 47,667
Basic earnings....................... As reported $ 4.11 $ 3.30 $ 3.07
Pro forma 4.00 3.20 2.99
Diluted earnings..................... As reported $ 4.03 $ 3.22 $ 2.96
Pro forma 3.93 3.12 2.89
</TABLE>
The Company has a formal stock repurchase program and as part of the
program, the Company occasionally repurchases shares of Common Stock related to
the exercise of stock options through the surrender of other shares of Common
Stock of the Company owned by the option holders.
(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, 1999,
1998 and 1997 and noncancellable lease commitments at December 31, 1999 were not
significant.
Cash of approximately $29,171,000 and $25,434,000 at December 31, 1999 and
1998, 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 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 IRS has issued a Notice of
Proposed Adjustments to Affected Items of a Partnership for the other
transaction and
31
<PAGE>
INTERNATIONAL BANCSHARES CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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.Management currently estimates its exposure to be approximately
$4,800,000, which amount has been accrued for and included in income tax
expense. Management intends to continue to evaluate the merits of this matter
and make appropriate revisions if warranted.
(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
$39,938,000 and $48,712,000 at December 31, 1999 and 1998, respectively. During
1999, $16,397,000 of new loans were made and repayments totaled $25,171,000.
(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, 1999, the following financial instruments, whose contract amounts represent
credit risks, were outstanding:
<TABLE>
<S> <C>
Commitments to extend credit......... $ 577,480,000
Credit card lines.................... 50,981,000
Letters of credit.................... 50,011,000
</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.
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,
32
<PAGE>
INTERNATIONAL BANCSHARES CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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.
(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, 1999, the
aggregate amount legally available to be distributed to the Corporation from
bank subsidiaries as dividends was approximately $58,641,000, 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 $306,263,000. The undivided profits of the bank subsidiaries was
$152,078,000. 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,
1999, that the Corporation and the bank subsidiaries met all capital adequacy
requirements to which it is subject.
As of December 31, 1999, 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.
33
<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 1999 are also presented in the following table:
<TABLE>
<CAPTION>
TO BE WELL
CAPITALIZED UNDER
FOR CAPITAL PROMPT CORRECTIVE
ACTUAL ADEQUACY PURPOSES ACTION PROVISIONS
--------------------- ---------------------- ----------------------
AMOUNT RATIO AMOUNT RATIO AMOUNT RATIO
---------- --------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C> <C>
(GREATER (GREATER (GREATER (GREATER
THAN OR THAN OR THAN OR THAN OR
EQUAL TO) EQUAL TO) EQUAL TO) EQUAL TO)
(DOLLARS IN THOUSANDS)
AS OF DECEMBER 31, 1999:
Total Capital (to Risk Weighted Assets):
Consolidated....................... $ 374,803 14.46% $ 207,412 8.00% $ 259,266 10.00%
International Bank of Commerce,
Laredo........................... 274,551 12.29 178,752 8.00 223,441 10.00
International Bank of Commerce,
Brownsville...................... 36,833 19.37 15,211 8.00 19,014 10.00
International Bank of Commerce,
Zapata........................... 16,835 27.20 4,951 8.00 6,189 10.00
Commerce Bank...................... 19,705 21.47 7,343 8.00 9,178 10.00
Tier 1 Capital (to Risk Weighted Assets):
Consolidated....................... $ 347,780 13.41% $ 103,706 4.00% $ 155,559 6.00%
International Bank of Commerce,
Laredo........................... 251,450 11.25 89,376 4.00 134,064 6.00
International Bank of Commerce,
Brownsville...................... 34,982 18.40 7,605 4.00 11,408 6.00
International Bank of Commerce,
Zapata........................... 16,315 26.36 2,476 4.00 3,713 6.00
Commerce Bank...................... 18,556 20.22 3,671 4.00 5,507 6.00
Tier 1 Capital (to Average Assets):
Consolidated....................... $ 347,780 6.58% $ 211,527 4.00% $ 264,409 5.00%
International Bank of Commerce,
Laredo........................... 251,450 5.70 176,321 4.00 220,401 5.00
International Bank of Commerce,
Brownsville...................... 34,982 8.18 17,110 4.00 21,387 5.00
International Bank of Commerce,
Zapata........................... 16,315 8.18 7,983 4.00 9,978 5.00
Commerce Bank...................... 18,556 8.52 8,715 4.00 10,894 5.00
</TABLE>
34
<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 following table:
<TABLE>
<CAPTION>
TO BE WELL
CAPITALIZED UNDER
FOR CAPITAL PROMPT CORRECTIVE
ACTUAL ADEQUACY PURPOSES ACTION PROVISIONS
--------------------- ---------------------- ----------------------
AMOUNT RATIO AMOUNT RATIO AMOUNT RATIO
---------- --------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C> <C>
(GREATER (GREATER (GREATER (GREATER
THAN OR THAN OR THAN OR THAN OR
EQUAL TO) EQUAL TO) EQUAL TO) EQUAL TO)
(DOLLARS IN THOUSANDS)
AS OF DECEMBER 31, 1998:
Total Capital (to Risk Weighted Assets):
Consolidated....................... $ 343,669 14.45% $ 190,239 8.00% $ 237,798 10.00%
International Bank of Commerce,
Laredo........................... 248,814 12.03 165,426 8.00 206,783 10.00
International Bank of Commerce,
Brownsville...................... 30,436 18.20 13,375 8.00 16,719 10.00
International Bank of Commerce,
Zapata........................... 14,404 28.18 4,089 8.00 5,112 10.00
Commerce Bank...................... 18,768 24.18 6,208 8.00 7,760 10.00
Tier 1 Capital (to Risk Weighted Assets):
Consolidated....................... $ 317,794 13.36% $ 95,119 4.00% $ 142,679 6.00%
International Bank of Commerce,
Laredo........................... 226,595 10.96 82,713 4.00 124,070 6.00
International Bank of Commerce,
Brownsville...................... 28,806 17.23 6,688 4.00 10,031 6.00
International Bank of Commerce,
Zapata........................... 13,893 27.18 2,045 4.00 3,067 6.00
Commerce Bank...................... 17,795 22.93 3,104 4.00 4,656 6.00
Tier 1 Capital (to Average Assets):
Consolidated....................... $ 317,794 6.50% $ 195,546 4.00% $ 244,433 5.00%
International Bank of Commerce,
Laredo........................... 226,595 5.46 166,115 4.00 207,644 5.00
International Bank of Commerce,
Brownsville...................... 28,806 6.98 16,508 4.00 20,634 5.00
International Bank of Commerce,
Zapata........................... 13,893 9.38 5,924 4.00 7,404 5.00
Commerce Bank...................... 17,795 10.12 7,037 4.00 8,796 5.00
</TABLE>
35
<PAGE>
INTERNATIONAL BANCSHARES CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(18) FAIR VALUE OF FINANCIAL INSTRUMENTS
The fair value estimates, methods, and assumptions for the Company's
financial instruments at December 31, 1999 and 1998 are outlined below.
CASH, DUE FROM BANKS AND FEDERAL FUNDS SOLD
For these short-term instruments, the carrying amount is a reasonable
estimate of fair value.
TIME DEPOSITS WITH BANKS
As the contract interest rates are comparable to current market rates, the
carrying amount approximates fair market value.
INVESTMENT SECURITIES
For investment securities, which include U.S. Treasury securities,
obligations of other U.S. government agencies, obligations of states and
political subdivisions and mortgage pass through and related securities, fair
values are based on quoted market prices or dealer quotes. Fair values are based
on the value of one unit without regard to any premium or discount that may
result from concentrations of ownership of a financial instrument, possible tax
ramifications, or estimated transaction costs. See disclosures of fair value of
investment securities in Note 3.
LOANS
Fair values are estimated for portfolios of loans with similar financial
characteristics. Loans are segregated by type such as commercial, real estate
and consumer loans as outlined by regulatory reporting guidelines. Each category
is segmented into fixed and variable interest rate terms and by performing and
non-performing categories.
For variable rate performing loans, the carrying amount approximates the
fair value. For fixed rate performing loans, except residential mortgage loans,
the fair value is calculated by discounting scheduled cash flows through the
estimated maturity using estimated market discount rates that reflect the credit
and interest rate risk inherent in the loan. For performing residential mortgage
loans, fair value is estimated by discounting contractual cash flows adjusted
for prepayment estimates using discount rates based on secondary market sources
or the primary origination market. At December 31, 1999 and 1998, the carrying
amount of fixed rate performing loans was $677,616,000 and $558,386,000,
respectively, and the estimated fair value was $673,973,000 and $559,128,000,
respectively.
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, 1999 and 1998, the net carrying amount of
non-performing 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,
1999 and 1998. 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. At December 31, 1999 and 1998, the carrying amount of time deposits was
$2,099,388,000 and $2,007,817,000, respectively, and the estimated fair value
was $2,109,599,000 and $1,996,975,000, respectively.
36
<PAGE>
INTERNATIONAL BANCSHARES CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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, 1999 and 1998.
COMMITMENTS TO EXTEND CREDIT AND LETTERS OF CREDIT
Commitments to extend credit and fund letters of credit are principally at
current interest rates and therefore the carrying amount approximates fair
value.
LIMITATIONS
Fair value estimates are made at a point in time, based on relevant market
information and information about the financial instrument. These estimates do
not reflect any premium or discount that could result from offering for sale at
one time the Company's entire holdings of a particular financial instrument.
Because no market exists for a significant portion of the Company's financial
instruments, fair value estimates are based on judgments regarding future
expected loss experience, current economic conditions, risk characteristics of
various financial instruments and other factors. These estimates are subjective
in nature and involve uncertainties and matters of significant judgment and
therefore cannot be determined with precision. Changes in assumptions could
significantly affect the estimates.
Fair value estimates are based on existing on-and off-balance sheet
financial instruments without attempting to estimate the value of anticipated
future business and the value of assets and liabilities that are not considered
financial instruments. Other significant assets and liabilities that are not
considered financial assets or liabilities include the bank premises and
equipment and core deposit value. In addition, the tax ramifications related to
the effect of fair value estimates have not been considered in the above
estimates.
37
<PAGE>
INTERNATIONAL BANCSHARES CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(19) INTERNATIONAL BANCSHARES CORPORATION (PARENT COMPANY ONLY) FINANCIAL
INFORMATION
STATEMENTS OF CONDITION
(PARENT COMPANY ONLY)
DECEMBER 31, 1999 AND 1998
(DOLLARS IN THOUSANDS)
1999 1998
---------- ----------
ASSETS
Cash................................. $ 227 $ 97
Repurchase agreements................ -- 1,600
Other investments.................... 8,390 10,708
Notes receivable..................... 42,374 49,925
Investment in subsidiaries........... 292,284 296,422
Other assets......................... 10,196 12,244
---------- ----------
Total assets............... 353,471 370,996
========== ==========
LIABILITIES AND SHAREHOLDERS' EQUITY
Liabilities:
Other liabilities............... 35 713
---------- ----------
Total liabilities.......... 35 713
---------- ----------
Shareholders' equity:
Common stock.................... 21,092 16,791
Surplus......................... 24,050 22,250
Retained earnings............... 385,942 341,025
Accumulated other comprehensive
income (loss).................. (36,912) 8,797
---------- ----------
394,172 388,863
Less cost of shares in
treasury....................... (40,736) (18,580)
---------- ----------
Total shareholders'
equity.................. 353,436 370,283
---------- ----------
Total liabilities and
shareholders' equity.... $ 353,471 $ 370,996
========== ==========
38
<PAGE>
INTERNATIONAL BANCSHARES CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
STATEMENTS OF INCOME
(PARENT COMPANY ONLY)
YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997
(DOLLARS IN THOUSANDS)
1999 1998 1997
--------- --------- ---------
Income:
Dividends from subsidiaries..... $ 30,500 $ 3,455 $ 17,035
Interest income on notes
receivable.................... 4,463 5,202 6,134
Interest income on
investments................... 506 745 36
Other interest income........... 343 289 307
Other........................... 1,316 (1,377) 4,517
--------- --------- ---------
Total income............... 37,128 8,314 28,029
--------- --------- ---------
Expenses:
Interest expense on notes
payable....................... -- -- 142
Other........................... 382 695 380
--------- --------- ---------
Total expenses............. 382 695 522
--------- --------- ---------
Income before federal
income taxes and equity
in undistributed net
income of
subsidiaries............ 36,746 7,619 27,507
Federal income tax expense........... 873 (277) 1,785
--------- --------- ---------
Income before equity in
undistributed net income
of subsidiaries......... 35,873 7,896 25,722
Equity in undistributed net income of
subsidiaries....................... 30,375 45,829 23,159
--------- --------- ---------
Net income................. $ 66,248 $ 53,725 $ 48,881
========= ========= =========
39
<PAGE>
INTERNATIONAL BANCSHARES CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
STATEMENTS OF CASH FLOWS
(PARENT COMPANY ONLY)
YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
1999 1998 1997
---------- ---------- ----------
<S> <C> <C> <C>
Operating activities:
Net income................................ $ 66,248 $ 53,725 $ 48,881
Adjustments to reconcile net income to net
cash provided by operating activities:
Gain on sale of other real estate.... -- -- (113)
(Decrease) increase in other
liabilities....................... (678) 482 197
Equity in undistributed net income of
subsidiaries...................... (30,375) (45,829) (23,159)
---------- ---------- ----------
Net cash provided by operating
activities................... 35,195 8,378 25,806
---------- ---------- ----------
Investing activities:
Contributions to subsidiaries............. (10,965) (11,648) (18,656)
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.................................. (2,500) (3,550) (7,500)
Proceeds from repurchase agreement with
banks.................................. 4,100 9,450 --
Purchase of available for sale other
securities............................. -- (10,036) (1,156)
Principal collected on mortgage-backed
securities............................. 2,087 1,339 --
Net decrease in notes receivable.......... 7,551 7,284 10,192
Decrease (increase) in other assets....... 2,048 11,149 (5,364)
Proceeds from sale of other real estate... -- -- 665
---------- ---------- ----------
Net cash provided (used) in
investing activities......... 2,321 3,988 (21,653)
---------- ---------- ----------
Financing activities:
Proceeds from issuance of other borrowed
funds.................................. -- -- 6,333
Principal payments on notes payable....... -- -- (8,333)
Proceeds from stock transactions.......... 1,898 2,765 6,778
Payments of cash dividends................ (17,102) (11,297) (4,400)
Payments of cash dividends in lieu of
fractional shares...................... (26) (41) (26)
Purchase of treasury stock................ (22,156) (4,046) (4,491)
---------- ---------- ----------
Net cash used in financing
activities................... (37,386) (12,619) (4,139)
---------- ---------- ----------
Increase (decrease) in cash and
cash equivalents............. 130 (253) 14
Cash at beginning of year................... 97 350 336
---------- ---------- ----------
Cash at end of year......................... $ 227 $ 97 $ 350
========== ========== ==========
Supplemental cash flow information:
Interest paid............................. $ -- $ -- $ 131
</TABLE>
40
<PAGE>
INTERNATIONAL BANCSHARES CORPORATION
OFFICERS AND DIRECTORS
OFFICERS DIRECTORS
DENNIS E. NIXON DENNIS E. NIXON
Chairman of the Board and President President
International Bank of Commerce
R. DAVID GUERRA
Vice President R. DAVID GUERRA
President
LEONARDO SALINAS International Bank of Commerce
Vice President Branch in McAllen, Texas
EDUARDO J. FARIAS LEONARDO SALINAS
Vice President Senior Executive Vice President
International Bank of Commerce
RICHARD CAPPS
Vice President LESTER AVIGAEL
Retail Merchant
IMELDA NAVARRO Chairman of the Board
Treasurer International Bank of Commerce
WILLIAM CUELLAR IRVING GREENBLUM
Auditor Retail Merchant
LUISA D. BENAVIDES RICHARD E. HAYNES
Secretary Attorney at Law; Real
Estate Investments
MARISA V. SANTOS
Assistant Secretary SIOMA NEIMAN
An International Entrepreneur
ANTONIO R. SANCHEZ, JR.
Chairman of the Board of Sanchez
Oil & Gas Corporation;
Investments
PEGGY J. NEWMAN
Investments
"EXHIBIT 21"
LIST OF SUBSIDIARIES
Subsidiaries of International Bancshares Corporation
NAME BUSINESS % OF OWNERSHIP
IBC Subsidiary Corporation Bank Holding Company 100%
IBC Life Insurance Company Credit Life Insurance 100%
IBC Trading Company Export Trading 100%
IBC Capital Corporation Investments 100%
Subsidiaries of IBC Subsidiary Corporation
NAME BUSINESS % OF OWNERSHIP
International Bank of Commerce State Bank 100%
Commerce Bank State Bank 100%
International Bank of Commerce,
Zapata State Bank 100%
International Bank of Commerce,
Brownsville State Bank 100%
"EXHIBIT 23"
ACCOUNTANTS' CONSENT
The Board of Directors
International Bancshares Corporation:
We consent to incorporation by reference in Registration Statement No. 33-11689
on Form S-8 of International Bancshares Corporation of our report dated March
15, 2000 relating to the consolidated statements of condition of International
Bancshares Corporation and subsidiaries as of December 31, 1999 and 1998, 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, 1999, which report is incorporated by reference in the
December 31, 1999 annual report on Form 10-K of International Bancshares
Corporation.
/s/ KPMG LLP
San Antonio, Texas
March 27, 2000
<TABLE> <S> <C>
<ARTICLE> 9
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-END> DEC-31-1999
<CASH> 121,695
<INT-BEARING-DEPOSITS> 1,877
<FED-FUNDS-SOLD> 13,300
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 2,993,311
<INVESTMENTS-CARRYING> 2,406
<INVESTMENTS-MARKET> 2,405
<LOANS> 1,911,879
<ALLOWANCE> 26,770
<TOTAL-ASSETS> 5,421,804
<DEPOSITS> 3,527,212
<SHORT-TERM> 1,330,000
<LIABILITIES-OTHER> 37,404
<LONG-TERM> 50,000
0
0
<COMMON> 21,092
<OTHER-SE> 332,344
<TOTAL-LIABILITIES-AND-EQUITY> 5,421,804
<INTEREST-LOAN> 160,105
<INTEREST-INVEST> 180,288
<INTEREST-OTHER> 343
<INTEREST-TOTAL> 340,736
<INTEREST-DEPOSIT> 124,808
<INTEREST-EXPENSE> 185,205
<INTEREST-INCOME-NET> 155,531
<LOAN-LOSSES> 6,379
<SECURITIES-GAINS> 13
<EXPENSE-OTHER> 106,983
<INCOME-PRETAX> 103,135
<INCOME-PRE-EXTRAORDINARY> 103,135
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 66,248
<EPS-BASIC> 4.11
<EPS-DILUTED> 4.03
<YIELD-ACTUAL> 0
<LOANS-NON> 7,662
<LOANS-PAST> 14,248
<LOANS-TROUBLED> 543
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 25,551
<CHARGE-OFFS> 6,549
<RECOVERIES> 1,389
<ALLOWANCE-CLOSE> 26,770
<ALLOWANCE-DOMESTIC> 25,448
<ALLOWANCE-FOREIGN> 1,322
<ALLOWANCE-UNALLOCATED> 0
</TABLE>
