INTERNATIONAL BANCSHARES CORPORATION AND SUBSIDIARIES
(CONSOLIDATED)
SELECTED FINANCIAL DATA
AT OR FOR THE YEARS ENDED DECEMBER 31,
--------------------------------------------------------------
2000 1999 1998 1997 1996
---------- ---------- ---------- ---------- ----------
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
BALANCE SHEET
Assets........................... $5,860,714 $5,421,804 $4,987,877 $4,517,846 $3,351,231
Net loans........................ 2,212,467 1,876,754 1,589,788 1,420,180 1,214,959
Deposits......................... 3,744,598 3,527,212 3,369,637 3,175,560 2,662,153
Other borrowed funds............. 1,432,500 1,380,000 1,074,000 490,000 239,000
Shareholders' equity............. 416,892 353,436 370,283 341,244 283,767
INCOME STATEMENT
Interest income.................. $ 421,627 $ 340,736 $ 326,174 $ 275,732 $ 221,779
Interest expense................. 251,756 185,205 181,909 145,371 107,372
---------- ---------- ---------- ---------- ----------
Net interest income.............. 169,871 155,531 144,265 130,361 114,407
Provision for possible loan
losses......................... 6,824 6,379 8,571 7,740 6,630
Non-interest income.............. 57,501 60,966 41,698 36,776 30,194
Non-interest expense............. 111,957 106,983 99,047 85,745 73,457
---------- ---------- ---------- ---------- ----------
Income before income taxes....... 108,591 103,135 78,345 73,652 64,514
Income taxes..................... 33,417 36,887 24,620 24,771 20,164
---------- ---------- ---------- ---------- ----------
Net income....................... $ 75,174 $ 66,248 $ 53,725 $ 48,881 $ 44,350
========== ========== ========== ========== ==========
Per common share:
Basic.......................... $ 3.51 $ 3.03 $ 2.44 $ 2.28 $ 2.08
Diluted........................ $ 3.46 $ 2.98 $ 2.38 $ 2.20 $ 2.02
Cash dividends per share......... $ 1.10 $ 1.10 $ .90 $ .50 $ .50
Note 1: See note 2 of notes to the consolidated financial statements
regarding the acquisitions made by International Bancshares Corporation and its
subsidiaries in 2000 and 1999.
Note 2: 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, 2000. The Company is a financial
holding company with four bank subsidiaries operating in over 100 main banking
and branch facilities in South and Southeast Texas, and four non-bank
subsidiaries. The following discussion should be read in conjunction with the
Company's Annual Report on Form 10-K for the year ended December 31, 2000, and
the Selected Financial Data and Consolidated Financial Statements included
elsewhere herein.
RESULTS OF OPERATIONS
Net income for 2000 was $75,174,000 or $3.51 per share--basic ($3.46 per
share--diluted) compared with $66,248,000 or $3.03 per share--basic ($2.98 per
share--diluted) in 1999 and $53,725,000 or $2.44 per share--basic ($2.38 per
share--diluted) in 1998.
Historically, the Company's acquisitions have been accounted for using the
purchase method of accounting which results in the creation of goodwill. The
Company's goodwill is being amortized as a non-cash reduction of net income over
time periods from ten to twenty years. "Income before goodwill charges" reflects
the net income of the Company excluding goodwill amortization. In computing the
income tax adjustment, management has considered tax deductible goodwill
separately from non-tax deductible goodwill in making this calculation. The
income tax on tax deductible goodwill has been computed using the standard
corporate tax rate of 35%, and the non-tax deductible goodwill has been
grossed-up using the same 35% tax rate to reflect the earnings result. These two
calculations have been combined to reflect the net income tax adjustment
displayed in the income before goodwill charges table below. The table
reconciles reported earnings to net income excluding intangible amortization
("income before goodwill charges") to help facilitate peer group comparisons.
YEARS ENDED DECEMBER 31,
------------------------------
2000 1999 1998
-------- -------- --------
(DOLLARS IN THOUSANDS, EXCEPT
PER SHARE DATA)
Reported net income.............................. $75,174 $66,248 $53,725
Amortization of intangible assets................ 4,219 3,898 3,936
Income tax adjustment............................ (421) (309) (322)
------- ------- -------
Income before goodwill charges................... $78,972 $69,837 $57,339
======= ======= =======
Income before goodwill charges per common share:
Basic.......................................... $ 3.69 $ 3.20 $ 2.60
Diluted........................................ 3.64 3.14 2.54
Total assets at December 31, 2000 grew 8% to $5,860,714,000 from
$5,421,804,000 at December 31, 1999 while net loans increased 18% to
$2,212,467,000 at December 31, 2000 from $1,876,754,000 at December 31, 1999.
Deposits at December 31, 2000 were $3,744,598,000, an increase of 6% over the
$3,527,212,000 at December 31, 1999, an increase of 5% over the $3,369,637,000
at December 31, 1998. Total assets at December 31, 1999 grew 9% to
$5,421,804,000 from $4,987,877,000 at December 31, 1998 while net loans
increased 18% to $1,876,574,000 at December 31, 1999 from $1,589,788,000 at
December 31, 1998. The increase in assets and deposits during 2000 reflects
growth opportunities in the Company's market through its branch system. The
aggregate amount of certificates of indebtedness with the Federal Home Loan Bank
of Dallas ("FHLB") increased to $1,432,500,000 at December 31, 2000 from the
$1,380,000,000 at December 31, 1999. Certificates of indebtedness and the
deposits are used to fund the earning asset base of the Company.
2
Net interest income in 2000 increased by $14,340,000, or 9%, over that in
1999. The net yield on average interest earning assets decreased by .08% from
3.38% in 1999 to 3.30% in 2000. The net yield on average interest earning assets
increased by .02% in 1999 to 3.38% from 3.36% in 1998 while net interest income
increased by $11,266,000 or 8% over 1998. Average interest earning assets
increased 12% from $4,600,812,000 in 1999 to $5,147,489,000 in 2000 and a 7%
increase from $4,296,845,000 in 1998 to $4,600,812,000 in 1999 which contributed
to the growth in net interest income for 2000 and 1999, respectively. The
Company experienced a .78% increase in the yield on average interest earning
assets to 8.19% in 2000 from 7.41% in 1999 and a .89% increase was reflected on
the rates paid on average interest bearing liabilities to 5.33% in 2000 from
4.44% in 1999. In 1999 a .18% decrease was reflected in the yield on average
interest earning assets to 7.41% from 7.59% in 1998 and a .28% decrease on the
rates paid on average interest bearing liabilities to 4.44% in 1999 from 4.72%
in 1998.
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 decreased 6% in 2000 to $57,501,000 from $60,966,000 in
1999 which increased 46% over $41,698,000 in 1998. The 2000 decrease and 1999
increase in non-interest income were primarily due to a $6,530,000 gain
recognition on the partial sale of credit card receivables recorded in 1999.
Excluding the gain related to the sale of the credit card receivables in 1999,
the non-interest income would have increased by $3,065,000 in 2000 due to the
increases in service charges. The increase in service charges was attributable
to the amount of account transaction fees received as a result of the deposit
growth, new deposit products and increased collection efforts. Investment
securities losses of $4,248,000 were recorded in 2000 compared to gains of
$13,000 for 1999. These losses occurred due to a bond program initiated by
management in 2000 to reposition a portion of the Company's bond portfolio and
take advantage of higher bond yields.
Expense control is an essential element in the Company's profitability. This
is achieved through maintaining optimum staffing levels, an effective budgeting
process, and internal consolidation of bank functions. Non-interest expense
includes such items as salaries and wages and employee benefits, net occupancy
expenses, equipment expenses and other operating expenses such as FDIC
insurance. Non-interest expense increased 5% in 2000 to $111,957,000 from
$106,983,000 in 1999 which increased 8% from $99,047,000 in 1998. The 2000 and
1999 increases in non-interest expense increased due to the Company's expanded
operations at the bank subsidiaries.
3
The efficiency ratio, a measure of non-interest expense to net interest
income plus non-interest income was 49.24% for the year ended December 31, 2000,
compared to the year ago ratio of 49.42%. The Company's efficiency ratio has
been under 53% for each of the last five years, which the Company believes is
below national peer group ratios.
Most of the Company's lending activities involve commercial (domestic and
foreign), consumer and real estate mortgage financing. In 2000, the Company's
efforts to increase its loan volume resulted in an increase of 21% in average
domestic loans and an increase of 29% in average foreign loans for an increase
in total average loans of 21% over 1999. The average yield for these loans
increased .82% for domestic loans and increased by 1.23% for foreign loans in
2000 as compared to 1999. The Company experienced an increase of 14% in average
domestic loans and a 35% increase in average foreign loans in 1999 as compared
to 1998. The yield for these loans decreased .46% for domestic loans and
decreased by .30% for foreign loans in 1999 as compared to 1998.
The Company experienced an increase of 6% in average balances of taxable
investment securities from $2,762,895,000 for 1999 to $2,932,778,000 for 2000
and a decrease of .33% from $2,771,927,000 for 1998 to $2,762,985,000 for 1999.
The changes reflected during 2000 and 1999 were primarily from the results of
continued increases in deposits, repurchase agreements and borrowings, which
provide the Company with available funds for investments. The slight decrease in
1999 is primarily from the impact of carrying the available for sale securities
at fair value.
The allowance for possible loan losses increased 15% from $26,770,000 at
December 31, 1999 to $30,812,000 at December 31, 2000 and increased 5% from
$25,551,000 at December 31, 1998 to $26,770,000 at December 31, 1999. The
provision for possible loan losses charged to expense increased 7% from
$6,379,000 in 1999 to $6,824,000 in 2000 and decreased 26% from $8,571,000 in
1998 to $6,379,000 in 1999. The increase in the allowance for possible loan
losses was largely due to the increase in the size of the loan portfolio. The
allowance for possible loan losses was 1.37% of total loans, net of unearned
income, at December 31, 2000 compared to 1.41% at 1999 and 1.58% at 1998.
Non-performing assets as a percentage of total loans and total assets were .63%
and .24%, respectively, at December 31, 2000, and 1.17% and .41% at
December 31, 1999, respectively. Loans accounted for on a non-accrual basis
decreased 18% from $7,662,000 at December 31, 1999 to $6,273,000 at
December 31, 2000. As loans are placed on non-accrual status, interest
previously accrued and recorded is reversed unless the loan is well secured and
in the process of collection. Foreclosed assets decreased 19% from $2,285,000 at
December 31, 1999 to $1,854,000 at December 31, 2000. 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 1999, non-accruals increased 38%
from $5,538,000 at December 31, 1998 to $7,662,000 at December 31, 1999 and
foreclosed assets decreased 27% from $3,129,000 at December 31, 1998 to
$2,285,000 at December 31, 1999.
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.
4
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, financial and agricultural
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, 2000 was adequate to absorb possible losses from loans in
the portfolio at that date.
On December 31, 2000, the Company had $5,860,714,000 of consolidated assets
of which approximately $278,119,000 or 5% 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, 2000 is presented below.
RELATED
AMOUNT OF ALLOWANCE FOR
LOANS POSSIBLE LOSSES
--------- ---------------
(DOLLARS IN THOUSANDS)
Secured by certificates of deposit in United States
banks.............................................. $109,191 $ 55
Secured by United States real estate................. 30,336 376
Secured by other United States collateral
(securities, gold, silver, etc.)................... 9,782 118
Foreign real estate guaranteed under lease
obligations primarily by U.S. companies............ 41,233 367
Direct unsecured Mexican sovereign debt (principally
former FICORCA debt)............................... 1,074 18
Other (principally Mexico real estate)............... 86,503 897
-------- ------
$278,119 $1,831
======== ======
The transactions for the year ended December 31, 2000 in that portion of the
allowance for possible loan losses related to Mexican debt were as follows:
(DOLLARS IN THOUSANDS)
----------------------
Balance at January 1, 2000............................... $1,322
Charge-offs............................................ (49)
Recoveries............................................. 49
------
Net charge-offs........................................ 0
Provision charged to operations........................ 509
------
Balance at December 31, 2000............................. $1,831
======
5
LIQUIDITY AND CAPITAL RESOURCES
The maintenance of adequate liquidity provides the Company's bank
subsidiaries with the ability to meet potential depositor withdrawals, provide
for customer credit needs, maintain adequate statutory reserve levels and take
full advantage of high-yield investment opportunities as they arise. Liquidity
is afforded by access to financial markets and by holding appropriate amounts of
liquid assets. The bank subsidiaries of the Company derive their liquidity
largely from deposits of individuals and business entities. Historically, the
Mexico based deposits of the Company's bank subsidiaries have been a stable
source of funding. Deposits from persons and entities domiciled in Mexico
comprise a significant and stable portion of the deposit base of the Company's
bank subsidiaries. Such deposits comprised approximately 42%, 41% and 38% of the
Company's bank subsidiaries' total deposits as of December 31, 2000, 1999 and
1998, respectively. Other important funding sources for the Company's bank
subsidiaries during 2000 and 1999 have been wholesale liabilities with FHLB,
FNMA, FHLMC and large certificates of deposit, requiring management to closely
monitor its asset/liability mix in terms of both rate sensitivity and maturity
distribution. Primary liquidity of the Company and its subsidiaries has been
maintained by means of increased investment in shorter-term securities,
certificates of deposit and loans. As in the past, the Company will continue to
monitor the volatility and cost of funds in an attempt to match maturities of
rate-sensitive assets and liabilities, and respond accordingly to anticipated
fluctuations in interest rates over reasonable periods of time.
The Company's funds management policy has as its primary focus the
measurement and management of the banks' earnings at risk in the face of rising
and falling interest rate forecasts. The earliest and most simplistic concept of
earnings at risk measurement is the gap report, which is used to generate a
rough estimate of the vulnerability of net interest income to changes in market
rates as implied by the relative repricings of assets and liabilities. The gap
report calculates the difference between the amounts of assets and liabilities
repricing across a series of intervals in time, with emphasis typically placed
on the one-year period. This difference, or gap, is usually expressed as a
percentage of total assets.
If an excess of liabilities over assets matures or reprices within the
one-year period, the balance sheet is said to be negatively gapped. This
condition is sometimes interpreted to suggest that an institution is
liability-sensitive, indicating that earnings would suffer from rising rates and
benefit from falling rates. If a surplus of assets over liabilities occurs in
the one-year time frame, the balance sheet is said to be positively gapped,
suggesting a condition of asset sensitivity in which earnings would benefit from
rising rates and suffer from falling rates.
The gap report thus consists of an inventory of dollar amounts of assets and
liabilities that have the potential to mature or reprice within a particular
period. The flaw in drawing conclusions about interest rate risk from the gap
report is that it takes no account of the probability that potential maturities
or repricings of interest-rate-sensitive accounts will occur, or at what
relative magnitudes. Because simplicity, rather than utility, is the only virtue
of gap analysis, financial institutions increasingly have either abandoned gap
analysis or accorded it a distinctly secondary role in managing their
interest-rate risk exposure. See page 15 of the Company's Form 10-K for the
table that summarizes interest rate sensitive assets and liabilities by their
repricing dates at December 31, 2000.
The detailed inventory of balance sheet items contained in gap reports is
the starting point of income simulation analysis. Income simulation analysis
also focuses on the variability of net interest income and net income, but
without the limitations of gap analysis. In particular, gone is the fundamental,
but often unstated, assumption of the gap approach that every balance sheet item
that can reprice will do so to the full extent of any movement in market
interest rates.
6
Accordingly, income simulation analysis captures not only the potential of
assets and liabilities to mature or reprice but also the probability that they
will do so. Moreover, income simulation analysis focuses on the relative
sensitivities of these balance sheet items and projects their behavior over an
extended period of time in a motion picture rather than snapshot fashion.
Finally, income simulation analysis permits management to assess the probable
effects on balance sheet items not only of changes in market interest rates but
also of proposed strategies for responding to such changes. The Company and many
other institutions rely primarily upon income simulation analysis in measuring
and managing exposure to interest rate risk.
At December 31, 2000, based on these simulations, a rate shift of 200 basis
points in interest rates either up or down will not vary earnings by more than
7 percent of projected 2001 after-tax net income. A 200 basis point shift in
interest rates is a hypothetical rate scenario used to calibrate risk, and does
not necessarily represent management's current view of future market
developments.
All the measurements of risk described above are made based upon the
Company's business mix and interest rate exposures at the particular point in
time. The exposure changes continuously as a result of the Company's ongoing
business and its risk management initiatives. While management believes these
measures provide a meaningful representation of the Company's interest rate
sensitivity, they do not necessarily take into account all business developments
that have an affect on net income, such as changes in credit quality or the size
and composition of the balance sheet.
Principal sources of liquidity and funding for the Company are dividends
from subsidiaries and borrowed funds, with such funds being used to finance the
Company's cash flow requirements. The Company closely monitors the dividend
restrictions and availability from the bank subsidiaries as disclosed in
Note 17 to the Consolidated Financial Statements. At December 31, 2000, the
aggregate amount legally available to be distributed to the Company from bank
subsidiaries as dividends was approximately $68,119,000, 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
$335,481,000 as of December 31, 2000. The undivided profits of the bank
subsidiaries were approximately $187,211,000 as of December 31, 2000.
As of December 31, 2000, the Company has outstanding $1,432,500,000 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, 2000, shareholders' equity was
$416,892,000 compared to $353,436,000 at December 31, 1999, an increase of
$63,456,000 or 18%. The increase in shareholders equity resulted from the
retention of earnings and comprehensive income. Comprehensive income includes
unrealized gains or losses on securities held available for sale, net of tax.
The net unrealized gains or losses on securities are not included in the
calculation of regulatory capital requirements.
During 1990, the Federal Reserve Board ("FRB") adopted a minimum leverage
ratio of 3% for the most highly-rated bank holding companies and at least 4% to
5% for all other bank holding companies. The Company's leverage ratio (defined
as stockholders' equity less goodwill and certain other intangibles divided by
average quarterly assets) was 6.54% at December 31, 2000 and 6.58% at
December 31, 1999. The core deposit intangibles and goodwill of $54,795,000 as
of December 31, 2000, recorded in connection with financial institution
acquisitions of the Company, are deducted from the sum of core capital elements
when determining the capital ratios of the Company.
The FRB has adopted risk-based capital guidelines which assign risk
weightings to assets and off-balance sheet items. The guidelines also define and
set minimum capital requirements (risk-based capital ratios). Under the final
1992 rules, all banks are required to have core capital (Tier 1) of at least
4.0% of risk-weighted assets and total capital of 8.0% of risk-weighted assets.
Tier 1 capital consists
7
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 loan losses. In order to be deemed well capitalized
pursuant to the regulations, an institution must have a total risk-weighted
capital ratio of 10%, a Tier 1 risk-weighted ratio of 6% and a Tier 1 leverage
ratio of 5%. The Company had risk-weighted Tier 1 capital ratios of 13.23% and
13.41% and risk weighted total capital ratios of 14.29% and 14.46% for
December 31, 2000 and 1999, respectively, which are well above the minimum
regulatory requirements and exceed the well capitalized ratios (see note 17 to
notes to Consolidated Financial Statements).
The Company announced a new formal stock repurchase program on June 22, 1999
and announced it expanded the stock repurchase program on July 16, 1999,
January 11, 2000 and on December 21, 2000. Under the stock repurchase program,
the Company is authorized to repurchase up to $45,000,000 of its common stock
through December 2001. Stock repurchases may be made from time to time, on the
open market or through private transactions. Shares repurchased in this program
will be held in treasury for reissue for various corporate purposes, including
employee stock option plans. As of March 20, 2001, a total of 781,794 shares
were repurchased under this program at a cost of $31,968,000. Stock repurchases
are presented quarterly at the Company's Board of Directors meetings and the
Board of Directors has stated that the aggregate investment in treasury stock
should not exceed $70,000,000. In the past, the board has increased previous
caps on treasury stock once they were met, but there are no assurances that an
increase of the $70,000,000 cap will occur in the future. As of March 20, 2001,
the Company has approximately $52,941,000 invested in treasury shares, which
amount has been accumulated since the inception of the Company.
During the past few years the Company has expanded its banking facilities.
Among the activities and commitments the Company funded during 2000 and 1999
were certain capital expenditures relating to the modernization and improvement
of several existing bank facilities and the expansion of the bank branch
network.
EFFECTS OF INFLATION
The principal component of earnings is net interest income, which is
affected by changes in the level of interest rates. Changes in rates of
inflation affect interest rates. It is difficult to precisely measure the impact
of inflation on net interest income because it is not possible to accurately
differentiate between increases in net interest income resulting from inflation
and increases resulting from increased business activity. Inflation also raises
costs of operation, primarily those of employment and services.
FORWARD LOOKING INFORMATION
Certain matters discussed in this report, excluding historical information,
include forward-looking statements. Although the Company believes such
forward-looking statements are based on reasonable assumptions, no assurance can
be given that every objective will be reached. The words "estimate," "expect,"
"intend" and "project," as well as other words or expressions of similar meaning
are intended to identify forward-looking statements. Readers are cautioned not
to place undue reliance on forward-looking statements, which speak only as of
the date of this report. Such statements are based on current expectations, are
inherently uncertain, are subject to risks and should be viewed with caution.
Actual results and experience may differ materially from the forward-looking
statements as a result of many factors.
Factors that could cause actual results to differ materially from any
results that are projected, forecasted, estimated or budgeted by the Company in
forward-looking statements include, among others, the following possibilities:
(I) changes in local, state, national and international economic conditions,
(II) changes in the capital markets utilized by the Company and its
subsidiaries, including changes in the interest rate environment that may reduce
margins, (III) changes in state and/or federal laws and regulations to which the
Company and its subsidiaries, as well as their customers, competitors and
8
potential competitors, are subject, including, without limitation, banking, tax,
securities, insurance and employment laws and regulations, and (IV) the loss of
senior management or operating personnel, and (V) increased competition from
both within and without the banking industry. It is not possible to foresee or
identify all such factors. The Company makes no commitment to update any
forward-looking statement, or to disclose any facts, events or circumstances
after the date hereof that may affect the accuracy of any forward-looking
statement, unless required by law.
ACCOUNTING STANDARDS ISSUED BUT NOT YET EFFECTIVE
In June 1998, the Financial Accounting Standards Board issued SFAS No. 133,
"Accounting for Derivative Instruments and Hedging Activities." SFAS No. 133
establishes accounting and reporting standards for derivative instruments,
including certain derivative instruments embedded in other contracts, and for
hedging activities. SFAS No. 133 requires that an entity recognize all
derivatives as either assets or liabilities in the statement of financial
position and measure those instruments at fair value. If certain conditions are
met, a derivative may be specifically designated as a "fair value hedge," a
"cash flow hedge," or a hedge of a foreign currency exposure of a net investment
in a foreign operation. The accounting for changes in the fair value of a
derivative (that is, gains and losses) depends on the intended use of the
derivative and the resulting designation. In June 1999, the Financial Accounting
Standards Board issued SFAS No. 138, "Accounting for Derivative Instruments and
Hedging Activities--Deferral of the Effective Date of SFAS No. 133", which
deferred the effective date of SFAS No. 133 to fiscal years beginning after
June 15, 2000. The Company currently does not engage in hedging activities and
does not hold any derivative instruments or embedded derivatives. The Company
adopted SFAS No. 133 on January 1, 2001 and the adoption did not have any impact
on its consolidated financial statements.
In September 2000, the Financial Accounting Standards Board's issued SFAS
No. 140, "Accounting for Transfers and Servicing of Financial Assets and
Extinguishments of Liabilities", which replaces the Financial Accounting
Standards Board's Statement No. 125, "Accounting for Transfers and Servicing of
Financial Assets and Extinguishments of Liabilities", but carries over most of
SFAS No. 125's provisions without change. SFAS No. 140 elaborates on the
qualifications necessary for a special-purpose entity, clarifies sales
accounting criteria in certain circumstances, refines accounting for collateral,
and adds disclosures for collateral, securitizations, and retained interests in
securitized assets. This statement should be applied prospectively and is
effective for transactions occurring after March 31, 2001. Disclosure
requirements of this statement and any changes in accounting for collateral are
effective for fiscal years ending after December 15, 2000. The Company has
adopted the disclosure requirements and does not expect that the adoption of the
remaining provisions of SFAS No. 140 will have a material impact on its
consolidated financial statements.
COMMON STOCK AND DIVIDENDS
The Company had issued and outstanding 21,307,510 shares of $1.00 par value
Common Stock held by approximately 2,000 holders of record at March 20, 2001.
The book value of the stock at December 31, 2000 was $20.98 per share compared
with $17.64 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 was not extensive and such trades could not be characterized as
amounting to an active trading market. As of March 4, 1998, the Common Stock was
listed on the NASDAQ National Market under the trading symbol IBOC.
9
The following table sets forth the approximate high and low bid prices in
the Company's Common Stock, adjusted for stock dividends during 1999 and 2000,
as quoted on the NASDAQ National Market for each of the quarters in the two year
period ended December 31, 2000. Some of the quotations reflect inter-dealer
prices, without retail mark-up, mark-down or commission and may not necessarily
represent actual transactions. The closing sales price of the Company's Common
Stock was $36.50 per share at March 20, 2001.
HIGH LOW
-------- --------
2000: First quarter........................................ $35.40 $29.40
Second quarter....................................... 39.00 30.00
Third quarter........................................ 34.94 30.00
Fourth quarter....................................... 35.94 30.00
HIGH LOW
-------- --------
1999: First quarter........................................ $33.44 $27.36
Second quarter....................................... 34.00 28.32
Third quarter........................................ 38.00 32.95
Fourth quarter....................................... 38.40 33.27
The Company paid cash dividends to the shareholders in 2000 of $1.10 per
share or $21,040,000 and in 1999 paid cash dividends of $1.10 per share or
$17,127,000. In addition, the Company has issued stock dividends during the last
five year period as follows:
DATE STOCK DIVIDEND
- ---- --------------
May 17, 1996................................................ 25%
May 16, 1997................................................ 25
May 22, 1998................................................ 25
May 20, 1999................................................ 25
May 18, 2000................................................ 25
The Company's principal source of funds to pay cash dividends on its Common
Stock is cash dividends from the bank subsidiaries. There are certain statutory
limitations on the payment of dividends from the subsidiary banks. For a
discussion of the limitations, please see Note 17 of notes to consolidated
financial statements.
RECENT SALES OF UNREGISTERED SECURITIES
No securities were sold by the Company during the fiscal year ended
December 31, 2000 that were not registered under the Securities Act of 1933.
10
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, 2000 and 1999, and
the related consolidated statements of income, comprehensive income,
shareholders' equity, and cash flows for each of the years in the three-year
period ended December 31, 2000. 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 auditing standards generally
accepted in the United States of America. Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of
International Bancshares Corporation and subsidiaries as of December 31, 2000
and 1999, and the results of their operations and their cash flows for each of
the years in the three-year period ended December 31, 2000, in conformity with
accounting principles generally accepted in the United States of America.
/s/ KPMG LLP
San Antonio, Texas
February 23, 2001
11
INTERNATIONAL BANCSHARES CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CONDITION
DECEMBER 31, 2000 AND 1999
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
2000 1999
---------- ----------
ASSETS
Cash and due from banks..................................... $ 125,628 $ 121,695
Federal funds sold.......................................... 500 13,300
---------- ----------
Total cash and cash equivalents....................... 126,128 134,995
Time deposits with banks.................................... 2,471 1,877
Investment securities:
Held to maturity (Market value of $2,220 on December 31,
2000 and $2,405 on December 31, 1999)..................... 2,220 2,406
Available for sale (Amortized cost of $3,126,107 on
December 31, 2000 and $3,050,099 on December 31, 1999).... 3,096,626 2,993,311
---------- ----------
Total investment securities........................... 3,098,846 2,995,717
Loans:
Commercial, financial and agricultural.................... 1,286,576 1,115,511
Real estate--mortgage..................................... 287,319 278,819
Real estate--construction................................. 232,589 129,813
Consumer.................................................. 165,875 171,104
Foreign................................................... 278,119 216,632
---------- ----------
Total loans........................................... 2,250,478 1,911,879
Less unearned discounts................................... (7,199) (8,355)
---------- ----------
Loans, net of unearned discounts...................... 2,243,279 1,903,524
Less allowance for possible loan losses................... (30,812) (26,770)
---------- ----------
Net loans............................................. 2,212,467 1,876,754
Bank premises and equipment, net............................ 155,523 145,342
Accrued interest receivable................................. 40,159 34,827
Other investments........................................... 132,848 130,089
Intangible assets........................................... 55,580 43,598
Other assets................................................ 36,692 58,605
---------- ----------
Total assets.......................................... $5,860,714 $5,421,804
========== ==========
LIABILITIES AND SHAREHOLDERS' EQUITY
Liabilities:
Deposits:
Demand--non-interest bearing............................ 573,681 $ 499,369
Savings and interest bearing demand..................... 913,894 928,455
Time.................................................... 2,257,023 2,099,388
---------- ----------
Total deposits........................................ 3,744,598 3,527,212
Securities sold under repurchase agreements............... 230,108 123,752
Other borrowed funds...................................... 1,432,500 1,380,000
Other liabilities......................................... 36,616 37,404
---------- ----------
Total liabilities..................................... 5,443,822 5,068,368
---------- ----------
Shareholders' equity:
Common stock of $1.00 par value. Authorized 40,000,000
shares; issued 26,481,211 shares in 2000 and 21,091,754
shares in 1999.......................................... 26,481 21,092
Surplus................................................... 25,933 24,050
Retained earnings......................................... 434,796 385,942
Accumulated other comprehensive loss...................... (19,163) (36,912)
---------- ----------
468,047 394,172
Less cost of shares in treasury, 5,139,863 shares in 2000
and 3,851,844 shares in 1999............................ (51,155) (40,736)
---------- ----------
Total shareholders' equity............................ 416,892 353,436
---------- ----------
Total liabilities and shareholders' equity............ $5,860,714 $5,421,804
========== ==========
See accompanying notes to consolidated financial statements.
12
INTERNATIONAL BANCSHARES CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
YEARS ENDED DECEMBER 31, 2000, 1999 AND 1998
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
2000 1999 1998
----------- ----------- -----------
Interest income:
Loans, including fees..................................... $ 212,522 $ 160,105 $ 145,016
Time deposits with banks.................................. 157 104 89
Federal funds sold........................................ 929 710 1,462
Investment securities:
Taxable................................................. 202,579 175,042 179,030
Tax-exempt 5,119 4,432 241
Other..................................................... 321 343 336
----------- ----------- -----------
Total interest income................................. 421,627 340,736 326,174
----------- ----------- -----------
Interest expense:
Savings and interest bearing demand deposits.............. 27,945 27,182 26,419
Time deposits............................................. 120,743 97,626 101,823
Federal funds purchased and securities sold under
repurchase agreements................................... 8,160 6,047 13,396
Other borrowings.......................................... 94,908 54,340 39,969
Other..................................................... -- 10 302
----------- ----------- -----------
Total interest expense................................ 251,756 185,205 181,909
----------- ----------- -----------
Net interest income................................... 169,871 155,531 144,265
Provision for possible loan losses.......................... 6,824 6,379 8,571
----------- ----------- -----------
Net interest income after provision for possible loan
losses.............................................. 163,047 149,152 135,694
----------- ----------- -----------
Non-interest income:
Service charges on deposit accounts....................... 35,348 30,629 21,679
Other service charges, commissions and fees............... 8,423 9,129 9,352
Investment securities transactions, net................... (4,248) 13 3,893
Other investments......................................... 7,646 6,441 (1,391)
Gain on sale of loans..................................... 51 6,449 178
Other income.............................................. 10,281 8,305 7,987
----------- ----------- -----------
Total non-interest income............................. 57,501 60,966 41,698
----------- ----------- -----------
Non-interest expense:
Employee compensation and benefits........................ 47,900 42,857 39,733
Occupancy................................................. 9,204 7,537 7,675
Depreciation of bank premises and equipment............... 12,220 11,700 10,388
Professional fees......................................... 4,565 4,953 3,461
Stationery and supplies................................... 3,268 3,157 3,186
Amortization of intangible assets......................... 4,219 3,898 3,936
Other..................................................... 30,581 32,881 30,668
----------- ----------- -----------
Total non-interest expense............................ 111,957 106,983 99,047
----------- ----------- -----------
Income before income taxes............................ 108,591 103,135 78,345
Income taxes................................................ 33,417 36,887 24,620
----------- ----------- -----------
Net income............................................ $ 75,174 $ 66,248 $ 53,725
=========== =========== ===========
Basic earnings per common share:
Net Income................................................ $ 3.51 $ 3.03 $ 2.44
=========== =========== ===========
Weighted average number of shares outstanding............. 21,428,764 21,828,496 22,055,944
Diluted earnings per common share:
Net Income................................................ $ 3.46 $ 2.98 $ 2.38
=========== =========== ===========
Weighted average number of shares outstanding............. 21,699,549 22,208,637 22,581,395
See accompanying notes to consolidated financial statements.
13
INTERNATIONAL BANCSHARES CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
YEARS ENDED DECEMBER 31, 2000, 1999, AND 1998
(DOLLARS IN THOUSANDS)
2000 1999 1998
-------- -------- --------
Net Income.................................................. $75,174 $ 66,248 $53,725
------- -------- -------
Other comprehensive income, net of tax:
Unrealized holding gains (losses) on securities available
for sale arising during the year........................ 11,902 (48,751) (9,021)
Reclassification adjustment for (gains) losses on
securities available for sale included in net income.... 5,847 3,042 (3,764)
------- -------- -------
Comprehensive income........................................ $92,923 $ 20,539 $40,940
======= ======== =======
See accompanying notes to consolidated financial statements.
14
INTERNATIONAL BANCSHARES CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
YEARS ENDED DECEMBER 31, 2000, 1999 AND 1998
(IN THOUSANDS)
ACCUMULATED
OTHER
NUMBER COMMON RETAINED COMPREHENSIVE TREASURY
OF SHARES STOCK SURPLUS EARNINGS INCOME STOCK TOTAL
--------- -------- -------- -------- -------------- -------- --------
Balances at January 1, 1998.................. 13,196 $13,196 $19,012 $301,988 $ 21,582 $(14,534) $341,244
Net income................................. -- -- -- 53,725 -- -- 53,725
Stock dividends:
Shares issued............................ 3,350 3,350 -- (3,350) -- -- --
Cash dividends........................... -- -- -- (11,338) -- -- (11,338)
Purchase of treasury stock................. -- -- -- -- -- (4,046) (4,046)
Exercise of stock options.................. 245 245 2,520 -- -- -- 2,765
Tax effect of non-qualified stock options
exercised................................ -- -- 718 -- -- -- 718
Other comprehensive income, net of tax:
Net change in unrealized gains (losses)
on available for sale securities, net
of reclassification adjustment......... -- -- -- -- (12,785) -- (12,785)
------ ------- ------- -------- -------- -------- --------
Balances at December 31, 1998................ 16,791 $16,791 $22,250 $341,025 $ 8,797 $(18,580) $370,283
====== ======= ======= ======== ======== ======== ========
Net income................................. -- -- -- 66,248 -- -- 66,248
Stock dividends:
Shares issued............................ 4,204 4,204 -- (4,204) -- -- --
Cash dividends........................... -- -- -- (17,127) -- -- (17,127)
Purchase of treasury stock................. -- -- -- -- -- (22,156) (22,156)
Exercise of stock options.................. 97 97 1,800 -- -- -- 1,897
Other comprehensive income, net of tax:
Net change in unrealized gains (losses)
on available for sale securities, net
of reclassification adjustment......... -- -- -- -- (45,709) -- (45,709)
------ ------- ------- -------- -------- -------- --------
Balances at December 31, 1999................ 21,092 $21,092 $24,050 $385,942 $(36,912) $(40,736) $353,436
====== ======= ======= ======== ======== ======== ========
Net income................................. -- -- -- 75,174 -- -- 75,174
Stock dividends:
Shares issued............................ 5,280 5,280 -- (5,280) -- -- --
Cash dividends........................... -- -- -- (21,040) -- -- (21,040)
Purchase of treasury stock................. -- -- -- -- -- (10,419) (10,419)
Exercise of stock options.................. 109 109 1,883 -- -- -- 1,992
Other comprehensive income, net of tax:
Net change in unrealized gains (losses)
on available for sale securities, net
of reclassification adjustment......... -- -- -- -- 17,749 -- 17,749
------ ------- ------- -------- -------- -------- --------
Balances at December 31, 2000................ 26,481 $26,481 $25,933 $434,796 $(19,163) $(51,155) $416,892
====== ======= ======= ======== ======== ======== ========
See accompanying notes to consolidated financial statements.
15
INTERNATIONAL BANCSHARES CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, 2000, 1999 AND 1998
(DOLLARS IN THOUSANDS)
2000 1999 1998
----------- ----------- -----------
Operating activities:
Net income................................................ $ 75,174 $ 66,248 $ 53,725
Adjustments to reconcile net income to net cash provided
by operating activities:
Provision for possible loan losses...................... 6,824 6,379 8,571
Recoveries on charged-off loans......................... 900 1,389 1,349
Net cost of operations of other real estate owned....... 36 509 106
Write down of credit card receivables to net realizable
value................................................. -- 2,766 --
Gain on sale of loans................................... (51) (6,449) (178)
Depreciation of bank premises and equipment............. 12,220 11,700 10,388
Depreciation and amortization of leasing assets......... 1,747 1,796 948
Accretion of investment securities discounts............ (18,371) (15,460) (10,708)
Amortization of investment securities premiums.......... 10,313 12,611 14,260
Realized loss (gain) on investment securities
transactions, net..................................... 4,248 (13) (3,893)
Gain on sale of bank premises and equipment............. (171) (45) (1,715)
Deferred tax expense.................................... 7,592 4,372 2,122
Increase in accrued interest receivable................. (5,332) (3,261) (271)
(Decrease) increase other liabilities................... (788) (5,287) 11,831
----------- ----------- -----------
Net cash provided by operating activities............. 94,341 77,255 86,535
----------- ----------- -----------
Investing activities:
Cash acquired in purchase transactions.................... -- 20,320 --
Proceeds from maturities of securities.................... 1,572 2,350 975
Proceeds from sales of available for sale securities...... 163,085 616,080 541,362
Purchases of available for sale securities................ (599,926) (1,325,652) (1,967,527)
Principal collected on mortgage-backed securities......... 353,699 676,535 976,706
Proceeds from matured time deposits with banks............ 1,184 684 1,290
Purchases of time deposits with banks..................... (1,778) (1,188) (1,076)
Net increase in loans..................................... (343,386) (286,548) (179,350)
Net (increase) decrease in other assets................... (2,203) (132,896) 17,787
Purchases of bank premises and equipment.................. (22,676) (18,983) (19,193)
Proceeds from sale of bank premise and equipment.......... 446 76 2,573
----------- ----------- -----------
Net cash used in investing activities................. (449,983) (449,222) (626,453)
----------- ----------- -----------
Financing activities:
Net increase (decrease) in non-interest bearing demand
deposits................................................ 74,312 84,031 (36,125)
Net (decrease) increase in savings and interest bearing
demand deposits......................................... (14,561) (27,177) 127,649
Net increase in time deposits............................. 157,635 72,848 102,553
Net increase (decrease) in federal funds purchased and
securities sold under repurchase agreements............. 106,356 (11,948) (342,709)
Proceeds from issuance of other borrowed funds............ 2,365,500 2,045,000 2,440,000
Principal payments on other borrowed funds................ (2,313,000) (1,739,000) (1,856,000)
Purchase of treasury stock................................ (10,419) (22,156) (4,046)
Proceeds from stock transactions.......................... 1,992 1,897 2,765
Payments of cash dividends................................ (21,016) (17,101) (11,297)
Payments of cash dividends in lieu of fractional shares... (24) (26) (41)
----------- ----------- -----------
Net cash provided by financing activities............. 346,775 386,368 422,749
----------- ----------- -----------
(Decrease) increase in cash and cash equivalents............ (8,867) 14,401 (117,169)
Cash and cash equivalents at beginning of year.............. 134,995 120,594 237,763
----------- ----------- -----------
Cash and cash equivalents at end of year.................... $ 126,128 $ 134,995 $ 120,594
=========== =========== ===========
Supplemental cash flow information:
Interest paid............................................. $ 247,699 $ 189,137 $ 185,402
Income taxes paid......................................... 26,520 26,753 21,691
Supplemental schedule of noncash investing and financing
activities relating to various purchase transactions:
Loans acquired............................................ $ -- $ 4,503 $ --
Investment securities and other assets acquired........... -- 3,112 --
Deposit and other liabilities assumed..................... -- 27,935 --
See accompanying notes to consolidated financial statements.
16
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 subsidiaries, is primarily engaged in the business
of banking, including the acceptance of checking and savings deposits and the
making of commercial, real estate, personal, home improvement, automobile and
other installment and term loans. The primary markets of the Company are South
and Southeast Texas. Each bank subsidiary is very active in facilitating
international trade along the United States border with Mexico and elsewhere.
Although the Company's loan portfolio is diversified, the ability of the
Company's debtors to honor their contracts is primarily dependent upon the
economic conditions in the Company's trade area. In addition, the investment
portfolio is directly impacted by fluctuations in market interest rates. The
Company and its bank subsidiaries are subject to the regulations of certain
Federal agencies as well as the Texas Department of Banking and undergo periodic
examinations by those regulatory authorities. Such agencies may require certain
standards or impose certain limitations based on their judgments or changes in
law and regulations.
The financial statements have been prepared in accordance with generally
accepted accounting principles. In preparing the financial statements,
management is required to make estimates and assumptions that affect the
reported amounts of assets and liabilities as of the dates of the balance sheets
and income and expenses for the periods. Actual results could differ
significantly from those estimates. Material estimates that are particularly
susceptible to significant changes in the near-term relate to the determination
of the allowance for possible loan losses.
PER SHARE DATA
All share and per share information has been restated giving retroactive
effect to stock dividends distributed.
INVESTMENT SECURITIES
The Company classifies debt and equity securities into one of these
categories: held-to-maturity, available-for-sale, or trading. Such
classifications are reassessed for appropriate classification at each reporting
date. Securities classified as "held-to-maturity" are carried at amortized cost
for financial statement reporting, while securities classified as
"available-for-sale" and "trading" are carried at their fair value. Unrealized
holding gains and losses are included in net income for those securities
classified as "trading", while unrealized holding gains and losses related to
those securities classified as "available-for-sale" are excluded from net income
and reported net of tax as other comprehensive income and as a separate
component of shareholders' equity until realized. The Company did not maintain
any trading securities during the three year period ending December 31, 2000.
17
INTERNATIONAL BANCSHARES CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Mortgage-backed securities held at December 31, 2000 and 1999 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 to approximate the effective interest method.
PROVISION AND ALLOWANCE FOR POSSIBLE LOAN LOSSES
The allowance for possible loan losses is maintained at a level considered
adequate by management to provide for potential loan losses. The allowance is
increased by provisions charged to operating expense and reduced by net
charge-offs. The provision for possible loan losses is the amount which, in the
judgment of management, is necessary to establish the allowance for possible
loan losses at a level that is adequate to absorb known and inherent risks in
the loan portfolio.
Management believes that the allowance for possible loan losses is adequate.
While management uses available information to recognize losses on loans, future
additions to the allowance may be necessary based on changes in economic
conditions. In addition, various regulatory agencies, as an integral part of
their examination process, periodically review the Company's bank subsidiaries
allowances for possible loan losses. Such agencies may require the Company's
bank subsidiaries to recognize additions or reductions to their allowances based
on their judgments of information available to them at the time of their
examination.
NON-ACCRUAL LOANS
The non-accrual loan policy of the Company's bank subsidiaries is to
discontinue the accrual of interest on loans when management determines that it
is probable that future interest accruals will be uncollectible. Interest income
on non-accrual loans is recognized only to the extent payments are received or
when, in management's opinion, the creditor's financial condition warrants
reestablishment of interest accruals.
OTHER REAL ESTATE OWNED
Other real estate owned is comprised of real estate acquired by foreclosure
and deeds in lieu of foreclosure. Other real estate is carried at the lower of
the recorded investment in the property or its fair value less estimated costs
to sell such property (as determined by independent appraisal). Prior to
foreclosure, the value of the underlying loan is written down to the fair value
of the real estate to be acquired by a charge to the allowance for loan losses
if necessary. Any subsequent write-downs are charged against other non-interest
expenses. Operating expenses of such properties and gains and losses on their
disposition are included in other non-interest expenses.
18
INTERNATIONAL BANCSHARES CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
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 subsequent years as if the fair-value-based method defined in
SFAS No. 123 had been applied. The Company has elected to continue to apply the
provisions of APB Opinion No. 25 and provide the pro forma disclosure provisions
of SFAS No. 123.
NET INCOME PER SHARE
Per share amounts are computed in accordance with SFAS No. 128, "Earnings
per Share." Basic EPS is calculated by dividing net income available to common
shareholders, by the weighted average number of common shares outstanding. The
computation of diluted EPS assumes the issuance of common shares for all
dilutive potential common shares outstanding during the reporting period. The
dilutive effect of stock options is considered in earnings per share
calculations if dilutive, using the treasury stock method.
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 lives not exceeding 15 years.
IMPAIRMENT OF LONG-LIVED ASSETS AND LONG-LIVED ASSETS TO BE DISPOSED OF
Long-lived assets are reviewed for impairment whenever events or changes in
circumstances indicate the carrying value may not be recoverable. If the sum of
the expected undiscounted cash flows is less than the carrying amount of the
assets, a loss is recognized for the difference between the fair value and the
carrying value of the asset. Long-lived assets and certain identifiable
intangibles to be disposed of are reported at the lower of carrying amount or
fair value less cost to sell, except for assets that are covered by APB Opinion
No. 30.
19
INTERNATIONAL BANCSHARES CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
CONSOLIDATED STATEMENT OF CASH FLOWS
For purposes of the statement of cash flows, the Company considers all
short-term investments with a maturity at date of purchase of three months or
less to be cash equivalents. Also, the Company reports transactions related to
deposits with other financial institutions, customer time deposits and loans to
customers on a net basis.
ENVIRONMENTAL REMEDIATION
Environmental remediation liabilities are accrued when the criteria of SFAS
No. 5, "Accounting for Contingencies," have been met.
ACCOUNTING FOR TRANSFERS AND SERVICING OF FINANCIAL ASSETS
The Company accounts for transfers and servicing of financial assets and
extinguishments of liabilities based on the application of a
financial-components approach that focuses on control. After a transfer of
financial assets, the Company recognizes the financial and servicing assets it
controls and liabilities it has incurred, derecognizes financial assets when
control has been surrendered and derecognizes liabilities when extinguished.
COMPREHENSIVE INCOME
The Company reports comprehensive income in accordance with SFAS No. 130.
SFAS No. 130 requires that an enterprise (a) classify items of other
comprehensive income by their nature in a financial statement and (b) display
the accumulated balance of other comprehensive income separately from retained
earnings and additional paid-in capital in the equity section of a statement of
financial position.
SEGMENTS OF AN ENTERPRISE AND RELATED INFORMATION
The Company applies the provisions of SFAS No. 131, "Disclosures about
Segments of an Enterprise and Related Information," in determining it's
reportable segments and related disclosures. Management of the Company believes
that it does not have separate reportable operating segments under the provision
of SFAS No. 131.
(2) ACQUISITIONS
Effective February 16, 2001, IBC acquired the assets of First Equity
Corporation, an Austin-based mortgage banker. The acquisition was accounted for
as a purchase transaction. In connection with the acquisition, IBC recorded
goodwill totaling $5,304,000 which is being amortized on a straight line basis
over a fifteen year period.
Effective October 2, 2000, the Company purchased a controlling interest in
the GulfStar Group, a Houston-based investment banking firm serving
middle-market corporations primarily in Texas. The acquisition was accounted for
as a purchase transaction. In connection with the acquisition, the Company
recorded goodwill totaling $13,199,000 which is being amortized on a straight
line basis over a fifteen year period.
During 2000, IBC established an insurance subsidiary and acquired the assets
of two insurance agencies in Texas. The acquisitions were accounted for as a
purchase transaction. In connection with the acquisitions, IBC recorded goodwill
totaling $3,003,000 which is being amortized on a straight line basis over a
fifteen year period.
20
INTERNATIONAL BANCSHARES CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(2) ACQUISITIONS (CONTINUED)
Effective February 19, 1999, IBC purchased certain assets and assumed
certain liabilities of the Laredo branch of Pacific Southwest Bank, Corpus
Christi, Texas. IBC purchased loans of approximately $4,503,000 and assumed
deposits of approximately $27,873,000 and received cash and other assets in the
amount of approximately $23,432,000. The acquisition was accounted for as a
purchase transaction. IBC recorded core deposit premium totaling $2,525,000
which is being amortized on a straight line basis over a fifteen year period.
(3) INVESTMENT SECURITIES
The amortized cost and estimated market value by type of investment security
at December 31, 2000 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........................ $ 60 $ -- $ $ 60 $ 60
Other securities...................... 2,160 -- -- 2,160 2,160
---------- ------- -------- ---------- ----------
Total investment securities........... $ 2,220 $ -- $ $ 2,220 $ 2,220
========== ======= ======== ========== ==========
AVAILABLE FOR SALE
--------------------------------------------------------------
GROSS GROSS ESTIMATED
AMORTIZED UNREALIZED UNREALIZED MARKET CARRYING
COST GAINS LOSSES VALUE VALUE
---------- ---------- ---------- ---------- ----------
(DOLLARS IN THOUSANDS)
U.S. Treasury securities.............. $ 278,885 $ -- $(34,074) $ 244,811 $ 244,811
Mortgage-backed securities............ 2,565,642 19,895 (2,214) 2,583,323 2,583,323
Obligations of states and political
subdivisions........................ 102,388 2 (5,599) 96,791 96,791
Other securities...................... 93,232 -- (7,509) 85,723 85,723
Equity securities..................... 85,960 108 (90) 85,978 85,978
---------- ------- -------- ---------- ----------
Total investment securities........... $3,126,107 $20,005 $(49,486) $3,096,626 $3,096,626
========== ======= ======== ========== ==========
The amortized cost and estimated market value of investment securities at
December 31, 2000, 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........................... $1,610 $1,610 $ 743 $ 743
Due after one year through five years............. 485 485 537 530
Due after five years through ten years............ 125 125 20,000 19,900
Due after ten years............................... -- -- 453,225 406,152
Mortgage-backed securities........................ -- -- 2,565,642 2,583,323
Equity securities................................. -- -- 85,960 85,978
------ ------ ---------- ----------
Total investment securities....................... $2,220 $2,220 $3,126,107 $3,096,626
====== ====== ========== ==========
21
INTERNATIONAL BANCSHARES CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(3) INVESTMENT SECURITIES (CONTINUED)
The amortized cost and estimated market value by type of investment security
at December 31, 1999 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........................ $ 321 $ -- $ (1) $ 320 $ 321
Other securities...................... 2,085 -- -- 2,085 2,085
---------- ------ -------- ---------- ----------
Total investment securities........... $ 2,406 $ -- $ (1) $ 2,405 $ 2,406
========== ====== ======== ========== ==========
AVAILABLE FOR SALE
--------------------------------------------------------------
GROSS GROSS ESTIMATED
AMORTIZED UNREALIZED UNREALIZED MARKET CARRYING
COST GAINS LOSSES VALUE VALUE
---------- ---------- ---------- ---------- ----------
(DOLLARS IN THOUSANDS)
U.S. Treasury securities.............. $ 261,980 $ -- $ (1,000) $ 260,980 $ 260,980
Mortgage-backed securities............ 2,534,461 4,695 (47,193) 2,491,963 2,491,963
Obligations of states and political
subdivisions........................ 102,210 2 (11,796) 90,416 90,416
Other securities...................... 76,212 45 (2,103) 74,154 74,154
Equity securities..................... 75,236 603 (41) 75,798 75,798
---------- ------ -------- ---------- ----------
Total investment securities........... $3,050,099 $5,345 $(62,133) $2,993,311 $2,993,311
========== ====== ======== ========== ==========
Mortgage-backed securities are primarily securities issued by the Federal
Home Loan Mortgage Corporation ("Freddie Mac") and the Federal National Mortgage
Association ("Fannie Mae").
The amortized cost and fair market value of investment securities pledged to
qualify for fiduciary powers, to secure public monies as required by law,
repurchase agreements and short-term fixed borrowings was $2,190,700,000 and
$2,172,637,000, respectively, at December 31, 2000.
Proceeds from the sale of securities available-for-sale were $163,085,000,
$616,080,000 and $541,362,000 during 2000, 1999 and 1998, respectively. Gross
gains of $434,000 and gross losses of $4,682,000 were realized in 2000 primarily
from the sale of available-for-sale mortgage-backed securities. Gross gains and
losses of $2,639,000 and $2,626,000 and $4,374,000 and $481,000 were realized in
1999 and 1998, respectively.
The Company maintains the required level of stock at the Federal Home Loan
Bank of Dallas, Texas (the "FHLB"). The FHLB stock is included in equity
securities and is recorded at cost and totaled $85,550,000 at December 31, 2000.
22
INTERNATIONAL BANCSHARES CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(4) ALLOWANCE FOR POSSIBLE LOAN LOSSES
A summary of the transactions in the allowance for possible loan losses for
the years ended December 31, 2000, 1999 and 1998 is as follows:
2000 1999 1998
-------- -------- --------
(DOLLARS IN THOUSANDS)
Balance at January 1, 2000.................................. $26,770 $25,551 $24,516
------- ------- -------
Losses charged to allowance............................... (3,682) (6,549) (8,885)
Recoveries credited to allowance.......................... 900 1,389 1,349
------- ------- -------
Net losses charged to allowance........................... (2,782) (5,160) (7,536)
Provision charged to operations........................... 6,824 6,379 8,571
------- ------- -------
Balance at December 31, 2000 $30,812 $26,770 $25,551
======= ======= =======
Loans accounted for on a non-accrual basis at December 31, 2000, 1999 and
1998 amounted to $6,273,000, $7,662,000 and $5,538,000, respectively. The effect
of such non-accrual loans reduced interest income by $842,000, $874,000 and
$708,000 for the years ended December 31, 2000, 1999 and 1998, respectively.
Amounts received on non-accruals are applied, for financial accounting purposes,
first to principal and then to interest after all principal has been collected.
Impaired loans are those loans where it is probable that all amounts due
according to contractual terms of the loan agreement will not be collected. The
Company has identified these loans through its normal loan review procedures.
Impaired loans include (1) all non-accrual loans, (2) loans which are 90 days or
more past due, unless they are well secured (i.e. the collateral value is
sufficient to cover principal and accrued interest) and are in the process of
collection, and (3) other loans which management believes are impaired. Impaired
loans are measured based on (1) the present value of expected future cash flows
discounted at the loan's effective interest rate; (2) the loan's observable
market price; or (3) the fair value of the collateral if the loan is collateral
dependent. Substantially all of the Company's impaired loans are measured at the
fair value of the collateral. In limited cases the Company may use other methods
to determine the level of impairment of a loan if such loan is not collateral
dependent.
Impaired loans were $5,226,000 at December 31, 2000, $7,738,000 at
December 31, 1999 and $8,440,000 at December 31, 1998. The average recorded
investment in impaired loans during 2000, 1999, and 1998 was $6,064,000,
$8,028,000 and $8,962,000, respectively. The total allowance for possible loan
losses related to these loans was $1,722,000, $882,000 and $1,384,000 at
December 31, 2000, 1999 and 1998, respectively. Interest income on impaired
loans of $279,000, $371,000 and $443,000 was recognized for cash payments
received in 2000, 1999 and 1998, respectively.
Management of the Company recognizes the risks associated with these
impaired loans. However, management's decision to place loans in this category
does not necessarily mean that the Company expects losses to occur.
The bank subsidiaries charge off that portion of any loan which management
considers to represent a loss as well as that portion of any other loan which is
classified as a "loss" by bank examiners. Commercial and industrial or real
estate loans are generally considered by management to represent a loss, in
whole or part, when an exposure beyond any collateral coverage is apparent and
when no further collection of the loss portion is anticipated based on the
borrower's financial condition and general economic conditions in the borrower's
industry. Generally, unsecured consumer loans are charged-off when 90 days past
due.
23
INTERNATIONAL BANCSHARES CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(4) ALLOWANCE FOR POSSIBLE LOAN LOSSES (CONTINUED)
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, 2000 was adequate to absorb possible losses from loans in
the portfolio at that date.
(5) BANK PREMISES AND EQUIPMENT
A summary of bank premises and equipment, by asset classification, at
December 31, 2000 and 1999 were as follows:
ESTIMATED
USEFUL LIVES 2000 1999
------------ ---------- ----------
(DOLLARS IN THOUSANDS)
Bank buildings and improvements............................ 5 - 40 years $119,682 $108,165
Furniture, equipment and vehicles.......................... 1 - 20 years 86,758 76,199
Land....................................................... 27,499 27,270
Real estate held for future expansion:
Land, building, furniture, fixture and equipment......... 7 - 27 years 1,174 2,215
Less: accumulated depreciation............................. (79,590) (68,507)
-------- --------
Bank premises and equipment, net....................... $155,523 $145,342
======== ========
24
INTERNATIONAL BANCSHARES CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(6) DEPOSITS
Deposits as of December 31, 2000 and 1999 and related interest expense for
the years ended December 31, 2000, 1999 and 1998 were as follows:
2000 1999
---------- ----------
(DOLLARS IN THOUSANDS)
Deposits:
Demand--non-interest bearing
Domestic.............................................. $ 503,863 $ 438,028
Foreign............................................... 69,818 61,341
---------- ----------
Total demand non-interest bearing 573,681 499,369
---------- ----------
Savings and interest bearing demand
Domestic.............................................. 692,513 709,104
Foreign............................................... 221,381 219,351
---------- ----------
Total savings and interest bearing demand................. 913,894 928,455
---------- ----------
Time, certificates of deposit
$100,000 or more
Domestic.............................................. 504,293 469,607
Foreign............................................... 961,902 859,164
Less than $100,000
Domestic.............................................. 464,290 472,217
Foreign............................................... 326,538 298,400
---------- ----------
Total time, certificates of deposit....................... 2,257,023 2,099,388
---------- ----------
Total deposits............................................ $3,744,598 $3,527,212
========== ==========
2000 1999 1998
-------- -------- --------
(DOLLARS IN THOUSANDS)
Interest Expense:
Savings and interest bearing demand
Domestic.............................................. $ 21,756 $ 21,678 $ 21,580
Foreign............................................... 6,189 5,504 4,839
-------- -------- --------
Total savings and interest bearing demand................. 27,945 27,182 26,419
-------- -------- --------
Time, certificates of deposit
$100,000 or more
Domestic.............................................. 28,359 22,790 24,484
Foreign............................................... 51,675 38,497 36,865
Less than $100,000
Domestic.............................................. 24,756 24,158 28,746
Foreign............................................... 15,953 12,181 11,728
-------- -------- --------
Total time, certificates of deposit....................... 120,743 97,626 101,823
-------- -------- --------
Total interest expense on deposits........................ $148,688 $124,808 $128,242
======== ======== ========
25
INTERNATIONAL BANCSHARES CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(7) SECURITIES SOLD UNDER REPURCHASE AGREEMENTS
The Company's bank subsidiaries have entered into repurchase agreements with
the FHLB and individual customers of the bank subsidiaries. The purchasers have
agreed to resell to the bank subsidiaries identical securities upon the
maturities of the agreements. Securities sold under repurchase agreements were
mortgage-backed book entry securities and averaged $145,096,000, $124,276,000
and $257,589,000 during 2000, 1999 and 1998, respectively, and the maximum
amount outstanding at any month end during 2000, 1999 and 1998 was $231,663,000,
$136,066,000 and $518,450,000, respectively.
Further information related to repurchase agreements at December 31, 2000
and 1999 is set forth in the following table:
COLLATERAL SECURITIES REPURCHASE BORROWING
--------------------------------- -----------------------------
BOOK VALUE OF MARKET VALUE OF BALANCE OF WEIGHTED AVERAGE
SECURITIES SOLD SECURITIES SOLD LIABILITY INTEREST RATE
--------------- --------------- ---------- ----------------
(DOLLARS IN THOUSANDS)
December 31, 2000 Term:
Overnight agreements.................. $ 16,214 $ 16,252 $ 8,161 5.70%
1 to 29 days.......................... 36,400 36,381 29,664 6.15%
30 to 90 days......................... 75,938 76,129 50,072 6.17%
Over 90 days 173,224 175,514 142,211 5.87%
-------- -------- -------- -----
Total................................. $301,776 $304,276 $230,108 5.96%
======== ======== ======== =====
December 31, 1999 Term:
Overnight agreements.................. $ 37,091 $ 36,040 $ 21,799 4.65%
1 to 29 days.......................... 8,776 8,173 6,249 4.77%
30 to 90 days......................... 37,370 35,439 34,469 5.03%
Over 90 days.......................... 62,178 57,219 61,235 5.30%
-------- -------- -------- -----
Total................................. $145,415 $136,871 $123,752 5.09%
======== ======== ======== =====
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, 2000 and 1999 were $1,232,500,000 and
$1,330,000,000, respectively, of short-term fixed borrowings with the Federal
Home Loan Bank of Dallas at the market price offered at the time of funding.
These borrowings are secured by mortgage-backed investment securities. The
weighted average interest rate on the short-term fixed borrowings outstanding at
December 31, 2000 and 1999 was 6.56% and 5.86%, respectively, and the weighted
average interest rate for the year 2000 and 1999 was 6.46% and 5.27%,
respectively. The average daily balance on short-term fixed borrowings was
$1,396,537,000 and $948,446,000 during 2000 and 1999, respectively, and the
maximum amount outstanding at any month end during 2000 and 1999 was
$1,609,000,000 and $1,335,000,000, respectively.
At December 31, 2000, the Company had a $200,000,000 long-term certificate
of indebtedness outstanding payable to the FHLB at a three month Libor rate
minus ten basis points which resets quarterly, maturing October 18, 2002. At
December 31, 1999, the Company had a $50,000,000 long-term fixed rate
certificate of indebtedness outstanding payable to the FHLB at a ten year
Treasury rate minus forty-five basis points, maturing December 8, 2009. These
borrowings are secured by a blanket lien of 1-4 family first lien mortgage
loans.
26
INTERNATIONAL BANCSHARES CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(9) EARNINGS PER SHARE
Basic EPS is calculated by dividing net income available to common
shareholders by the weighted average number of common shares outstanding. The
computation of diluted EPS assumes the issuance of common shares for all
dilutive potential common shares outstanding during the reporting period. The
calculation of the basic EPS and the diluted EPS at December 31, 2000, 1999, and
1998 is set forth in the following table:
INCOME SHARES PER-SHARE
(NUMERATOR) (DENOMINATOR) AMOUNT
----------- ------------- ---------
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE
AMOUNTS)
December 31, 2000:
Basic EPS
Income available to common stockholders................. $75,174 21,428,764 $3.51
Potential dilutive common shares........................ 270,785
------- ----------
Diluted EPS............................................... $75,174 21,699,549 $3.46
======= ==========
December 31, 1999:
Basic EPS
Income available to common stockholders................. $66,248 21,828,496 $3.03
Potential dilutive common shares........................ 380,141
------- ----------
Diluted EPS............................................... $66,248 22,208,637 $2.98
======= ==========
December 31, 1998:
Basic EPS
Income available to common stockholders................. $53,725 22,055,944 $2.44
Potential dilutive common shares........................ 525,451
------- ----------
Diluted EPS............................................... $53,725 22,581,395 $2.38
======= ==========
(10) EMPLOYEES' PROFIT SHARING PLAN
The Company has a deferred profit sharing plan for full-time employees with
a minimum of one year of continuous employment. The Company's annual
contribution to the plan is based on a percentage, as determined by the Board of
Directors, of income before income taxes, as defined, for the year. Allocation
of the contribution among officers' and employees' accounts is based on length
of service and amount of salary earned. Profit sharing costs of $1,844,878,
$1,722,600 and $1,546,700 were charged to income for the years ended
December 31, 2000, 1999, and 1998, respectively.
(11) INTERNATIONAL OPERATIONS
The Company provides international banking services for its customers
through its bank subsidiaries. Neither the Company nor its bank subsidiaries
have facilities located outside the United States. International operations are
distinguished from domestic operations based upon the domicile of the customer.
Because the resources employed by the Company are common to both
international and domestic operations, it is not practical to determine net
income generated exclusively from international activities.
27
INTERNATIONAL BANCSHARES CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(11) INTERNATIONAL OPERATIONS (CONTINUED)
A summary of assets attributable to international operations at
December 31, 2000 and 1999 are as follows:
2000 1999
---------- ----------
(DOLLARS IN THOUSANDS)
Loans:
Commercial............................................ $242,450 $184,129
Others................................................ 35,669 32,503
-------- --------
278,119 216,632
Less allowance for possible loan losses............... (1,831) (1,322)
-------- --------
Net loans........................................... $276,288 $215,310
======== ========
Accrued interest receivable........................... $ 2,630 $ 1,725
-------- --------
At December 31, 2000, the Company had $7,100,000 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 $22,826,000,
$15,317,000 and $11,795,000 for the years ended December 31, 2000, 1999 and
1998, respectively.
(12) INCOME TAXES
The Company files a consolidated U.S. Federal income tax return. The current
and deferred portions of income tax expense (benefit) included in the
consolidated statements of income are presented below for the years ended
December 31:
2000 1999 1998
-------- -------- --------
(DOLLARS IN THOUSANDS)
Current
U.S............................................ $25,702 $32,413 $22,443
Foreign........................................ 123 102 55
------- ------- -------
Total current taxes.......................... 25,825 32,515 22,498
Deferred....................................... 7,592 4,372 2,122
------- ------- -------
Total income taxes........................... $33,417 $36,887 $24,620
======= ======= =======
Total income tax expense differs from the amount computed by applying the
U.S. Federal income tax rate of 35% for 2000, 1999 and 1998 to income before
income taxes. The reasons for the differences for the years ended December 31
are as follows:
2000 1999 1998
-------- -------- --------
(DOLLARS IN THOUSANDS)
Computed expected tax expense.................... $38,007 $36,097 $27,416
Change in taxes resulting from:
Tax-exempt interest income..................... (1,596) (1,397) (151)
Lease financing................................ (1,386) 3,193 (2,309)
Employee benefits.............................. (1,994) (1,609) --
Other.......................................... 386 603 (336)
------- ------- -------
Actual tax expense........................... $33,417 $36,887 $24,620
======= ======= =======
28
INTERNATIONAL BANCSHARES CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(12) INCOME TAXES (CONTINUED)
The tax effects of temporary differences that give rise to significant
portions of the deferred tax assets and deferred tax liabilities at
December 31, 2000 and 1999 are reflected below:
2000 1999
-------- --------
(DOLLARS IN
THOUSANDS)
Deferred tax assets:
Loans receivable, principally due to the allowance for
possible loan losses.................................. $10,144 $ 8,561
Other real estate owned................................. 251 766
Accrued expenses........................................ 42 1,466
Net unrealized losses on available for sale investment
securities............................................ 10,318 19,876
Other................................................... 236 284
------- -------
Total deferred tax assets............................... 20,991 30,953
Deferred tax liabilities:
Lease financing receivable.............................. (12,951) (8,772)
Bank premises and equipment, principally due to
differences in depreciation........................... (2,146) (1,684)
FHLB stock.............................................. (5,040) (2,842)
Other................................................... (616) (267)
------- -------
Total deferred tax liabilities.......................... (20,753) (13,565)
------- -------
Net deferred tax asset (liability).................... $ 238 $17,388
======= =======
The Company did not record a valuation allowance against deferred tax assets
at December 31, 2000 and 1999 because management has concluded it is more likely
than not the Company will have future taxable earnings in excess of future tax
deductions.
(13) STOCK OPTIONS
On April 3, 1996, the Board of Directors adopted the 1996 International
Bancshares Corporation Stock Option Plan (the "1996 Plan"). The 1996 Plan
replaced the 1987 International Bancshares Corporation Key Contributor Stock
Option Plan (the "1987 Plan"). Under the 1987 Plan and the 1996 Plan both
qualified incentive stock options ("ISOs") and nonqualified stock options
("NQSOs") may be granted. Options granted may be exercisable for a period of up
to 10 years from the date of grant, excluding ISOs granted to 10% shareholders,
which may be exercisable for a period of up to only five years.
The Company granted nonqualified stock options exercisable for a total of
120,000 shares of Common Stock to certain employees of the GulfStar Group. The
grants were not made under either the 1987 Plan or the 1996 Plan. The options
are exercisable for a period of seven years and vest in equal increments over a
period of five years. All options granted to the GulfStar Group employees had an
option price of not less than the fair market value of the Common Stock on or
about the date of grant.
29
INTERNATIONAL BANCSHARES CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(13) STOCK OPTIONS (CONTINUED)
The schedule on the following page summarizes the pertinent information
(adjusted for stock distributions) with regard to stock.
OPTION PRICE OPTIONS
PER SHARE OUTSTANDING
-------------- -----------
Balance at January 1, 1998........................ 1,297,213
Terminated...................................... $6.83 - 37.82 (40,445)
Granted......................................... 30.72 - 31.84 17,813
Exercised....................................... 6.83 - 37.82 (244,753)
----------
Balance at December 31, 1998...................... 1,029,828
Terminated...................................... $15.00 - 43.00 (50,610)
Granted......................................... 29.44 - 34.40 193,900
Exercised....................................... 15.74 - 30.23 (96,504)
----------
Balance at December 31, 1999...................... 1,076,614
Terminated...................................... $ 30.40 (750)
Granted......................................... 31.00 - 32.87 133,000
Exercised....................................... 12.58 - 34.40 (108,954)
----------
Balance at December 31, 2000...................... 1,099,910
==========
At December 31, 2000 and 1999, 534,004 and 316,698 options were exercisable,
respectively, and as of December 31, 2000, 37,465 shares were available for
future grants under the 1996 Plan. All options granted under the 1987 Plan and
the 1996 Plan had an option price of not less than the fair market value of the
Company's common stock at the date of grant and a vesting period of five years.
The following table summarizes information about stock options outstanding
at December 31, 2000:
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
------------------------------------- -----------------------
WEIGHTED-
AVERAGE WEIGHTED- WEIGHTED-
NUMBER REMAINING AVERAGE NUMBER AVERAGE
RANGE OF OUTSTANDING CONTRACTUAL EXERCISE EXERCISABLE EXERCISE
EXERCISE PRICES AT 12/31/00 LIFE PRICE AT 12/31/00 PRICE
- --------------- ----------- ----------- --------- ----------- ---------
$12.58................................... 197,922 2.5 years $12.58 197,922 $12.58
15.57................................... 492 3.8 years 15.57 492 15.57
24.17 - 33.28........................... 510,516 4.4 years 24.44 282,855 24.44
30.72 - 31.84........................... 23,047 6.1 years 30.88 8,900 30.88
29.44 - 34.40........................... 234,933 7.3 years 30.51 43,835 30.51
31.00 - 32.87........................... 133,000 6.8 years 31.81 -- 31.81
--------- -------
$12.58 - 34.40........................... 1,099,910 534,004
========= =======
The Company has elected to continue to apply the provisions of APB Opinion
No. 25 and provide the following pro forma disclosure required by SFAS No. 123.
The fair values of options at date of grant was estimated using the
Black-Scholes option pricing model with the following weighted-average
assumptions:
2000 1999 1998
-------- -------- --------
Expected life (years).................................. 5 6 6
Interest rate.......................................... 5.81% 5.54% 4.46%
Volatility............................................. 35.54% 33.68% 36.40%
30
INTERNATIONAL BANCSHARES CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(13) STOCK OPTIONS (CONTINUED)
The following schedule shows total net income as reported and the pro forma
results:
2000 1999 1998
-------- -------- --------
Net income As reported............. $75,174 $66,248 $53,725
Pro forma............... 73,199 64,478 52,123
Basic earnings As reported............. $ 3.51 $ 3.03 $ 2.44
Pro forma............... 3.42 2.95 2.36
Diluted earnings As reported............. $ 3.46 $ 2.98 $ 2.38
Pro forma............... 3.37 2.90 2.31
The Company has a formal stock repurchase program and as part of the
program, the Company occasionally repurchases shares of Common Stock related to
the exercise of stock options through the surrender of other shares of Common
Stock of the Company owned by the option holders.
(14) COMMITMENTS AND CONTINGENT LIABILITIES
The Company is involved in various legal proceedings that are in various
stages of litigation. Some of these actions allege "lender liability" claims on
a variety of theories and claim substantial actual and punitive damages. The
Company has determined, based on discussions with its counsel, that any material
loss in such actions, individually or in the aggregate, is remote or the damages
sought, even if fully recovered, would not be considered material. However, many
of these matters are in various stages of proceedings and further developments
could cause management to revise its assessment of these matters.
The Company leases portions of its banking premises and equipment under
operating leases. Total rental expense for the years ended December 31, 2000,
1999 and 1998 and noncancellable lease commitments at December 31, 2000 were not
significant.
Cash of approximately $28,480,000 and $29,171,000 at December 31, 2000 and
1999, respectively, was maintained to satisfy regulatory reserve requirements.
The Company's lead bank subsidiary has invested in several lease financing
transactions. Two of the lease financing transactions have been examined by the
Internal Revenue Service ("IRS"). In both transactions, a subsidiary of the lead
bank is the owner of a ninety-nine percent (99%) limited partnership interest.
The IRS has issued a Notice of Proposed Adjustments to Affected Items of a
partnership for each of the transactions and the affected partnership has
submitted a Protest contesting the adjustments. No reliable prediction can be
made at this time as to the likely outcome of the IRS proceedings regarding the
lease transactions; however, if the IRS proceedings are decided adversely to the
partnerships, all or a portion of the $12 million in tax benefits previously
recognized by the Company in connection with these lease financing transactions
would be in question. Management has estimated the Company's exposure in
connection with these transactions and has reserved the estimated amount.
Management intends to continue to evaluate the merits of this matter and make
appropriate revisions if warranted.
(15) TRANSACTIONS WITH RELATED PARTIES
In the ordinary course of business, the Corporation and its subsidiaries
make loans to directors and executive officers of the Corporation, including
their affiliates, families and companies in which they are principal owners. In
the opinion of management, these loans are made on substantially the same terms,
including interest rates and collateral, as those prevailing at the time for
comparable transactions with other persons and do not involve more than normal
risk of collectibility or present other unfavorable features. The aggregate
amounts receivable from such related parties amounted to approximately
$37,959,000 and $42,115,000 at December 31, 2000 and 1999, respectively. During
2000, $10,053,000 of new loans were made and repayments totaled $14,209,000.
31
INTERNATIONAL BANCSHARES CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(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, 2000, the following financial instruments, whose contract amounts
represent credit risks, were outstanding:
Commitments to extend credit................................ $610,923,000
Credit card lines........................................... 39,299,000
Letters of credit........................................... 50,878,000
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,
Calhoun, and Harris counties in Southeast Texas. Although the loan portfolio is
diversified, a substantial portion of its debtors' ability to honor their
contracts is dependent upon the economic conditions in these areas, especially
in the real estate and commercial business sectors.
(17) DIVIDEND RESTRICTIONS AND CAPITAL REQUIREMENTS
Bank regulatory agencies limit the amount of dividends which the bank
subsidiaries can pay the Corporation, through IBC Subsidiary Corporation,
without obtaining prior approval from such agencies. At December 31, 2000, the
aggregate amount legally available to be distributed to the Company from bank
subsidiaries as dividends was approximately $68,119,000, assuming that each
subsidiary bank continues to be classified as "well capitalized" pursuant to the
applicable regulations. The restricted capital of the bank subsidiaries was
approximately $335,481,000. The undivided profits of the bank subsidiaries was
$187,211,000. 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 Company historically has
not allowed any subsidiary bank to pay dividends in such a manner as to impair
its capital adequacy.
32
INTERNATIONAL BANCSHARES CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(17) DIVIDEND RESTRICTIONS AND CAPITAL REQUIREMENTS (CONTINUED)
The Company and the bank subsidiaries are subject to various regulatory
capital requirements administered by the federal banking agencies. Failure to
meet minimum capital requirements can initiate certain mandatory and possibly
additional discretionary actions by regulators that, if undertaken, could have a
direct material effect on the Company's financial statements. Under capital
adequacy guidelines and the regulatory framework for prompt corrective action,
the Company must meet specific capital guidelines that involve quantitative
measures of the Company's assets, liabilities, and certain off-balance sheet
items as calculated under regulatory accounting practices. The Company's capital
amounts and classification are also subject to qualitative judgments by the
regulators about components, risk weightings, and other factors.
Quantitative measures established by regulation to ensure capital adequacy
require the Company to maintain minimum amounts and ratios (set forth in the
table on the following page) of Total and Tier 1 capital to risk-weighted assets
and of Tier 1 capital to average assets. Management believes, as of
December 31, 2000, that the Company and each of the bank subsidiaries met all
capital adequacy requirements to which it is subject.
As of December 31, 2000, 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 Company 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
Company or any of the bank subsidiaries as well capitalized.
33
INTERNATIONAL BANCSHARES CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(17) DIVIDEND RESTRICTIONS AND CAPITAL REQUIREMENTS (CONTINUED)
The Company's and the bank subsidiaries' actual capital amounts and ratios
for 2000 are also presented in the following 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, 2000:
Total Capital (to Risk Weighted Assets):
Consolidated....................................... $412,080 14.29% $230,631 8.00% $288,288 10.00%
International Bank of Commerce, Laredo............. 310,379 12.51 198,414 8.00 248,018 10.00
International Bank of Commerce, Brownsville........ 44,738 19.32 18,522 8.00 23,153 10.00
International Bank of Commerce, Zapata............. 16,846 25.96 5,192 8.00 6,490 10.00
Commerce Bank...................................... 19,736 19.98 7,902 8.00 9,877 10.00
Tier 1 Capital (to Risk Weighted Assets):
Consolidated....................................... $381,260 13.23% $115,315 4.00% $172,973 6.00%
International Bank of Commerce, Laredo............. 283,885 11.45 99,207 4.00 148,811 6.00
International Bank of Commerce, Brownsville........ 42,333 18.28 9,261 4.00 13,892 6.00
International Bank of Commerce, Zapata............. 16,279 25.08 2,596 4.00 3,894 6.00
Commerce Bank...................................... 18,500 18.73 3,951 4.00 5,926 6.00
Tier 1 Capital (to Average Assets):
Consolidated....................................... $381,260 6.54% $233,028 4.00% $291,286 5.00%
International Bank of Commerce, Laredo............. 283,885 5.86 193,687 4.00 242,109 5.00
International Bank of Commerce, Brownsville........ 42,333 8.01 21,152 4.00 26,440 5.00
International Bank of Commerce, Zapata............. 16,279 7.05 9,235 4.00 11,544 5.00
Commerce Bank...................................... 18,500 7.49 9,878 4.00 12,347 5.00
34
INTERNATIONAL BANCSHARES CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(17) DIVIDEND RESTRICTIONS AND CAPITAL REQUIREMENTS (CONTINUED)
The Company's and the bank subsidiaries' actual capital amounts and ratios
for 1999 are also presented in the following 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, 1999:
Total Capital (to Risk Weighted Assets):
Consolidated....................................... $374,803 14.46% $207,412 8.00% $259,266 10.00%
International Bank of Commerce, Laredo............. 274,551 12.29 178,752 8.00 223,441 10.00
International Bank of Commerce, Brownsville........ 36,833 19.37 15,211 8.00 19,014 10.00
International Bank of Commerce, Zapata............. 16,835 27.20 4,951 8.00 6,189 10.00
Commerce Bank...................................... 19,705 21.47 7,343 8.00 9,178 10.00
Tier 1 Capital (to Risk Weighted Assets):
Consolidated....................................... $347,780 13.41% $103,706 4.00% $155,559 6.00%
International Bank of Commerce, Laredo............. 251,450 11.25 89,376 4.00 134,064 6.00
International Bank of Commerce, Brownsville........ 34,982 18.40 7,605 4.00 11,408 6.00
International Bank of Commerce, Zapata............. 16,315 26.36 2,476 4.00 3,713 6.00
Commerce Bank...................................... 18,556 20.22 3,671 4.00 5,507 6.00
Tier 1 Capital (to Average Assets):
Consolidated....................................... $347,780 6.58% $211,527 4.00% $264,409 5.00%
International Bank of Commerce, Laredo............. 251,450 5.70 176,321 4.00 220,401 5.00
International Bank of Commerce, Brownsville........ 34,982 8.18 17,110 4.00 21,387 5.00
International Bank of Commerce, Zapata............. 16,315 8.18 7,983 4.00 9,978 5.00
Commerce Bank...................................... 18,556 8.52 8,715 4.00 10,894 5.00
35
INTERNATIONAL BANCSHARES CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(18) FAIR VALUE OF FINANCIAL INSTRUMENTS
The fair value estimates, methods, and assumptions for the Company's
financial instruments at December 31, 2000 and 1999 are outlined below.
CASH, DUE FROM BANKS AND FEDERAL FUNDS SOLD
For these short-term instruments, the carrying amount is a reasonable
estimate of fair value.
TIME DEPOSITS WITH BANKS
As the contract interest rates are comparable to current market rates, the
carrying amount approximates fair market value.
INVESTMENT SECURITIES
For investment securities, which include U. S. Treasury securities,
obligations of other U. S. government agencies, obligations of states and
political subdivisions and mortgage pass through and related securities, fair
values are based on quoted market prices or dealer quotes. Fair values are based
on the value of one unit without regard to any premium or discount that may
result from concentrations of ownership of a financial instrument, possible tax
ramifications, or estimated transaction costs. See disclosures of fair value of
investment securities in Note 3.
LOANS
Fair values are estimated for portfolios of loans with similar financial
characteristics. Loans are segregated by type such as commercial, real estate
and consumer loans as outlined by regulatory reporting guidelines. Each category
is segmented into fixed and variable interest rate terms and by performing and
non-performing categories.
For variable rate performing loans, the carrying amount approximates the
fair value. For fixed rate performing loans, except residential mortgage loans,
the fair value is calculated by discounting scheduled cash flows through the
estimated maturity using estimated market discount rates that reflect the credit
and interest rate risk inherent in the loan. For performing residential mortgage
loans, fair value is estimated by discounting contractual cash flows adjusted
for prepayment estimates using discount rates based on secondary market sources
or the primary origination market. At December 31, 2000 and 1999, the carrying
amount of fixed rate performing loans was $789,028,000 and $677,616,000
respectively, and the estimated fair value was $788,619,000 and $673,973,000,
respectively.
Fair value for significant non-performing loans is based on recent external
appraisals. If appraisals are not available, estimated cash flows are discounted
using a rate commensurate with the risk associated with the estimated cash
flows. Assumptions regarding credit risk, cash flows and discount rates are
judgmentally determined using available market and specific borrower
information. As of December 31, 2000 and 1999, the net carrying amount of
non-performing loans was a reasonable estimate of the fair value.
36
INTERNATIONAL BANCSHARES CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(18) FAIR VALUE OF FINANCIAL INSTRUMENTS (CONTINUED)
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,
2000 and 1999. The fair value of time deposits is based on the discounted value
of contractual cash flows. The discount rate is based on currently offered
rates. At December 31, 2000 and 1999, the carrying amount of time deposits was
$2,257,023,000 and $2,099,388,000, respectively, and the estimated fair value
was $2,259,960,000 and $2,109,599,000, respectively.
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, 2000 and 1999.
COMMITMENTS TO EXTEND CREDIT AND LETTERS OF CREDIT
Commitments to extend credit and fund letters of credit are principally at
current interest rates and therefore the carrying amount approximates fair
value.
LIMITATIONS
Fair value estimates are made at a point in time, based on relevant market
information and information about the financial instrument. These estimates do
not reflect any premium or discount that could result from offering for sale at
one time the Company's entire holdings of a particular financial instrument.
Because no market exists for a significant portion of the Company's financial
instruments, fair value estimates are based on judgments regarding future
expected loss experience, current economic conditions, risk characteristics of
various financial instruments and other factors. These estimates are subjective
in nature and involve uncertainties and matters of significant judgment and
therefore cannot be determined with precision. Changes in assumptions could
significantly affect the estimates.
Fair value estimates are based on existing on-and off-balance sheet
financial instruments without attempting to estimate the value of anticipated
future business and the value of assets and liabilities that are not considered
financial instruments. Other significant assets and liabilities that are not
considered financial assets or liabilities include the bank premises and
equipment and core deposit value. In addition, the tax ramifications related to
the effect of fair value estimates have not been considered in the above
estimates.
37
INTERNATIONAL BANCSHARES CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(19) INTERNATIONAL BANCSHARES CORPORATION (PARENT COMPANY ONLY) FINANCIAL
INFORMATION
STATEMENTS OF CONDITION
(PARENT COMPANY ONLY)
DECEMBER 31, 2000 AND 1999
2000 1999
---------- ----------
(DOLLARS IN THOUSANDS)
ASSETS
Cash........................................................ $ 733 $ 227
Other investments........................................... 5,788 8,390
Notes receivable............................................ 35,381 42,374
Investment in subsidiaries.................................. 369,217 292,284
Other assets................................................ 6,270 10,196
-------- --------
Total assets.......................................... $417,389 $353,471
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
Liabilities:
Other liabilities......................................... 497 35
-------- --------
Total liabilities..................................... 497 35
-------- --------
Shareholders' equity:
Common stock.............................................. 26,481 21,092
Surplus................................................... 25,933 24,050
Retained earnings......................................... 434,796 385,942
Accumulated other comprehensive loss...................... (19,163) (36,912)
-------- --------
468,047 394,172
Less cost of shares in treasury........................... (51,155) (40,736)
-------- --------
Total shareholders' equity............................ 416,892 353,436
-------- --------
Total liabilities and shareholders' equity............ $417,389 $353,471
======== ========
38
INTERNATIONAL BANCSHARES CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(19) INTERNATIONAL BANCSHARES CORPORATION (PARENT COMPANY ONLY) FINANCIAL
INFORMATION (CONTINUED)
STATEMENTS OF INCOME
(PARENT COMPANY ONLY)
YEARS ENDED DECEMBER 31, 2000, 1999 AND 1998
2000 1999 1998
-------- -------- --------
(DOLLARS IN THOUSANDS)
Income:
Dividends from subsidiaries............................... $22,000 $30,500 $ 3,455
Interest income on notes receivable....................... 3,771 4,463 5,202
Interest income on investments............................ 399 506 745
Other interest income..................................... 321 343 289
Gain on sale of other securities.......................... 386 -- --
Other..................................................... 904 1,316 (1,377)
------- ------- -------
Total income.......................................... 27,781 37,128 8,314
------- ------- -------
Expenses:
Other..................................................... 476 382 695
------- ------- -------
Total expenses........................................ 476 382 695
------- ------- -------
Income before federal income taxes and equity in
undistributed net income of subsidiaries............ 27,305 36,746 7,619
Federal income tax expense.................................. 663 873 (277)
------- ------- -------
Income before equity in undistributed net income of
subsidiaries........................................ 26,642 35,873 7,896
Equity in undistributed net income of subsidiaries.......... 48,532 30,375 45,829
------- ------- -------
Net income............................................ $75,174 $66,248 $53,725
======= ======= =======
39
INTERNATIONAL BANCSHARES CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(19) INTERNATIONAL BANCSHARES CORPORATION (PARENT COMPANY ONLY) FINANCIAL
INFORMATION (CONTINUED)
STATEMENTS OF CASH FLOWS
(PARENT COMPANY ONLY)
YEARS ENDED DECEMBER 31, 2000, 1999 AND 1998
2000 1999 1998
-------- -------- --------
(DOLLARS IN THOUSANDS)
Operating activities:
Net income................................................ $ 75,174 $ 66,248 $ 53,725
Adjustments to reconcile net income to net cash provided
by operating activities:
Gain on sale of other investments..................... (386) -- --
Increase (decrease) in other liabilities.............. 462 (678) 482
Equity in undistributed net income of subsidiaries.... (48,532) (30,375) (45,829)
-------- -------- --------
Net cash provided by operating activities............. 26,718 35,195 8,378
-------- -------- --------
Investing activities:
Contributions to subsidiaries............................. (10,494) (10,965) (11,648)
Purchase of repurchase agreement with banks............... -- (2,500) (3,550)
Proceeds from repurchase agreement with banks............. -- 4,100 9,450
Proceeds from sales of available for sale securities...... 1,404 -- --
Purchase of available for sale other securities........... -- -- (10,036)
Principal collected on mortgage-backed securities......... 1,426 2,087 1,339
Net decrease in notes receivable.......................... 6,993 7,551 7,284
Decrease in other assets.................................. 3,926 2,048 11,149
-------- -------- --------
Net cash provided in investing activities................. 3,255 2,321 3,988
-------- -------- --------
Financing activities:
Proceeds from stock transactions.......................... 1,992 1,898 2,765
Payments of cash dividends................................ (21,016) (17,102) (11,297)
Payments of cash dividends in lieu of fractional shares... (24) (26) (41)
Purchase of treasury stock................................ (10,419) (22,156) (4,046)
-------- -------- --------
Net cash used in financing activities..................... (29,467) (37,386) (12,619)
-------- -------- --------
Increase (decrease) in cash and cash equivalents.......... 506 130 (253)
Cash at beginning of year................................... 227 97 350
-------- -------- --------
Cash at end of year......................................... $ 733 $ 227 $ 97
======== ======== ========
40
INTERNATIONAL BANCSHARES CORPORATION AND SUBSIDIARIES
CONDENSED QUARTERLY INCOME STATEMENTS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
FOURTH THIRD SECOND FIRST
QUARTER QUARTER QUARTER QUARTER
-------- -------- -------- --------
2000
Interest income.................................... $111,167 $108,115 $104,993 $97,352
Interest expense................................... 69,108 66,106 60,546 55,996
-------- -------- -------- -------
Net interest income................................ 42,059 42,009 44,447 41,356
Provision for possible loan losses................. 1,734 1,756 1,758 1,576
Non-interest income................................ 13,760 15,634 14,888 13,219
Non-interest expense............................... 31,455 28,655 26,730 25,117
-------- -------- -------- -------
Income before income taxes......................... 22,630 27,232 30,847 27,882
Income taxes....................................... 6,463 8,492 9,760 8,702
-------- -------- -------- -------
Net income......................................... $ 16,167 $ 18,740 $ 21,087 $19,180
======== ======== ======== =======
Per common share:
Basic............................................ $ .76 $ .88 $ .98 $ .89
Diluted.......................................... $ .75 $ .87 $ .97 $ .87
1999
Interest income.................................... $ 92,459 $ 87,680 $ 79,423 $81,174
Interest expense................................... 53,013 47,472 40,984 43,736
-------- -------- -------- -------
Net interest income................................ 39,446 40,208 38,439 37,438
Provision for possible loan losses................. 1,229 636 2,327 2,187
Non-interest income................................ 14,685 19,703 13,877 12,701
Non-interest expense............................... 28,232 28,408 26,325 24,018
Income before income taxes......................... 24,670 30,867 23,664 23,934
Income taxes....................................... 8,245 12,982 7,621 8,039
-------- -------- -------- -------
Net income......................................... $ 16,425 $ 17,885 $ 16,043 $15,895
======== ======== ======== =======
Per common share:
Basic............................................ $ .76 $ .82 $ .73 $ .72
Diluted.......................................... $ .75 $ .81 $ .71 $ .71
41
INTERNATIONAL BANCSHARES CORPORATION
OFFICERS AND DIRECTORS
OFFICERS
DENNIS E. NIXON
Chairman of the Board and President
R. DAVID GUERRA
Vice President
EDUARDO J. FARIAS
Vice President
RICHARD CAPPS
Vice President
IMELDA NAVARRO
Treasurer
WILLIAM CUELLAR
Auditor
LUISA D. BENAVIDES
Secretary
MARISA V. SANTOS
Assistant Secretary
DIRECTORS
DENNIS E. NIXON
President
International Bank of Commerce
R. DAVID GUERRA
President
International Bank of Commerce
Branch in McAllen, Texas
LEONARDO SALINAS
Investments
LESTER AVIGAEL
Retail Merchant
Chairman of the Board
International Bank of Commerce
IRVING GREENBLUM
Retail Merchant
RICHARD E. HAYNES
Attorney at Law
Real Estate Investments
SIOMA NEIMAN
An International Entrepreneur
ANTONIO R. SANCHEZ, JR.
Chairman of the Board
Sanchez Oil & Gas Corporation;
Investments
PEGGY J. NEWMAN
Investments
DANIEL B. HASTINGS, JR.
Licensed U.S. Custom Broker
President
Daniel B. Hastings, Inc.
42