-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, C69bhsPsTqI1xfQBi6AhKFCO2g2tF1LeXbLKEMMD3JzECg3vedyLVIBCRm0JZIu1 Zru4LhaAPRDIo6UFQALEnQ== 0000890566-97-000597.txt : 19970401 0000890566-97-000597.hdr.sgml : 19970401 ACCESSION NUMBER: 0000890566-97-000597 CONFORMED SUBMISSION TYPE: 10-K405 PUBLIC DOCUMENT COUNT: 5 CONFORMED PERIOD OF REPORT: 19961231 FILED AS OF DATE: 19970331 SROS: NONE FILER: COMPANY DATA: COMPANY CONFORMED NAME: INTERNATIONAL BANCSHARES CORP CENTRAL INDEX KEY: 0000315709 STANDARD INDUSTRIAL CLASSIFICATION: STATE COMMERCIAL BANKS [6022] IRS NUMBER: 742157138 STATE OF INCORPORATION: TX FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K405 SEC ACT: 1934 Act SEC FILE NUMBER: 000-09439 FILM NUMBER: 97568517 BUSINESS ADDRESS: STREET 1: 12OO SAN BERNARDO AVE STREET 2: PO BOX 1359 CITY: LAREDO STATE: TX ZIP: 78040-1359 BUSINESS PHONE: 2107227611 MAIL ADDRESS: STREET 1: P O BOX 1359 STREET 2: 1200 SAN BERNARDO CITY: LAREDO STATE: TX ZIP: 78040 10-K405 1 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, 1996 0-9439 INTERNATIONAL BANCSHARES CORPORATION (Exact Name of Registrant as Specified in its Charter) TEXAS 74-2157138 (State of Incorporation) (I.R.S. Employer Identification No.) 1200 San Bernardo Avenue LAREDO, TEXAS 78042-1359 AREA CODE (210) 722-7611 (Address of principal executive (Registrant's telephone number) office and Zip Code) Securities registered pursuant to Section 12(b) of the Act: Name of Each Exchange on TITLE OF EACH CLASS WHICH REGISTERED None None Securities Registered Pursuant to Section 12(g) of the Act: COMMON STOCK ($1.00 PAR VALUE) (Title of Class) Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No . Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of Registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.[X] The aggregate market value of the voting stock held by non-affiliates of the Registrant as of March 21, 1997 was $269,691,493. As of March 21, 1997, there were 8,777,058 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, 1996 (in Parts I and II). CONTENTS PART I PAGE Item 1. Business........................................... 3 Item 2. Properties......................................... 25 Item 3. Legal Proceedings.................................. 26 Item 4. Submission of Matters to a Vote of Security Holders................................. 26 PART II Item 5. Market for the Registrant's Common Stock and Related Security Holder Matters.............. 26 Item 6. Selected Financial Data............................ 26 Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations...................................... 26 Item 8. Financial Statements and Supplementary Data........ 26 Item 9. Changes In and Disagreements with Accountants on Accounting and Financial Disclosure.............. 26 PART III Item 10. Directors and Executive Officers of the Registrant. 27 Item 11. Executive Compensation............................. 29 Item 12. Security Ownership of Certain Beneficial Owners and Management............................ 31 Item 13. Certain Relationships and Related Transactions..... 33 PART IV Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K.......................... 34 Signatures................................................... 38 2 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 62 branch offices located in 23 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, 1996 consisted of all the outstanding capital stock of four Texas state banking associations (the "Banks" or "bank subsidiaries"). All of the Company's bank subsidiaries are members of the Federal Deposit Insurance Corporation. The bank subsidiaries are in the business of gathering funds from various sources and investing these funds in order to earn a return. Funds gathering primarily takes the form of accepting demand and time deposits from individuals, partnerships, corporations and public entities. Investments principally are made in loans to various individuals and entities as well as in debt securities of the U.S. Government and various other entities whose payments are guaranteed by the U.S. Government. Historically, the bank subsidiaries have primarily focused on providing commercial banking services to small and medium sized businesses located in its trade area and international banking services. In recent years, the bank subsidiaries have also emphasized consumer and retail banking, including mortgage lending and credit card services, as well as branches situated in retail locations and grocery stores. The Company's philosophy focuses on customer service as represented by its motto, "We Do More." The Banks maintain a strong commitment to their local communities by, among other things, appointing selected members of the communities in which the Banks' branches are located to local advisory boards (the "local boards"). The local boards direct the operations of the branches, with the supervision of the Bank's board of directors, and assist in introducing prospective customers to the Banks as well as developing or modifying products and services to meet customer needs. The Banks function largely on an autonomous basis, and the Company believes that such decentralized structure enhances the commitment of the Banks to the communities in which their branches are located. In contrast to many of its principal competitors, the credit decisions of the Banks are made locally and promptly. The Company believes that the knowledge and expertise afforded by the local boards are key components to sound credit decisions. Expense control is an essential element in the Company's profitability. The Company has centralized virtually all of the Banks' back office support and investment functions in order to achieve consistency and cost efficiencies in the 3 delivery of products and services. The Company's efficiency ratio (other operating expenses divided by net interest income and other operating income) currently stands at 51% and has been well below national peer group ratios for the last five years. One of the benefits derived from such operating efficiencies is that the Company is not subjected to undue pressure to generate interest income from high-risk loans. Accordingly, the Company believes it is able to be more selective and conservative with respect to its credit decisions. Despite this lack of economic pressure, the Banks aggressively pursue, with the help of the local boards, quality credits with an emphasis on loans to small and medium sized businesses. During the last seven years, IBC, as defined below, has been an active acquiror of financial institutions and banking assets in its trade area. The community focus of IBC and the involvement of the local boards have 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 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 82% 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 $1,568,192,000 in assets and assumed $1,529,729,000 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 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 $397,000 and assumed deposits of approximately $86,314,000 and received cash or other assets in the amount of approximately $85,917,000. The acquisition was accounted for as a purchase transaction. IBC recorded intangible assets, goodwill and core deposit premium, totaling $3,754,000. These assets are being amortized on a straight line basis over a fifteen year period. Effective November 21, 1996, IBC purchased certain assets and assumed certain liabilities of three branches of Home Savings of America F.S.B., Irwindale, California. IBC purchased loans of approximately $769,000 and assumed deposits of approximately $196,813,000 and received cash and other assets in the amount of approximately $196,081,000. The acquisition was accounted for as a purchase transaction. IBC recorded intangible assets, goodwill and core deposit premium totaling $9,670,000. These assets are being amortized on a straight line basis over a fifteen year period. Effective June 27, 1996, IBC purchased certain assets and assumed certain liabilities of River Valley Bank, F.S.B., in Weslaco, Texas, a federal savings bank organized under the laws of the United States. At the date of closing, total loans 4 acquired were approximately $21,408,000, deposits assumed were approximately $132,133,000 and cash and other assets received were in the amount of approximately $110,756,000. The acquisition was accounted for as a purchase transaction. IBC recorded intangible assets, goodwill and core deposit premium totaling $6,599,000. These assets are being amortized on a straight line basis over a fifteen year period. For more information regarding the acquisition transactions of the Company during the last three years, see note 2 of notes to Consolidated Financial Statements of the Company located on page 25 of the 1996 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 120 automated teller machines, and through their branches situated in retail locations and grocery stores. As part of the Company's 5 expansion of its retail banking services, the Company's current plan is to open 17, 12, and 2 additional grocery store branches in 1997, 1998 and 1999, respectively. The Company owns U.S. and Texas service mark registrations for "Rite Check", "IBC Centre", "INTERNATIONAL BANK OF COMMERCE" and the related United States and Mexico logo. In addition, the Company owns a Texas service mark registration for "CHECK 'N SAVE". Also, IBC is investigating the availability of service mark registrations related to certain proprietary products. No material portion of the business of the Company may be deemed seasonal and the deposit and loan base of the Company's bank subsidiaries are diverse in nature. There has been no material effect upon the Company's capital expenditures, earnings or competitive position as a result of Federal, State or local environmental regulation. As of December 31, 1996, the Company and its subsidiaries employed approximately 933 persons full-time and 94 persons part-time. COMPETITION The Company is the largest minority-owned bank holding company in the United States, with more than a majority of its common stock being held by Hispanic shareholders. The Company is the second largest independent Texas bank holding company. The primary market area of the Company is South and Southeast Texas, an area bordered on the east by the Houston area, to the northwest by San Antonio, to the southwest by Laredo and to the southeast by Brownsville. The Company has increased its market share in its primary market area over the last seven years through strategic acquisitions. The Company, through its bank subsidiaries, competes for deposits and loans with other commercial banks, savings and loan associations, credit unions and nonbank entities, which nonbank entities serve as an alternative to traditional financial institutions and are considered to be formidable competitors. The Company and its bank subsidiaries do a significant amount of business for customers domiciled in Mexico, with an emphasis in Northern Mexico. Deposits from persons and entities domiciled in Mexico comprise a significant portion of the deposit base of the Company's bank subsidiaries. Such deposits comprised approximately 39%, 43% and 43% of the Company's bank subsidiaries' total deposits as of December 31, 1996, 1995 and 1994, respectively. To date, neither the Company nor its bank subsidiaries has experienced a material adverse impact related to the 1994 devaluations of the peso in Mexico. However, as of December 31, 1996, the Company experienced a decrease in total average loans of .21% over 1995. The Company believes that the decrease in loan demand, while not material, was due in part to the effect of the 1994 peso devaluations on the United States/Mexico border region. SUPERVISION AND REGULATION GENERAL. 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 6 bank subsidiaries and include, among other matters, requirements to maintain reserves against deposits; restrictions on the nature and amount of loans that may be made and the interest that may be charged thereon; restrictions on the amounts, terms and conditions of loans to directors, officers, large shareholders and their affiliates; restrictions related to investments in activities other than banking; and minimum capital requirements. With few exceptions, state and Federal banking laws have as their principal objective either the maintenance of the safety and soundness of the Federal deposit insurance system or the protection of consumers, rather than the specific protection of shareholders of the Company. Further, the earnings of the Company are affected by the fiscal and monetary policies of the Federal Reserve System, which regulates the national money supply in order to mitigate recessionary and inflationary pressures. These monetary policies influence to a significant extent the overall growth of bank loans, investments and deposits and the interest rates charged on loans or paid on time and savings deposits. The nature of future monetary policies and the effect of such policies on the future earnings and business of the Company cannot be predicted. FRB APPROVALS. The Company is a registered bank holding company within the meaning of the Bank Holding Company Act of 1956, as amended ("BHCA"), and is subject to supervision by the FRB and to a certain extent the Texas Department of Banking. The Company is required to file with the FRB annual reports and other information regarding the business operations of itself and its subsidiaries. It is also subject to examination by the FRB. Under the BHCA, a bank holding company is, with limited exceptions, prohibited from acquiring direct or indirect ownership or control of any voting stock of any company which is not a bank or bank holding company, and must engage only in the business of banking, managing, controlling banks, and furnishing services to or performing services for its subsidiary banks. One of the exceptions to this prohibition is the ownership of shares of any company provided such shares do not constitute more than 5% of the outstanding voting shares of the company and so long as the FRB does not disapprove such ownership. Another exception to this prohibition is the ownership of shares of a company the activities of which the FRB has specifically determined to be so closely related to banking, managing or controlling banks as to be a proper incident thereto. The restrictions on the activities of bank holding companies could change significantly if the Glass- Steagall Act of 1935 is reformed. Current congressional debate over reforming the Glass-Steagall Act is centered around whether enhanced bank powers should be conducted within a holding company or through affiliates. It is impossible to predict at this time whether any of the reform proposals will pass, or what effect the proposals would have on the Company or its subsidiaries. The BHCA and the Change in Bank Control Act of 1978 require that, depending on the circumstances, either FRB approval must be obtained or notice must be furnished to the FRB and not disapproved prior to any person or company acquiring "control" of a bank holding company, such as the Company, subject to certain exceptions for certain transactions. Control is conclusively presumed to exist if an individual or company acquires 25% or more of any class of voting securities of 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"). 7 As a bank holding company, the Company is required to obtain approval prior to merging or consolidating with any other bank holding company, acquiring all or substantially all of the assets of any bank or acquiring ownership or control of shares of a bank or bank holding company if, after the acquisition, the Company would directly or indirectly own or control 5% or more of the voting shares of such bank or bank holding company. INTERSTATE BANKING. In 1994, Congress enacted the Riegle-Neal Interstate Banking and Branching Efficiency Act of 1994 ("Interstate Banking Act"), which rewrote federal law governing the interstate expansion of banks in the United States. Effective as of September 29, 1995, adequately capitalized, well managed bank holding companies with FRB approval may acquire banks located in any State in the United States, provided that the target bank meets the minimum age (up to a maximum of five years, which is the maximum Texas has adopted) established by the host State. Under the Interstate Banking Act, an anti-concentration limit will bar interstate acquisitions that would give a bank holding company control of more than ten percent (10%) of all deposits nationwide or thirty percent (30%) of any one State's deposits, or such higher or lower percentage established by the host State. The anti-concentration limit in Texas has been set at twenty percent (20%) of all federally insured deposits in Texas. Until September 29, 1995, when the holding company acquisition provisions of the Interstate Banking Act became effective, a bank holding company and its subsidiaries were also prohibited from acquiring any bank located outside of the state in which the operations of the bank holding company's banking subsidiaries are located, unless the acquisition is specifically authorized by the statutes of the state in which the target bank is located. During 1986, new banking laws were enacted in Texas which removed the barriers for interstate banking. Under certain conditions, out of state financial institutions may own Texas financial institutions. As of December 31, 1995, many of Texas' largest bank holding companies had either merged with or been acquired by out-of-state banking concerns. In addition to providing for interstate acquisitions of banks by bank holding companies, the Interstate Banking Act provides for interstate branching by permitting mergers between banks domiciled in different States beginning June 1, 1997. The Interstate Banking Act provides that States may opt out of interstate branching by enacting non-discriminatory legislation prohibiting interstate bank mergers before June 1, 1997. If a State opts out, no bank in any other state may establish a branch in that State either through merger or formation. A bank whose home State opts out of interstate branching may not participate in any interstate merger transaction. In 1995, Texas passed legislation opting out of the interstate branching provisions of The Interstate Banking Act until September 1999. No accurate prediction can be made at this time as to how this legislation will affect the Company and/or its bank subsidiaries. FRB ENFORCEMENT POWERS. The FRB has certain cease-and-desist and divestiture powers over bank holding companies and non-banking subsidiaries where their actions would constitute a serious threat to the safety, soundness or stability of a subsidiary bank. These powers may be exercised through the issuance of cease-and- desist orders or other actions. In the event a bank subsidiary experiences either a significant loan loss or rapid growth of loans or deposits, the Company may be compelled by the FRB to invest additional capital in the bank subsidiary. Further, 8 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 Banking Commissioner (as herein defined) may bring enforcement proceedings against a bank holding company in Texas. COMPANY DIVIDENDS. The FRB's policy discourages the payment of dividends from borrowed funds and discourages payments that would affect capital adequacy. The FRB has issued policy statements which generally state that bank holding companies should serve as a source of financial and managerial strength to their bank subsidiaries, and generally should not pay dividends except out of current earnings, and should not borrow to pay dividends if the bank holding company is experiencing capital or other financial problems. GENERAL. All of the bank subsidiaries of the Company are state banks subject to regulation by, and supervision of, the Texas Department of Banking and the FDIC. All of the bank subsidiaries of the Company are members of the FDIC, which currently insures the deposits of each member bank to a maximum of $100,000 per depositor. For this protection, each member bank pays a statutory assessment and is subject to the rules and regulations of the FDIC. A new FDIC insurance premium schedule went into effect January 1, 1993. The premiums increase incrementally based on the rating of the member bank. DIFA. The FDIC reduced the insurance premiums it charges on bank deposits insured by the Bank Insurance Fund ("BIF") to the statutory minimum of $2,000.00 for "well capitalized" banks, effective January 1, 1996. Premiums related to deposits assessed by the Savings Association Insurance Fund ("SAIF"), including savings association deposits acquired by banks, continued to be assessed at a rate of between 23 cents and 31 cents per $100.00 of deposits. On September 30, 1996, the Deposit Insurance Funds Act of 1996 ("DIFA") was enacted and signed into law. DIFA reduced the amount of semiannual FDIC insurance premiums for savings association deposits acquired by banks to the same levels assessed for deposits insured by BIF. DIFA also provided for a special one-time assessment imposed on deposits insured by the SAIF, including such deposits held by banks, to recapitalize the SAIF up to statutory required levels. The Company paid the one-time assessment in the first quarter of 1997 in the amount of $3.3 million in connection with the SAIF recapitalization. DIFA further provides for assessments to be imposed on insured depository institutions with respect to deposits insured by the BIF (in addition to assessments currently imposed on depository institutions with respect to SAIF-insured deposits) to pay amounts due on bonds issued by the Financing Corporation used to fund the federal thrift bailout. The Company currently estimates assessments may approximate $586,000 in 1997 with similar assessments per year through 1999 (or earlier if no savings associations exist prior to December 31, 1999) in connection with such bond payments. 9 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, 1996, the Company's ratio of total capital-to-risk-weighted assets was 17.27%. The guidelines make regulatory capital requirements more sensitive to differences in risk profiles among banking organizations, take off-balance sheet exposure into account in assessing capital adequacy, and encouraging the holding of liquid, low- risk assets. At least one-half of the minimum total capital must be comprised of Tier 1 Capital elements. Tier 1 Capital of the Company is comprised of common shareholders' equity. The core deposit intangibles and goodwill of $28,983,000 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, 1996 was 7.80 percent. The guidelines also provide that bank holding companies experiencing internal growth or making acquisitions will be expected to maintain strong capital positions substantially above the minimum supervisory levels without significant reliance on intangible assets. Furthermore, the guidelines indicate that the FRB will continue to consider a "tangible tier 1 leverage ratio" (deducting all intangibles) in evaluating proposals for expansion or new activity. The FRB has not advised the Company of any specific minimum leverage ratio or tangible tier 1 leverage ratio applicable to it. Each of the Company's bank subsidiaries is subject to similar capital requirements adopted by the FDIC. Each of the Company's bank subsidiaries had a leverage ratio in excess of five percent as of December 31, 1996. As of that date, the federal banking agencies had not advised any of the bank subsidiaries of any specific minimum leverage ratio applicable to it. Effective December 19, 1992, the federal bank regulatory agencies adopted regulations which mandate a five-tier scheme of capital requirements and corresponding supervisory actions to implement the prompt corrective action provisions of the Federal Deposit Insurance Corporation Improvement Act of 1991 ("FDICIA"). The regulations include requirements for the capital categories that will serve as benchmarks for mandatory supervisory actions. Under the regulations, the highest of the five categories would be a well capitalized institution with a total risk-based capital ratio of 10%, a Tier 1 risk-based capital ratio of 6% and a Tier 1 leverage ratio of 5%. An institution would be prohibited from declaring any dividends, making any other capital distribution or paying a management fee if the capital ratios drop below the levels for an adequately capitalized institution, which are 8%, 4% and 4%, respectively. The corresponding provisions of FDICIA mandate corrective actions be taken if a bank is undercapitalized. Based on the Company and each of the bank subsidiaries capital ratios as of December 31, 1996, the Company and each of the bank subsidiaries were classified as "well capitalized" under the applicable regulations. 10 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. INSOLVENCY. The Banking Commissioner of Texas (the "Banking Commissioner") may determine to close a Texas state bank when she finds that the interests of depositors and creditors of a state bank are jeopardized through its insolvency or imminent insolvency and that it is in the best interest of such depositors and creditors that the bank be closed. DEPOSITOR PREFERENCE STATUTE. Under federal law, deposits and certain claims for administrative expenses and employee compensation against an insured depository institution would be afforded a priority over other general unsecured claims against such an institution, including federal funds and letters of credit, in the liquidation or other resolution of such an institution by any receiver. TEXAS LAW. Effective September 1, 1995, the new Texas Banking Act ("Act") became effective and the Texas Banking Code of 1943 was repealed. The purpose of the Act was to modernize and streamline the Texas banking laws. One of the many significant provisions of the Act adopts by reference the Texas Business Corporation Act, subject to modification by the Banking Commissioner. Among other matters, these corporate provisions will permit Texas state banks to merge with non-banking business entities, while national banks are only permitted to merge with banking entities. At present, no accurate prediction can be made as to how this legislation will affect the Company or its bank subsidiaries. CRA. Under the Community Reinvestment Act ("CRA"), the FDIC is required to assess the record of each bank subsidiary to determine if the bank meets the credit needs of its entire community, including low and moderate-income neighborhoods served by the institution, and to take that record into account in its evaluation of any application made by the bank for, among other things, approval of the acquisition or establishment of a branch or other deposit facility, an office relocation, a merger, or the acquisition of shares of capital stock of another financial institution. The FDIC prepares a written evaluation of an institution's record of meeting the credit needs of its entire community and assigns a rating. In 1995, the CRA regulations were rewritten and the new regulations and examination procedures were designed to emphasize performance over paperwork and process. Each bank subsidiary received either an "outstanding" or "satisfactory" rating in its most recent CRA review. Further, there are fair lending laws which prohibit discrimination in connection with lending decisions. 11 BSA. The bank subsidiaries are required to report certain deposit transactions to the U.S. Treasury Department pursuant to the Bank Secrecy Act ("BSA"). During 1996, the Financial Crimes Enforcement Network and the federal banking regulators amended the BSA regulations regarding suspicious activity reporting, funds transfer recordkeeping and the definition and designation of exempt customers. The bank subsidiaries' compliance with BSA is examined regularly by the FDIC and the Texas Department of Banking as well as the internal auditors of the Company. SECTION 23A. The Company, IBC and the other bank subsidiaries of the Company are "affiliates" within the meaning of Section 23A of the Federal Reserve Act which sets forth certain restrictions on loans and extensions of credit between a bank subsidiary and affiliates, on investments in an affiliate's stock or other securities, and on acceptance of such stock or other securities as collateral for loans. Such restrictions prevent a bank holding company from borrowing from any of its bank subsidiaries unless the loans are secured by specific obligations. Further, such secured loans and investments by a bank subsidiary are limited in amount, as to a bank holding company or any other affiliate, to 10% of such bank subsidiary's capital and surplus and, as to the bank holding company and its affiliates, to an aggregate of 20% of such bank subsidiary's capital and surplus. Certain restrictions do not apply to 80% or more owned sister banks of bank holding companies. Each bank subsidiary of the Company is wholly-owned by the Company. Section 23B of the Federal Reserve Act requires that the terms of affiliate transactions be comparable to terms of similar non-affiliate transactions. LENDING RESTRICTIONS. The operations of the Banks are also subject to lending limit restrictions pertaining to the extension of credit and making of loans to one borrower. The scope and requirements of such laws and regulations have been expanded significantly in recent years. Further, under the BHCA and the regulations of the FRB thereunder, the Company and its subsidiaries are prohibited from engaging in certain tie-in arrangements with respect to any extension of credit or provision of property or services; however, recently the FRB adopted a rule relaxing tying restrictions by permitting a bank holding company to offer a discount on products or services if a customer obtains other products or services from such company. BANK DIVIDENDS. The ability of the Company to pay dividends is largely dependent on the amount of cash derived from dividends declared by its bank subsidiaries. The payment of dividends by any bank or bank holding company is affected by the requirement to maintain adequate capital as discussed above. At December 31, 1996, there was an aggregate of approximately $74,230,000 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 $74,230,000 and continue to be classified as "well capitalized". Note 15 of notes to Consolidated Financial Statements of the Company located on page 40 of the 1996 Annual Report is incorporated herein by reference. FDICIA. In 1991, Congress enacted FDICIA. FDICIA emphasizes the regulatory focus of protecting the Bank Insurance Fund. The FDIC was granted an expanded supervisory role in connection with all federally insured financial institutions. FDICIA firmly links supervision to bank capital. FDICIA provides for mandatory early intervention procedures that are triggered by diminishing capital of a 12 financial institution. Specifically, FDICIA requires the FDIC to establish a system of risk-based assessments for federal deposit insurance, by which banks that pose a greater risk of loss to the FDIC (based on their capital levels and the FDIC's level of supervisory concern) will pay a higher insurance assessment. As a result of FDICIA, the authority of the FDIC over state-chartered banks was expanded. FDICIA limits state-chartered banks to only those principal activities permissible for national banks, except for other activities specifically approved by the FDIC. The new Texas Banking Act includes a parity provision which establishes procedures for state banks to notify the Banking Commissioner if the bank intends to conduct any activity permitted for a national bank that is otherwise denied to a state bank. The Banking Commissioner has thirty (30) days to prohibit the activity. During 1996, the Office of the Comptroller of the Currency (the "OCC") adopted a major overhaul of its rules governing corporate applications, practices, and notices. The new rule incorporates a risk-based approach to corporate applications and activities of national banks. The new rule includes authority for operating subsidiaries to conduct for the first time activities beyond those permitted for national banks directly. Under the new rule, an operating subsidiary engaged in activities not permissible for the parent bank must observe certain separateness requirements. National banks must file applications for prior OCC approval to establish, or acquire, operating subsidiaries engaged in activities that are not permissible for the parent bank and the OCC may grant such approval on a case by case basis. Pursuant to the Texas parity provision, a Texas state bank may be permitted to engage in such activities permitted for national banks if notice is provided to the Banking Commissioner and the Banking Commissioner does not prohibit the activity. As part of the Small Business Job Protection Act of 1996, financial institutions are now eligible to make an S election for federal income tax purposes. To qualify as an S corporation, a financial institution must (I) not use the reserve method of accounting for bad debts, (ii) have only one class of stock, (iii) have no more than seventy-five shareholders, and (iv) have no foreign shareholders. The Company currently does not qualify for the S election. 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. 13 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, 1996, 1995 and 1994 (Dollars in Thousands) (Note 1). Nonaccrual loans have been included in assets for the purpose of this analysis:
YEARS ENDED DECEMBER 31, ----------------------------------------------------------------------------------------------- 1996 1995 1994 ------------------------------ ---------------------------- ---------------------------- AVERAGE AVERAGE AVERAGE AVERAGE AVERAGE AVERAGE BALANCE INTEREST RATE/COST BALANCE INTEREST RATE/COST BALANCE INTEREST RATE/COST ------- -------- --------- ------- -------- --------- ------- -------- --------- ASSETS Interest earning assets: Loans, net of unearned discounts: Domestic $ 1,073,524 $108,852 10.14% $ 1,086,515 $115,064 10.59% $ 947,333 $89,332 9.43% Foreign 126,067 10,331 8.19 115,621 9,347 8.08 107,913 7,725 7.16 Investment securities: Taxable 1,449,211 99,411 6.86 1,381,781 91,178 6.60 1,016,871 58,983 5.80 Tax-exempt 23,916 1,292 5.40 33,668 1,825 5.42 50,142 1,691 3.37 Time deposits with banks 708 53 7.49 917 43 4.69 952 38 3.99 Federal funds sold 32,369 1,540 4.76 13,004 991 7.62 23,477 1,022 4.35 Other 2,576 300 11.65 3,668 419 11.42 2,911 469 16.11 ----------- ------- ----------- ------- --------- ------- Total interest-earning assets $2,708,371 $221,779 8.19 $2,635,174 $218,867 8.31 $2,149,599 $159,260 7.41 Non-interest earning assets: Cash and due from banks $ 94,972 $ 84,277 $ 71,521 Bank premises and equipment, net 85,584 76,065 66,693 Other assets 89,450 74,451 54,856 Less allowance for possible loan losses (19,866) (18,794) (15,979) ----------- ----------- ---------- Total $ 2,958,511 $ 2,851,173 $2,326,690 =========== =========== ========== LIABILITIES AND SHAREHOLDERS' EQUITY Interest bearing liabilities: Savings and interest bearing demand deposits $ 617,090 $18,390 2.98 $548,917 $16,741 3.05 $488,654 $10,930 2.24 Time deposits: Domestic 645,782 32,065 4.97 555,446 28,028 5.05 471,597 18,290 3.88 Foreign 748,343 37,652 5.03 678,908 34,050 5.02 641,507 24,829 3.87 Subordinated debt - - - - - - 446 29 6.50 Securities sold under repurchase agreements and federal funds purchased 236,223 12,151 5.14 444,379 25,594 5.76 248,817 10,311 4.14 Other borrowings 137,404 7,114 5.18 122,133 7,948 6.51 43,923 2,365 5.38 --------- ------ --------- ------ --------- ------ Total interest bearing liabilities $2,384,842 $107,372 4.50 $2,349,783 $112,361 4.78 $1,894,944 $66,754 3.52 Non-interest bearing liabilities: Demand deposits 297,539 269,218 244,436 Other liabilities 21,927 17,269 12,074 Shareholders' equity 254,203 214,903 175,236 --------- --------- --------- Total $ 2,958,511 $ 2,851,173 $ 2,326,690 =========== =========== =========== Net interest income $114,407 $106,506 $92,506 ======== ======== ======= Net yield on interest earning assets 4.22% 4.04% 4.30% ==== ==== ====
(Note 1) The average balances for purposes of the above table are calculated on the basis of month-end balances. 14 INTEREST RATES AND INTEREST DIFFERENTIAL The following table analyzes the changes in net interest income during 1996 and 1995 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):
1996 COMPARED TO 1995 1995 COMPARED TO 1994 ---------------------- ---------------------- NET INCREASE (DECREASE) NET INCREASE (DECREASE) DUE TO DUE TO ---------------------- ---------------------- VOLUME RATE TOTAL VOLUME RATE TOTAL ------ ---- ----- ------ ---- ----- (Dollars in Thousands) (Dollars in Thousands) Interest earned on: Loans, net of unearned discounts: Domestic $(1,330)$ (4,882) $(6,212) $647,871 $(622,139) $25,732 Foreign 846 138 984 (1,749) 3,371 1,622 Investment securities: Taxable 4,528 3,705 8,233 70,444 (38,249) 32,195 Tax-exempt (529) (4) (533) 60 74 134 Time deposits with banks (16) 26 10 5 - 5 Federal funds sold (84,272) 84,821 549 (38) 7 (31) Other (127) 8 (119) 12,195 (12,245) (50) -------- ------- ------ -------- --------- ------- Total interest income $(80,900) $83,812 $2,912 $728,788 $(669,181) $59,607 Interest incurred on: Savings and interest bearing demand deposits $2,092 $(443) $1,649 $(2,533) $8,344 $5,811 Time deposits: Domestic 4,568 (531) 4,037 (9,762) 19,500 9,738 Foreign 3,482 120 3,602 (2,099) 11,320 9,221 Subordinated debt - - - (29) - (29) Securities sold under repurchase agreements and federal funds purchased (11,836) (1,607) (13,443) 25,124 (9,841) 15,283 Other borrowings 636 (1,470) (834) 8,308 (2,725) 5,583 -------- ------- ------ -------- --------- ------- Total interest expense $(1,058) $(3,931) $(4,989) $19,009 $26,598 $45,607 -------- ------- ------ -------- --------- ------- Net interest income $(79,842) $87,743 $ 7,901 $709,779 $(695,779) $14,000 ======== ======= ======= ======== ========= =======
(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. 15 INTEREST RATE SENSITIVITY The net interest rate sensitivity as of December 31, 1996 is illustrated in the following table. This information reflects the balances of assets and liabilities whose rates are subject to change. As indicated in the table, the Company is liability sensitive during the early time periods and is asset sensitive in the longer periods. The table shows the sensitivity of the balance sheet at one point in time and is not necessarily indicative of the position at future dates.
RATE/MATURITY RATE/MATURITY RATE/MATURITY RATE/MATURITY December 31, 1996 3 MONTHS OVER 3 MONTHS OVER 1 YR OVER (Dollars in Thousands) OR LESS TO 1 YR TO 5 YRS 5 YRS TOTAL ========================================================================================================= SECTION A - --------------------------------------------------------------------------------------------------------- RATE SENSITIVE ASSETS FEDERAL FUNDS SOLD $ 36,000 - - - $ 36,000 DUE FROM BANK INTEREST EARNING - 198 - - 198 INVESTMENT SECURITIES 157,709 362,633 1,237,790 1,435 1,759,567 LOANS, NET OF NON-ACCRUALS 973,766 93,817 101,062 66,228 1,234,873 - --------------------------------------------------------------------------------------------------------- TOTAL EARNING ASSETS $1,167,475 $456,648 $1,338,852 $ 67,663 $ 3,030,638 - --------------------------------------------------------------------------------------------------------- CUMULATIVE EARNING ASSETS $1,167,475 $1,624,123 $2,962,975 $3,030,638 ========================================================================================================= SECTION B - --------------------------------------------------------------------------------------------------------- RATE SENSITIVE LIABILITIES TIME DEPOSITS $ 732,061 $ 696,970 $ 201,717 $ 376 $1,631,124 OTHER INTEREST BEARING DEPOSITS 684,867 - - - 684,867 FED FUNDS PURCHASED AND REPOS 95,993 52,490 - - 148,483 OTHER BORROWINGS 239,000 - - - 239,000 - --------------------------------------------------------------------------------------------------------- TOTAL INTEREST BEARING LIABILITIES $1,751,921 $ 749,460 $ 201,717 $ 376 $2,703,474 - --------------------------------------------------------------------------------------------------------- CUMULATIVE SENSITIVE LIABILITIES $1,751,921 $2,501,381 $2,703,098 $ 2,703,474 ========================================================================================================= SECTION C - --------------------------------------------------------------------------------------------------------- REPRICING GAP $ (584,446) $(292,812) $1,137,135 $ 67,287 $ 327,164 CUMULATIVE REPRICING GAP (584,446) (877,258) 259,877 327,164 327,164 RATIO OF INTEREST-SENSITIVE ASSETS TO LIABILITIES .67 .61 6.64 - 1.12 RATIO OF CUMULATIVE, INTEREST- SENSITIVE ASSETS TO LIABILITIES .67 .65 1.10 1.12 =========================================================================================================
16 INVESTMENT SECURITIES The following table sets forth the carrying value of investment securities as of December 31, 1996, 1995 and 1994: YEARS ENDED DECEMBER 31, --------------------------------------- 1996 1995 1994 ----------- ----------- ----------- (Dollars in Thousands) U.S. Treasury securities Held to maturity $ - - 23,074 Available for sale 5,020 7,058 5,828 Mortgage-backed securities Held to maturity - 1,044 610,553 Available for sale 1,734,484 1,408,705 605,197 Obligations of states and political subdivisions Held to maturity 858 - 10,564 Available for sale 1,014 29,975 23,013 Equity securities Held to maturity - - - Available for sale 16,201 14,694 12,364 Other securities Held to maturity 1,990 1,865 3,641 ----------- ----------- ----------- Total $ 1,759,567 $ 1,463,341 $ 1,294,234 =========== =========== =========== The following tables set forth the contractual maturities of investment securities at December 31, 1996 and the average yields of such securities, except for the totals which reflect the weighted average yields. Actual maturities will differ from contractual maturities because borrowers may have the right to prepay obligations with or without prepayment penalties.
Available for Sale Maturing -------------------------------------------------------------------------------- After one After five Within but within but within After One Year Five Years Ten Years Ten Years ----------------- ----------------- ----------------- ----------------- Adjusted Adjusted Adjusted Adjusted Cost Yield Cost Yield Cost Yield Cost Yield ---------- ---- ---------- ---- ---------- ---- ---------- ---- (Dollars in Thousands) U.S. Treasury and obligations of other U.S. Govern- ment agencies ..... $ 1,985 5.69% $ 2,957 5.88% $ -- --% $ -- % Mortgage-backed securities ........ 1,553 7.08 207,227 7.24 490,333 7.68 1,017,883 7.69 Obligations of states and political subdivisions ...... 498 -- -- -- 561 7.50 -- -- Equity securities ... 16,201 5.89 -- -- -- -- -- -- ---------- ---- ---------- ---- ---------- ---- ---------- ---- Total ..... $ 20,237 5.82% $ 210,184 7.22% $ 490,894 7.68% $1,017,883 7.69% ========== ========== ========== ==========
17
Held to Maturity Maturing ------------------------------------------------------------ After one After five Within but within but within After One Year Five Years Ten Years Ten Years ------------- ------------- ------------- --------- Adjusted Adjusted Adjusted Adjusted Cost Yield Cost Yield Cost Yield Cost Yield ------ ---- ------ ---- ------ ---- --- --- (Dollars in Thousands) Obligations of states and political subdivisions ...... $ 160 8.19% $ 698 8.20% $ -- - % $-- -% Other securities .... -- -- 1,580 7.99 410 7.10 -- -- ------ ---- ------ ---- ------ ---- --- --- Total ...... $ 160 8.19% $2,278 8.05% $ 410 7.10% $-- -% ====== ==== ====== ==== ====== ==== === ===
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, 1996, 1995, 1994, 1993 and 1992 are shown in the following table:
Years Ended December 31, ------------------------------------------------------- 1996 1995 1994 1993 1992 ---------- ---------- ---------- ---------- -------- (Dollars in Thousands) Commercial, financial and agricultural $ 719,151 $718,364 $664,449 $611,612 $515,559 Lease financing receivable, net 3,910 3,910 3,910 4,323 4,288 Real estate-mortgage 193,101 200,998 201,998 180,777 185,788 Real estate-construction 32,610 39,527 46,584 21,326 12,937 Consumer 161,594 124,843 122,751 88,452 70,488 Foreign 128,932 120,748 106,707 107,771 108,285 ---------- ---------- ---------- ---------- -------- Total loans 1,239,298 1,208,390 1,146,399 1,014,261 897,345 Unearned discount (3,303) (3,479) (3,885) (2,547) (2,437) ---------- ---------- ---------- ---------- -------- Loans, net of unearned discount $1,235,995 $1,204,911 $1,142,514 $1,011,714 $894,908 ========== ========== ========== ========== ========
The table on the following page shows the amounts of loans (excluding lease financing receivables, real estate mortgages and consumer loans) outstanding as of December 31, 1996 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: 18 Maturing ------------------------------------------------ After one Within but within After One Year Five Years Five Years Total --------- --------- -------- -------- (Dollars in Thousands) Commercial, financial and agricultural $ 277,696 $ 348,177 $93,278 $719,151 Real estate - construction 19,211 12,150 1,249 32,610 Foreign 71,731 48,640 8,561 128,932 --------- --------- -------- -------- Total $ 368,638 $ 408,967 $103,088 $880,693 ========= ========= ======== ======== INTEREST SENSITIVITY ----------------------- Fixed Variable RATE RATE ---------- -------- (Dollars in Thousands) Due after one but within five years $ 160,428 $617,177 Due after five years 34,004 69,084 ---------- -------- Total $ 194,432 $686,261 ========== ======== 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, ------------------------------------------------------ 1996 1995 1994 1993 1992 ------- ------- ------- ------- ------- (Dollars in Thousands) Loans accounted for on a non-accrual basis $ 3,363 $ 5,291 $ 2,895 $ 5,371 $ 7,375 Loans contractually past due ninety days or more as to interest or prin- cipal payments 5,075 7,954 5,605 3,777 3,217 Loans accounted for as "troubled debt restruc- turings" 1,462 2,742 1,990 3,170 2,901
19 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, ---------------------------------------------- 1996 1995 1994 1993 1992 ------- ------ ------ ------ ------ (Dollars in Thousands) Loans accounted for on a non-accrual basis $ 1,062 $ 942 $ 732 $ 733 $ 14 Loans contractually past due ninety days or more as to interest or prin- cipal payments 1,321 944 1,086 759 738 The gross income that would have been recorded during 1996 on non-accrual and restructured loans in accordance with their original contract terms was $538,000 on domestic loans and $106,000 on foreign loans. The amount of interest income on such loans that was recognized in 1996 was $7,000 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. 20 The following table presents certain information about cross-border outstanding loans, accrued interest thereon, acceptances, interest bearing deposits with other banks, other interest bearing investments and other monetary assets related to Mexico: Years Ended December 31, --------------------------------------- 1996 1995 1994 --------- --------- --------- (Dollars in Thousands) Loans: Commercial, financial, industrial and agricultural $ 86,861 $ 90,541 $ 86,949 Real estate-mortgage 20,591 10,254 11,403 Consumer 21,480 19,953 8,355 --------- --------- --------- 128,932 120,748 106,707 Less allowance for possible loan losses (1,101) (1,035) (949) --------- --------- --------- Net loans $ 127,831 $ 119,713 $ 105,758 ========= ========= ========= Accrued interest receivable $ 1,317 $ 1,191 $ 1,151 ========= ========= ========= 21 SUMMARY OF LOAN LOSS EXPERIENCE The following table summarizes loan balances at the end of each year and average loans outstanding during the year; changes in the allowance for possible loan losses arising from loans charged-off and recoveries on loans previously charged-off by loan category; and additions to the allowance which have been charged to expense:
At Years Ended December 31, ----------------------------------------------------- 1996 1995 1994 1993 1992 ---------- ---------- ---------- ---------- -------- (Dollars in Thousands) Loans, net of unearned discounts, outstanding at December 31, $1,235,995 $1,204,911 $1,142,514 $1,011,714 $894,908 ========== ========== ========== ========== ======== Average loans outstanding during the year (Note 1) $1,199,591 $1,202,136 $1,055,246 $ 941,381 $823,274 ========== ========== ========== ========== ======== Balance of allowance at January 1, $ 18,455 $17,025 $ 13,831 $ 10,055 $ 8,519 Provision charged to expense 6,630 5,150 3,804 4,540 4,664 ---------- ---------- ---------- ---------- -------- Loans charged-off: Domestic: Commercial, financial and agricultural (1,518) (2,248) (1,073) (1,299) (1,939) Real estate-mortgage (261) (619) (685) ( 569) (1,209) Consumer (3,363) (1,849) (816) (556) (549) Foreign (23) ( 48) (148) (49) ( 54) ---------- ---------- ---------- ---------- -------- Total loans charged-off (5,165) (4,764) (2,722) (2,473) (3,751) ---------- ---------- ---------- ---------- -------- Recoveries credited to allowance: Domestic: Commercial, financial and agricultural 305 190 236 663 167 Real estate mortgage 51 80 968 146 71 Consumer 755 229 237 136 91 Foreign 5 110 227 67 33 ---------- ---------- ---------- ---------- -------- Total recoveries 1,116 609 1,668 1,012 362 ---------- ---------- ---------- ---------- -------- Net loans charged-off: (4,049) (4,155) (1,054) (1,461) (3,389) ---------- ---------- ---------- ---------- -------- Allowance acquired in purchase transactions - 435 444 697 261 ---------- ---------- ---------- ---------- -------- Balance of allowance at December 31, $ 21,036 $18,455 $17,025 $13,831 $10,055 ========== ========== ========== ========== ======== Ratio of net loans charged-off during the year to average loans outstanding during the year (Note 1) .34% .35% .10% .16% .41% ---------- ---------- ---------- ---------- -------- Ratio of allowance to loans, net of unearned discounts, out- standing at December 31, 1.70% 1.53% 1.49% 1.37% 1.12% ---------- ---------- ---------- ---------- --------
(Note 1) The average balances for purposes of the above table are calculated on the basis of month-end balances. 22 Each bank subsidiary has always provided an amount for possible loan losses sufficient both to cover net loan losses sustained and to maintain an appropriate balance in the allowance for possible loan losses that considers the element of risk which is estimated to be present in outstanding loans. The aggregate allowance for possible loan losses of all bank subsidiaries approximated 1.70% and 1.53% of total loans of bank subsidiaries, net of unearned income, at December 31, 1996 and 1995, respectively. The amount charged against 1996 earnings and the other years presented as a provision for possible loan losses was the sum required to bring the allowance to the point which management of each bank subsidiary considers adequate to cover potential loan losses. Such a determination is based on a continual and conservative review process of the loan portfolio performed by senior officers of each bank subsidiary who consider certain factors, including but not limited to, previous loss experience in portfolio segments and assessment of current economic conditions. The allowance for possible loan losses has been allocated based on the amount management has deemed to be reasonably necessary to provide for the possibility of losses being incurred within the following categories of loans at the dates indicated and the percentage of loans to total loans in each category:
At December 31, ----------------------------------------------------------------------------------------------------------- 1996 1995 1994 1993 1992 ------------------ ----------------- ----------------- ----------------- ----------------- Percent Percent Percent Percent Percent Allowance Of Loans Allowance Of Loans Allowance Of Loans Allowance Of Loans Allowance Of Loans -------- ----- -------- ----- -------- ----- -------- ----- -------- ----- (Dollars in Thousands) Commercial, financial and agricultural $ 12,911 58.0% $ 11,506 59.4% $ 10,274 58.0% $ 8,813 60.3% $ 6,177 57.5% Lease financing receivables 70 0.3 63 0.3 61 0.3 62 0.4 51 0.5 Real estate mortgage 3,467 15.6 3,219 16.6 3,123 17.6 2,605 17.8 2,226 20.7 Real estate construction 586 2.6 633 3.3 720 4.1 307 2.1 155 1.4 Consumer 2,901 13.1 1,999 10.4 1,898 10.7 1,275 8.8 845 7.9 Foreign 1,101 10.4 1,035 10.0 949 9.3 769 10.6 601 12.0 -------- ----- -------- ----- -------- ----- -------- ----- -------- ----- $ 21,036 100.0% $ 18,455 100.0% $ 17,025 100.0% $ 13,831 100.0% $ 10,055 100.0% ======== ===== ======== ===== ======== ===== ======== ===== ======== =====
23 DEPOSITS The average amount of deposits, based on month-end balances and interest expense is summarized for the years indicated in the following table:
For The Years Ended December 31, ------------------------------------------ 1996 1995 1994 ----------- ----------- ----------- (Dollars in Thousands) Deposits: Demand - non-interest bearing Domestic $ 256,186 $ 234,793 $ 214,985 Foreign 41,353 34,425 29,451 ----------- ----------- ----------- Total demand non-interest bearing 297,539 269,218 244,436 ----------- ----------- ----------- Savings and interest bearing demand Domestic 459,451 382,028 301,738 Foreign 157,639 166,889 186,916 ----------- ----------- ----------- Total savings and interest bearing demand 617,090 548,917 488,654 ----------- ----------- ----------- Time certificates of deposit $100,000 or more: Domestic 280,550 250,103 210,186 Foreign 546,643 493,747 460,747 Less than $100,000: Domestic 365,232 305,343 261,411 Foreign 201,700 185,161 180,760 ----------- ----------- ----------- Total time, certificates of deposit 1,394,125 1,234,354 1,113,104 ----------- ----------- ----------- Total deposits $ 2,308,754 $ 2,052,489 $ 1,846,194 =========== =========== =========== Interest Expense: Savings and interest bearing demand Domestic $ 14,079 $ 12,341 $ 7,271 Foreign 4,311 4,400 3,659 ----------- ----------- ----------- Total savings and interest bearing demand 18,390 16,741 10,930 ----------- ----------- ----------- Interest, certificates of deposit $100,000 or more: Domestic 14,193 13,151 8,502 Foreign 28,561 25,713 18,692 Less than $100,000 Domestic 17,872 14,877 9,788 Foreign 9,091 8,337 6,137 ----------- ----------- ----------- Total interest, certificates of deposit 69,717 62,078 43,119 ----------- ----------- ----------- Total interest expense $ 88,107 $ 78,819 $ 54,049 =========== =========== ===========
24 Maturities of time, certificates of deposit of $100,000 or more outstanding at December 31, 1996 are summarized as follows: December 31, 1996 --------- (Dollars in Thousands) 3 months or less $ 438,513 Over 3 but through 12 months 377,299 Over 12 months 98,855 --------- Total $ 914,667 --------- RETURN ON EQUITY AND ASSETS Certain key ratios for the Company for the years ended December 31, 1996, 1995 and 1994 follows (Note 1): Years Ended December 31, ------------------------------ 1996 1995 1994 ----- ----- ----- Percentage of net income to: Average shareholders' equity 17.45% 18.64% 21.62% Average total assets 1.50 1.41 1.63 Percentage of average shareholders' equity to average total assets 8.59 7.54 7.53 Percentage of cash dividends per share to net income per share 9.87 8.65 15.95 (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 10 of notes to consolidated financial statements located on page 34 of the 1996 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 62 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, Zapata, the Rio Grande Valley of Texas and the Coastal Bend area of Texas. As Texas state-chartered banks, no bank subsidiary of the Company may, without the prior written consent of the Banking Commissioner, invest an amount in excess of its capital and certified surplus in bank facilities, furniture, fixtures and equipment. None of the Company's bank subsidiaries exceed such limitation. 25 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 1996 Annual Meeting of Shareholders of the Company held on May 16, 1996, no matter was submitted to a vote of Registrant's security holders through the solicitation of proxies or otherwise. Part II Item 5. MARKET FOR THE REGISTRANT'S COMMON STOCK AND RELATED SECURITY HOLDER MATTERS The information set forth under the caption "Common Stock and Dividends" located on pages 10 and 11 of Registrant's 1996 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 1996 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 1996 Annual Report is incorporated herein by reference. Item 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA The consolidated financial statements located on pages 12 through 49 of Registrant's 1996 Annual Report are incorporated herein by reference. Item 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE None. 26 PART III Item 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT DIRECTORS Eleven directors are to be elected at the 1997 Annual Meeting of Shareholders of the Company to be held on May 15, 1997 (the "Annual Meeting"). The following named persons, each of whom, with the exception of Peggy J. Newman, is currently a director, have been nominated for election as directors of the Company, to serve until the Company's next annual meeting and until his or her successor is elected and qualified. Certain information concerning each such person is set forth below including information regarding such person's respective positions with IBC: Served as Nominee for Director Director Since (1) Age Principal Occupation (2) ----------- --------- --- ------------------------ Lester Avigael 1966 70 Retail Merchant and Director of IBC R. David Guerra 1993 44 Vice President of the Company since 1986 and President of the IBC branch in McAllen, Texas and Director of IBC since 1990 Irving Greenblum 1981 67 Retail Merchant (Muebleria Mexico, S.A.) Richard E. Haynes 1977 54 Attorney at Law; Real Estate Investments; and Director of IBC Roy Jennings Jr. 1966 73 Investments; Vice Chairman of the Board of the Company and Director of IBC Sioma Neiman 1981 69 International entrepreneur Dennis E. Nixon 1975 54 Chairman of the Board of the Company since May 1992 and President of the Company since 1979; President, Chief Executive Officer and Director of IBC Peggy J. Newman - 65 Real Estate and Investments; Director of IBC since 1996 Leonardo Salinas 1976 63 Vice President of the Company since 1982; Senior Executive Vice President and Director of IBC 27 Served as Nominee for Director Director Since (1) Age Principal Occupation (2) ----------- --------- --- ------------------------ Antonio R. Sanchez Jr. 1995 54 Chairman of the Board of Sanchez O'Brien Oil & Gas Corporation; Investments; and Director of IBC Alberto A. Santos 1966 69 Investments; and Director of IBC (1) Includes time served as director of IBC prior to July 28, 1980 when the Company became the successor issuer to IBC. (2) Except as otherwise noted, each nominee has held the office indicated or other offices in the same company for the last five years. None of the above-named persons and none of the executive officers of the Company have a family relationship with any of the other above-named persons or executive officers, except for Leonardo Salinas and Alberto A. Santos, who are first cousins. None of the directors is a director of any other company which has a class of securities registered under, or is required to file reports under, the Exchange Act or of any company registered under the Investment Company Act of 1940, except for Mr. Sanchez who is Chairman of the Board of Sanchez O'Brien Oil & Gas Corporation. 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 1997 Annual Meeting of Shareholders of the Company and until his successor is duly elected and qualified. Officer of the Name Age Position Of Office Company Since - -------------------------------------------------------------------------------- Dennis E. Nixon 54 Chairman of the Board of the 1979 Company, President of the Company, President and Chief Executive Officer of IBC Leonardo Salinas 63 Vice President of the Company 1982 and Senior Executive Vice President of IBC R. David Guerra 44 Vice President of the Company 1986 and President of IBC McAllen Branch Arnoldo Cisneros 45 Secretary-Treasurer of the 1982 Company and Executive Vice President of IBC 28 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. FILING OF BENEFICIAL OWNERSHIP REPORTS Under the securities laws of the United States, the Company's directors, its executive officers and any persons holding more than ten percent of the Company's Common Stock are required to report their initial ownership of the Company's Common Stock and any subsequent changes in that ownership to the Securities and Exchange Commission. Specific due dates for these reports have been established and the Company is required to disclose in this Form 10-K and in the Company's Proxy Statement any failure to file such reports by the applicable dates during 1996. The Company believes that all of these filing requirements were timely satisfied. In making these disclosures, the Company has relied solely on written representations of its directors, executive officers and its ten percent holders and copies of the reports that they have filed with the Commission. Item 11. EXECUTIVE COMPENSATION SUMMARY Compensation of the key executive officers of the bank subsidiaries is linked to the financial performance of the Company. The Company maintains a cash bonus plan as well as a stock option plan. The following table contains information concerning the compensation awarded during each of the last three years for the chief executive officer of the Company and the other most highly compensated executive officers of the Company whose total annual salary and bonus exceeded $100,000 in 1996. SUMMARY COMPENSATION TABLE
Long Term Annual Compensation Compensation All Other Name and -------------------------- Securities Compensation Principal Position Year Salary (1) Bonus Underlying Options (2) - ------------------ ---- ---------- -------- ---------------- ------- Dennis E. Nixon 1994 $ 298,580 $ 500,000 - $ 7,291 President and Director of 1995 295,601 600,000 5,000 9,144 the Company and of IBC 1996 313,722 700,000 - 8,672 R. David Guerra 1994 162,687 33,558 - 6,461 Vice President and 1995 161,587 33,317 2,500 8,392 Director of the Company; 1996 172,588 36,688 - 8,375 President of IBC McAllen Branch and Director of IBC Leonardo Salinas 1994 144,099 19,581 - 6,302 Vice President and 1995 145,799 19,393 - 8,043 Director of the Company; 1996 108,670 13,975 - 5,473 Director and Senior Executive Vice President of IBC
29 (1) These amounts do not include certain perquisites and other personal benefits, securities or property received by the officers which did not exceed the lesser of $50,000 or 10% of such executive officer's total salary and bonus set forth in the table; however, such amounts include directors fees as well as certain expense allowances. All cash compensations paid to the named officers was paid by IBC. The Company does not pay any cash compensation to any officer. (2) All amounts shown in this column consist of funds contributed or allocated by the Company pursuant to the Company's Employee Profit Sharing Plan and Trust, a deferred profit sharing plan for employees with one year of continual employment. Each director of the Company and each director of IBC receives compensation for his or her services as a director in the amount of $700 for each meeting of the Board such director attends and $200 for each meeting of a committee of the Board such director attends. Salaried officers who are directors are not compensated for committee meetings. The director fees paid to the named executive officers are included in the salary totals set forth in the table. STOCK OPTIONS During 1996, the Company did not grant options to any of the named executive officers of the Company. The following table sets forth certain information regarding individual exercises of stock options with respect to the Common Stock during 1996 and through March 21, 1997 by each of the named executive officers. AGGREGATED OPTION EXERCISES IN 1996 AND FISCAL YEAR-END OPTION VALUES
Number of Underlying Value of Shares of Unexercised Unexercised In-the-Money Options at Options at Shares 12/31/96 12/31/96 Acquired on Value Exercisable/ Exercisable/ Name Exercise Realized (1) Unexercisable Unexercisable (1) ---- ---------- ------------ ------------- ----------------- Dennis E. Nixon 20,214 $ 723,774 36,718/ $ 1,524,618/ 15,039 499,989 R. David Guerra 12,422 491,622 781/ 15,831/ 5,468 162,919 Leonardo Salinas 2,284 126,365 1,172 49,722
(1) Based on market value of underlying shares minus aggregate exercise price. 30 Item 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT PRINCIPAL SHAREHOLDERS Insofar as is known to the Company, no person beneficially owned, as of March 21, 1997, more than five percent of the outstanding Common Stock of the Company, except as follows: Shares of Common Stock Percent Name and Address Beneficially Owned as of Of Beneficial Owner Of March 21, 1997 Class ------------------- ---------------------- ------ Alicia M. Sanchez (1) 1,619,301 18.45% 2119 Guerrero Street Laredo, Texas 78040 A. R. Sanchez Jr. (2) 873,027 9.95% P.O. Box 2986 Laredo, Texas 78041 (1) All the shares shown for Mrs. Alicia M. Sanchez are held by certain trusts for which Mrs. Sanchez serves as sole trustee. 222,777 of the shares are held by her as sole trustee for trusts in which certain of her children and grandchildren have a vested interest in the income and corpus of the trusts. Mrs. Sanchez has the sole power to vote and to dispose of all of the shares held by such trusts. Mrs. Sanchez is the mother of A. R. Sanchez Jr. (2) A. R. Sanchez Jr. owns directly and has the sole power to vote and to dispose of 523,447 shares owned beneficially by him. Mr. Sanchez also controls the disposition of 349,580 shares as trustee for trusts in which his children have a vested interest in the income and corpus of such trusts, however, George M. Sanchez, the brother of Mr. Sanchez, has the power to vote the 349,580 shares. SECURITY OWNERSHIP OF MANAGEMENT Based upon information received from the persons concerned, each of whom is a director and nominee for director, the following individuals and all directors and executive officers of the Company as a group owned beneficially as of March 21, 1997, the number and percentage of outstanding shares of Common Stock of the Company indicated in the following table: Name of Individual Shares Beneficially Owned Percent Or Identity Of Group As Of March 21, 1997 Of Class -------------------- -------------------------- -------- Lester Avigael (1) 78,012 * Irving Greenblum (2) 84,446 * R. David Guerra (3) 70,615 + * Richard E. Haynes 8,465 * Roy Jennings Jr. (4) 94,834 1.08% Sioma Neiman (5) 347,550 3.96% Peggy J. Newman 250 * Dennis E. Nixon (6) 435,954 + 4.96% Leonardo Salinas (7) 32,126 + * 31 Name of Individual Shares Beneficially Owned Percent Or Identity Of Group As Of March 21, 1997 Of Class -------------------- -------------------------- -------- A. R. Sanchez Jr. (8) 873,027 9.95% Alberto A. Santos 56,560 * All Directors and Executive Officers as a group (12 persons) (9) 2,106,033 23.99% * Ownership of less than one percent + Include shares which are issuable upon the exercise of options exercisable on or prior to May 14, 1997 ("currently exercisable options"). (1) The holdings shown for Mr. Avigael include 4,622 shares which he holds as trustee for the benefit of his grandchildren. (2) The holdings shown for Mr. Greenblum include 10,020 shares held in the name of his wife. (3) The holdings shown for Mr. Guerra include 67,490 shares which he and his wife hold in their names jointly. Total holdings for Mr. Guerra include 3,125 shares which are issuable upon the exercise of currently exercisable options. (4) The holdings shown for Mr. Jennings include 17,132 shares which he and his wife hold in their names jointly, and 29,577 shares held in the name of his wife. (5) The holdings shown for Mr. Neiman include 347,550 shares in the name of Inar Investments, Corp., of which he is the Managing Director. (6) The holdings shown for Mr. Nixon include 45,507 shares which are issuable upon the exercise of currently exercisable options. The holdings shown for Mr. Nixon also include 1,105 shares held in the name of his wife. (7) The holdings shown for Mr. Salinas include 2,343 shares which are issuable upon the exercise of currently exercisable options. (8) The holdings shown for Mr. A. R. Sanchez Jr. include 523,447 shares which he owns directly and has the sole power to dispose of and to vote. Mr. Sanchez also controls the disposition of 349,580 shares as trustee for trusts in which his children have a vested interest in the income and corpus of such trusts, however, George M. Sanchez, the brother of Mr. Sanchez, has the power to vote the 349,580 shares. (9) The holdings shown for all directors and executive officers as a group include 54,078 shares which are issuable upon the exercise of currently exercisable options. Except as reflected in the notes to the preceding table, each of the individuals listed in the table owns directly the number of shares indicated in the table and has the sole power to vote and to dispose of such shares. 32 Item 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS Some of the directors, executive officers and nominees for directors of the Company and IBC and principal shareholders of the Company and their immediate families and the companies with which they are associated were customers of, and had banking transactions with, the Company's bank subsidiaries in the ordinary course of the bank subsidiaries' business during 1996, and the Company anticipates that such banking transactions will continue in the future. All loans and commitments to loan included in such banking transactions were made in the ordinary course of business, on substantially the same terms, including interest rates and collateral, as those prevailing in the industry at the time for comparable transactions with non-insiders, and, in the opinion of management of the Company, did not involve more than a normal risk of collectibility or present other unfavorable features. At December 31, 1996, loans outstanding made by the Company and all of the Company's bank subsidiaries to directors, executive officers and nominees for directors of the Company (not including those executive officers and directors who only serve at the bank subsidiaries) and principal shareholders of the Company and to persons or entities affiliated with such individuals aggregated $35,909,031.45. At December 31, 1996, all of such loans were current with respect to principal and interest. During 1994, IBC sold for an approximate appraised value of $4,700,000 approximately 44% of its other real estate portfolio to IBC Partners, Ltd., a Texas real estate limited partnership (the "Partnership") owned by certain shareholders of the Company. On May 21, 1996, IBC sold an approximately 417.68 acre tract of land located in Travis County, Texas to the Partnership, which land was part of IBC's other real estate portfolio for an approximate aggregate appraised value of $400,000. As of December 31, 1996, except for the aforementioned property, the Partnership had not acquired any other properties from IBC's other real estate portfolio. Roy Jennings Jr., Dennis E. Nixon and A. R. Sanchez, Jr. serve as the managers of IBC Properties, L.C., the general partner of IBC Partners Management, Ltd., which is the general partner of the Partnership. Lester Avigael and Alberto Santos initially served as managers of IBC Properties, L.C. but each resigned their position as manager effective June 21, 1995. During 1994, 1995, and 1996 the Partnership entered into banking transactions with IBC. All loans and commitments to loan included in such banking transactions were made in the ordinary course of business, in compliance with applicable laws and on substantially the same terms, including interest rates and collateral, as those prevailing in the industry at the time for comparable transactions with non-insiders and, in the opinion of management of the Company, did not involve more than a normal risk of collectibility or present other unfavorable features. During 1994, the Company obtained approval from the FRB to engage in the activity of making loans to certain of its executive officers, directors, affiliates, and principal shareholders, and to certain executive officers and directors and their related interests of the bank subsidiaries. In connection with such approval, the Company committed that all loans would be on terms and under circumstances, including credit standards, that are substantially the same or at least as favorable to it, as those prevailing at the time for comparable transactions with or involving other non-affiliated borrowers, or in the absence of comparable transactions, on terms and under circumstances, including credit standards, that in good faith would be offered to or would apply to non-affiliated companies. As of December 31, 1996, loans outstanding made by the Company to such persons or entities aggregated $9,601,170 and all of said loans, which are described in the following paragraph, were made on terms and under circumstances consistent with the 33 commitment made by the Company to the FRB. As of December 31, 1996, the Partnership was indebted to the Company in the amount of $2,755,676 in connection with three real estate related loans. During 1996, the Partnership repaid $1,406,004 of the related loans. As of December 31, 1996, IBC Partners Investment Joint Venture and IBC Partners Organizational Joint Venture were indebted to the Company in the amount of $308,374 and $818,570, respectively. The two loans were extended as part of a single credit facility in connection with the formation of the Partnership. The two joint ventures are controlled by certain directors and executive officers of the Company or its bank subsidiaries. The joint ventures repaid $68,938 and $179,213, respectively, on the credit facility during 1996. As of December 31, 1996, Dennis E. Nixon and his related interests were indebted to the Company in the amount of $5,288,548 in connection with five real estate related loans. Mr. Nixon and his related interests repaid $971,845 on the related loans during 1996. As of December 31, 1996, R. David Guerra and his related interests were indebted to the Company in the amount of $430,000. At December 31, 1996, all of the loans outstanding in the aggregate principal amount of $9,601,170 (as described in this paragraph and the foregoing paragraph) were current with respect to principal and interest. IBC and Sanchez O'Brien Oil & Gas Corporation, a related interest of Antonio R. Sanchez, Jr., who is a director and principal shareholder of the Company, jointly own, in varying percentages certain aircraft used for business purposes by IBC, the other bank subsidiaries and said company. The net book value of IBC's aggregate interest in all of the aircraft as of March 18, 1997 was approximately $5.6 million. Each bank subsidiary and said company pay the pro rata expense related to their actual use of the aircraft. For a description of certain other related party transactions, see Note (14) of the Notes to the Consolidated Financial Statements. 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 1996 Annual Report to shareholders filed as an exhibit hereto and they include: Independent Auditors' Report Consolidated: Statements of Condition as of December 31, 1996 and 1995 Statements of Income for the years ended December 31, 1996, 1995 and 1994 Statements of Shareholders' Equity for the years ended December 31, 1996, 1995 and 1994 Statements of Cash Flows for the years ended December 31, 1996, 1995 and 1994 Notes to Financial Statements 34 2. All Financial Statement Schedules are omitted as the required information is inapplicable or the information is presented in the financial statements or related notes. 3. The following exhibits are filed as a part of this Report: (3)(a)*-Articles of Incorporation of International Bancshares Corporation incorporated herein as an exhibit by reference to the Current Report, Exhibit 3.1 therein, under the Securities Exchange Act of 1934, filed by Registrant on Form 8-K with the Securities and Exchange Commission on June 20, 1995, SEC File No. 09439. (3)(b)*-By-Laws of International Bancshares Corporation incorporated herein as an exhibit by reference to the Current Report, Exhibit 3.2 therein, under the Securities Exchange Act of 1934, filed by Registrant on Form 8-K with the Securities and Exchange Commission on June 20, 1995, SEC File No. 0-9439 (10)*-Sublease between Commerce Bank and Americity Federal Savings Bank incorporated herein as an exhibit by reference to the Annual Report, Exhibit 11(b) therein, under the Securities Exchange Act of 1934, filed by Registrant on Form 10-K with the Securities and Exchange Commission on March 23, 1982, SEC File No. 0-9439 (10a)*-Purchase and Assumption Agreement dated June 29, 1990 by and between the Resolution Trust Corporation, receiver of Valley Federal Savings Association and New Valley Federal Savings Association incorporated herein as an exhibit by reference to the Annual Report, Exhibit 10(a) therein, under the Securities Exchange Act of 1934, filed by Registrant on Form 10-K with the Securities and Exchange Commission on March 30, 1992, SEC File No. 0-9439 (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 35 Option Plan as amended and restated (formerly the International Bancshares Corporation 1981 Incentive Stock Option Plan) incorporated herein as an exhibit by reference to Exhibit 28 to the Registration Statement on Form S-8 filed with the Securities and Exchange Commission on July 13, 1987, SEC File No. 33-15655. (10f)*-Merger Agreement by and between International Bank of Commerce, Michigan National Corporation and First State Bank and Trust Company, dated May 5, 1994 incorporated herein by reference to Exhibit 10(f) of the Form 10Q filed with the Securities and Exchange Commission on August 15, 1994, SEC File No. 0-9439. (10g)*-Merger Agreement by and between International Bank of Commerce, and The Bank of Corpus Christi, dated August 19, 1994 incorporated herein by reference to Exhibit 10(g) of Form 10-Q filed with the Securities and Exchange Commission on November 14, 1994, SEC File No. 0-9439. (10h)*-Merger Agreement by and between International Bank of Commerce, and Stone Oak National Bank, dated February 28, 1995, incorporated by reference to Exhibit 10(h) of the Registrant's Quarterly Report on Form 10Q for the period ended March 31, 1995, filed with the Securities and Exchange Commission on May 15, 1995, SEC File No. 0-9439. (10i)*-Agreement and Plan of Merger dated as of June 7, 1995, by and between International Bancshares Corporation, a Delaware corporation, and International Bancshares Corporation, a Texas corporation, incorporated herein by reference to Exhibit 2 of the Current Report on Form 8-K filed with the Securities and Exchange Commission on June 20, 1995, SEC File No. 0-9439. (10j)*-Purchase and Assumption Agreement dated as of February 27, 1996, by and between International Bank of Commerce, River Valley Bank, F.S.B. and Western Capital Holdings, Inc. incorporated herein, by reference to Exhibit 10(j) of the Registrant's Annual Report on Form 10-K filed with the Securities and Exchange Commission on April 1, 1996, SEC File No. 09439. (10k)*-Purchase of Asset and Liability Agreement dated as of July 30, 1996, by and between International Bank of Commerce and Home Savings of America F.S.B. incorporated herein by reference to Exhibit 10(k) of the Registrant's Quarterly Report on Form 10-Q filed with the Securities and Exchange Commission on November 13, 1996. (10l)*+-The 1996 International Bancshares Corporation Stock Option Plan incorporated herein by reference to Exhibit 99.1 to the Post Effective Amendment No. 1 to Form S-8 filed with the Securities and Exchange Commission on March 21, 1997, SEC File No. 33-15655. (13)**-International Bancshares Corporation 1996 Annual Report (21)-List of Subsidiaries of International Bancshares Corporation as of March 21, 1997 36 (23)-Accountants' Consent (27)-Financial Data Schedule * Previously filed ** Deemed filed only with respect to those portions thereof incorporated herein by reference + Executive Compensation Plans and Arrangements (b) REPORTS ON FORM 8-K Registrant filed a current report on Form 8-K dated December 30, 1996, covering Item 5 - Other Events and Item 7 - Financial Statements and Exhibits, in connection with the acquisition of three branches of Home Savings of America, F.S.B. located in San Antonio, Texas. Registrant filed a current report on Form 8-K dated March 14, 1997, covering Item 5 - Other Events and Item 7 - Financial Statements and Exhibits, in connection with the acquisition of five branches of Bank of America Texas, N.A., located in the Coastal Bend area of Texas. 37 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 21, 1997 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 21, 1997 Dennis E. Nixon (Principal Executive Officer) /S/ ARNOLDO CISNEROS Secretary-Treasurer MARCH 21, 1997 Arnoldo Cisneros (Principal Financial Officer) /S/ LEONARDO SALINAS Vice President and MARCH 21, 1997 Leonardo Salinas Director /S/ LESTER AVIGAEL Director MARCH 21, 1997 Lester Avigael /S/ IRVING GREENBLUM Director MARCH 21, 1997 Irving Greenblum /S/ R. DAVID GUERRA Director MARCH 21, 1997 R. David Guerra ________________________ Director Richard E. Haynes /S/ ROY JENNINGS, JR. Director MARCH 21, 1997 Roy Jennings, Jr. ________________________ Director Sioma Neiman /S/ ALBERTO A. SANTOS Director MARCH 21, 1997 Alberto A. Santos /S/ ANTONIO R. SANCHEZ JR. Director MARCH 21, 1997 Antonio R. Sanchez Jr. 38 Exhibit Index Exhibit 13 - International Bancshares Corporation 1996 Annual Report, page 40 Exhibit 21 - List of Subsidiaries of International Bancshares Corporation as of March 21, 1997, page 93 Exhibit 23 - Accountants' Consent, page 94 Exhibit 27 - Financial Data Schedule 39 EX-13 2 EXHIBIT 13 INTERNATIONAL BANCSHARES CORPORATION AND SUBSIDIARIES (Consolidated) SELECTED FINANCIAL DATA
At Or For The Years Ended December 31, ------------------------------------------------------- 1996 1995 1994 1993 1992 ----------- ---------- ---------- ---------- ---------- (Dollars in Thousands, Except Per Share Data) BALANCE SHEET Assets $ 3,351,231 $2,935,606 $2,659,392 $2,115,786 $1,883,883 Net loans 1,214,959 1,186,456 1,125,489 997,883 884,853 Deposits 2,662,153 2,143,346 2,061,638 1,723,919 1,626,935 Other borrowed funds 239,000 66,500 123,500 4,500 5,500 Shareholders' equity 283,767 245,761 178,536 163,055 131,154 INCOME STATEMENT Interest income $ 221,779 $ 218,867 $ 159,260 $ 131,829 $ 135,972 Interest expense 107,372 112,361 66,754 51,155 60,769 ----------- ---------- ---------- ---------- ---------- Net interest income 114,407 106,506 92,506 80,674 75,203 Provision for possible loan losses 6,630 5,150 3,804 4,540 4,664 Non-interest income 30,194 26,009 20,945 25,935 24,657 Non-interest expense 73,457 68,989 58,355 60,236 51,224 ----------- ---------- ---------- ---------- ---------- Income before income taxes 64,514 58,376 51,292 41,833 43,972 Income taxes 20,164 18,315 13,402 9,971 14,262 ----------- ---------- ---------- ---------- ---------- Net income $ 44,350 $ 40,061 $ 37,890 $ 31,862 $ 29,710 =========== ========== ========== ========== ========== Per common share: Primary $ 4.87 $ 4.43 $ 4.17 $ 3.58 $ 3.29 Fully diluted $ 4.87 $ 4.43 $ 4.17 $ 3.43 $ 3.15 Cash dividend per share $ .50 $ 0.50 $ 1.10 - -
Note 1: See note l of notes to the consolidated financial statements regarding the adoption of Statement of Financial Accounting Standards No. 115. Note 2: See note 2 of notes to the consolidated financial statements regarding the acquisitions made by International Bancshares Corporation and its subsidiaries in 1996 and 1995. Note 3: See note 8 of notes to the consolidated financial statements regarding the other borrowed funds of the Company and its subsidiaries. 1 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, 1996. The Company is a bank holding company with four bank subsidiaries operating in 62 locations in South 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, 1996, and the Selected Financial Data and Consolidated Financial Statements included elsewhere herein. RESULTS OF OPERATIONS Net income for 1996 was $44,350,000, or $4.87 per share, compared with $40,061,000, or $4.43 per share, in 1995 and $37,890,000, or $4.17 per share in 1994. Total assets at December 31, 1996 grew 14% to $3,351,231,000 from $2,935,606,000 while net loans increased 2% to $1,214,959,000 from $1,186,456,000 for the prior year. Deposits at December 31, 1996 were $2,662,153,000, an increase of 24% over the $2,143,346,000 amount reported at December 31, 1995. Deposits at December 31, 1995 were $2,143,346,000, an increase of 4% over the $2,061,638,000 amount reported at December 31, 1994. Total assets at December 31, 1995 grew 10% to $2,935,606,000 from $2,659,392,000 at December 31, 1994 while net loans increased 5% in 1995 to $1,186,456,000 from $1,125,489,000 in 1994. The increase in assets and deposits during 1996 was primarily attributable to the acquisition of The River Valley Bank, F.S.B. ("RVB") and three branches of Home Savings of America, F.S.B. ("Savings of America"). See note 2 of notes to Consolidated Financial Statements. The aggregate amount of repurchase agreements, short term fixed borrowings and certificates of indebtedness with the Federal Home Loan Bank of Dallas ("FHLB"), Federal National Mortgage Association ("FNMA") and Federal Home Loan Mortgage Corporation ("FHLMC") decreased to $237,000,000 at December 31, 1996 from the $359,500,000 reflected at December 31, 1995. The decrease in wholesale liabilities, repurchase agreements, short term fixed borrowings and certificates of indebtedness is related to the Company's assumption of the RVB and Savings of America deposits and the payment of the premiums for said deposits. Net interest income increased by $7,901,000, or 7%, over that in 1995 due to a slight increase in the net yield on average interest earning assets of .18% from 4.04% in 1995 to 4.22% in 1996. The net yield on average interest earning assets decreased by .26% in 1995 to 4.04% from 4.30% in 1994 while net interest income increased by $14,000,000 or 15% over 1994. A 2.8% increase in average interest earning assets from $2,635,174,000 in 1995 to $2,708,371,000 in 1996 and a 23% increase from $2,149,599,000 in 1994 to $2,635,174,000 in 1995 contributed to the continued increase in net interest income for 1996 and 1995, respectively. The Company experienced a .12% decrease in the yield on average interest earning assets to 8.19% in 1996 from 8.31% in 1995. In 1995 a .90% increase was reflected in the yield on average interest earning assets to 8.31% from 7.41% in 1994 and an increase was reflected on the rates paid on average interest bearing liabilities to 4.78% in 1995 from 3.52% in 1994. 2 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 16% in 1996 to $30,194,000 over $26,009,000 in 1995 and increased 44% over $20,945,000 in 1994. The 1996 and 1995 increases in non-interest income were primarily due to the increases in service charges. The increase in service charges is attributable to the amount of account transaction fees received as a result of the deposit growth and increased collection efforts. Expense control is an essential element in the Company's profitability. This is achieved through maintaining optimum staffing levels, an effective budgeting process, and internal consolidation of bank functions. The Company's efficiency ratio (other operating expenses divided by net interest income and other operating income) has been under 57% for each of the last five years, which the Company believes is well below national peer group ratios. Non-interest expense includes such items as salaries and wages and employee benefits, net occupancy expenses, equipment expenses and other operating expenses such as FDIC insurance. Non-interest expense increased 6% in 1996 to $73,457,000 from $68,989,000 in 1995 and increased 26% from $58,355,000 in 1994. The 1996 increase in non-interest expense was primarily due to the increased operations at certain of the bank subsidiaries as a result of acquisitions. The 1995 increase was due to the increased operations at each of the bank subsidiaries and, in particular, was the result of the $2,800,000 reserve for litigation costs created by the Company in connection with certain pending litigation involving a lender liability claim. Most of the Company's lending activities involve commercial (domestic and foreign), consumer and real estate mortgage financing. In 1996, average domestic loans decreased by 1% and average foreign loans increased by 9% for a decrease in total average loans of .21% over 1995. The Company believes that the decrease in loan demand, while not material, was due in part to the effect of the 1994 peso devaluations. The average 3 yield for these loans decreased .45% for domestic loans and increased by .11% for foreign loans in 1996 as compared to 1995. Although the economic conditions in the U.S./Mexico border region have improved, loan demand has not improved significantly. Competition for loans in the Company's market area has intensified and has resulted in loan pricing by certain competitors which management believes is not commensurate with the risk associated with making such loans. The result of which has been a reduction of the Company's market penetration for loans. The Company experienced an increase of 15% in average domestic loans and a 7% increase in average foreign loans in 1995 as compared to 1994. The yield for these loans increased 1.16% for domestic loans and .92% for foreign loans in 1995 as compared to 1994, due to increasing interest rates. The Company experienced an increase of 5% in average balances of taxable investment securities from $1,381,781,000 during 1995 to $1,449,211,000 for 1996 and an increase of 36% from $1,016,871,000 during 1994 to $1,381,781,000 for 1995. These trends were the results of continued increases in deposits, repurchase agreements and borrowings during 1996 and 1995 providing the Company with available funds for investments. The allowance for possible loan losses increased 14% from $18,455,000 in 1995 to $21,036,000 in 1996 and increased 8% from $17,025,000 in 1994 to $18,455,000 in 1995. The provision for possible loan losses charged to expense increased 29% from $5,150,000 in 1995 to $6,630,000 in 1996 and increased 35% from $3,804,000 in 1994 to $5,150,000 in 1995. Increases in the allowance for possible loan losses were largely due to uncertain, although improving, economic conditions. The allowance for possible loan losses was 1.70% of total loans at December 31, 1996 compared to 1.53% at 1995 and 1.49% at 1994. Non-performing assets as a percentage of total loans and total assets were .99% and .37%, respectively, at December 31, 1996, and 1.27% and .52% at December 31, 1995, respectively. Loans accounted for on a non-accrual basis decreased 29% from $6,233,000 in 1995 to $4,425,000 in 1996. As loans are placed on a non-accrual status, interest previously accrued and recorded is reversed unless the loans are well secured and in the process of collection. Foreclosed assets decreased 48% from $9,372,000 in 1995 compared to $4,874,000 in 1996. The decreases in the non-performing loans and foreclosed assets were primarily due to improving conditions in the Company's loan portfolio as economic conditions have improved, as well as the sale of foreclosed assets. In 1995, non-accruals increased 72% from $3,627,000 in 1994 to $6,233,000 in 1995 while foreclosed assets had an increase of 53% from $6,145,000 in 1994 to $9,372,000 in 1995. 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. Please see note 4 of the notes to the Consolidated Financial Statements included elsewhere herein for a discussion of 4 impaired loans pursuant to SFAS No. 114 as amended by SFAS No. 118. No additional provision to the allowance for possible loan losses was required by the adoption of SFAS No. 114 by the Company on January 1, 1995. The bank subsidiaries charge off that portion of any loan which management considers to represent a loss as well as that portion of any other loan which is classified as a "loss" by bank examiners. Commercial and industrial or real estate loans are generally considered by management to represent a loss, in whole or part, when an exposure beyond any collateral coverage is apparent and when no further collection of the portion of the loan so exposed is anticipated based on the borrower's financial condition and general economic conditions in the borrower's industry. Generally, unsecured consumer loans are charged off when 90 days past due. While management of the Company considers that it is generally able to identify borrowers with financial problems reasonably early and to monitor credit extended to such borrowers carefully, there is no precise method of predicting loan losses. The determination that a loan is likely to be uncollectible and that it should be wholly or partially charged off as a loss is an exercise of judgment. Similarly, the determination of the adequacy of the allowance for possible loan losses can be made only on a subjective basis. It is the judgment of the Company's management that the allowance for possible loan losses at December 31, 1996 was adequate to absorb possible losses from loans in the portfolio at that date. On December 31, 1996, the Company had $3,351,231,000 of consolidated assets of which approximately $128,932,000 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, 1996 were as follows: Related Amount of Allowance for LOANS POSSIBLE LOSSES -------- -------- (Dollars in Thousands) Secured by certificates of deposit in United States banks ................... $ 55,706 $ 28 Secured by United States real estate ........... 37,590 443 Secured by other United States collateral (securities, gold, silver, etc.) ......... 12,453 197 Direct unsecured Mexican sovereign debt (principally former FICORCA debt) ........ 1,961 188 Other .......................................... 21,222 245 -------- -------- $128,932 $ 1,101 ======== ======== 5 The transactions for the year ended December 31, 1996 in that portion of the allowance for possible loan losses related to Mexican debt were as follows: (Dollars in Thousands) Balance at January 1, 1996 ............. $ 1,035 Charge-offs ......................... (23) Recoveries .......................... 31 ------- Net recoveries ......................... 8 ------- Provision for possible loan losses ..... 58 ------- Balance at December 31, 1996 ........... $ 1,101 ======= LIQUIDITY AND CAPITAL RESOURCES The maintenance of adequate liquidity provides the Company's bank subsidiaries with the ability to meet potential depositor withdrawals, provide for customer credit needs, maintain adequate statutory reserve levels and take full advantage of high-yield investment opportunities as they arise. Liquidity is afforded by access to financial markets and by holding appropriate amounts of liquid assets. The bank subsidiaries of the Company derive their liquidity largely from deposits of individuals and business entities. In recent years, deposit growth has largely been attributable to acquisitions. Historically, the Mexico based deposits of the Company's bank subsidiaries have been a stable source of funding. Deposits from persons and entities domiciled in Mexico comprise a significant portion of the deposit base of the Company's bank subsidiaries. Such deposits comprised approximately 39%, 43% and 43% of the Company's bank subsidiaries' total deposits as of December 31, 1996, 1995 and 1994, respectively. Other important funding sources for the Company's bank subsidiaries during 1996 and 1995 have been securities sold under agreements to repurchase, FHLB certificates of indebtedness 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. 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 15 to the Consolidated Financial Statements. At December 31, 1996, the aggregate amount legally available to be distributed to the Company from bank subsidiaries as dividends was approximately $74,230,000, 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 $186,789,000 as of December 31, 1996. The undivided profits of the bank subsidiaries were approximately $116,286,000 as of December 31, 1996. 6 As of December 31, 1996, the Company has outstanding $239,000,000 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, 1996, shareholders' equity was $283,767,000 compared to $245,761,000 at December 31, 1995, an increase of $38,006,000 or 15%. This increase in capital resulted primarily from the retention of earnings. During 1990, the Federal Reserve Board ("FRB") adopted a minimum leverage ratio of 3% for the most highly-rated bank holding companies and at least 4% to 5% for all other bank holding companies. The Company's leverage ratio (defined as stockholders' equity less goodwill and certain other intangibles divided by average quarterly assets) was 7.80% at December 31, 1996 and 7.55% at December 31, 1995. The core deposit intangibles and goodwill of $28,983,000 booked in connection with financial institution acquisitions of the Company are deducted from the sum of core capital elements when determining the capital ratios of the Company. The FRB has adopted risk-based capital guidelines which assign risk weightings to assets and off-balance sheet items. The guidelines also define and set minimum capital requirements (risk-based capital ratios). Under the final 1992 rules, all banks are required to have core capital (Tier 1) of at least 4.0% of risk-weighted assets and total capital of 8.0% of risk-weighted assets. Tier 1 capital consists principally of shareholders' equity less goodwill and certain other intangibles, while total capital consists of core capital, certain debt instruments and a portion of the reserve for credit losses. In order to be deemed well capitalized pursuant to the regulations, an institution must have a total risk-weighted capital ratio of 10%, a Tier 1 risk- weighted ratio of 6% and a Tier 1 leverage ratio of 5%. The Company had risk-weighted Tier 1 capital ratios of 16.02% and 14.94% and risk weighted total capital ratios of 17.27% and 16.19% for December 31, 1996 and 1995, respectively, which are well above the minimum regulatory requirements and exceed the well capitalized ratios (see note 17 to notes to Consolidated Financial Statements). The Company had 1,603,467 treasury shares as of March 21, 1997. The Company does not have a formal stock repurchase program; however, the Company occasionally repurchases shares of Common Stock, including repurchases related to the exercise of stock options through the surrender of other shares of Common Stock of the Company owned by the option holders. As of December 31, 1996, the Company had repurchased shares in the cumulative total amount of $10,043,000. The Board of Directors has stated that it will not approve repurchases of more than a total of $12,000,000. While the Board has increased previous caps related to treasury shares once they were met, there are no assurances that an increase of the $12,000,000 cap will occur in the future. The Company has no definite plans for the treasury shares; however, the treasury shares may be used to fulfill option exercises under the Company's Stock Option Plan. During the past few years the Company has expanded its banking facilities. Among the activities and commitments the Company funded during 1996 and 1995 were certain capital expenditures as they related to modernization and improvement of several existing bank facilities and expansion of the bank branch network. The Company has budgeted an 7 amount of approximately $6.8 million to fund certain capital expenditures during 1997 relating to the modernization, improvement and expansion of the main bank buildings and branch facilities of the bank subsidiaries. EFFECTS OF INFLATION The principal component of earnings is net interest income, which is affected by changes in the level of interest rates. Changes in rates of inflation affect interest rates. It is difficult to precisely measure the impact of inflation on net interest income because it is not possible to accurately differentiate between increases in net interest income resulting from inflation and increases resulting from increased business activity. Inflation also raises costs of operation, primarily those of employment and services. FORWARD LOOKING INFORMATION Certain matters discussed in this report, excluding historical information, include forward-looking statements. Although the Company believes such forward-looking statements are based on reasonable assumptions, no assurance can be given that every objective will be reached. These forward-looking statements involve certain risks and uncertainties. Such statements are made in reliance on the "safe harbor" protection provided under the Private Securities Litigation Reform Act of 1995. Factors that could cause actual results to differ materially from any results that are projected, forecasted, estimated or budgeted by the Company in forward-looking statements include, among others, the following possibilities: (I) changes in local, state, national and international economic conditions, (II) changes in the capital markets utilized by the Company and its subsidiaries, including changes in the interest rate environment that may reduce margins, (III) changes in state and/or federal laws and regulations to which the Company and its subsidiaries, as well as their customers, competitors and potential competitors, are subject, including, without limitation, banking, tax, securities, insurance and employment laws and regulations, and (IV) increased competition from both within and without the banking industry. ADOPTION OF NEW ACCOUNTING STANDARDS During 1993 the Financial Accounting Standards Board ("FASB") issued Statement of Financial Accounting Standards ("SFAS") No. 115, "Accounting for Certain Investments in Debt and Equity Securities" which required that an enterprise classify debt and equity securities into one of these categories: held-to-maturity, available-for-sale, or trading. SFAS No. 115 also states that these classifications need to be reassessed for appropriate classification at each reporting date. Securities classified as "held- to-maturity" are to be carried at amortized cost for financial statement reporting, while securities classified as "available for sale" and "trading" are to be carried at their fair value. Unrealized holding gains and losses are included in net income for those securities classified as "trading", while unrealized holding gains and losses related to those securities classified as "available-for-sale" are excluded from net income and reported at a net amount as a separate component of shareholders' equity until realized. This Statement was adopted by the Company on January 1, 1994. The effect of the change in accounting treatment as of January 1, 1994 resulted in an increase in shareholders' equity of $5,312,000, and is reported separately in the consolidated statement of shareholders' equity. 8 The Company adopted SFAS No. 114, "Accounting by Creditors for Impairment of a Loan", as amended by SFAS No. 118, "Accounting by Creditors for Impairment of Loan-Income Recognition and Disclosure," effective January 1, 1995. These are applicable to all creditors and to all loans, uncollateralized as well as collateralized, except consumer loans. These Statements require that impaired loans be measured based on (1) the present value of expected future cash flows discounted at the loan's effective interest rate; (2) the loan's observable market price; or (3) the fair value of the collateral if the loan is collateral dependent. The adoption of these accounting standards did not have a material effect on the Company's consolidated financial position or results of operations since the Company's previous recognition and measurement policies regarding non-performing loans were consistent with the accounting requirements for impaired loans. The Company adopted SFAS No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of", effective January 1, 1996. This Statement established accounting standards for the impairment of long-lived assets, certain identifiable intangibles, and goodwill related to those assets to be held and used and for long-lived assets and certain identifiable intangibles which must be disposed. Long-lived assets and certain identifiable intangibles to be disposed of must be reported at the lower of carrying amount or fair value less cost to sell, except for assets that are covered by APB Opinion No. 30. Adoption of this Statement did not have a material impact on the Company's consolidated financial position, results of operations or liquidity. The Company adopted SFAS No. 122, "Accounting for Mortgage Servicing Rights" effective January 1, 1996. This Statement requires that a mortgage banking enterprise assess its capitalized mortgage servicing rights for impairment based on the fair value of those rights that are capitalized after the adoption of this Statement based on one or more of the predominant risk characteristics of the underlying loans. Impairment should be recognized through a valuation allowance for each impaired stratum. The adoption of this accounting standard did not have a material effect on the Company's consolidated financial position, results of operation or liquidity. In 1996, the Company adopted SFAS No. 123, "Accounting for Stock-Based Compensation." SFAS No. 123 permits companies to recognize as expense over the vesting period the fair value of all stock-based awards on the date of grant. In management's opinion, the existing stock option valuation models do not necessarily provide a reliable single measure of stock option fair value. Therefore, as permitted, the Company will continue to apply the existing accounting rules under APB No. 25 and provide pro forma net income and pro forma earnings per share disclosures for employee stock option grants made in 1995 and subsequent years as if the fair-value-based method defined in SFAS No. 123 had been applied. Effective January 1, 1996, the Company adopted the American Institute of Certified Public Accountants Statement Of Position ("SOP") 96-1, "Environmental Remediation Liabilities." SOP 96-1 requires, among other things, environmental remediation liabilities to be accrued when the criteria of SFAS No. 5, "Accounting for Contingencies," have been met and also provides guidance with respect to the measurement of remediation liabilities. Such accounting is consistent with the Company's previous method of accounting for environmental remediation costs and therefore, adoption of this new Statement did not have a material impact on the Company's consolidated financial position, results of operations or liquidity. 9 ACCOUNTING STANDARDS ISSUED BUT NOT YET EFFECTIVE 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. Management of the Company does not expect that adoption of SFAS No. 125 will have a material impact on the Company's consolidated financial position, results of operations or liquidity. COMMON STOCK AND DIVIDENDS The Company had issued and outstanding 8,777,058 shares of $1.00 par value Common Stock held by approximately 1,482 holders of record at March 21, 1997. The book value of the stock at December 31, 1996 was $34.82 per share compared with $30.50 per share, adjusted for stock dividends, one year ago. On August 28, 1995, the Common Stock began to trade on the OTC Bulletin Board under the trading symbol IBNC; however, trading in the Common Stock of the Company has not been extensive and such trades cannot be characterized as amounting to an active trading market. The Common Stock is not listed on any exchange. Most of the transactions in the Company's stock are handled privately; however, local brokerage firms, acting independently of the Company, handle some of the transactions for buyers and sellers of the stock on a negotiated basis. The following table sets forth the approximate high and low bid prices in the Company's Common Stock, adjusted for stock dividends during 1995 and 1996, as quoted on the OTC Bulletin Board, as recorded by local brokerage firms or from information in the Company's records for each of the quarters in the two year period ended December 31, 1996. Some of the quotations reflect inter-dealer prices, without retail mark-up, mark-down or commission and may not necessarily represent actual transactions. HIGH LOW ---- --- 1996: First quarter $ 41.00 $ 41.00 Second quarter 40.00 37.00 Third quarter 43.00 40.50 Fourth quarter 50.00 47.00 HIGH LOW ---- --- 1995: First quarter $ 33.28 $ 32.00 Second quarter 33.28 32.00 Third quarter 32.80 32.00 Fourth quarter 33.60 32.00 10 The Company's Common Stock prices, because of the limited market, do not necessarily represent the actual fair market value during the above periods and, in the opinion of the Board of Directors, should not be relied upon as representative of such market value. The Company in 1996 and 1995 paid a $3,507,000 and $2,771,000, or $0.50 per share respectively, special cash dividend to the shareholders. In addition, the Company has issued stock dividends during the last five year period as follows: Stock DATE DIVIDEND May 22, 1992 20 % May 20, 1993 25 May 19, 1994 25 May 19, 1995 25 May 17, 1996 25 A covenant of the Credit Agreement governing the Company's $10,000,000 note payable (see note 8 of notes to consolidated financial statements) restricts the Company from declaring or paying any dividends to its shareholders, other than stock dividends, provided, however, so long as no default then exists, or would result therefrom, the Company may pay cash dividends on its capital stock or redeem, purchase, retire or otherwise acquire its capital stock in an aggregate amount in any fiscal year not exceeding twenty percent (20%) of the Company's consolidated net income after taxes for such fiscal year. As of December 31, 1996, the Company was in compliance with the dividend restrictions of said Credit Agreement. The Company plans on paying the remaining outstanding indebtedness on said note on April 2, 1997. 11 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, 1996 and 1995, and the related consolidated statements of income, shareholders' equity, and cash flows for each of the years in the three-year period ended December 31, 1996. These consolidated financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of International Bancshares Corporation and subsidiaries as of December 31, 1996 and 1995, and the results of their operations and their cash flows for each of the years in the three-year period ended December 31, 1996, in conformity with generally accepted accounting principles. As discussed in Note 1 to the consolidated financial statements, the Company changed its method of accounting for the impairment of long-lived assets and for long-lived assets to be disposed of and its method of accounting for mortgage servicing rights in 1996. The Company also adopted the provisions of the Financial Accounting Standards Board's Statement of Financial Accounting Standards No. 123 "Accounting for Stock-based Compensation". As discussed in Notes 1 and 4 to the consolidated financial statements, the Company changed its method of accounting for impairment of loans receivable in 1995. As discussed in Note 1 to the consolidated financial statements, the Company changed its method of accounting for investment securities in 1994. /s/ KPMG PEAT MARWICK LLP San Antonio, Texas March 14, 1997 12 INTERNATIONAL BANCSHARES CORPORATION AND SUBSIDIARIES Consolidated Statements of Condition December 31, 1996 and 1995 (Dollars in Thousands) ASSETS 1996 1995 ------ ----------- ----------- Cash and due from banks $ 135,992 $ 86,827 Federal funds sold 36,000 37,000 ----------- ----------- Total cash and cash equivalents 171,992 123,827 Time deposits with banks 198 1,800 Investment securities: Held to maturity (Market value of $2,840 on December 31, 1996 and $2,895 on December 31, 1995) 2,848 2,909 Available for sale (Amortized cost of $1,739,198 on December 31, 1996 and $1,439,823 on December 31, 1995) 1,756,719 1,460,432 ----------- ----------- Total investment securities 1,759,567 1,463,341 Loans: Commercial, financial and agricultural 719,151 718,364 Lease financing receivables, net 3,910 3,910 Real estate - mortgage 193,101 200,998 Real estate - construction 32,610 39,527 Consumer 161,594 124,843 Foreign 128,932 120,748 ----------- ----------- Total loans 1,239,298 1,208,390 Less unearned discounts (3,303) (3,479) ----------- ----------- Loans, net of unearned discounts 1,235,995 1,204,911 Less allowance for possible loan losses (21,036) (18,455) ----------- ----------- Net loans 1,214,959 1,186,456 ----------- ----------- Bank premises and equipment, net 94,195 80,410 Accrued interest receivable 22,913 22,204 Other assets 87,407 57,568 ----------- ----------- Total assets $ 3,351,231 $ 2,935,606 =========== =========== (Continued) 13 INTERNATIONAL BANCSHARES CORPORATION AND SUBSIDIARIES Consolidated Statements of Condition, Continued (Dollars in Thousands) LIABILITIES AND SHAREHOLDERS' EQUITY 1996 1995 ------------------------------------ ----------- ----------- Liabilities: Deposits: Demand - non-interest bearing $ 346,162 $ 295,301 Savings and interest bearing demand 684,867 576,878 Time 1,631,124 1,271,167 ----------- ----------- Total deposits 2,662,153 2,143,346 Securities sold under repurchase agreements 148,483 462,602 Other borrowed funds 239,000 66,500 Other liabilities 17,828 17,397 ----------- ----------- Total liabilities 3,067,464 2,689,845 ----------- ----------- Shareholders' equity: Common stock of $1.00 par value. Authorized 15,000,000 shares; issued 10,353,202 shares in 1996 and 8,159,814 shares in 1995 10,353 8,160 Surplus 11,935 10,637 Retained earnings 260,134 221,350 Net unrealized holding gains on available for sale securities, net of deferred income taxes 11,388 13,396 ----------- ----------- 293,810 253,543 Less cost of shares in treasury, 1,599,788 shares in 1996 and 1,229,332 shares in 1995 (10,043) (7,782) ----------- ----------- Total shareholders' equity 283,767 245,761 ----------- ----------- Total liabilities and shareholders' equity $ 3,351,231 $ 2,935,606 =========== =========== See accompanying notes to consolidated financial statements. 14 INTERNATIONAL BANCSHARES CORPORATION AND SUBSIDIARIES Consolidated Statements of Income Years ended December 31, 1996, 1995 and 1994 (Dollars in Thousands, Except Per Share Amounts)
1996 1995 1994 ----------- ----------- ----------- Interest income: Loans, including fees $ 119,183 $ 124,411 $ 97,057 Time deposits with banks 53 43 38 Federal funds sold 1,540 991 1,022 Investment securities: Taxable 99,411 91,178 58,983 Tax-exempt 1,292 1,825 1,691 Other 300 419 469 ----------- ----------- ----------- Total interest income 221,779 218,867 159,260 ----------- ----------- ----------- Interest expense: Savings and interest bearing demand deposits 18,390 16,741 10,930 Time deposits 69,717 62,078 43,119 Federal funds purchased and securities sold under repurchase agreements 12,151 25,594 10,311 Other borrowings 7,114 7,948 2,365 Subordinated debt -- -- 29 ----------- ----------- ----------- Total interest expense 107,372 112,361 66,754 ----------- ----------- ----------- Net interest income 114,407 106,506 92,506 Provision for possible loan losses 6,630 5,150 3,804 ----------- ----------- ----------- Net interest income after provision for possible loan losses 107,777 101,356 88,702 ----------- ----------- ----------- Non-interest income: Service charges on deposit accounts 15,642 13,522 13,012 Other service charges, commissions and fees 6,780 5,717 5,466 Investment securities transactions, net 31 (2) (1,783) Other income 7,741 6,772 4,250 ----------- ----------- ----------- Total non-interest income 30,194 26,009 20,945 ----------- ----------- -----------
(Continued) 15 INTERNATIONAL BANCSHARES CORPORATION AND SUBSIDIARIES Consolidated Statements of Income, Continued Years ended December 31, 1996, 1995 and 1994 (Dollars in Thousands, Except Per Share Amounts)
1996 1995 1994 ----------- ----------- ----------- Non-interest expense: Employee compensation and benefits 28,882 25,701 22,113 Occupancy 5,336 5,105 4,119 Depreciation of bank premises and equipment 7,024 5,478 5,964 Regulatory and deposit insurance fees 3,813 4,578 4,756 Legal expense including settlements 2,043 5,045 1,481 Net cost of operations for other real estate owned 308 558 -- Lease asset write-downs and expenses 931 471 787 Stationary and supplies 2,479 2,176 1,821 Other 22,641 19,877 17,314 ----------- ----------- ----------- Total non-interest expense 73,457 68,989 58,355 ----------- ----------- ----------- Income before income taxes 64,514 58,376 51,292 Income taxes 20,164 18,315 13,402 ----------- ----------- ----------- Net income $ 44,350 $ 40,061 $ 37,890 ----------- ----------- ----------- Per share: Net income - primary and fully diluted $ 4.87 $ 4.43 $ 4.17 =========== =========== =========== Weighted average number of shares outstanding 9,109,001 9,045,806 9,093,301
See accompanying notes to consolidated financial statements. 16 INTERNATIONAL BANCSHARES CORPORATION AND SUBSIDIARIES Consolidated Statements of Shareholders' Equity Years ended December 31, 1996, 1995 and 1994 (Dollars in Thousands)
Unrealized Gain (Loss) on Available Number Common Retained for Sale Treasury Of Shares Stock Surplus Earnings Securities Stock Total --------- --------- --------- --------- --------- --------- --------- Balances at January 1, 1994 5,113 $ 5,113 $ 9,547 $ 155,094 -- $ (6,699) $ 163,055 Net income -- -- -- 37,890 -- -- 37,890 Effect of adopting Statement of Financial Accounting Standards No. 115 at January 1, 1994, net of deferred income taxes -- -- -- -- 5,312 -- 5,312 Stock dividends: Shares issued 1,287 1,287 -- (1,287) -- -- -- Cash dividends -- -- -- (6,012) -- -- (6,012) Purchase of treasury stock -- -- -- -- -- (459) (459) Exercise of stock options 66 66 607 -- -- -- 673 Net change in unrealized loss on available for sale securities, net of deferred income taxes -- -- -- -- (21,923) -- (21,923) --------- --------- --------- --------- --------- --------- --------- Balances at December 31, 1994 $ 6,466 $ 6,466 $ 10,154 $ 185,685 $ (16,611) $ (7,158) $ 178,536 Net income -- -- -- 40,061 -- -- 40,061 Stock dividends: Shares issued 1,625 1,625 -- (1,625) -- -- -- Cash dividends -- -- -- (2,771) -- -- (2,771) Purchase of treasury stock -- -- -- -- -- (624) (624) Exercise of stock options 69 69 483 -- -- -- 552 Net change in unrealized gain on available for sale securities, net of deferred income taxes -- -- -- -- 30,007 -- 30,007 --------- --------- --------- --------- --------- --------- --------- Balances at December 31, 1995 8,160 $ 8,160 $ 10,637 $ 221,350 $ 13,396 $ (7,782) $ 245,761 Net income -- -- -- 44,350 -- -- 44,350 Stock dividends: Shares issued 2,059 2,059 -- (2,059) -- -- -- Cash dividends -- -- -- (3,507) -- -- (3,507) Purchase of treasury stock -- -- -- -- -- (2,261) (2,261) Exercise of stock options 134 134 831 -- -- -- 965 Tax effect of non-qualified stock options exercised -- -- 467 -- -- -- 467 Net change in unrealized gain on available for sale securities, net of deferred income taxes -- -- -- -- (2,008) -- (2,008) --------- --------- --------- --------- --------- --------- --------- Balances at December 31, 1996 10,353 $ 10,353 $ 11,935 $ 260,134 $ 11,388 $ (10,043) $ 283,767 ========= ========= ========= ========= ========= ========= =========
See accompanying notes to consolidated financial statements. 17 INTERNATIONAL BANCSHARES CORPORATION AND SUBSIDIARIES Consolidated Statements of Cash Flows Years ended December 31, 1996, 1995 and 1994 (Dollars in Thousands)
1996 1995 1994 ----------- ----------- ----------- Operating activities: Net income $ 44,350 $ 40,061 $ 37,890 Adjustments to reconcile net income to net cash provided by operating activities: Provision for possible loan losses 6,630 5,150 3,804 Recoveries on charged-off loans 1,116 609 1,668 Net profit (cost) of operations for other real estate owned 308 558 (761) Lease asset write-downs 931 471 787 Depreciation of bank premises and equipment 7,024 5,478 5,964 Accretion of investment securities discounts (1,382) (1,736) (593) Amortization of investment securities premiums 6,762 10,831 14,818 Realized (gain) loss on investment securities transactions, net (31) 2 1,783 Gain on sale of bank premises and equipment (115) (11) (26) Increase in accrued interest receivable (709) (333) (2,839) Increase (decrease) in other liabilities 1,996 5,484 (24,443) ----------- ----------- ----------- Net cash provided by operating activities 66,880 66,564 38,052 ----------- ----------- ----------- Investing activities: Cash acquired in purchase transactions 284,395 7,123 21,938 Proceeds from maturities of securities 582 30,154 3,757 Purchases of held to maturity securities -- -- (323,309) Proceeds from sales of available for sale securities 441,151 154,506 395,656 Purchases of available for sale securities (1,038,351) (490,489) (531,552) Principal collected on mortgage-backed securities 285,822 209,262 249,899 Principal collected on other investment securities -- -- 15 Proceeds from matured time deposits with banks 2,295 297 1,091 Purchases of time deposits with banks (693) (1,602) (297) Net increase in loans (15,003) (30,154) (84,874) Net increase in other assets (6,829) (2,909) (20,646) Purchases of bank premises and equipment (16,068) (11,582) (11,978) Proceeds from sale of bank premises and equipment 545 48 83 ----------- ----------- ----------- Net cash used in investing activities (62,154) (135,346) (300,217) ----------- ----------- -----------
(Continued) 18 INTERNATIONAL BANCSHARES CORPORATION AND SUBSIDIARIES Consolidated Statements of Cash Flows, Continued Years ended December 31, 1996, 1995 and 1994 (Dollars in Thousands)
1996 1995 1994 ----------- ----------- ----------- Financing activities: Net increase in non-interest bearing demand deposits $ 27,831 $ 3,486 $ 27,364 Net increase (decrease) in savings and interest bearing demand deposits 58,604 (34,712) 837 Net increase in time deposits 103,426 24,614 83,652 Net (decrease) increase in federal funds purchased and securities sold under repurchase agreements (314,119) 168,864 69,207 Proceeds from issuance of other borrowed funds 1,181,000 93,500 120,000 Principal payments on other borrowed funds and subordinated debt (1,008,500) (150,500) (2,451) Purchase of treasury stock (2,261) (624) (459) Proceeds from exercise of stock options 965 552 673 Payment of cash dividends (3,489) (2,762) (6,012) Payments of cash dividends in lieu of fractional shares (18) (9) -- ----------- ----------- ----------- Net cash provided by financing activities 43,439 102,409 292,811 ----------- ----------- ----------- Increase in cash and cash equivalents 48,165 33,627 30,646 Cash and cash equivalents at beginning of year 123,827 90,200 59,554 ----------- ----------- ----------- Cash and cash equivalents at end of year $ 171,992 $ 123,827 $ 90,200 =========== =========== =========== Supplemental cash flow information: Interest paid $ 107,187 $ 114,685 $ 69,506 Income taxes paid 19,059 18,966 18,177 Supplemental schedule of noncash investing and financing activities relating to various purchase transactions: Loans acquired $ 22,177 $ 37,043 $ 48,991 Investment securities and other assets acquired 22,442 54,087 183,030 Deposit liabilities assumed 329,014 98,253 253,959
See accompanying notes to consolidated financial statements. 19 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 agencies as well as the Texas Department of Banking and undergo periodic examinations by those regulatory authorities. Such agencies may require certain standards or impose certain limitations based on their judgements or changes in law and regulations. The financial statements have been prepared in accordance with generally accepted accounting principles. In preparing the financial statements, management is required to make estimates and assumptions that affect the reported amounts of assets and liabilities as of the dates of the balance sheets and income and expenses for the periods. Actual results could differ significantly from those estimates. Material estimates that are particularly susceptible to significant changes in the near-term relate to the determination of the allowance for possible loan losses. INVESTMENT SECURITIES The Financial Accounting Standards Board's ("FASB") Statement of Financial Accounting Standards ("SFAS") No. 115, "Accounting for Certain Investments in (Continued) 20 INTERNATIONAL BANCSHARES CORPORATION AND SUBSIDIARIES Notes to Consolidated Financial Statements Debt and Equity Securities," requires that an enterprise classify debt and equity securities into one of these categories: held-to maturity, available-for-sale, or trading. SFAS No. 115 also states that these classifications need to be reassessed for appropriate classification at each reporting date. Securities classified as "held-to-maturity" are carried at amortized cost for financial statement reporting, while securities classified as "available-for-sale" and "trading" are carried at their fair value. Unrealized holding gains and losses are included in net income for those securities classified as "trading", while unrealized holding gains and losses related to those securities classified as "available-for-sale" are excluded from net income and reported at a net amount as a separate component of shareholders' equity until realized. The Company adopted SFAS No. 115 on January 1, 1994. Mortgage-backed securities held at December 31, 1996 and 1995 represent participating interests in pools of long-term first mortgage loans originated and serviced by the issuers of the securities. Premiums and discounts are amortized using the straight-line method over the contractual maturity of the loans adjusted for anticipated prepayments. Income recognized under the straight line method is not materially different from income that would be recognized under the level yield or "interest method". Mortgage-backed securities are either issued or guaranteed by the U.S. Government or its agencies. Market interest rate fluctuations can affect the prepayment speed of principal and the yield on the security. UNEARNED DISCOUNTS Consumer loans are frequently made on a discount basis. The amount of the discount is subsequently included in interest income ratably over the term of the related loans under the sum-of-the-digits (Rule of 78's) method. Income recognized under the sum-of-the-digits method is not materially different than income that would be recognized under the level yield or "interest method". PROVISION AND ALLOWANCE FOR POSSIBLE LOAN LOSSES The allowance for possible loan losses is maintained at a level considered adequate by management to provide for potential loan losses. The allowance is increased by provisions charged to operating expense and reduced by net charge-offs. The provision for possible loan losses is the amount which, in the judgement of management, is necessary to establish the allowance for possible loan losses at a level that is adequate to absorb known and inherent risks in the loan portfolio. Management believes that the allowance for possible loan losses is adequate. While management uses available information to recognize losses on loans, future (Continued) 21 INTERNATIONAL BANCSHARES CORPORATION AND SUBSIDIARIES Notes to Consolidated Financial Statements 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. The Company adopted SFAS No. 114, "Accounting by Creditors for Impairment of a Loan," as amended by SFAS No. 118, "Accounting by Creditors for Impairment of a Loan - Income Recognition and Disclosure", effective January 1, 1995. These Statements are applicable to all creditors and to all loans, uncollateralized as well as collateralized, except consumer loans. These Statements require that impaired loans be measured based on (1) the present value of expected future cash flows discounted at the loan's effective interest rate; (2) the loan's observable market price; or (3) the fair value of the collateral if the loan is collateral dependent. The adoption of these accounting standards did not have a material effect on the Company's financial position or results of operations since the Company's previous recognition and measurement policies regarding non-performing loans were consistent with the accounting requirements for impaired loans. 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. MORTGAGE SERVICING RIGHTS The Company adopted SFAS No. 122, "Accounting for Mortgage Servicing Rights" effective January 1, 1996. This Statement requires that a mortgage banking enterprise assess its capitalized mortgage servicing rights for impairment based on the fair value of those rights that are capitalized after the adoption of this Statement based on one or more of the predominant risk characteristics of the underlying loans. Impairment should be recognized through a valuation allowance for each impaired stratum. The adoption of this accounting standard did not have a material effect on the Company's financial position or results of operations or liquidity. 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 (Continued) 22 INTERNATIONAL BANCSHARES CORPORATION AND SUBSIDIARIES Notes to Consolidated Financial Statements sell such property (as determined by independent appraisal). Prior to foreclosure, the value of the underlying loan is written down to the fair value of the real estate to be acquired by a charge to the allowance for loan losses if necessary. Any subsequent write-downs are charged against other non-interest expenses. Operating expenses of such properties and gains and losses on their disposition are included in other non-interest expenses. BANK PREMISES AND EQUIPMENT Bank premises and equipment are stated at cost less accumulated depreciation. Depreciation is computed on straight-line and accelerated methods over the estimated useful lives of the assets. Repairs and maintenance are charged to operations as incurred and expenditures for renewals and betterments are capitalized. INCOME TAXES The Company recognizes certain income and expenses in different time periods for financial reporting and income tax purposes. The provision for deferred income taxes is based on the asset and liability method and represents the change in the deferred income tax accounts during the year, including the effect of enacted tax rate changes. 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. (Continued) 23 INTERNATIONAL BANCSHARES CORPORATION AND SUBSIDIARIES Notes to Consolidated Financial Statements NET INCOME PER SHARE Primary net income per common and common equivalent shares has been computed on the basis of the weighted average shares outstanding. All share and per share information has been restated giving retroactive effect to stock dividends distributed. ACQUISITIONS AND AMORTIZATION OF INTANGIBLES Operations of companies acquired in purchase transactions are included in the consolidated statements of income from the respective dates of acquisition. The excess of the purchase price over net identifiable assets acquired (goodwill) and core deposit intangibles are included in other assets and are being amortized over varying remaining lives not exceeding 15 years. IMPAIRMENT OF LONG-LIVED ASSETS AND LONG-LIVED ASSETS TO BE DISPOSED OF The Company adopted SFAS No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of", effective January 1, 1996. This Statement established accounting standards for the impairment of long-lived assets, certain identifiable intangibles, and goodwill related to those assets to be held and used and for long-lived assets and certain identifiable intangibles which must be disposed. Long-lived assets and certain identifiable intangibles to be disposed of must be reported at the lower of carrying amount or fair value less cost to sell, except for assets that are covered by APB Opinion No. 30. Adoption of this Statement did not have a material impact on the Company's financial position, results of operations or liquidity. CONSOLIDATED STATEMENT OF CASH FLOWS For purposes of the statement of cash flows, the Company considers all short-term investments with a maturity at date of purchase of three months or less to be cash equivalents. Also, the Company reports transactions related to deposits with other financial institutions, customer time deposits and loans to customers on a net basis. ENVIRONMENTAL REMEDIATION Effective January 1, 1996, the Company adopted the American Institute of Certified Public Accountants Statement Of Position ("SOP") 96-1, "Environmental Remediation Liabilities." SOP 96-1 requires, among other things, environmental remediation liabilities to be accrued when the criteria of SFAS No. 5, "Accounting for Contingencies," have been met and also provides guidance with respect to the measurement of remediation liabilities. Such accounting is consistent with the Company's previous method of accounting for environmental remediation costs and therefore, adoption of this new Statement did not have a material impact on the Company's financial position, results of operations or liquidity. 24 (Continued) INTERNATIONAL BANCSHARES CORPORATION AND SUBSIDIARIES Notes to Consolidated Financial Statements ACCOUNTING FOR TRANSFERS AND SERVICING OF FINANCIAL ASSETS In June 1996, the Financial Accounting Standards Board issued SFAS No. 125, "Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities". SFAS No. 127, "Deferral of the Effective Date of Certain Provisions of FASB Statement No. 125" was issued in December 1996. SFAS No. 127 defers portions of SFAS No. 125 to be effective for transfers and servicing of financial assets and extinguishments of liabilities occurring after December 31, 1997. These Standards are to be applied prospectively. SFAS No. 125 provides accounting and reporting standards for transfers and servicing of financial assets and extinguishments of liabilities based on consistent application of a financial-components approach that focuses on control. It distinguishes transfers of financial assets that are sales from transfers that are secured borrowings. Management of the Company does not expect that adoption of SFAS No. 125 will have a material impact on the Company's financial position, results of operations or liquidity. (2) ACQUISITIONS 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 $397,000 and assumed deposits of approximately $86,314,000 and received cash or other assets in the amount of approximately $85,917,000. The acquisition was accounted for as a purchase transaction. IBC recorded intangible assets, goodwill and core deposit premium totaling $3,754,000 at such date. These assets are being amortized on a straight line basis over a fifteen year period. Effective November 21, 1996, IBC purchased certain assets and assumed certain liabilities of three branches of Home Savings of America F.S.B., Irwindale, California. IBC purchased loans of approximately $769,000 and assumed deposits of approximately $196,813,000 and received cash and other assets in the amount of approximately $196,081,000. The acquisition was accounted for as a purchase transaction. IBC recorded intangible assets, goodwill and core deposit premium totaling $9,670,000 at such date. These assets are being amortized on a straight line basis over a fifteen year period. Effective June 27, 1996, IBC purchased certain assets and assumed certain liabilities of River Valley Bank, F.S.B., in Weslaco, Texas, a federal savings bank organized under the laws of the United States. At the date of closing, total loans acquired were approximately $21,408,000, deposits assumed were approximately $132,133,000 and cash and other assets received were in the amount of approximately $110,756,000. The acquisition was accounted for as a purchase transaction. IBC recorded intangible assets, goodwill and core deposit premium totaling $6,599,000 at such date. These assets are being amortized on a straight line basis over a fifteen year period. (Continued) 25 INTERNATIONAL BANCSHARES CORPORATION AND SUBSIDIARIES Notes to Consolidated Financial Statements Effective September 8, 1995, Stone Oak National Bank, in San Antonio, Texas, a national banking association organized under the laws of the United States, was merged with and into IBC. At the date of closing, total assets acquired were approximately $18,000,000. The acquisition was accounted for as a purchase transaction. IBC recorded intangible assets, goodwill and core deposit premium totaling $1,387,000 at such date. These assets are being amortized on a straight line basis over a fifteen year period. Effective February 1, 1995, The Bank of Corpus Christi, Corpus Christi, Texas a state bank organized under the laws of the state of Texas, was merged with and into IBC. At the date of closing, total assets acquired were approximately $80,000,000. The acquisition was accounted for as a purchase transaction. IBC recorded intangible assets, goodwill and core deposit premium totaling $4,062,000 at such date. These assets are being amortized on a straight line basis over a fifteen year period. Effective August 31, 1994, First State Bank and Trust Company, Port Lavaca, Texas, a wholly-owned subsidiary of Michigan National Corporation, was merged with and into IBC. At the date of closing, total assets acquired were approximately $254,000,000 at such date. The acquisition was accounted for as a purchase. IBC recorded intangible assets, goodwill and core deposit premium totaling approximately $8,300,000. These assets are being amortized on a straight line basis over a fifteen year period. (Continued) 26 INTERNATIONAL BANCSHARES CORPORATION AND SUBSIDIARIES Notes to Consolidated Financial Statements (3) INVESTMENT SECURITIES The amortized cost and estimated market value by type of investment security at December 31, 1996 are as follows: Held To Maturity --------------------------------------------------------------- Gross Gross Estimated Amortized unrealized unrealized market Carrying Cost Gains Losses Value Value ---------- ---------- ---------- ---------- ---------- (Dollars in Thousands) Obligations of states and political subdivisions $ 858 $ -- $ (8) $ 850 $ 858 Other securities 1,990 -- 1,990 1,990 ---------- ---------- ---------- ---------- ---------- Total investment securities $ 2,848 $ -- $ (8) $ 2,840 $ 2,848 ========== ========== ========== ========== ==========
Available For Sale --------------------------------------------------------------- Gross Gross Estimated Amortized unrealized unrealized market Carrying Cost Gains Losses Value Value ---------- ---------- ---------- ---------- ---------- (Dollars in Thousands) U.S. Treasury securities $ 4,942 $ 78 $ -- $ 5,020 $ 5,020 Mortgage-backed securities 1,716,996 18,536 (1,048) 1,734,484 1,734,484 Obligations of states and political subdivisions 1,059 1 (46) 1,014 1,014 Equity securities 16,201 -- -- 16,201 16,201 ---------- ---------- ---------- ---------- ---------- Total investment securities $1,739,198 $ 18,615 $ (1,094) $1,756,719 $1,756,719 ========== ========== ========== ========== ==========
(Continued) 27 INTERNATIONAL BANCSHARES CORPORATION AND SUBSIDIARIES Notes to Consolidated Financial Statements The amortized cost and estimated market value of investment securities at December 31, 1996, by contractual maturity, are shown below. Expected maturities will differ from contractual maturities because borrowers may have the right to prepay obligations with or without prepayment penalties.
Held To Maturity Available For Sale ----------------------- ----------------------- Estimated Estimated Amortized market Amortized market Cost Value Cost Value ---------- ---------- ---------- ---------- (Dollars in Thousands) Due in one year or less $ 160 $ 160 $ 2,483 $ 2,501 Due after one year through five years 2,278 2,270 2,957 3,018 Due after five years through ten years 410 410 561 515 Mortgage-backed securities -- -- 1,716,996 1,734,484 Equity securities -- -- 16,201 16,201 ---------- ---------- ---------- ---------- Total investment securities $ 2,848 $ 2,840 $1,739,198 $1,756,719 ========== ========== ========== ==========
The amortized cost and estimated market value by type of investment security at December 31, 1995 are as follows:
Held To Maturity --------------------------------------------------------------- Gross Gross Estimated Amortized unrealized unrealized market Carrying Cost Gains Losses Value Value ---------- ---------- ---------- ---------- ---------- (Dollars in Thousands) Mortgage-backed securities $ 1,044 $ -- $ (14) $ 1,030 $ 1,044 Other securities 1,865 -- -- 1,865 1,865 ---------- ---------- ---------- ---------- ---------- Total investment securities $ 2,909 $ -- $ (14) $ 2,895 $ 2,909 ========== ========== ========== ========== ==========
Available For Sale --------------------------------------------------------------- Gross Gross Estimated Amortized unrealized unrealized market Carrying Cost Gains Losses Value Value ---------- ---------- ---------- ---------- ---------- (Dollars in Thousands) U.S. Treasury securities $ 6,877 $ 181 $ -- $ 7,058 $ 7,058 Mortgage-backed securities 1,388,292 22,335 (1,922) 1,408,705 1,408,705 Obligations of states and political subdivisions 29,960 200 (185) 29,975 29,975 Equity securities 14,694 -- -- 14,694 14,694 ---------- ---------- ---------- ---------- ---------- Total investment securities $1,439,823 $ 22,716 $ (2,107) $1,460,432 $1,460,432 ========== ========== ========== ========== ==========
(Continued) 28 INTERNATIONAL BANCSHARES CORPORATION AND SUBSIDIARIES Notes to Consolidated Financial Statements The Company may invest in collateralized mortgage obligations and structured notes; however, such investments at December 31, 1996 is not significant to the financial position of the Company. Mortgage-backed securities are primarily securities issued by the Federal Home Loan Mortgage Corporation ("Freddie Mac") and the Federal National Mortgage Association ("Fannie Mae"). The amortized cost and fair market value of investment securities pledged to qualify for fiduciary powers and to secure public monies as required by law and for repurchase agreements was $687,776,000 and $696,860,000, respectively, at December 31, 1996. Proceeds from the sale of securities available-for-sale were $441,151,000, $154,506,000 and $395,656,000 during 1996, 1995 and 1994, respectively. Gross gains of $1,953,000 and gross losses of $1,922,000 were realized in 1996 primarily from the sale of available-for- sale mortgage-backed securities. Gross gains and losses of $541,000 and $543,000 and $1,310,000 and $3,093,000 were realized in 1995 and 1994, respectively. During 1995, the Company decided to transfer certain securities from held-to-maturity to available-for-sale as allowed for under the Financial Accounting Standards Board's Special Report on the Implementation of Statement of Financial Accounting Standards No. 115. Effective November 30, 1995, securities with an amortized cost of $484,196,000 were reclassified from held-to-maturity to available-for-sale. The unrealized gain as of the date of the transfer was $4,366,000. The Company maintains the required level of stock at the Federal Home Loan Bank of Dallas, Texas (the "FHLB"). The FHLB stock is included in equity securities and is recorded at cost and totaled $16,201,000 at December 31, 1996. (4) ALLOWANCE FOR POSSIBLE LOAN LOSSES A summary of the transactions in the allowance for possible loan losses for the years ended December 31, 1996, 1995 and 1994 is as follows: 1996 1995 1994 -------- -------- -------- (Dollars in Thousands) Balance at January 1 $ 18,455 $ 17,025 $ 13,831 -------- -------- -------- Losses charged to allowance (5,165) (4,764) (2,722) Recoveries credited to allowance 1,116 609 1,668 -------- -------- -------- Net losses charged to allowance (4,049) (4,155) (1,054) Provision charged to operations 6,630 5,150 3,804 -------- -------- -------- Allowances acquired in purchase transactions -- 435 444 -------- -------- -------- Balance at December 31 $ 21,036 $ 18,455 $ 17,025 -------- -------- -------- (Continued) 29 INTERNATIONAL BANCSHARES CORPORATION AND SUBSIDIARIES Notes to Consolidated Financial Statements Loans accounted for on a non-accrual basis at December 31, 1996, 1995 and 1994 amounted to $4,425,000, $6,233,000 and $3,627,000, respectively. The effect of such non-accrual loans reduced interest income by $644,000, $1,010,000 and $667,000 for the years ended December 31, 1996, 1995 and 1994, respectively. On January 1, 1995, the Company adopted SFAS No. 114 as amended by SFAS No. 118. The Company classifies as impaired those loans where it is probable that all amounts due according to contractual terms of the loan agreement will not be collected. The Company has identified these loans through its normal loan review procedures. Impaired loans included (1) all non-accrual loans, (2) loans which are 90 days or more past due, unless they are well secured (i.e. the collateral value is sufficient to cover principal and accrued interest) and are in the process of collection, and (3) other loans which management believes are impaired. Substantially all of the Company's impaired loans are measured at the fair value of the collateral. In limited cases the Company may use other methods to determine the level of impairment of a loan if such loan is not collateral dependent. Amounts received on non-accruals are applied, for financial accounting purposes, first to principal and then to interest after all principal has been collected. Impairment of loans having recorded investments of $10,927,000 at December 31, 1996 and $14,287,000 at December 31, 1995 has been recognized in conformity with Statement No. 114, as amended by Statement No. 118. The average recorded investment in impaired loans during 1996 and 1995 was $10,940,000 and $14,100,000, respectively. The total allowance for possible loan losses related to these loans was $972,000 and $782,000 at December 31, 1996 and 1995, respectively. Interest income on impaired loans of $566,000 and $863,000 was recognized for cash payments received in 1996 and 1995, respectively. Management of the Company recognizes the risks associated with these impaired loans. However, management's decision to place loans in this category does not necessarily mean that the Company expects losses to occur. The Company had previously measured the allowance for loan losses using methods similar to the prescribed method in SFAS No. 114. As a result, no additional provision was required by the adoption of SFAS No. 114. The bank subsidiaries charge off that portion of any loan which management considers to represent a loss as well as that portion of any other loan which is classified as a "loss" by bank examiners. Commercial and industrial or real estate loans are generally considered by management to represent a loss, in whole or part, when an exposure beyond any collateral coverage is apparent and when no further collection of the loss portion is anticipated based on the borrower's financial condition and general economic conditions in the borrower's industry. Generally, unsecured consumer loans are charged-off when 90 days past due. While management of the Company considers that it is generally able to identify borrowers with financial problems reasonably early and to monitor credit extended to such borrowers carefully, there is no precise method of predicting loan losses. The determination that a loan is likely to be uncollectible and that it should be wholly or partially charged-off as a loss, is an exercise of judgment. Similarly, the determination of the adequacy of the allowance for possible loan losses can be made only on a subjective basis. It is the judgment of the Company's management that the allowance for possible loan losses at December 31, 1996 was adequate to absorb possible losses from loans in the portfolio at that date. (Continued) 30 INTERNATIONAL BANCSHARES CORPORATION AND SUBSIDIARIES Notes to Consolidated Financial Statements (5) BANK PREMISES AND EQUIPMENT A summary of bank premises and equipment, by asset classification, at December 31, 1996 and 1995 follows: Estimated Useful Lives 1996 1995 ------------- -------- -------- (Dollars in Thousands) Bank buildings and improvements 5 - 40 years $ 66,314 $ 54,734 Less: accumulated depreciation (12,044) (10,134) -------- -------- 54,270 44,600 Furniture, equipment and vehicles 1 - 20 years 46,374 39,025 Less: accumulated depreciation (26,949) (21,990) -------- -------- 19,425 17,035 Land 19,122 17,346 -------- -------- Real estate held for future expansion: Land, building, furniture, fixture and equipment 7 - 27 years 2,215 2,215 Less: accumulated depreciation (837) (786) -------- -------- 1,378 1,429 Bank premises and equipment, net $ 94,195 $ 80,410 ======== ======== (Continued) 31 INTERNATIONAL BANCSHARES CORPORATION AND SUBSIDIARIES Notes to Consolidated Financial Statements (6) DEPOSITS Deposits as of December 31, 1996 and 1995 and related interest expense for the years ended December 31, 1996, 1995 and 1994 were as follows: 1996 1995 ---------- ---------- (Dollars in Thousands) Deposits: Demand - non-interest bearing Domestic $ 294,746 $ 258,710 Foreign 51,416 36,592 ---------- ---------- Total demand non-interest bearing 346,162 295,302 ---------- ---------- Savings and interest bearing demand Domestic 513,086 396,999 Foreign 171,781 179,879 ---------- ---------- Total savings and interest bearing demand 684,867 576,878 ---------- ---------- Time, certificates of deposit $100,000 or more Domestic 323,601 253,960 Foreign 591,066 515,415 Less than $100,000 Domestic 501,484 308,182 Foreign 214,973 193,609 ---------- ---------- Total time, certificates of deposits 1,631,124 1,271,166 ---------- ---------- Total deposits $2,662,153 $2,143,346 ========== ========== 1996 1995 1994 ------- ------- ------- (Dollars in Thousands) Interest Expense: Savings and interest bearing demand Domestic $14,079 $12,341 $ 7,271 Foreign 4,311 4,400 3,659 ------- ------- ------- Total savings and interest bearing demand 18,390 16,741 10,930 ------- ------- ------- Time, certificates of deposit $100,000 or more Domestic 14,193 13,151 8,502 Foreign 28,561 25,713 18,692 Less than $100,000 Domestic 17,872 14,877 9,788 Foreign 9,091 8,337 6,137 ------- ------- ------- Total time, certificates of deposit $69,717 $62,078 $43,119 ======= ======= ======= (Continued) 32 INTERNATIONAL BANCSHARES CORPORATION AND SUBSIDIARIES Notes to Consolidated Financial Statements (7) SECURITIES SOLD UNDER REPURCHASE AGREEMENTS The Company's bank subsidiaries have entered into repurchase agreements with the FHLB, the FHLMC and individual customers of the bank subsidiaries. The purchasers have agreed to resell to the bank subsidiaries identical securities upon the maturities of the agreements. Securities sold under repurchase agreements were mortgage-backed book entry securities and averaged $236,223,000 and $444,389,000 during 1996 and 1995, respectively, and the maximum amount outstanding at any month end during 1996 and 1995 was $477,874,000 and $552,628,000, respectively. Further information related to repurchase agreements (securities sold under agreements to repurchase) at December 31, 1996 and 1995 is set forth in the following table:
Collateral Securities Repurchase Borrowing --------------------------------- ------------------------- Book Value Market Value of Balance of Weighted Average Securities Sold Securities Sold Liability Interest Rate --------------- --------------- --------- ------------- (Dollars in Thousands) December 31, 1996 Term: Overnight agreements $ 59,730 $ 76,028 $ 50,313 $ 4.93% 1 to 29 days 43,520 43,791 22,154 4.92% 30 to 90 days 32,943 33,430 23,526 5.15% Over 90 days 55,938 57,122 52,490 5.23% --------------- --------------- --------- ------------- Total $ 192,131 $ 210,371 $ 148,483 $ 5.07% =============== =============== ========= ============= December 31, 1995 Term: Overnight agreements $ 40,014 $ 40,423 $ 23,075 $ 5.13% 1 to 29 days 272,730 277,713 210,879 5.04% 30 to 90 days 178,350 178,793 176,840 5.37% Over 90 days 62,529 63,907 51,308 5.23% --------------- --------------- --------- ------------- Total $ 553,623 $ 560,836 $ 462,102 $ 5.21% =============== =============== ========= =============
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, 1996 included a $10,000,000 note payable to an unaffiliated bank governed by a Credit Agreement dated of even date with the note, which had an outstanding balance of $2,000,000 as of such date. Such note bears interest at a floating rate which resulted in an average interest rate of 7.61% per annum in 1996. Such loan is unsecured. Accrued interest thereon is due and payable quarterly. On January 2, 1997, the Company made payments and additional draws on said credit facility resulting in a principal balance of $8,333,333. No further advances are available under such credit facility. The principal balance of the loan is due and payable in equal installments quarterly through and including April 1, 1998. At December 31, 1995, the Company had (Continued) 33 INTERNATIONAL BANCSHARES CORPORATION AND SUBSIDIARIES Notes to Consolidated Financial Statements borrowed funds evidenced by a note payable to an unaffiliated bank in the amount of $2,500,000 bearing interest at a floating rate of interest, with an average rate of interest of 8.81% per annum in 1995. Said $2,500,000 loan was secured by all of the capital stock of each of the Company's bank subsidiaries. This loan was fully paid on June 5, 1996, and the security interest covering such stock was released. The terms of the Credit Agreement governing the Company's $10,000,000 note payable require the Company to maintain compliance with certain covenants which at December 31, 1996, the Company was in compliance with or with respect to which the Company had obtained a written waiver. (See note 15) Also included in other borrowed funds at December 31, 1996 are $137,000,000 of short-term fixed borrowings with the Federal Home Loan Bank of Dallas at the market price offered at the time of funding. As of December 31, 1996, the Company had two certificates of indebtedness outstanding in the amounts of $50,000,000 payable to the FHLB at a three month Libor rate minus fifteen basis points. (9) EMPLOYEES' PROFIT SHARING PLAN The Company has a deferred profit sharing plan for full-time employees with one year of continuous employment. The Company's annual contribution to the plan is based on a percentage, as determined by the Board of Directors, of income before income taxes, as defined, for the year. Allocation of the contribution among officers' and employees' accounts is based on length of service and amount of salary earned. Profit sharing costs of $939,000, $861,000 and $610,000 were charged to income for the years ended December 31, 1996, 1995 and 1994, respectively. (10) INTERNATIONAL OPERATIONS The Corporation provides international banking services for its customers through its bank subsidiaries. Neither the Corporation nor its bank subsidiaries have facilities located outside the United States. International operations are distinguished from domestic operations on the basis of the domicile of the customer. Because the resources employed by the Company are common to both international and domestic operations, it is not practical to determine net income generated exclusively from international activities. (Continued) 34 INTERNATIONAL BANCSHARES CORPORATION AND SUBSIDIARIES Notes to Consolidated Financial Statements A summary of assets attributable to international operations at December 31, 1996 and 1995 are as follows: 1996 1995 --------- --------- (Dollars in Thousands) Loans: Commercial $ 107,452 $ 100,795 Others 21,480 19,953 --------- --------- 128,932 120,748 Less allowance for possible loan losses (1,101) (1,035) --------- --------- Net loans $ 127,831 $ 119,713 ========= ========= Accrued interest receivable $ 1,317 $ 1,191 ========= ========= Included in accrued interest receivable is $155,000 in 1996 and $105,000 in 1995 on loans to international customers totaling $8,577,000 and $6,243,000 which were past due five days or more, of which $1,062,000 and $942,000 had been placed on non-accrual status at December 31, 1996 and 1995, respectively. At December 31, 1996, the Company had $6,910,000 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 $10,331,000, $9,447,000 and $7,725,000 for the years ended December 31, 1996, 1995 and 1994, respectively. (11) 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: 1996 1995 1994 -------- -------- -------- (Dollars in Thousands) Current U.S $ 19,643 $ 19,271 $ 14,610 Foreign 80 22 109 State -- -- 130 -------- -------- -------- Total current taxes 19,723 19,293 14,849 Deferred 441 (978) (1,447) -------- -------- -------- Total income taxes $ 20,164 $ 18,315 $ 13,402 -------- -------- -------- (Continued) 35 INTERNATIONAL BANCSHARES CORPORATION AND SUBSIDIARIES Notes to Consolidated Financial Statements Total income tax expense differs from the amount computed by applying the U.S. Federal income tax rate of 35% for 1996, 1995 and 1994 to income before income taxes. The reasons for the differences for the years ended December 31 are as follows: 1996 1995 1994 -------- -------- -------- (Dollars in Thousands) Computed expected tax expense $ 22,580 $ 20,424 $ 17,952 Change in taxes resulting from: Tax-exempt interest income (481) (636) (629) Lease financing (1,792) (1,587) (3,624) Other (143) 114 (297) -------- -------- -------- Actual tax expense $ 20,164 $ 18,315 $ 13,402 ======== ======== ======== The tax effects of temporary differences that give rise to significant portions of the deferred tax assets and deferred tax liabilities at December 31, 1996 and 1995 are reflected below: 1996 1995 -------- -------- (Dollars in Thousands) Deferred tax assets: Loans receivable, principally due to the allowance for possible loan losses $ 7,290 $ 6,406 Other real estate owned 533 1,090 Accrued expenses 1,076 980 Other 582 379 -------- -------- Total deferred tax assets 9,481 8,855 -------- -------- Deferred tax liabilities: Lease financing receivable (1,215) (420) Bank premises and equipment, principally due to differences in depreciation (2,032) (1,968) Net unrealized gains on available for sale investment securities (6,132) (7,213) Other (626) (417) -------- -------- Total deferred tax liabilities (10,005) (10,018) -------- -------- Net deferred tax liability $ (524) $ (1,163) ======== ======== (Continued) 36 INTERNATIONAL BANCSHARES CORPORATION AND SUBSIDIARIES Notes to Consolidated Financial Statements The Company did not record a valuation allowance against deferred tax assets at December 31, 1996 and 1995 because management has concluded it is more likely than not the Company will have future taxable earnings in excess of the future tax deductions. (12) 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, 1994 through December 31, 1996 which were granted by the Company under the 1987 Plan or the 1996 Plan. Option Price Options Per Share Outstanding --------- ----------- Balance at January 1, 1994 594,958 Terminated $ 4.16 - 5.19 (4,681) Granted 32.64 4,687 Exercised 4.16 - 10.67 (74,328) ------ Balance at December 31, 1994 520,636 Terminated $ 4.16 - 8.53 (2,737) Granted 30.72 224,442 Exercised 4.16 - 8.53 (67,779) ------ Balance at December 31, 1995 674,562 Terminated $ 10.67 - 32.72 (25,676) Granted 38.00 - 46.50 2,000 Exercised 5.34 - 30.72 (134,013) ------- Balance at December 31, 1996 516,873 ------- At December 31, 1996 and 1995, 119,420 and 54,218 options were exercisable, respectively, and as of December 31, 1996, 373,000 shares were available for future grants under the 1996 Plan. All options granted under the 1987 Plan and the 1996 Plan had an option price of not less than the fair market value of the Company's common stock at the date of grant and a vesting period of five years. (Continued) 37 INTERNATIONAL BANCSHARES CORPORATION AND SUBSIDIARIES Notes to Consolidated Financial Statements The following table summarizes information about stock options outstanding at December 31, 1996: Weighted- Average Weighted Weighted- Number Remaining Average Number Average Range of Outstanding Contractual Exercise Exercisable Exercise Exercise Prices At 12/31/96 Life Price At 12/31/96 Price - --------------- ----------- ---- ------ ----------- ------ $ 5.34 - 7.51 13,475 1.5 years $ 6.76 13,475 $ 6.76 8.19 - 10.24 253,137 1.25 years 8.56 175,968 8.56 15.98 - 21.03 19,132 2.05 years 17.42 11,478 17.42 32.64 4,687 3.8 years 32.64 1,874 32.64 30.72 224,442 6.4 years 30.72 44,888 30.72 38.00 - 46.50 2,000 7.75 years 42.25 - 42.25 ------- ------- $ 5.34 - 46.50 516,873 247,683 ======= ======= Prior to January 1, 1996, the Company accounted for its stock option plan in accordance with the provisions of Accounting Principles Board ("APB") Opinion No. 25, "Accounting for Stock Issued to Employees," and related interpretations. As such, compensation expense would be recorded on the date of grant only if the current market price of the underlying stock exceeded the exercise price. In October 1995, the Financial Accounting Standards Board issued SFAS No. 123, "Accounting for Stock-Based Compensation," which permits entities to recognize as expense over the vesting period the fair value of all stock-based awards on the date of grant. Alternatively, SFAS No. 123 also allows entities to continue to apply the provisions of APB Opinion No. 25 and provide pro forma net income and pro forma earnings per share disclosures for employee stock option grants made in 1995 and future years as if the fair-value-based method defined in SFAS No. 123 had been applied. The Company has elected to continue to apply the provisions of APB Opinion No. 25 and provide the pro forma disclosure provisions of SFAS No. 123. The per-share weighted average fair value of stock options granted in 1996 and 1995 was $42.25 and $30.72, respectively. The fair value was estimated as of the grant date using the Black-Scholes option pricing model. Input variables used in the model included a weighted-average risk free interest rate of 6.78% and 6.28% for 1996 and 6.09% for 1995; an expected volatility factor of 41% for each of 1996 and 1995; and an estimated option life of ten years. The pro forma impact on income assumes no options will be forfeited. The pro forma effects may not be representative of the effects on reported net income for future years as most of the Company's employee stock options have an option life of 6 to 8 years. (Continued) 38 INTERNATIONAL BANCSHARES CORPORATION AND SUBSIDIARIES Notes to Consolidated Financial Statements The following schedule shows total net income as reported and the pro forma results: 1996 1995 ---- ---- Net income As reported $ 44,350 $ 40,061 Pro forma 43,476 39,480 Primary earnings As reported $ 4.87 $ 4.43 Pro forma 4.77 4.36 Fully diluted earnings As reported $ 4.87 $ 4.43 Pro forma 4.77 4.36 The Company does not have a formal stock repurchase program; however, the Company occasionally repurchases shares of Common Stock including repurchases related to the exercise of stock options through the surrender of other shares of Common Stock of the Company owned by the option holders. Stock repurchases are presented quarterly at the Company's Board of Director meetings and the Board of Directors has stated that they will not permit purchases of more than a total of $12,000,000 of stock. In the past, the Board has increased previous caps once they were met, but there are no assurances that an increase of the $12,000,000 cap will occur in the future. (13) 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, 1996, 1995 and 1994 and noncancellable lease commitments at December 31, 1996 were not significant. Certain bank subsidiaries of the Corporation are required to maintain average reserve balances with the FRB. The amounts of such balances are calculated based upon specified percentages of a bank's deposits. The average amount of those reserve balances during 1996 was approximately $3,560,000. The American Institute of Certified Public Accountants issued Statement Of Position ("SOP") 96-1, "Environmental Remediation Liabilities." SOP 96-1 was adopted by the Company on January 1, 1996 and requires, among other things, environmental remediation liabilities to be accrued when the criteria of SFAS No. 5, "Accounting for Contingencies," have been met. (Continued) 39 INTERNATIONAL BANCSHARES CORPORATION AND SUBSIDIARIES Notes to Consolidated Financial Statements The SOP also provides guidance with respect to the measurement of the remediation liabilities. Such accounting is consistent with the Company's previous method of accounting for environmental remediation costs and therefore, adoption of this new Statement did not have a material impact on the Company's financial position, results of operations or liquidity. (14) TRANSACTIONS WITH RELATED PARTIES In the ordinary course of business, the Corporation and its subsidiaries make loans to directors and executive officers of the Corporation and the bank subsidiaries, including their affiliates, families and companies in which they are principal owners. In the opinion of management, these loans are made on substantially the same terms, including interest rates and collateral, as those prevailing at the time for comparable transactions with other persons and do not involve more than normal risk of collectibility or present other unfavorable features. The aggregate amounts receivable from such related parties amounted to approximately $80,342,000 and $58,285,000 at December 31, 1996 and 1995, respectively. During 1996, $49,346,000 of new loans were made and repayments totaled $27,289,000. Between June 29 and July 15, 1994, IBC sold for an approximate aggregate appraised value of $4,700,000, forty four percent (44%) of its other real estate portfolio to IBC Partners, Ltd. (the "Partnership"), a Texas real estate limited partnership owned by certain shareholders of the Company. On May 21, 1996, IBC sold an approximately 417.67 acres of land in Travis County, Texas, to the Partnership for an approximate aggregate appraised value of $400,000. (15) DIVIDEND RESTRICTIONS 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, 1996, the aggregate amount legally available to be distributed to the Corporation from bank subsidiaries as dividends was approximately $74,230,000, assuming that each subsidiary bank continues to be classified as "well capitalized" pursuant to the applicable regulations (see note 17). The restricted capital of the bank subsidiaries was approximately $186,789,000. The undivided profits of the bank subsidiaries was $116,286,000. 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. A covenant of the Credit Agreement governing the Company's $10,000,000 note payable (see note 8) restricts the Company from declaring or paying any dividends to its shareholders, other than stock dividends, provided, however, that so long as no default then exists, or would result therefrom, the Company may pay cash dividends on its capital stock or redeem, purchase, retire or otherwise acquire its capital stock in an aggregate amount in any fiscal year not exceeding twenty percent (20%) of the Company's consolidated net income after taxes for such fiscal year. The Company paid a special cash dividend on May 17, 1996. As of December 31, 1996, the Company was in compliance with the dividend restrictions under the terms of the above referenced Credit Agreement. (Continued) 40 INTERNATIONAL BANCSHARES CORPORATION AND SUBSIDIARIES Notes to Consolidated Financial Statements (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, 1996, the following financial instruments, whose contract amounts represent credit risks, were outstanding: Commitments to extend credit $ 201,936,000 Credit card lines 288,180,000 Letters of credit 29,856,000 The bank subsidiaries' exposure to credit loss in the event of nonperformance by the other party to the above financial instruments is represented by the contractual amounts of the instruments. The bank subsidiaries use the same credit policies in making commitments and conditional obligations as they do for on-balance sheet instruments. The bank subsidiaries control the credit risk of these transactions through credit approvals, limits and monitoring procedures. Commitments to extend credit are agreements to lend to a customer as long as there is no violation of any condition established in the contract. Commitments generally have fixed expiration dates normally less than one year or other termination clauses and may require the payment of a fee. Since many of the commitments are expected to expire without being drawn upon, the total commitment amounts do not necessarily represent future cash requirements. The bank subsidiaries evaluate each customer's credit-worthiness on a case-by-case basis. The amount of collateral obtained, if deemed necessary by the subsidiary banks upon extension of credit, is based on management's credit evaluation of the customer. Collateral held varies, but may include residential and commercial real estate, bank certificates of deposit, accounts receivable and inventory. Letters of credit are written conditional commitments issued by the bank subsidiaries to guarantee the performance of a customer to a third party. The credit risk involved in issuing letters of credit is essentially the same as that involved in extending loan facilities to customers. The bank subsidiaries make commercial, real estate and consumer loans to customers principally located in Webb, Bexar, Hidalgo, Cameron, Starr and Zapata counties in South Texas as well as Matagorda, Brazoria, Galveston, Fort Bend and Calhoun counties in the Texas Coastal Bend area. Although the loan portfolio is diversified, a substantial portion of its debtors' ability to honor their contracts is dependent upon the economic conditions in these areas, especially in the real estate and commercial business sectors. To date, the Company has not experienced a material adverse impact related to the 1994 devaluation of the peso in Mexico. (Continued) 41 INTERNATIONAL BANCSHARES CORPORATION AND SUBSIDIARIES Notes to Consolidated Financial Statements (17) CAPITAL REQUIREMENTS 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 judgements by the regulators about components, risk weightings, and other factors. Quantitative measures established by regulation to ensure capital adequacy require the Company to maintain minimum amounts and ratios (set forth in the table on the following page) of total and Tier 1 capital to risk-weighted assets and of Tier 1 capital to average assets. Management believes, as of December 31, 1996, that the Corporation and the bank subsidiaries met all capital adequacy requirements to which it is subject. As of December 31, 1996, the most recent notification from the Federal Deposit Insurance Corporation categorized all the bank subsidiaries as well capitalized under the regulatory framework for prompt corrective action. To be categorized as "well capitalized" the Corporation and the bank subsidiaries must maintain minimum total risk-based, Tier 1 risk-based, and Tier 1 leverage ratios as set forth in the table. There are no conditions or events since that notification that management believes have changed the categorization of the Corporation or any of the bank subsidiaries as well capitalized. (Continued) 42 INTERNATIONAL BANCSHARES CORPORATION AND SUBSIDIARIES Notes to Consolidated Financial Statements The Corporation's and the bank subsidiaries' actual capital amounts and ratios for 1996 are also presented in the table.
To Be Well Capitalized Under For Capital Prompt Corrective Actual Adequacy Purposes Action Provisions ---------------- ---------------- ---------------- Amount Ratio Amount Ratio Amount Ratio -------- ----- -------- ----- -------- ----- (greater (greater (greater (greater than or than or than or than or equal to) equal to) equal to) equal to) (Dollars in thousands) As of December 31, 1996: Total Capital (to Risk Weighted Assets): Consolidated $262,413 17.27% $121,547 8.00% $151,933 10.00% International Bank of Commerce, Laredo 189,462 14.49 104,591 8.00 130,739 10.00 International Bank of Commerce, Brownsville 20,429 16.69 9,794 8.00 12,243 10.00 International Bank of Commerce, Zapata 11,094 33.14 2,678 8.00 3,348 10.00 Commerce Bank 13,384 22.76 4,705 8.00 5,881 10.00 Tier 1 Capital (to Risk Weighted Assets): Consolidated $243,396 16.02% $ 60,773 4.00% $ 91,160 6.00% International Bank of Commerce, Laredo 173,099 13.24 52,295 4.00 78,443 6.00 International Bank of Commerce, Brownsville 19,174 15.66 4,897 4.00 7,346 6.00 International Bank of Commerce, Zapata 10,675 31.89 1,339 4.00 2,009 6.00 Commerce Bank 12,646 21.50 2,352 4.00 3,529 6.00 Tier 1 Capital (to Average Assets): Consolidated $243,396 7.80% $124,761 4.00% $155,951 5.00% International Bank of Commerce, Laredo 173,099 6.79 101,979 4.00 127,474 5.00 International Bank of Commerce, Brownsville 19,174 5.70 13,449 4.00 16,811 5.00 International Bank of Commerce, Zapata 10,675 9.97 4,282 4.00 5,353 5.00 Commerce Bank 12,646 9.47 5,342 4.00 6,678 5.00
(Continued) 43 INTERNATIONAL BANCSHARES CORPORATION AND SUBSIDIARIES Notes to Consolidated Financial Statements The Corporation's and the bank subsidiaries' actual capital amounts and ratios for 1995 are also presented in the table.
To Be Well Capitalized Under For Capital Prompt Corrective Actual Adequacy Purposes Action Provisions ---------------- ---------------- ---------------- Amount Ratio Amount Ratio Amount Ratio -------- ----- -------- ----- -------- ----- (greater (greater (greater (greater than or than or than or than or equal to) equal to) equal to) equal to) (Dollars in thousands) As of December 31, 1995: Total Capital (to Risk Weighted Assets): Consolidated $236,520 16.19% $116,891 8.00% $146,114 10.00% International Bank of Commerce, Laredo 173,123 13.93 99,403 8.00 124,253 10.00 International Bank of Commerce, Brownsville 16,064 14.97 8,588 8.00 10,735 10.00 International Bank of Commerce, Zapata 9,607 30.14 2,550 8.00 3,188 10.00 Commerce Bank 12,981 21.76 4,771 8.00 5,964 10.00 Tier 1 Capital (to Risk Weighted Assets): Consolidated $218,253 14.94% $ 58,446 4.00% $ 87,668 6.00% International Bank of Commerce, Laredo 157,583 12.68 49,701 4.00 74,552 6.00 International Bank of Commerce, Brownsville 15,058 14.03 4,294 4.00 6,441 6.00 International Bank of Commerce, Zapata 9,208 28.89 1,275 4.00 1,913 6.00 Commerce Bank 12,235 20.51 2,386 4.00 3,579 6.00 Tier 1 Capital (to Average Assets): Consolidated $218,253 7.55% $115,647 4.00% $144,559 5.00% International Bank of Commerce, Laredo 157,583 6.35 99,255 4.00 124,068 5.00 International Bank of Commerce, Brownsville 15,058 5.94 10,146 4.00 12,682 5.00 International Bank of Commerce, Zapata 9,208 9.62 3,828 4.00 4,785 5.00 Commerce Bank 12,235 8.92 5,486 4.00 6,857 5.00
(Continued) 44 INTERNATIONAL BANCSHARES CORPORATION AND SUBSIDIARIES Notes to Consolidated Financial Statements (18) FAIR VALUE OF FINANCIAL INSTRUMENTS The fair value estimates, methods, and assumptions for the Company's financial instruments at December 31, 1996 and 1995 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 , which include U. S. Treasury securities, obligations of other U. S. government agencies, obligations of states and political subdivisions and mortgage pass through and related securities, fair values are based on quoted market prices or dealer quotes. Fair values are based on the value of one unit without regard to any premium or discount that may result from concentrations of ownership of a financial instrument, possible tax ramifications, or estimated transaction costs. See disclosures of fair value of investment securities in Note 3. Loans Fair values are estimated for portfolios of loans with similar financial characteristics. Loans are segregated by type such as commercial, real estate and consumer loans as outlined by regulatory reporting guidelines. Each category is segmented into fixed and variable interest rate terms and by performing and non-performing categories. For variable rate performing loans, the carrying amount approximates the fair value. For fixed rate performing loans, except residential mortgage loans, the fair value is calculated by discounting scheduled cash flows through the estimated maturity using estimated market discount rates that reflect the credit and interest rate risk inherent in the loan. For performing residential mortgage loans, fair value is estimated by discounting contractual cash flows adjusted for prepayment estimates using discount rates based on secondary market sources or the primary origination market. Fair value for significant non-performing loans is based on recent external appraisals. If appraisals are not available, estimated cash flows are discounted using a rate commensurate with the risk associated with the estimated cash flows. Assumptions (Continued) 45 INTERNATIONAL BANCSHARES CORPORATION AND SUBSIDIARIES Notes to Consolidated Financial Statements regarding credit risk, cash flows and discount rates are judgementally determined using available market and specific borrower information. As of December 31, 1996 and 1995, the carrying amount of net loans was a reasonable estimate of the fair value. Deposits The fair value of deposits with no stated maturity, such as non-interest bearing demand deposit accounts, savings accounts and interest bearing demand deposit accounts, was equal to the amount payable on demand as of December 31, 1996 and 1995. The fair value of time deposits is based on the discounted value of contractual cash flows. The discount rate is based on currently offered rates. As of December 31, 1996 and 1995, the carrying amount of time deposits was a reasonable estimate of the fair value. Federal Funds Purchased and Securities Sold Under Repurchase Agreements, Other Borrowed Funds and Subordinated Debt Due to the contractual terms of these financial instruments, the carrying amounts approximated fair value at December 31, 1996 and 1995. Commitments to Extend Credit and Letters of Credit For commitments to extend credit and letters of credit, the carrying amount is based on the notional amount of the agreements and fair value is based on the discounted value of fees charged. Fair value estimates are made at a point in time, based on relevant market information and information about the financial instrument. These estimates do not reflect any premium or discount that could result from offering for sale at one time the Company's entire holdings of a particular financial instrument. Because no market exists for a significant portion of the Company's financial instruments, fair value estimates are based on judgments regarding future expected loss experience, current economic conditions, risk characteristics of various financial instruments and other factors. These estimates are subjective in nature and involve uncertainties and matters of significant judgment and therefore cannot be determined with precision. Changes in assumptions could significantly affect the estimates. Fair value estimates are based on existing on-and off-balance sheet financial instruments without attempting to estimate the value of anticipated future business and the value of assets and liabilities that are not considered financial instruments. Other significant assets and liabilities that are not considered financial assets or liabilities include the bank premises and equipment and core deposit value. In addition, the tax ramifications related to the effect of fair value estimates have not been considered in the above estimates. (Continued) 46 INTERNATIONAL BANCSHARES CORPORATION AND SUBSIDIARIES Notes to Consolidated Financial Statements (19) INTERNATIONAL BANCSHARES CORPORATION (PARENT COMPANY ONLY) FINANCIAL INFORMATION Statements of Condition (Parent Company Only) December 31, 1996 and 1995 (Dollars in Thousands) ASSETS 1996 1995 ------ --------- --------- Cash $ 336 $ 151 Notes receivable 67,401 76,078 Investment in subsidiaries 199,108 157,442 Other assets 18,956 14,964 --------- --------- Total assets 285,801 248,635 ========= ========= LIABILITIES AND SHAREHOLDERS' EQUITY ------------------------------------ Liabilities: Notes payable 2,000 2,500 Other liabilities 34 374 --------- --------- Total liabilities 2,034 2,874 --------- --------- Shareholders' equity: Common stock 10,353 8,160 Surplus 11,935 10,637 Retained earnings 260,134 221,350 Net unrealized holding gains on available for sale securities, net of deferred income taxes 11,388 13,396 --------- --------- 293,810 253,543 Less cost of shares in treasury (10,043) (7,782) --------- --------- Total shareholders' equity 283,767 245,761 --------- --------- Total liabilities and shareholders' equity $ 285,801 $ 248,635 ========= ========= (Continued) 47 INTERNATIONAL BANCSHARES CORPORATION AND SUBSIDIARIES Notes to Consolidated Financial Statements Statements of Income (Parent Company Only) Years ended December 31, 1996, 1995 and 1994 (Dollars in Thousands) 1996 1995 1994 ------- ------- ------- Income: Dividends from subsidiaries $ 7,250 $13,332 $16,053 Interest income on notes receivable 6,944 7,218 6,881 Interest income on time deposits with banks 15 11 6 Other interest income 299 419 469 Other 4,603 3,368 1,615 ------- ------- ------- Total income 19,111 24,348 25,024 ------- ------- ------- Expenses: Interest expense on notes payable 158 255 275 Interest expense on subordinated debt -- -- 29 Other 338 271 1,029 ------- ------- ------- Total expenses 496 526 1,333 ------- ------- ------- Income before federal income taxes and equity in undistributed net income of subsidiaries 18,615 23,822 23,691 Federal income tax expense 1,847 1,302 333 ------- ------- ------- Income before equity in undistributed net income of subsidiaries 16,768 22,520 23,358 Equity in undistributed net income of subsidiaries 27,582 17,541 14,532 ------- ------- ------- Net income $44,350 $40,061 $37,890 ======= ======= ======= (Continued) 48 INTERNATIONAL BANCSHARES CORPORATION AND SUBSIDIARIES Notes to Consolidated Financial Statements Statements of Cash Flows (Parent Company Only) Years ended December 31, 1996, 1995 and 1994 (Dollars in Thousands)
1996 1995 1994 -------- -------- -------- Operating activities: Net income $ 44,350 $ 40,061 $ 37,890 Adjustments to reconcile net income to net cash provided by operating activities: Increase (Decrease) in other liabilities 127 284 (29) Equity in undistributed net income of subsidiaries (27,582) (17,541) (14,532) -------- -------- -------- Net cash provided by operating activities 16,895 22,804 23,329 -------- -------- -------- Investing activities: Contributions to subsidiaries (16,092) (10,161) (6,870) Purchase of time deposits with banks -- (728) (600) Proceeds from time deposits with banks -- 1,328 -- Net decrease (increase) in notes receivable 8,677 (6,125) (1,953) Increase in other assets (3,992) (3,197) (5,654) -------- -------- -------- Net cash used in investing activities (11,407) (18,883) (15,077) -------- -------- -------- Financing activities: Principal payments on notes payable and subordinated debt (500) (1,000) (2,451) Proceeds from exercise of stock options 965 552 673 Payments of cash dividends (3,489) (2,762) (6,012) Payments of cash dividends in lieu of fractional shares (18) (9) -- Purchase of treasury stock (2,261) (624) (459) -------- -------- -------- Net cash used in financing activities (5,303) (3,843) (8,249) -------- -------- -------- Increase in cash and cash equivalents 185 78 3 Cash at beginning of year 151 73 70 -------- -------- -------- Cash at end of year $ 336 $ 151 $ 73 ======== ======== ======== Supplemental cash flow information: Interest paid $ 117 $ 239 $ 275
49 INTERNATIONAL BANCSHARES CORPORATION OFFICERS AND DIRECTORS OFFICERS DIRECTORS -------- --------- DENNIS E. NIXON DENNIS E. NIXON Chairman of the Board and President President International Bank of Commerce ROY JENNINGS, JR. Vice Chairman of the Board ROY JENNINGS, JR. Investments ALBERTO SANTOS Secretary of the Board ALBERTO SANTOS Investments R. DAVID GUERRA Chairman of the Board Vice President International Bank of Commerce LEONARDO SALINAS LEONARDO SALINAS Vice President Senior Executive Vice President International Bank of Commerce RICHARD CAPPS Vice President LESTER AVIGAEL Retail Merchant EDUARDO J. FARIAS (Las Novedades, Inc.) Vice President IRVING GREENBLUM ARNOLDO CISNEROS Retail Merchant Treasurer (Muebleria Mexico, S.A.) WILLIAM J. CUELLAR RICHARD E. HAYNES Auditor Attorney at Law; Real Estate Investments AMELIA A. BENAVIDES Secretary SIOMA NEIMAN An International Entrepreneur IMELDA NAVARRO Assistant Treasurer R. DAVID GUERRA President LUISA D. BENAVIDES International Bank of Commerce Assistant Secretary Branch in McAllen, Texas ANTONIO R. SANCHEZ, JR. Chairman of the Board of Sanchez O'Brien Oil & Gas Corporation; Investments 50 EX-21 3 EXHIBIT 21 "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% EX-23 4 EXHIBIT 23 "EXHIBIT 23" ACCOUNTANTS' CONSENT The Board of Directors International Bancshares Corporation: We consent to incorporation by reference in Registration Statement No. 33-15655 on Form S-8 of International Bancshares Corporation of our report dated March 14, 1997, relating to the consolidated statements of condition of International Bancshares Corporation and subsidiaries as of December 31, 1996 and 1995, and the related consolidated statements of income, shareholders' equity and cash flows for each of the years in the three-year period ended December 31, 1996, which report is incorporated by reference in the December 31, 1996 annual report on Form 10-K of International Bancshares Corporation. Our report refers to a change in the method of accounting for the impairment of long-lived assets and for long-lived assets to be disposed of, a change in the method of accounting for mortgage servicing rights and to the adoption of provisions of the Financial Accounting Standards Board's Statement of Financial Accounting Standards No. 123 "Accounting for Stock-based Compensation" in 1996. Our report also refers to a change in the method of accounting for impairment of loans receivable in 1995 and to a change in the method of accounting for investment securities in 1994. /s/ KPMG PEAT MARWICK LLP San Antonio, Texas March 27, 1997 EX-27 5
9 12-MOS DEC-31-1996 DEC-31-1996 135,992 198 36,000 0 1,756,719 2,848 2,840 1,239,298 21,036 3,351,231 2,662,153 139,000 17,828 100,000 0 0 10,353 273,414 3,351,231 119,183 102,296 300 221,779 88,107 107,372 114,407 6,630 31 73,457 64,514 64,514 0 0 44,350 4.87 4.87 0 4,425 6,396 1,462 0 18,455 5,165 4,049 21,036 19,935 1,101 0
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