INTERNATIONAL BANCSHARES CORPORATION AND SUBSIDIARIES
(Consolidated)
SELECTED FINANCIAL DATA
AT OR FOR THE YEARS ENDED DECEMBER 31,_____
2001 2000 1999 1998 1997
(Dollars in Thousands, Except Per Share Data)
BALANCE SHEET
Assets $6,381,401 $5,860,714 $5,421,804 $4,987,877 $4,517,846
Net loans 2,608,467 2,212,467 1,876,754 1,589,788 1,420,180
Deposits 4,332,834 3,744,598 3,527,212 3,369,637 3,175,560
Other borrowed funds 777,296 1,432,500 1,380,000 1,074,000 490,000
Shareholders' equity 497,028 416,892 353,436 370,283 341,244
INCOME STATEMENT
Interest income $394,419 $421,627 $340,736 $326,174 $275,732
Interest expense 200,808 251,756 185,205 181,909 145,371
Net interest income 193,611 169,871 155,531 144,265 130,361
Provision for possible
loan losses 8,631 6,824 6,379 8,571 7,740
Non-interest income 75,524 57,501 60,966 41,698 36,776
Non-interest expense 135,441 111,957 106,983 99,047 85,745
Income before income
taxes 125,063 108,591 103,135 78,345 73,652
Income taxes 41,721 33,417 36,887 24,620 24,771
Net income $ 83,342 $ 75,174 $ 66,248 $ 53,725 $ 48,881
Per common share:
Basic $ 3.15 $ 2.81 $ 2.43 $ 1.95 $ 1.82
Diluted $ 3.09 $ 2.77 $ 2.39 $ 1.90 $ 1.76
Cash dividends per
share $ .90 $ 1.10 $ 1.10 $ .90 $ .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 2001
and 2000.
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 and subsidiaries (the "Company") on a consolidated basis for the three year
period ended December 31, 2001. 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, 2001, and the Selected Financial Data and Consolidated Financial
Statements included elsewhere herein.
Special Cautionary Notice Regarding 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 a 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 interest
rates and market prices, which could reduce the Company’s net interest margins, asset
valuations and expense expectations, (II) changes in the capital markets utilized by
the Company and its subsidiaries, including changes in the interest rate environment
that may reduce margins, (III) changes in state and/or federal laws and regulations to
which the Company and its subsidiaries, as well as their customers, competitors and
potential competitors, are subject, including, without limitation, banking, tax,
securities, insurance and employment laws and regulations, (IV) the loss of senior
management or operating personnel, (V) increased competition from both within and
without the banking industry, (VI) changes in local, national and international
economic business conditions which adversely affect the Company’s customers and their
ability to transact profitable business with the Company, including the ability of its
borrowers to repay their loans according to their terms or a change in the value of the
related collateral, (VII) the timing, impact and other uncertainties of the Company’s
potential future acquisitions including the Company’s ability to identify suitable
potential future acquisition candidates, the success or failure in the integration of
their operations, and the Company’s ability to maintain its current branch network and
to enter new markets successfully and capitalize on growth opportunities, (VIII)
changes in the Company’s ability to pay dividends on its Common Stock, (IX) the effects
of the litigation pending with the Internal Revenue Service regarding the Company’s
lease financing transactions, and (X) changes in economic and business conditions which
would adversely affect the value of the Company’s investment in the Aircraft Finance
Trust (“AFT”). 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.
2
Results of Operations
Overview
Net income for 2001 was $83,342,000 or $3.15 per share - basic ($3.09 per share -
diluted) compared with $75,174,000 or $2.81 per share - basic ($2.77 per share -
diluted) in 2000 and $66,248,000 or $2.43 per share - basic ($2.39 per share - diluted)
in 1999.
Net income for the fourth quarter 2001 was negatively affected by a $3.6 million
impairment charge recognized by a company in which the Company holds an investment
accounted for under the equity method of accounting. During the year-ended December
31, 1999, IBC Aircraft Services, Inc., a wholly owned subsidiary of the Company’s lead
bank, International Bank of Commerce, Laredo, Texas, acquired for approximately $15
million, a 20% ownership interest in the Aircraft Finance Trust (“AFT”), a special
purpose business trust formed to acquire, finance, refinance, own, lease, sublease,
sell and maintain aircraft. During 1999, AFT issued approximately $1.209 billion in
aggregate principal amount of notes in five debt classes. AFT used the proceeds from
the debt offering to initially purchase 36 leased aircraft located in at least thirteen
different countries from General Electric Capital Corporation and certain of its
affiliates. The expected final payment date of the AFT notes is August 15, 2016 and
the final maturity date of the AFT notes is May 15, 2024. GE Capital Aviation Services
Limited acts as servicer of the AFT aircraft portfolio.
Management believes its investment in AFT has been impaired by the events of
September 11 and the impact on the airline industry including declines in air travel
and reduced demand for commercial aircraft. During the third quarter of 2001, AFT
recorded an impairment charge of $18,158,000 related to two airplanes. Accordingly,
the Company recognized an impairment charge to income and reduced the carrying amount
of the investment by $3.6 million in the fourth quarter of 2001. The Company’s
carrying amount in AFT was $8.9 million at December 31, 2001. AFT may suffer further
significant impairment charges as a result of continuing weakness in the airline
industry, which would result in the Company recognizing further reductions in the
carrying amount of the Company’s AFT investment.
On March 13, 2002, Albertson’s, Inc. announced its intention to exit
substantially all of the Company’s markets. The Company began its relationship with
Albertson’s in 1995 and has added over 46 Albertson’s branches since that time. Ten
Albertson’s supermarkets and the related in-store branches of the Company located in
Brownsville, Corpus Christi, Laredo, Endinburg, San Juan, Pharr, Mission, Weslaco and
Harlingen have already been closed or will be closed in the near future. Albertson’s
has advised the Company that the remaining Albertson’s supermarkets in the Houston and
San Antonio areas will remain open during the immediate future while Albertson’s
markets them to potential buyers. As soon as the potential buyers of the Houston and
San Antonio Albertson’s stores are identified, the Company will assess the possibility
of the Company’s continued presence within the stores. After the Company determines if
a continued presence within the former Albertson’s stores is suitable with the
potential buyers, the Company will be better able to formulate a plan on its in-store
and traditional branch network. In either case, the Company plans to aggressively
expand its branch banking operations to service its existing and future deposit base.
The Company currently has 27 Albertson’s in-store branches in the Houston and San
Antonio markets and has an additional seven in-store branches in five other markets.
The Company has an extensive traditional branch network that the in-store branch
deposit base can utilize. The Company is unable to predict the ultimate impact of the
branch closings on its consolidated financial condition or results of operations;
however, the Company does not expect a significant loss of its deposit base or a
significant impact from the branch closings on its consolidated financial condition or
results of operations.
3
Total assets at December 31, 2001 grew 9% to $6,381,401,000 from $5,860,714,000
at December 31, 2000, while net loans increased 18% to $2,608,467,000 at December 31,
2001 from $2,212,467,000 at December 31, 2000. Deposits at December 31, 2001 were
$4,332,834,000, an increase of 16% over the $3,744,598,000 at December 31, 2000, which
represented an increase of 23% over the $3,527,212,000 at December 31, 1999. 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. The increase in assets and deposits during 2001
reflects internal growth through the Company’s branch system and the acquisition of
National Bancshares Corporation of Texas (“NBC”) in the fourth quarter of 2001. The
aggregate amount of certificates of indebtedness with the Federal Home Loan Bank of
Dallas (“FHLB”) decreased to $709,296,000 at December 31, 2001 from the $1,432,500,000
at December 31, 2000. Long term debt of $68,000,000 in the form of trust preferred
securities was issued in 2001. Trust preferred securities, certificates of
indebtedness and the deposits are used to fund the earning asset base of the Company.
Net Interest Income
Net interest income in 2001 increased by $23,740,000, or 14%, over that in 2000,
while net interest income in 2000 increased by $14,340,000, or 9% over that in 1999.
The net yield on average interest earning assets increased by .3% from 3.30% in 2000 to
3.56% in 2001. The net yield on average interest earning assets decreased by .08% in
2000 to 3.30% from 3.38% in 1999. Average interest earning assets increased 6% from
$5,147,489,000 in 2000 to $5,443,962,000 in 2001 and increased 12% from $4,600,812,000
in 1999 to $5,147,589,000 in 2000 which contributed to the growth in net interest
income for 2001 and 2000, respectively. The yield on average interest earning assets
decreased .94% from 8.19% in 2000 to 7.25% in 2001 and the rates paid on average
interest bearing liabilities decreased 1.2% from 5.33% in 2000 to 4.13% in 2001. The
yield on average interest earning assets increased .78% from 7.41% in 1999 to 8.19% in
2000 and the rates paid on average interest bearing liabilities increased .89% from
4.44% in 1999 to 5.33% in 2000.
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 re-price 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 re-price 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.
4
Non-Interest Income
Non-interest income increased 31% in 2001 to $75,524,000 from $57,501,000 in
2000, which represented a decrease of 6% from $60,966,000 in 1999. The 2001 increase
in non-interest income occurred due to increased service charges and fees on both
deposit accounts and other services provided. The 2000 decrease in non-interest income
was 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 in 2001
and 2000 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 $1,010,000 were recorded in 2001 compared to losses of
$4,248,000 for 2000. These losses occurred due to a bond program initiated by
management in 2000 and completed in 2001 to reposition a portion of the Company’s bond
portfolio and take advantage of higher bond yields.
Non-Interest Expense
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 Federal Deposit Insurance Corporation (“FDIC”)
insurance. Non-interest expense increased 21% in 2001 to $135,441,000 from
$111,957,000 in 2000 which increased 5% from $106,489,000 in 1999. The increases in
non-interest expense for the three years ended 2001 increased due to the expanded
operations of the Company’s bank subsidiaries.
The efficiency ratio, a measure of non-interest expense to net interest income
plus non-interest income was 50.32% for the year ended December 31, 2001, compared to
49.24% for the year ended December 31, 2000. The Company's efficiency ratio has been
under 53% for each of the last five years, which the Company believes is better than
national peer group ratios.
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.
Financial Condition
Loans and Allowance for Possible Loan Loss
Most of the Company's lending activities involve commercial (domestic and
foreign), consumer and real estate mortgage financing. In 2001, the Company’s efforts
to increase its loan volume resulted in an increase of 13.7% in average domestic loans
from $1,856,462,000 for 2000 to $2,111,103,000 in 2001 and a increase of .26% in
average foreign loans from $247,130,000 for 2000 to $247,784,000 in 2001 for an
increase of 12.1% in total average loans from $2,103,592,000 for 2000 to $2,358,887,000
5
in 2001. The average yield for these loans decreased 1.8% for domestic loans and
decreased by .2% for foreign loans in 2001 as compared to 2000. The Company
experienced an increase of 21% in average domestic loans from 1999 to 2000 and a 29%
increase in average foreign loans from 1999 to 2000. The yield for these loans
increased .82% for domestic loans and increased by 1.2% for foreign loans in 2000 as
compared to 1999.
Loan commitments, consisting of unused commitments to lend, letters of credit,
credit card lines and other approved loans which have not been funded, were
$742,081,000 at December 31, 2001. See Note 17 to the Consolidated Financial
Statements.
The allowance for possible loan losses increased 30% from $30,812,000 at December
31, 2000 to $40,065,000 at December 31, 2001 and increased 15% from $26,770,000 at
December 31, 1999 to $30,812,000 at December 31, 2000. The provision for possible loan
losses charged to expense increased 26% from $6,824,000 in 2000 to $ 8,631,000 in 2001
and increased 7% from $6,379,000 in 1999 to $6,824,000 in 2000. The increase in the
allowance for possible loan losses was largely due to the increase in the size of the
loan portfolio and the addition of $3,995,000 in existing loan loss reserve as part of
the loan portfolio acquired in the NBC acquisition. The allowance for possible loan
losses was 1.51% of total loans, net of unearned income, at December 31, 2001 compared
to 1.37% at 2000 and 1.41% at 1999. Non-performing assets as a percentage of total
loans and total assets were .43% and .18%, respectively, at December 31, 2001, and .63%
and .24% at December 31, 2000, respectively. Loans accounted for on a non-accrual
basis increased 32% from $6,273,000 at December 31, 2000 to $8,252,000 at December 31,
2001. 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 increased 186% from $1,854,000 at December 31, 2000 to $5,308,000 at
December 31, 2001. The increases in the non-performing loans and foreclosed assets were
primarily due to deteriorating conditions in the Company’s loan portfolio as economic
conditions have deteriorated. In 2000, non-accruals decreased 18% from $7,665,000 at
December 31, 1999 to $6,273,000 at December 31, 2000 and foreclosed assets decreased
19% from $2,285,000 at December 31, 1999 to $1,854,000 at December 31, 2000.
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 identified 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 economic conditions in the market area served by the bank subsidiaries.
Management of each of the bank subsidiaries, along with management of the Company,
continually review the allowances to determine whether additional provisions should be
made after considering the preceding factors.
The bank subsidiaries charge off that portion of any loan which management
considers to represent a loss as well as that portion of any other loan which is
classified as a "loss" by bank examiners. Commercial, 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
6
such borrowers carefully, there is no precise method of predicting loan losses. The
determination that a loan is likely to be un-collectible 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, 2001 was adequate to absorb probable
losses from loans in the portfolio at that date.
Investment Securities
The average balances of taxable investment securities increased .5% from
$2,932,778,000 for 2000 to $2,921,396,000 for 2001 and increased 6.70% from
$2,762,895,000 for 1999 to $2,932,778,000 for 2000. The changes reflected during 2001
and 2000 were primarily from the results of continued increases in deposits, repurchase
agreements and borrowings, which provide the Company with available funds for
investments.
Mexico
On December 31, 2001, the Company had $6,381,401,000 of consolidated assets of
which approximately $273,038,000 or 4% were related to loans outstanding to borrowers
domiciled in Mexico. The loan policies of the Company’s bank subsidiaries generally
require that loans to borrowers domiciled in Mexico be primarily secured by assets
located in the United States or have credit enhancements, in the form of guarantees,
from significant United States corporations. The composition of such loans and the
related amounts of allocated allowance for possible loan losses as of December 31, 2001
is presented below.
Related
Amount of Allowance for
Loans Possible Losses
(Dollars in Thousands)
Secured by certificates of deposit in
United States banks $ 133,225 $ 64
Secured by United States real estate 34,897 327
Secured by other United States collateral
(securities, gold, silver, etc.) 10,864 95
Foreign real estate guaranteed under lease
obligations primarily by U.S. companies 14,802 157
Direct unsecured Mexican sovereign debt
(principally former FICORCA debt) 832 -
Other
(principally Mexico real estate) 78,418 859
$ 273,038 $ 1,502
The transactions for the year ended December 31, 2001 in that portion of the
allowance for possible loan losses related to Mexican debt were as follows:
(Dollars in Thousands)
Balance at January 1, 2001 $ 1,831
Charge-offs (16)
Recoveries 9
Net charge-offs 7
Provision charged to operations (322)
Balance at December 31, 2001 $ 1,502
7
Liquidity and Capital Resources
Generally
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 40%, 42% and 41% of the
Company’s bank subsidiaries’ total deposits as of December 31, 2001, 2000 and 1999,
respectively. Other important funding sources for the Company's bank subsidiaries
during 2001 and 2000 have been wholesale liabilities with FHLB 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 re-pricings of assets and liabilities. The gap report calculates the
difference between the amounts of assets and liabilities re-pricing 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 re-prices 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 re-price 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 re-pricings 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 16
of the Company’s Form 10-K for the table that summarizes interest rate sensitive assets
and liabilities by their re-pricing dates at December 31, 2001.
8
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, the fundamental, but often unstated, assumption of
the gap approach that every balance sheet item that can re-price will do so to the full
extent of any movement in market interest rates is taken into consideration in income
simulation analysis.
Accordingly, income simulation analysis captures not only the potential of assets
and liabilities to mature or re-price 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, 2001, 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 5
percent of projected 2002 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 effect 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 18 to the Consolidated
Financial Statements. At December 31, 2001, the aggregate amount legally available to
be distributed to the Company from bank subsidiaries as dividends was approximately
$81,000,000, assuming that each bank subsidiary continues to be classified as “well
capitalized” under the applicable regulations. The restricted capital (capital,
surplus and certified surplus) of the bank subsidiaries was approximately $438,694,000
as of December 31, 2001. The undivided profits of the bank subsidiaries were
approximately $179,533,000 as of December 31, 2001.
As of December 31, 2001, the Company has outstanding $777,296,000 in short-term
borrowed funds and long-term debt. 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, 2001, shareholders' equity was
$497,028,000 compared to $416,892,000 at December 31, 2000, an increase of $80,136,000,
or 19%. 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 and changes in the fair value of derivative
instruments of an equity method investee, net of tax. The accumulated other
comprehensive income is not included in the calculation of regulatory capital ratios.
9
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 plus trust preferred securities issued and outstanding less goodwill and certain
other intangibles divided by average quarterly assets) was 6.67% at December 31, 2001
and 6.54% at December 31, 2000. The core deposit intangibles and goodwill of
$96,748,000 as of December 31, 2001, recorded in connection with financial institution
acquisitions of the Company after February 1992, 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 Tier 1 capital of at least 4.0% of risk-weighted assets and total
capital of 8.0% of risk-weighted assets. Tier 1 capital consists principally of
shareholders' equity plus trust preferred securities issued and outstanding less
goodwill and certain other intangibles, while total capital consists of Tier 1 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 13.83%
and 13.23% and risk weighted total capital ratios of 15.06% and 14.29% as of December
31, 2001 and 2000, respectively, which are well above the minimum regulatory
requirements and exceed the well capitalized ratios (see note 18 to notes to
Consolidated Financial Statements).
During the past few years the Company has expanded its banking facilities. Among
the activities and commitments the Company funded during 2001 and 2000 were certain
capital expenditures relating to the modernization and improvement of several existing
bank facilities and the expansion of the bank branch network.
Trust Preferred Securities
On March 16, 2001, the Company formed International Bancshares Capital Trust I
(“Trust I”), a statutory business trust formed under the laws of the State of Delaware,
for the purpose of issuing trust preferred securities. On March 28, 2001, Trust I
issued $10,000,000 of 10.18% Capital Securities and $400,000 of 10.18% Common
Securities, and invested the proceeds thereof in an equivalent amount of the 10.18%
Junior Subordinated Deferrable Interest Debentures (the “March Debentures”) issued by
the Company. The March Debentures accrue interest at a fixed rate of 10.18%, payable
semi-annually beginning on June 8, 2001. The March Debentures will mature June 8,
2031; however, the March Debentures may be redeemed at specified prepayment prices (a)
in whole or in part on or after June 8, 2011, or (b) in whole within 90 days upon the
occurrence prior to June 8, 2011, and continuance of any one of certain legal,
regulatory or tax events specified in the Indenture.
On June 28, 2001, the Company formed International Bancshares Capital Trust II
(“Trust II”), a statutory business trust formed under the laws of the State of
Delaware, for the purpose of issuing trust preferred securities. On July 16, 2001,
Trust II issued $25,000,000 of Capital Securities and $774,000 of Common Securities,
and invested the proceeds thereof in an equivalent amount of the Junior Subordinated
Debt Security (the “July Debentures”) issued by the Company. The July Debentures
accrue interest at a floating rate of 3.75% over the London Interbank Offer Rate
(“LIBOR”) as determined in accordance with the Indenture, payable semi-annually
beginning January 25, 2002. The July Debentures will mature July 25, 2031; however,
the July Debentures may be redeemed at specified prepayment prices (a) in whole or in
part on any interest payment date on or after July 25, 2006, or (b) in whole within 90
days upon the occurrence of any one of certain legal, regulatory, or tax events
specified in the Indenture.
10
On November 9, 2001, the Company formed International Bancshares Capital Trust
III (“Trust III”), a statutory business trust formed under the laws of the State of
Delaware, for the purpose of issuing trust preferred securities. On November 28, 2001,
Trust III issued $33,000,000 of Capital Securities and $1,021,000 of Common Securities,
and invested the proceeds thereof in an equivalent amount of the Junior Subordinated
Debt Security (the “November Debentures”) issued by the Company. The November
Debentures accrue interest at a floating rate of 3.75% over the LIBOR as determined in
accordance with the Indenture, payable semi-annually beginning June 8, 2002. The
November Debentures will mature December 8, 2031; however, the November Debentures may
be redeemed at specified prepayment prices (a) in whole or in part on any interest
payment date on or after December 8, 2006, or (b) in whole within 90 days upon the
occurrence of any one of certain legal, regulatory, or tax events specified in the
Indenture.
Each of the March, July, and November Debentures are subordinated and junior in
right of payment to all present and future senior indebtedness (as defined in the
Indenture) of the Company, and are pari passu with one another. The interest rate
payable on, and the payment terms of, the March, July, and November Debentures is the
same as the distribution rate and payment terms of the respective issues of Capital and
Common Securities issued by Trusts I, II, and III. The Company has fully and
unconditionally guaranteed the obligations of each of Trusts I, II, and III with
respect to the Capital and Common Securities. The Company has the right, unless an
Event of Default (as defined in the Indenture) has occurred and is continuing, to defer
payment of interest on the March, July, or November Debentures for up to ten
consecutive semi-annual periods. If interest payments on any of the Debentures are
deferred, distributions on both the Capital and Common Securities related to that
Debenture will also be deferred. The redemption prior to maturity of any of the March,
July, or November Debentures may require the prior approval of the Federal Reserve
and/or other regulatory bodies.
For financial reporting purposes, Trusts I, II, and III are treated as
subsidiaries of the Company and consolidated in the corporate financial statements.
Although the trust preferred securities issued by each of Trusts I, II, and III (i.e.
the Capital and Common Securities) are included as long-term debt and not as a
component of shareholder’s equity on the balance sheet, they are treated as capital for
regulatory purposes. Specifically, under applicable regulatory guidelines, the trust
preferred securities qualify as Tier 1 capital up to a maximum of 25% of Tier 1 capital
on an aggregate basis. Any amount that exceeds the 25% threshold would qualify as Tier
2 capital. Management of the Company believes that the treatment of the trust
preferred securities as Tier 1 capital, in addition to the ability to deduct the
expense of the related Debentures for federal income tax purposes, provided the Company
with a cost-effective method of raising capital.
On March 25, 2002, the Company formed International Bancshares Capital Trust IV,
a statutory business trust formed under the laws of the State of Delaware, for the
purpose of issuing trust preferred securities. The trust preferred securities have not
been and will not be registered under the Securities Act of 1933, as amended, and may
not be offered or sold in the United States absent registration or an applicable
exemption from such registration requirements.
Stock Repurchase Program
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,
December 21, 2000, July 24, 2001 and January 28, 2002. Under the expanded stock
repurchase program, the Company is authorized to repurchase up to $80,000,000 of its
common stock through December 2002. 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 25, 2002, a total of 1,662,252 shares had been
repurchased under this program at a cost of $67,440,000, which shares are now reflected
11
as 2,039,288 shares of treasury stock as adjusted for stock dividends. Stock
repurchases are reviewed 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 $100,973,000. 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
$100,973,000 cap will occur in the future. As of March 25, 2002, the Company has
approximately $88,413,000 invested in treasury shares, which amount has been
accumulated since the inception of the Company.
Contractual Obligations and Commercial Commitments
The following table presents contractual cash obligations of the Company (other
than deposit liabilities) as of December 31, 2001 (dollars in thousands):
Payments due by Period_________________________
Contractual Cash Obligations
Total
Securities sold under repurchase
Agreements
Federal Home Loan Bank borrowings
Trust Preferred Securities
$ 714,675
$ 709,296
$ 68,000
Less than
One Year
One to
Three Years
Four to
Five Years
After
Five Years
$ 414,675 $ -
708,000
- - - $ 68,000
$ -
1,206
$300,000
$ 90
-
Total Contractual Cash Obligations $1,491,971
$1,122,675
$ -
$1,206
$368,090
The following table presents contractual commercial commitments of the Company
(other than deposit liabilities) as of December 31, 2001(dollars in thousands):
Commercial Commitments
Total
Less than
One Year
One to
Three Years
Four to
Five Years
After
Five Years
Amount of Commitment Expiration Per Period_____________________
Financial & Performance
Standby Letters of Credit
Commercial Letters of Credit
Credit Card Lines
Other Commercial Commitments
$ 42,866
$ 51,206
$ 2,140
2,140
$ 33,058 33,058
$ 655,677
$ 8,174
$ 166 $
-
-
-
-
-
$ -
-
$
417,268 108,820 75,115 $ 54,474
Total Commercial Commitments
$ 742,081
$ 495,332 $ 116,994 $ 75,281 $ 54,474
Due to the nature of the Company’s commercial commitments, including unfunded
loans commitments and lines of credit, the amounts presented above do not necessarily
reflect the amounts the Company anticipates funding in the periods presented above.
Critical Accounting Policies
The Company considers its Allowance for Possible Loan Losses policy as a policy
critical to the sound operations of the Banks. The Company provides for loan losses
each period by an amount resulting from both (a) an estimate by management of loan
losses that occurred during the period and (b) the ongoing adjustment of prior
estimates of losses occurring in prior periods. The provision for possible loan losses
increases the allowance for possible loan losses which is netted against loans on the
consolidated balance sheet. As losses are confirmed, the loan is written down,
reducing the allowance for possible loan losses. See discussion regarding the
allowance for possible loan losses and provision for possible loan losses included in
the results of operations and “Provision and Allowance for Possible Loan Losses”
included in Notes 1 and 4 of the Notes to Consolidated Financial Statements for further
information regarding the Company’s provision and allowance for possible loan losses
policy.
12
Recent Accounting Standards Issued
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 directly engage in hedging activities and does not directly
hold any derivative instruments or embedded derivatives. However, the Company’s equity
method investee, Aircraft Finance Trust (“AFT”), uses derivative instruments to manage
the interest rate on the bonds that AFT has issued. The derivative instruments qualify
as cash flow hedges using SFAS 133 and as such, the Company’s proportionate share of
changes in fair value of the derivative instruments are included in comprehensive
income and accumulated other comprehensive income, net of tax. The Company adopted SFAS
No. 133 on January 1, 2001 and the adoption did not have a significant 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’s adoption of SFAS No. 140 did
not have an impact on its consolidated financial statements.
In June 2001, the Financial Accounting Standards Board issued SFAS No. 141
“Business Combinations”, and SFAS No. 142, “Goodwill and Other Intangible Assets.”
SFAS No. 141 requires that the purchase method of accounting be used for all business
combinations initiated after June 30, 2001 as well as all purchase method business
combinations completed after June 30, 2001. SFAS No. 141 also specifies criteria that
intangible assets acquired in a purchase method business combination must meet to be
recognized and reported apart from goodwill. SFAS No. 142 requires that goodwill and
intangible assets with indefinite useful lives no longer be amortized, but instead
tested for impairment at least annually in accordance with the provisions in SFAS No.
142. SFAS No. 142 requires that intangible assets with definite useful lives be
amortized over their respective estimated useful lives to their estimated residual
values, and reviewed for impairment in accordance with SFAS no 121, “Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assts to Be Disposed Of.” SFAS No
144, “Accounting for the Impairment or Disposal of Long-Lived Assets” supercedes SFAS
No. 121 and is effective for fiscal years beginning after December 15, 2001.
On July 1, 2001, the Company adopted the provisions of SFAS 141 and certain
provisions of SFAS 142 as required for goodwill and intangible assets resulting from
business combinations consummated after June 30, 2001. The Company acquired
approximately 71% of outstanding common shares of National Bancshares Corporation of
13
Texas on November 20, 2001 and the remaining 29% outstanding common shares on December
31, 2001. The Company recorded an identified intangible asset and goodwill of
$35,126,000 related to the acquisition. Under the provisions of SFAS No. 142, the
amount of goodwill acquired in the acquisition that was not amortized during 2001 was
not significant.
SFAS No. 141 requires upon adoption of SFAS No. 142, that the Company evaluate
its existing intangible assets and goodwill that were acquired in prior purchase
business combinations, and to make any necessary reclassifications in order to conform
with the new classification criteria in SFAS No. 141 for recognition apart from
goodwill. Upon adoption of SFAS No. 142, the Company is required to reassess the
useful lives and residual values of all intangible assets acquired in purchase business
combinations, and make any necessary amortization period adjustments by the end of the
first interim period after adoption. In addition, to the extent an intangible asset is
identified as having an indefinite useful life, the Company is required to test the
intangible asset for impairment in accordance with the provisions of SFAS No. 142
within the first interim period. Any impairment loss will be measured as of the date
of adoption and recognized as the cumulative effect of a change in accounting principle
in the first interim period.
In connection with the transitional goodwill impairment evaluation, SFAS No. 142
requires the Company to perform an assessment of whether there is an indication that
goodwill is impaired as of the date of adoption. To accomplish this, the Company must
identify its reporting units and determine the carrying value of each reporting unit by
assigning the assets and liabilities, including the existing goodwill and intangible
assets, to those reporting units as of the date of adoption. The Company will have up
to six months from the date of adoption to determine the fair value of each reporting
unit and compare it to the reporting unit’s carrying amount. To the extent a reporting
unit’s carrying amount exceeds its fair value, an indication exists that the reporting
unit’s goodwill may be impaired and the Company must perform the second step of the
transitional impairment test. In the second step, the Company must compare the implied
fair value of the reporting unit’s goodwill, determined by allocating the reporting
unit’s fair value to all of its assets (recognized and unrecognized) and liabilities in
a manner similar to a purchase allocation in accordance with SFAS NO. 141, to its
carrying amount, both of which would be measured as of the date of adoption. This
second step is required to be completed as soon as possible, but no later than the end
of the year of adoption. Any transitional impairment loss will be recognized as the
cumulative effect of a change in accounting principle in the Company’s consolidated
statements of income.
The Company adopted the remaining provisions of SFAS No. 142 as of January 1,
2002 and will no longer amortize goodwill relating to business combinations consummated
before July 1, 2001. As of the date of the adoption, the Company had unamortized
goodwill in the amount of $75,869,000 and unamortized identifiable intangible assets in
the amount of $21,436,000, all of which are subject to the transition provisions of
SFAS No. 141 and No. 142. Amortization expense related to goodwill that will no longer
be amortized was $4,189,000, $3,014,000 and $2,645,000, for the years ended December
31, 2001, 2000 and 1999, respectively. The Company is in the process of determining
the fair value of its reporting units to determine if there is an indication that
goodwill may be impaired. In addition, the Company has evaluated its existing
intangible assets and determined that no reclassifications were necessary to conform to
the new criteria in SFAS No. 141 for recognition apart from goodwill. The Company is
in the process of reassessing the useful lives and residual values of all intangible
assets acquired in purchase business combinations and will make any necessary
amortization period adjustments by the end of the first interim period after adoption.
In August 2001, the Financial Accounting Standards Board issued SFAS No. 144,
“Accounting for the Impairment or Disposal of Long-Lived Assets”, which addresses
financial accounting and reporting for the impairment or disposal of long-lived assets.
While SFAS No. 144 supercedes SFAS No. 121, “Accounting for the Impairment of Long-
Lived Assets and for Long-Lived Assets to be Disposed of,” it retains many of the
fundamental provisions of SFAS No. 121, establishes a single accounting model for long-
14
lived assets to be disposed of by sale, and resolves certain implementation issues not
previously addressed by SFAS No. 121. SFAS No. 144 also supercedes the accounting and
reporting provisions of Financial Accounting Standards Board Opinion No. 30, “Reporting
the Results of Operations – Reporting the Effects of a Disposal of a Segment of a
Business and Extraordinary, Unusual and Infrequently Occurring Events and
Transactions”, for the disposal of a segment of a business. However, it retains the
requirement in Opinion No. 30 to report separately discontinued operations and extends
the reporting to a component of an entity, rather than a segment of a business, that
either has been disposed of or is classified as held for sale. SFAS No. 144 is
effective for fiscal years beginning after December 15, 2001. The Company adopted SFAS
No. 144 on January 1, 2002. The adoption of SFAS No. 144 did not have an impact on the
Company’s consolidated financial statements.
Common Stock and Dividends
The Company had issued and outstanding 25,903,870 shares of $1.00 par value
Common Stock held by approximately 2,046 holders of record at March 25, 2002. The book
value of the stock, adjusted for stock dividends, at December 31, 2001 was $20.48 per
share compared with $16.78 per share at December 31, 2000.
On August 28, 1995, the Common Stock began to trade on the OTC Bulletin Board
under the trading symbol IBNC; however, trading in the Common Stock of the Company was
not extensive and such trades could not be characterized as amounting to an active
trading market. As of March 4, 1998, the Common Stock was listed on the NASDAQ
National Market under the trading symbol IBOC.
The following table sets forth the approximate high and low bid prices in the
Company's Common Stock, adjusted for stock dividends during 2000 and 2001, as quoted on
the NASDAQ National Market for each of the quarters in the two year period ended
December 31, 2001. 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 $43.54 per share at March 25,
2002.
High Low
2001: First quarter $ 39.75 $ 31.50
Second quarter 48.47 33.50
Third quarter 41.00 34.30
Fourth quarter 44.80 31.07
High Low
2000: First quarter $ 28.32 $ 23.52
Second quarter 31.20 24.00
Third quarter 27.95 24.00
Fourth quarter 28.75 24.00
The Company paid cash dividends to the shareholders in 2001 of $.90 per share or
$21,182,000 in the aggregate and in 2000 paid cash dividends of $1.10 per share or
$21,040,000 in the aggregate. 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 %
May 17, 2001 25 %
15
The Company’s principal source of funds to pay cash dividends on its Common Stock
is cash dividends from its 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 18 of notes to Consolidated Financial Statements.
Recent Sales of Unregistered Securities
No equity securities were sold by the Company during the fiscal year ended
December 31, 2001 that were not registered under the Securities Act of 1933.
16
INDEPENDENT AUDITORS’ REPORT
The Board of Directors and Shareholders
International Bancshares Corporation:
We have audited the accompanying consolidated statements of condition of
International Bancshares Corporation and subsidiaries as of December 31, 2001 and 2000,
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, 2001. 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, 2001 and 2000, and the results of their
operations and their cash flows for each of the years in the three-year period ended
December 31, 2001, in conformity with accounting principles generally accepted in the
United States of America.
As discussed in Note 1 to the consolidated financial statements, effective July
1, 2001, International Bancshares Corporation adopted the provisions of Statement of
Financial Accounting Standards (“SFAS”) No. 141 “Business Combinations,” and certain
provisions of SFAS No. 142, “Goodwill and Other Intangible Assets” as required for
goodwill and intangible assets resulting from business combinations consummated after
June 30, 2001.
/s/ KPMG LLP
San Antonio, Texas
February 22, 2002
17
INTERNATIONAL BANCSHARES CORPORATION AND SUBSIDIARIES
Consolidated Statements of Condition
December 31, 2001 and 2000
(Dollars in Thousands, Except Per Share Amounts)
2001 2000
ASSETS
Cash and due from banks $ 177,122 $ 125,628
Federal funds sold 108,100 500
Total cash and cash equivalents 285,222 126,128
Time deposits with banks 1,253 2,471
Investment securities:
Held to maturity (Market value of $2,085 on December 31, 2001 and
$2,220 on December 31, 2000) 2,085 2,220
Available for sale (Amortized cost of $2,951,588 on December 31,
2001 and $3,126,107 on December 31, 2000) 2,987,167 3,096,626
Total investment securities 2,989,252 3,098,846
Loans:
Commercial, financial and agricultural 1,488,196 1,286,576
Real estate - mortgage 441,296 287,319
Real estate - construction 271,026 232,589
Consumer 180,652 165,875
Foreign 273,038 278,119
Total loans 2,654,208 2,250,478
Less unearned discounts (5,676) (7,199)
Loans, net of unearned discounts 2,648,532 2,243,279
Less allowance for possible loan losses (40,065) (30,812)
Net loans 2,608,467 2,212,467
Bank premises and equipment, net 190,051 155,523
Accrued interest receivable 33,850 40,159
Other investments 129,541 132,848
Intangible assets 97,305 55,580
Other assets 46,460 36,692
Total assets $ 6,381,401 $ 5,860,714
LIABILITIES AND SHAREHOLDERS’EQUITY
Liabilities:
Deposits:
Demand - non-interest bearing 695,218 $ 573,681
Savings and interest bearing demand 1,213,243 913,894
Time 2,424,373 2,257,023
Total deposits 4,332,834 3,744,598
Securities sold under repurchase agreements 714,675 230,108
Other borrowed funds and long term debt 777,296 1,432,500
Other liabilities 59,568 36,616
Total liabilities 5,884,373 5,443,822
Shareholders' equity:
Common shares of $1.00 par value. Authorized 40,000,000 shares;
issued 33,214,263 shares in 2001 and 26,481,211 shares in 2000 33,214 26,481
Surplus 27,564 25,933
Retained earnings 490,328 434,796
Accumulated other comprehensive income (loss) 18,221 (19,163)
569,327 468,047
Less cost of shares in treasury,
6,991,148 shares in 2001 and
5,139,863 shares in 2000 (72,299) (51,155)
Total shareholders' equity 497,028 416,892
Total liabilities and shareholders' equity $ 6,381,401 $ 5,860,714
See accompanying notes to consolidated financial statements.
18
INTERNATIONAL BANCSHARES CORPORATION AND SUBSIDIARIES
Consolidated Statements of Income
Years ended December 31, 2001, 2000 and 1999
(Dollars in Thousands, Except Per Share Amounts)
2001 2000 1999
Interest income:
Loans, including fees $ 200,036 $ 212,522 $ 160,105
Time deposits with banks 162 157 104
Federal funds sold 1,142 929 710
Investment securities:
Taxable 187,632 202,579 175,042
Tax-exempt 4,861 5,119 4,432
Other 586 321 343
Total interest income 394,419 421,627 340,736
Interest expense:
Savings and interest bearing demand
deposits 23,585 27,945 27,182
Time deposits 106,754 120,743 97,626
Federal funds purchased and securities
sold under repurchase agreements 23,100 8,160 6,047
Other borrowings and Long term debt 45,418 94,908 54,340
Other _1,951 _-___ 10
Total interest expense 200,808 251,756 185,205
Net interest income 193,611 169,871 155,531
Provision for possible loan losses 8,631 6,824 6,379
Net interest income after provision
for possible loan losses 184,980 163,047 149,152
Non-interest income:
Service charges on deposit accounts 42,496 35,348 30,629
Other service charges, commissions
and fees
Banking 9,993 8,423 8,480
Non-Banking 6,132 1,130 649
Investment securities transactions, net (1,010) (4,248) 13
Other investments 7,580 7,646 6,441
Gain on sale of loans 357 51 6,449
Other income _9,976 9,151 8,305
Total non-interest income 75,524 57,501 60,966
Non-interest expense:
Employee compensation and benefits 58,962 47,900 42,857
Occupancy 11,190 9,204 7,537
Depreciation of bank premises and equipment 13,434 12,220 11,700
Professional fees 5,019 4,565 4,953
Stationery and supplies 3,664 3,268 3,157
Amortization of intangible assets 5,378 4,219 3,898
Advertising 5,569 4,257 3,619
Other 32,225 26,324 29,262
Total non-interest expense 135,441 111,957 106,983
Income before income taxes 125,063 108,591 103,135
Income taxes 41,721 33,417 36,887
Net income $ 83,342 $ 75,174 $ 66,248
Basic earnings per common share:
Net Income $ 3.15 $ 2.81 $ 2.43
Weighted average number of shares
outstanding 26,460,845 26,785,955 27,285,620
Diluted earnings per common share:
Net Income $ 3.09 $ 2.77 $ 2.39
Weighted average number of shares
outstanding 26,945,890 27,124,436 27,760,796
See accompanying notes to consolidated financial statements.
19
INTERNATIONAL BANCSHARES CORPORATION AND SUBSIDIARIES
Consolidated Statements of Comprehensive Income
Years ended December 31, 2001, 2000, and 1999
(Dollars in Thousands)
2001 2000 1999
Net Income $ 83,342 $ 75,174 $ 66,248
Other comprehensive income, net of tax:
Net Unrealized gains (losses) on
securities available for sale
arising during the year 16,648 11,902 (48,751)
Reclassification adjustment for losses
on securities available for sale
included in net income 25,642 5,847 3,042
Change in fair value of equity
method investee’s derivatives (4,906) - -___
Comprehensive income $ 120,726 $ 92,923 $ 20,539
See accompanying notes to consolidated financial statements.
20
INTERNATIONAL BANCSHARES CORPORATION AND SUBSIDIARIES
Consolidated Statements of Shareholders' Equity
Years ended December 31, 2001, 2000 and 1999
(in Thousands)
Accumulated
Other
Number Common Retained Comprehensive Treasury
of Shares Stock Surplus Earnings Income Stock Total
Balances at December 31, 1998 16,791 $ 16,791 $ 22,250 $ 341,028 $ 8,797 $(18,580) $ 370,283
Net income - - - 66,248 - - 66,248
Stock dividends:
Shares issued 4,204 4,204 - (4,204) - - -
Cash dividends - - - (17,727) - - (17,727)
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 and
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 and
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
Net income - - - 83,342 - - 83,342
Stock dividends:
Shares issued 6,628 6,628 - (6,628) - - -
Cash dividends - - - (21,182) - - (21,182)
Purchase of treasury stock - - - - - (21,144) (21,144)
Exercise of stock options 105 105 1,631 - - - 1,736
Other comprehensive income,
net of tax:
Net change in unrealized gains and
losses on available for sale
securities, net of
reclassification adjustment - - - - 42,290 - 42,290
Change in fair value of equity
method investee’s derivatives - - - - (4,906) - (4,906)
Balances at December 31, 2001 33,214 $33,214_ $ 27,564 $ 490,328 $ 18,221 $(72,299) $ 497,028
See accompanying notes to consolidated financial statements.
21
INTERNATIONAL BANCSHARES CORPORATION AND SUBSIDIARIES
Consolidated Statements of Cash Flows
Years ended December 31, 2001, 2000 and 1999
(Dollars in Thousands)
2001 2000 1999
Operating activities:
Net income $ 83,342 $ 75,174 $ 66,248
Adjustments to reconcile net income to net
cash provided by operating activities:
Provision for possible loan losses (8,631) (6,824) (6,379)
Gain on sale of loans 357 51 (6,449)
Depreciation of bank premises and equipment 13,420 12,222 11,700
Gain on sale of bank premises and equipment (13) (171) (45)
Depreciation and amortization of leasing assets 3,069 1,747 1,796
Accretion of investment securities discounts (9,213) (18,371) (15,460)
Amortization of investment securities premiums 9,579 10,313 12,611
Loss on investment securities transactions 1,010 4,248 (13)
Amortization of intangible assets 5,378 4,219 3,898
Equity earnings from affiliates and other investments (7,580) (7,646) (6,441)
Deferred tax expense 2,802 7,592 4,372
(Increase) decrease in accrued interest receivable 8,402 (5,332) (3,261)
Net (Increase) decrease in other assets (12,098) 3,016 (2,309)
Net increase (decrease) in other liabilities (1,227) (788) 1,937
Net cash provided by operating activities
88,597 79,450 62,205
Investing activities:
Proceeds from maturities of securities 2,060 1,572 2,350
Proceeds from sales of available for sale securities 568,058 163,085 616,080
Purchases of available for sale securities (1,284,871) (590,369) (1,350,264)
Principal collected on mortgage-backed securities 1,051,167 353,648 676,535
Proceeds from matured time deposits with banks 2,669 1,184 684
Purchases of time deposits with banks (594) (1,778) (1,188)
Net increase in loans (111,150) (328,889) (269,635)
Purchases of other investments (3,544) (1,055) (105,222)
Distributions from other investments 1,519 5,942 3,288
Purchases of bank premises and equipment (29,661) (22,676) (18,983)
Proceeds from sales of bank premise and equipment 119 446 76
Cash paid in excess of net assets acquired (41,415) (16,202) (8,213)
Cash acquired in purchase transaction 73,881 - 20,320
Net cash provided by (used in) investing activities 228,238 (435,092) (434,172)
Financing activities:
Net increase in non-interest bearing
demand deposits 27,109 74,312 84,031
Net increase (decrease) in savings and interest
bearing demand deposits 83,701 (14,561) (27,177)
Net (decrease) increase in time deposits (57,324) 157,635 72,848
Net increase (decrease) in securities sold under
repurchase agreements
Proceeds from issuance of other borrowed funds
and long term debt 1,825,296 2,365,500 2,045,000
Principal payments on other borrowed funds (2,480,500) (2,313,000) (1,739,000)
Purchase of treasury stock (21,144) (10,419) (22,156)
Proceeds from stock transactions 1,736 1,992 1,897
Payments of cash dividends (21,158) (21,016) (17,101)
Payments of cash dividends in lieu of fractional shares (24) (24) (26)
484,567 106,356 (11,948)
Net cash provided by (used in) financing activities (157,741) 346,775 386,368
Increase (decrease) in cash and cash equivalents 159,094 (8,867) 14,401
Cash and cash equivalents at beginning of year 126,128 134,995 120,594
Cash and cash equivalents at end of year $ 285,222 $ 126,128 $ 134,995
Supplemental cash flow information:
Interest paid $ 209,384 $ 247,698 $ 181,723
Income taxes paid 35,993 26,520 26,673
See accompanying notes to consolidated financial statements.
22
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 accounting principles generally
accepted in the United States of America 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, International Bancshares Capital Trust I, International Bancshares Capital
Trust II, International Bancshares Capital Trust III and NBC Acquisitions Corp. All
significant inter-company 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 preparation of the consolidated financial statements in conformity with
accounting policies generally accepted in the United States of America requires
management to make estimates and assumptions that affect the reported amounts of assets
and liabilities as of the dates of the statement of condition 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
23
INTERNATIONAL BANCSHARES CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements-(Continued)
to those securities classified as “available-for-sale” are excluded from net income and
reported net of tax as other comprehensive income and in shareholders’ equity as
accumulated other comprehensive income until realized. The Company did not maintain
any trading securities during the three year period ended December 31, 2001.
Mortgage-backed securities held at December 31, 2001 and 2000 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 probable 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 probable 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 un-collectible. 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
24
INTERNATIONAL BANCSHARES CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements-(Continued)
underlying loan is written down to the fair value of the real estate to be acquired by
a charge to the allowance for loan possible losses if necessary. Any subsequent write-
downs are charged against other non-interest expense. Operating expenses of such
properties and gains and losses on their disposition are included in other non-interest
expense.
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
Basic Earnings Per Share (“EPS”) is calculated by dividing net income 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 Intangible Assets
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 intangible assets.
In June 2001, the Financial Accounting Standards Board issued SFAS No. 141
“Business Combinations”, and SFAS No. 142, “Goodwill and Other Intangible Assets.”
SFAS No. 141 requires that the purchase method of accounting be used for all business
25
INTERNATIONAL BANCSHARES CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements-(Continued)
combinations initiated after June 30, 2001 as well as all purchase method business
combinations completed after June 30, 2001. SFAS No. 141 also specifies criteria that
intangible assets acquired in a purchase method business combination must meet to be
recognized and reported apart from goodwill. SFAS No. 142 requires that goodwill and
intangible assets with indefinite useful lives no longer by amortized, but instead
tested for impairment at least annually in accordance with the provisions in SFAS No.
142. SFAS No. 142 requires that intangible assets with definite useful lives be
amortized over their respective estimated useful lives to their estimated residual
values, and reviewed for impairment in accordance with SFAS no 121, “Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assts to Be Disposed Of.” SFAS No
144, “Accounting for the Impairment or Disposal of Long-Lived Assets” supercedes SFAS
No. 121 and is effective for fiscal years beginning after December 15, 2001.
SFAS No. 141 requires upon adoption of SFAS No. 142, that the Company evaluate
its existing intangible assets and goodwill that were acquired in prior purchase
business combinations, and to make any necessary reclassifications in order to conform
with the new criteria in SFAS No. 141 for recognition apart from goodwill.
In connection with the transitional goodwill impairment evaluation, SFAS No. 142
requires the Company to perform an assessment of whether there is an indication that
goodwill is impaired as of the date of adoption. The Company will have up to six
months from the date of adoption to determine the fair value of each reporting unit and
compare it to the reporting unit’s carrying amount. To the extent a reporting unit’s
carrying amount exceeds its fair value, an indication exists that the reporting unit’s
goodwill may be impaired and the Company must perform the transitional impairment test.
The transitional impairment test is required to be completed as soon as possible, but
not later that the end of the year of adoption. Any transitional impairment loss will
be recognized as the cumulative effect of a change in accounting principle in the
Company’s consolidated statements of income.
On July 1, 2001, the Company adopted the provisions of SFAS No. 141 and certain
provisions of SFAS No. 142 as required for goodwill and intangible assets resulting
from business combinations after June 30, 2001. The goodwill related to the National
Bancshares Corporation of Texas acquisition discussed in Note 2 was not amortized.
The Company adopted the remaining provisions of SFAS No. 142 as of January 1,
2002 and will no longer amortize goodwill related to business combinations consummated
before July 1, 2001. As of the date of the adoption, the Company had unamortized
goodwill in the amount of $75,869,000 and unamortized identifiable intangible assets in
the amount of $21,436,000, all of which are subject to the transition provisions of
SFAS No. 141 and No. 142. Amortization expense related to goodwill that will no longer
be amortized was $4,189,000, $3,014,000 and $2,645,000, for the years ended December
31, 2001, 2000 and 1999, respectively.
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. Effective January 1, 2002, the Company
adopted SFAS No. 144, “Accounting for the Impairment or Disposal of Long-Lived Assets,”
which supercedes SFAS No. 120, “Accounting for the Impairment of Long Lived Assets and
for Long-Lived Assets to be Disposed of,” and APB Opinion No. 30. The adoption of SFAS
No. 144 did not have an impact on the consolidated financial statements.
26
INTERNATIONAL BANCSHARES CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements-(Continued)
Consolidated Statement of Cash Flows
For purposes of the statement of cash flows, the Company considers all short-term
investments with a maturity at date of purchase of three months or less to be cash
equivalents. Also, the Company reports transactions related to deposits with other
financial institutions, customer time deposits and loans to customers on a net basis.
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.
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 its reportable segments and
related disclosures. Management of the Company believes that it does not have separate
reportable operating segments under the provisions of SFAS No. 131. The Company’s non-
banking operations do not meet the threshold for reporting as separate segments.
Derivative Instruments
The Company currently does not directly engage in hedging activities and does not
directly hold any derivative instruments or embedded derivatives. However, the
Company’s equity method investee, Aircraft Finance Trust (“AFT”), uses derivative
instruments to manage the interest rate on the bonds that AFT has issued. The
derivative instruments qualify as cash flow hedges using SFAS 133, “Accounting for
Derivative Instruments and Hedging Activities” and as such, the Company’s proportionate
share of changes in fair value of the derivative instruments are included in
comprehensive income and accumulated other comprehensive income, net of tax. The
Company adopted SFAS No. 133 on January 1, 2001 and the adoption did not have a
significant impact on its consolidated financial statements.
Reclassifications
Certain amounts in the prior year’s presentations have been reclassified to
conform to the current presentation. These reclassifications have no effect on
previously reported net income.
(2) Acquisitions
On November 20, 2001, the Company acquired approximately 71% of the outstanding
common shares of National Bancshares Corporation of Texas (“NBC”) through a tender
offer by the Company’s subsidiary, NBC Acquisitions Corp. (“NBC Acquisitions”), for all
the outstanding shares of NBC. On December 31, 2001, the Company acquired the
remaining 29% of the outstanding common shares of NBC through the merger of NBC
Acquisitions with and into NBC. Prior to the acquisition, NBC was a bank holding
company incorporated in Texas and registered under the Bank Holding Company Act.
Through its subsidiary, NBC Bank, N.A. Eagle Pass, Texas (“NBC Bank”), NBC conducted a
commercial banking business through twelve locations.
27
INTERNATIONAL BANCSHARES CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements-(Continued)
Additionally, on December 31, 2001, NBC Bank was merged with and into the
Company’s lead bank, International Bank of Commerce, Laredo, Texas, and the three
former NBC Bank branches located in Laredo, Texas were transferred to another
subsidiary of the Company, Commerce Bank, Laredo, Texas.
The acquisition of NBC was accounted for as a purchase under the provisions of
SFAS No. 141. The purchase price for the outstanding common shares of NBC in the
tender offer and the merger was $24.75 per common share, and the total consideration
paid to NBC shareholders was $93,681,000 (exclusive of amounts paid to option holders).
The following table summarizes the estimated fair value of the assets acquired
and liabilities assumed at the date of the acquisition, in thousands. The Company is
in the process of obtaining third party valuations of certain intangible assets; thus,
the allocation of the purchase price is subject to refinement.
Cash and due from banks
Investments
Net loans
Goodwill
Intangible asset
Other assets
Total assets acquired
Deposits
Other liabilities
Total liabilities assumed
Net assets acquired
$ 73,881
222,445
278,200
24,192
10,934
26,079
635,731
(531,461)
(10,589)
(542,050)
$ 93,681
The intangible asset is core deposit premium and has a useful life of
approximately 10 years. Goodwill and the intangible asset in the amount of
approximately $35,126,000 is deductible for tax purposes. The amount of goodwill that
was not amortized under the provisions of SFAS No. 142 was not significant.
The minority income for the period from November 20, 2001 through December 31,
2001 was approximately $122,000 and is included in other non-interest expense in the
accompanying consolidated statements of income.
28
INTERNATIONAL BANCSHARES CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements-(Continued)
The following unaudited pro forma financial information is presented to show the
impact on the Company’s results of operations assuming that the NBC acquisition was
consummated on January 1, 2000.
For the years ended December 31,
(Dollars in Thousands, except Per Share Data)
2001
2000
(Unaudited)
Interest income
$ 430,161
Interest expense 216,396
Net interest income
Provision for possible
loan losses
Non-interest income
Non-interest expense
Income before income
taxes
124,806
213,765
9,546 7,408
81,967
63,582
161,380 131,964
$ 461,578
270,971
190,607
Income taxes
Net income
41,942
$ 82,864
114,817
36,321
$ 78,496
Per common share:
Basic
$ 3.12
$ 2.93
Diluted
$ 3.06
$ 2.89
Effective April 1, 2001, IBC through its insurance agency subsidiary, acquired
the assets of Grove Agency Insurance, Inc., of Corpus Christi, Texas. The acquisition
was accounted for as a purchase transaction. In connection with the acquisition, IBC
recorded goodwill totaling $1,575,000.
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
$4,864,000.
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.
During 2000, IBC established an insurance agency subsidiary and acquired the
assets of two insurance agencies in Texas. The acquisitions were accounted for as
purchase transactions. In connection with the acquisitions, IBC recorded goodwill
totaling $3,003,000.
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 goodwill and intangible assets totaling $2,525,000.
29
INTERNATIONAL BANCSHARES CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements-(Continued)
(3) Investment Securities
The amortized cost and estimated fair value by type of investment security at
December 31, 2001 are as follows:
Held to Maturity________________ __
Gross Gross Estimated
Amortized unrealized unrealized fair Carrying
cost gains losses value value_
(Dollars in Thousands)
Obligations of states and
political subdivisions $ - $ - $ - $ - $ -
Other securities 2,085 - - 2,085 2,085
Total investment securities $ 2,085 $ - $ - $ 2,085 $ 2,085
Available for Sale__ ____________ __
Gross Gross Estimated
Amortized unrealized unrealized fair Carrying
cost gains losses value value_
(Dollars in Thousands)
U.S. Treasury securities $ 151,645 $ 48 $(3,552) $ 148,141 $ 148,141
Mortgage-backed securities 2,613,236 43,381 (1,200) 2,655,417 2,655,417
Obligations of states and
political subdivisions 92,219 42 (2,775) 89,486 89,486
Other securities 27,859 1,121 (1,513) 27,467 27,467
Equity securities 66,629 _95 (68) 66,656 66,656
Total investment securities $2,951,588 $ 44,687 $(9,108) $2,987,167 $2,987,167
The amortized cost and estimated fair value of investment securities at December
31, 2001, 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 fair Amortized fair
cost value cost value__
(Dollars in Thousands)
Due in one year or less $ 75 $ 75 $ 87,091 $ 87,104
Due after one year through five years 300 300 1,004 1,038
Due after five years through ten years 110 110 - -
Due after ten years 1,600 1,600 183,628 176,952
Mortgage-backed securities - - 2,613,236 2,655,417
Equity securities - - 66,629 66,656
Total investment securities $ 2,085 $ 2,085 $2,951,588 $2,987,167
30
INTERNATIONAL BANCSHARES CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements-(Continued)
The amortized cost and estimated fair value by type of investment security at
December 31, 2000 are as follows:
Held to Maturity________________ __
Gross Gross Estimated
Amortized unrealized unrealized fair 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 fair 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 - (7,109) 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
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 value of available for sale investment securities
pledged to qualify for fiduciary powers, to secure public monies as required by law,
repurchase agreements and short-term fixed borrowings was $1,951,773,000 and
$1,982,624,000, respectively, at December 31, 2001.
Proceeds from the sale of securities available-for-sale were $568,058,000,
$163,085,000 and $616,080,000 during 2001, 2000 and 1999, respectively. Gross gains of
$5,693,000, $434,000 and $2,639,000 and gross losses of $6,703,000, $4,632,000 and
$2,626,000 were realized on the sales in 2001, 2000 and 1999, 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 $62,046,000 and $85,550,000 at December 31, 2001 and 2000,
respectively.
31
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, 2001, 2000 and 1999 is as follows:
2001 2000 1999
(Dollars in Thousands)
Balance at January 1, 2001 $ 30,812 $ 26,770 $ 25,551
Losses charged to allowance (4,269) (3,682) (6,549)
Recoveries credited to allowance 936 __900 1,389
Net losses charged to allowance (3,333) (2,782) (5,160)
Provision charged to operations 8,631 6,824 6,379
Acquired in purchase transaction 3,955 - -__
Balance at December 31, 2001 $ 40,065 $ 30,812 $ 26,770
Loans accounted for on a non-accrual basis at December 31, 2001, 2000 and 1999
amounted to $8,252,000, $6,273,000 and $7,662,000, respectively. The effect of such
non-accrual loans reduced interest income by $695,000, $842,000 and $874,000 for the
years ended December 31, 2001, 2000 and 1999, 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 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 $4,958,000 at December 31, 2001, $5,226,000 at December 31,
2000 and $7,738,000 at December 31, 1999. The average recorded investment in impaired
loans during 2001, 2000, and 1999 was $5,997,000, $6,064,000 and $8,028,000,
respectively. The total allowance for possible loan losses related to these loans was
$515,000, $1,772,000 and $882,000 at December 31, 2001, 2000 and 1999, respectively.
Interest income on impaired loans of $412,000, $279,000 and $371,000 was recognized for
cash payments received in 2001, 2000 and 1999, 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 losses will 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
32
INTERNATIONAL BANCSHARES CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements-(Continued)
collection of the loss portion is anticipated based on the borrower's financial
condition and general economic conditions in the borrower's industry. Generally,
unsecured consumer loans are charged-off when 90 days past due.
While management of the Company considers that it is generally able to identify
borrowers with financial problems reasonably early and to monitor credit extended to
such borrowers carefully, there is no precise method of predicting loan losses. The
determination that a loan is likely to be un-collectible 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, 2001 was adequate to absorb probable
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, 2001 and 2000 were as follows:
Estimated
useful lives 2001 2000
(Dollars in Thousands)
Bank buildings and improvements 5 - 40 years $ 141,661 $ 119,682
Furniture, equipment and vehicles 1 - 20 years 103,752 86,758
Land 36,042 27,499
Real estate held for future expansion:
Land, building, furniture,
fixture and equipment 7 - 27 years 1,123 1,174
Less: accumulated depreciation (92,527) (79,590)
Bank premises and equipment, net $ 190,051 $ 155,523
33
INTERNATIONAL BANCSHARES CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements-(Continued)
(6) Deposits
Deposits as of December 31, 2001 and 2000 and related interest expense for the
years ended December 31, 2001, 2000 and 1999 were as follows:
(Dollars in Thousands)
Deposits:
Demand - non-interest bearing
Domestic $ 627,135 $ 503,863
Foreign 68,083 69,818
Total demand non-interest
bearing 695,218 573,681
2001
2000
Savings and interest bearing demand
Domestic 930,861 692,513
Foreign 282,382 221,381
Total savings and interest
bearing demand 1,213,243 913,894
Time, certificates of deposit
$100,000 or more
Domestic 519,819 504,293
Foreign 1,024,136 961,902
Less than $100,000
Domestic 519,480 464,290
Foreign 360,938 326,538
Total time, certificates
of deposit 2,424,373 2,257,023
Total deposits $ 4,332,834 $ 3,744,598
2001 2000 1999
(Dollars in Thousands)
Interest Expense:
Savings and interest bearing demand
Domestic $ 18,636 $ 21,756 $ 21,678
Foreign _4,949 6,189 5,504
Total savings and interest
bearing demand 23,585 27,945 27,182
Time, certificates of deposit
$100,000 or more
Domestic 25,609 28,359 22,790
Foreign 46,447 51,675 38,497
Less than $100,000
Domestic 21,402 24,756 24,158
Foreign 13,296 15,953 12,181
Total time, certificates
of deposit 106,754 120,743 _97,626
Total interest expense on deposits $ 130,339 $ 148,688 $ 124,808
34
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 $478,875,000, $145,096,000 and $124,276,000 during 2001,
2000 and 1999, respectively, and the maximum amount outstanding at any month end during
2001, 2000 and 1999 was $769,262,000, $231,663,000 and $136,066,000, respectively.
Further information related to repurchase agreements at December 31, 2001 and
2000 is set forth in the following table:
Collateral Securities Repurchase Borrowing__ _
Book Value of Fair Value of Balance of Weighted Average
Securities Sold Securities Sold Liability Interest Rate
(Dollars in Thousands)
December 31, 2001 Term:
Overnight agreements $ 272,657 $ 272,401 $ 274,946 1.76 %
1 to 29 days 45,282 45,810 31,594 3.74 %
30 to 90 days 84,606 86,133 59,874 3.22 %
Over 90 days 354,064 358,740 348,261 4.90 %
Total $ 756,609 $ 763,084 $ 714,675 2.83 %
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 %
The book value and fair value of securities sold includes the entire book value
and fair value of securities partially or fully pledged under repurchase agreements.
(8) Other Borrowed Funds and Long Term Debt
Other borrowed funds and long term debt as of December 31, 2001 and 2000 were as
follows:
2001 2000
(Dollars in Thousands)
Federal Home Loan Bank borrowings $ 709,296 $ 1,432,500
Capital Securities 68,000 -___
Total other borrowings and long term
debt $ 777,296 $ 1,432,500
Federal Home Loan Bank borrowings are short term fixed borrowings issued by 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,
2001 and 2000 was 1.96% and 6.56%, respectively, and the weighted average interest rate
for the year 2001 and 2000 was 2.06% and 6.46%, respectively. The average daily
35
INTERNATIONAL BANCSHARES CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements-(Continued)
balance on short-term fixed borrowings was $1,337,947,000 and $1,396,537,000 during
2001 and 2000, respectively, and the maximum amount outstanding at any month end during
2001 and 2000 was $1,605,000,000 and $1,609,000,000, respectively.
On March 16, 2001, the Company formed International Bancshares Capital Trust I
(“Trust I”), a statutory business trust formed under the laws of the State of Delaware,
for the purpose of issuing trust preferred securities. On March 28, 2001, Trust I
issued $10,000,000 of 10.18% Capital Securities. The Capital Securities accrue
interest at a fixed rate of 10.18%, payable semi-annually beginning June 8, 2001. The
Capital Securities will mature June 8, 2031; however, the Capital Securities may be
redeemed at specified prepayment prices (a) in whole or in part on or after June 8,
2011, or (b) in whole within 90 days upon the occurrence prior to June 8, 2011, and
continuance of any one of certain legal, regulatory, or tax events.
On June 28, 2001, the Company formed International Bancshares Capital Trust II
(“Trust II”), a statutory business trust formed under the laws of the State of
Delaware, for the purpose of issuing trust preferred securities. On July 16, 2001,
Trust II issued $25,000,000 of Capital Securities. The Capital Securities accrue
interest at a floating rate (7.57% as of December 31, 2001) of 3.75% over the London
Interbank Offer Rate (“LIBOR”), payable semi-annually beginning January 25, 2002. The
Capital Securities will mature July 25, 2031; however, the Capital Securities may be
redeemed at specified prepayment prices (a) in whole or in part on any interest payment
date on or after July 25, 2006, or (b) in whole within 90 days upon the occurrence of
any one of certain legal, regulatory, or tax events.
On November 9, 2001, the Company formed International Bancshares Capital Trust
III (“Trust III”), a statutory business trust formed under the laws of the State of
Delaware, for the purpose of issuing trust preferred securities. On November 28, 2001,
Trust III issued $33,000,000 of Capital Securities. The Capital Securities accrue
interest at a floating rate (5.97% as of December 31, 2001) of 3.75% over the LIBOR,
payable semi-annually beginning June 8, 2002. The Capital Securities will mature
December 8, 2031; however, the Capital Securities may be redeemed at specified
prepayment prices (a) in whole or in part on any interest payment date on or after
December 8, 2006, or (b) in whole within 90 days upon the occurrence of any one of
certain legal, regulatory, or tax events.
The Capital Securities are subordinated and junior in right of payment to all
present and future senior indebtedness of the Company, and are pari passu with one
another. The Company has fully and unconditionally guaranteed the obligations of each
of Trusts I, II, and III with respect to the Capital Securities. The Company has the
right, unless an Event of Default has occurred and is continuing, to defer payment of
interest on the Capital Securities for up to ten consecutive semi-annual periods. The
redemption prior to maturity of any of the Capital Securities may require the prior
approval of the Federal Reserve and/or other regulatory bodies.
36
INTERNATIONAL BANCSHARES CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements-(Continued)
(9) Earnings per Share
Basic EPS is calculated by dividing net income 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, 2001,
2000, and 1999 is set forth in the following table:
Income Shares Per-Share
(Numerator) (Denominator) Amount
(Dollars in Thousands, Except Per Share Amounts)
December 31, 2001:
Basic EPS
Net income $ 83,342 26,460,845 $ 3.15
Potential dilutive common shares 485,045
Diluted EPS $ 83,342 26,945,890 $ 3.09
December 31, 2000:
Basic EPS
Net income $ 75,174 26,785,955 $ 2.81
Potential dilutive common shares 338,481
Diluted EPS $ 75,174 27,124,436 $ 2.77
December 31, 1999:
Basic EPS
Net income $ 66,248 27,285,620 $ 2.43
Potential dilutive common shares 475,176
Diluted EPS $ 66,248 27,760,796 $ 2.39
(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 $2,084,490, $1,844,878 and $1,722,600 were charged to
income for the years ended December 31, 2001, 2000, and 1999, respectively.
37
INTERNATIONAL BANCSHARES CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements-(Continued)
(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.
A summary of assets attributable to international operations at December 31, 2001
and 2000 are as follows:
2001 2000
(Dollars in Thousands)
Loans:
Commercial $ 228,610 $ 242,450
Others 44,428 35,669
273,038 278,119
Less allowance for possible loan losses (1,502) (1,831)
Net loans $ 271,536 $ 276,288
Accrued interest receivable $ 1,282 $ 2,630
At December 31, 2001, the Company had $8,443,000 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 $22,389,000,
$22,826,000 and $15,317,000 for the years ended December 31, 2001, 2000 and 1999,
respectively.
(12) Income Taxes
The Company files a consolidated U.S. Federal income tax return. The current and
deferred portions of net income tax expense included in the consolidated statements of
income are presented below for the years ended December 31:
2001 2000 1999
(Dollars in Thousands)
Current
U.S. $ 38,849 $ 25,702 $ 32,413
Foreign 70 123 102
Total current taxes 38,919 25,825 32,515
Deferred 2,802 7,592 4,372
Total income taxes $ 41,721 $ 33,417 $ 36,887
38
INTERNATIONAL BANCSHARES CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements-(Continued)
Total income tax expense differs from the amount computed by applying the U.S.
Federal income tax rate of 35% for 2001, 2000 and 1999 to income before income taxes.
The reasons for the differences for the years ended December 31 are as follows:
2001 2000 1999
(Dollars in Thousands)
Computed expected tax expense $ 43,772 $ 38,007 $ 36,097
Change in taxes resulting from:
Tax-exempt interest income (1,590) (1,596) (1,397)
Leasing activities 1,239 (1,386) 3,193
Employee benefits (2,110) (1,994) (1,609)
Other 410 386 603
Actual tax expense $ 41,721 $ 33,417 $ 36,887
The tax effects of temporary differences that give rise to significant portions
of the deferred tax assets and deferred tax liabilities at December 31, 2001 and 2000
are reflected below:
2001 2000
(Dollars in Thousands)
Deferred tax assets:
Loans receivable, principally due to the
allowance for possible loan losses $ 11,863 $ 10,144
Net unrealized loss on derivative instruments
of equity method investee 2,641 -
Other real estate owned 267 251
Accrued expenses - 42
Net unrealized losses on available for sale
investment securities - 10,318
Other 348 236
Total deferred tax assets 15,119 20,991
Deferred tax liabilities:
Net unrealized gains on available for sale
investment securities (12,439) -
Lease financing receivable (16,871) (12,951)
Bank premises and equipment, principally
due to differences in depreciation (2,822) (2,146)
FHLB stock (4,433) (5,040)
Other (1,234) (616)
Total deferred tax liabilities (37,799) (20,753)
Net deferred tax asset (liability) $ (22,680) $ 238
The net deferred tax liability of $22,680,000 at December 31, 2001 is included in
other liabilities and the net deferred tax asset of $238,000 at December 31, 2000 is
included in other assets in the consolidated statement of condition.
39
INTERNATIONAL BANCSHARES CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements-(Continued)
The Company did not record a valuation allowance against deferred tax assets at
December 31, 2001, 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) Other Investments
Included in other investments is the Company’s 20% investment in Aircraft
Finance Trust (“AFT”), a special purpose business trust formed to acquire, finance,
refinance, own, lease, sublease, sell and maintain aircraft. As of December 31, 2001
and 2000 the Company’s investment in AFT was $8,900,000 and $11,780,000, respectively.
The Company accounts for the investment in AFT under the equity method of accounting.
AFT uses interest rate swap derivatives to convert variable rate debt to fixed rate
debt. The interest rate swap derivatives meet the SFAS No. 133 requirements for cash
flow hedges and as such, the Company’s proportionate share of the change in the fair
value of the interest rate swap derivatives is recorded in comprehensive income and
accumulated comprehensive income.
(14) 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”). On April 5, 2001, the Board of Directors amended the 1996 plan and added
300,000 shares to the 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 150,000
shares, adjusted for stock dividends, 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.
The schedule on the following page summarizes the pertinent information (adjusted
for stock distributions) with regard to stock.
40
INTERNATIONAL BANCSHARES CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements-(Continued)
Option Price Options
per share outstanding
Balance at December 31, 1998 1,215,853
Terminated $ 5.46 – 30.25 (50,610)
Granted 24.57 – 25.47 242,375
Exercised 5.46 – 30.25 (96,504)
Balance at December 31, 1999 1,311,114
Terminated $ 12.00 – 34.40 (750)
Granted 25.60 – 26.30 166,250
Exercised 12.59 – 24.18 (108,954)
Balance at December 31, 2000 1,367,660
Terminated $ 10.06 (54,263)
Granted 34.00 – 36.50 245,750
Exercised 10.48 – 27.52 (105,513)
Balance at December 31, 2001 1,453,634
At December 31, 2001 and 2000, 732,012 and 531,004 options were exercisable,
respectively, and as of December 31, 2001, 228,879 shares were available for future
grants under the 1996 Plan, as amended. 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, 2001:
Options Outstanding Options Exercisable___
Weighted-
Average Weighted- Weighted-
Number Remaining Average Number Average
Range of Outstanding Contractual Exercise Exercisable Exercise
Exercise prices at 12/31/01 Life Price At 12/31/01 Price
$ 10.06 194,541 1.5 years $ 10.06 194,541 $ 10.06
19.34 – 26.62 547,006 3.4 years 19.55 437,604 19.55
24.58 – 25.47 27,832 4.10 years 24.70 16,699 24.70
23.55 – 27.52 271,505 6.3 years 19.53 50,918 19.53
25.60 – 26.30 166,250 6.10 years 25.94 32,250 25.94
34.00 – 36.50 246,500 7.9 years 34.18 - 34.18
$ 10.06 – 36.50 1,453,634 732,012
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:
2001 2000 1999
Expected life (years) 5 5 6
Interest rate 4.42% 5.81% 5.54%
Volatility 31.14% 35.54% 33.68%
41
INTERNATIONAL BANCSHARES CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements-(Continued)
The following schedule shows total net income as reported and the pro forma results:
2001 2000 1999
Net income As reported $ 83,342 $ 75,174 $ 66,248
Pro forma 81,145 73,199 64,478
Basic earnings As reported $ 3.15 $ 2.81 $ 2.43
Pro forma 3.07 2.73 2.36
Diluted earnings As reported $ 3.09 $ 2.77 $ 2.39
Pro forma 3.01 2.70 2.32
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.
(15) 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 to the consolidated financial
position or results of operations of the Company. 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, 2001, 2000 and 1999 and
non-cancellable lease commitments at December 31, 2001 were not significant.
Cash of approximately $43,671,000 and $28,480,000 at December 31, 2001 and 2000,
respectively, was maintained to satisfy regulatory reserve requirements.
The Company’s lead bank subsidiary has invested in partnerships which have
entered into several lease financing transactions. The lease financing transactions in
two of the partnerships have been examined by the Internal Revenue Service (“IRS”). In
both partnerships, the lead bank subsidiary 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 to each of the partnerships for the lease financing
transactions. Each of the partnerships has submitted a Protest contesting the
adjustments. The IRS has issued a Notice of Final Partnership Administrative
Adjustment (“FTPAA”) to one of the partnerships and on September 25, 2001 the Company
filed a lawsuit contesting the FPAA. Prior to filing the lawsuit the Company was
required to deposit the estimated tax due of approximately $4,083,000 with the IRS
pursuant to the Internal Revenue Code. No reliable prediction can be made at this time
as to the likely outcome of the lawsuit or the IRS proceedings regarding the other
partnership. However, if the lawsuit and 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 the partnerships’ lease financing
transactions would be in question. Management has estimated the Company’s exposure in
connection with these transactions and has reserved an appropriate amount based on the
estimated exposure at December 31, 2001. Management intends to continue to evaluate
the merits of each matter and make appropriate revisions to the reserve amount as
deemed necessary.
42
INTERNATIONAL BANCSHARES CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements-(Continued)
(16) 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 $31,014,000 and $38,701,000 at December 31, 2001 and 2000,
respectively. During 2001, $15,810,000 of new loans were made and repayments totaled
$23,497,000.
(17) 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, 2001, the following financial instruments,
whose contract amounts represent credit risks, were outstanding:
Commitments to extend credit $ 655,677,000
Credit card lines 33,058,000
Letters of credit 53,346,000
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.
43
INTERNATIONAL BANCSHARES CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements-(Continued)
The bank subsidiaries make commercial, real estate and consumer loans to
customers principally located in Webb, Bexar, Hidalgo, Cameron, Starr and Zapata
counties in South Texas as well as Matagorda, Brazoria, Galveston, Fort Bend, Calhoun,
and Harris counties in Southeast Texas. Although the loan portfolio is diversified, a
substantial portion of its debtors' ability to honor their contracts is dependent upon
the economic conditions in these areas, especially in the real estate and commercial
business sectors.
(18) 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, 2001, the aggregate
amount legally available to be distributed to the Company from bank subsidiaries as
dividends was approximately $81,000,000, 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 $438,694,000. The
undivided profits of the bank subsidiaries was $179,533,000. 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.
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 consolidated 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, 2001, that the
Company and each of the bank subsidiaries met all capital adequacy requirements to
which it is subject.
As of December 31, 2001, 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.
44
INTERNATIONAL BANCSHARES CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements-(Continued)
The Company’s and the bank subsidiaries’ actual capital amounts and ratios for
2001 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, 2001:
Total Capital (to Risk Weighted Assets):
Consolidated $ 490,124 15.06 % $ 260,339 8.00 % $ 325,424 10.00 %
International Bank of Commerce, Laredo 370,123 13.42 220,595 8.00 275,743 10.00
International Bank of Commerce, Brownsville 43,797 18.42 19,022 8.00 23,777 10.00
International Bank of Commerce, Zapata 20,291 28.66 5,665 8.00 7,081 10.00
Commerce Bank 22,180 12.96 13,694 8.00 17,117 10.00
Tier 1 Capital (to Risk Weighted Assets):
Consolidated $ 450,059 13.83 % $ 130,170 4.00 % $ 195,524 6.00 %
International Bank of Commerce, Laredo 336,486 12.20 110,297 4.00 165,446 6.00
International Bank of Commerce, Brownsville 40,822 17.17 9,511 4.00 14,266 6.00
International Bank of Commerce, Zapata 19,737 27.88 2,832 4.00 4,249 6.00
Commerce Bank 20,034 11.70 6,847 4.00 10,270 6.00
Tier 1 Capital (to Average Assets):
Consolidated $ 450,059 6.67 % $ 270,032 4.00 % $ 337,540 5.00 %
International Bank of Commerce, Laredo 336,486 7.00 192,178 4.00 240,223 5.00
International Bank of Commerce, Brownsville 40,822 8.15 20,037 4.00 25,046 5.00
International Bank of Commerce, Zapata 19,737 9.72 8,126 4.00 10,158 5.00
Commerce Bank 20,034 8.33 9,624 4.00 12,030 5.00
45
INTERNATIONAL BANCSHARES CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements-(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
(19) Fair Value of Financial Instruments
The fair value estimates, methods, and assumptions for the Company's financial
instruments at December 31, 2001 and 2000 are outlined below.
Cash and 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.
46
INTERNATIONAL BANCSHARES CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements-(Continued)
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, 2001 and 2000, the carrying amount of fixed rate performing loans was
$1,406,367,000 and $789,028,000 respectively, and the estimated fair value was
$1,406,633,000 and $788,619,000, 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, 2001 and 2000, the net carrying amount of non-performing loans was a reasonable
estimate of the fair value.
Deposits
The fair value of deposits with no stated maturity, such as non-interest bearing
demand deposit accounts, savings accounts and interest bearing demand deposit accounts,
was equal to the amount payable on demand as of December 31, 2001 and 2000. 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, 2001 and 2000, the
carrying amount of time deposits was $2,424,673,000 and $2,257,023,000, respectively,
and the estimated fair value was $2,395,652,000 and $2,259,960,000, respectively.
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, 2001 and 2000.
47
INTERNATIONAL BANCSHARES CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements-(Continued)
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.
48
INTERNATIONAL BANCSHARES CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements-(Continued)
(20) International Bancshares Corporation (Parent Company Only) Financial Information
Statements of Condition
(Parent Company Only)
December 31, 2001 and 2000
(Dollars in Thousands)
ASSETS 2001 2000
Cash $ 551 $ 733
Repurchase Agreements 2,600 -
Other investments 6,654 5,788
Notes receivable 30,683 35,381
Investment in subsidiaries 518,263 369,217
Other assets _8,417 6,270
Total assets 567,168 417,389
LIABILITIES AND SHAREHOLDERS’ EQUITY
Liabilities:
Due to IBC Trusts (Subordinated Debentures) 68,000 -
Due to IBC Trading 21 21
Due to IBC Capital Trust 28 -
Other liabilities 2,091 476
Total liabilities 70,140 497
Shareholders' equity:
Common shares 33,214 26,481
Surplus 27,564 25,933
Retained earnings 490,328 434,796
Accumulated other comprehensive income (loss) 18,221 (19,163)
569,327 468,047
Less cost of shares in treasury (72,299) (51,155)
Total shareholders' equity 497,028 416,892
Total liabilities and
shareholders' equity $ 567,168 $ 417,389
49
INTERNATIONAL BANCSHARES CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements-(Continued)
(21) International Bancshares Corporation (Parent Company Only) Financial Information
Statements of Income
(Parent Company Only)
Years ended December 31, 2001, 2000 and 1999
(Dollars in Thousands)
2001 2000 1999
Income:
Dividends from subsidiaries $ 88,245 $ 22,000 $ 30,500
Interest income on notes receivable 2,985 3,771 4,463
Interest income on investments 899 399 506
Other interest income 310 321 343
Gain on sale of other securities - 386 -
Other 3,097 904 1,316
Total income 95,536 27,781 37,128
Expenses:
Interest Expense (Debentures) 2,014 - -
Other 967 476 382
Total expenses 2,981 476 382
Income before federal income
taxes and equity in
undistributed net income
of subsidiaries 92,555 27,305 36,746
Federal income tax expense 578 663 873
Income before equity
in undistributed net
income of subsidiaries 91,977 26,642 35,873
Equity in undistributed (dividends in
excess of) net income of subsidiaries (8,635) 48,532 30,375
Net income $ 83,342 $ 75,174 $ 66,248
50
INTERNATIONAL BANCSHARES CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements-(Continued)
(22) International Bancshares Corporation (Parent Company Only) Financial Information
Statements of Cash Flows
(Parent Company Only)
Years ended December 31, 2001, 2000 and 1999
(Dollars in Thousands)
2001 2000 1999
Operating activities:
Net income $ 83,342 $ 75,174 $ 66,248
Adjustments to reconcile net income to net
cash provided by operating activities:
Gain on sale of other investments - (386) -
Increase (decrease) in other liabilities 1,643 462 (678)
Equity in undistributed net income of
subsidiaries 8,635 (48,532) (30,375)
Net cash provided by operating activities 93,620 26,718 35,195
Investing activities:
Contributions to subsidiaries (119,157) (10,494) (10,965)
Purchase of repurchase agreement with banks (2,600) - (2,500)
Proceeds from repurchase agreement with banks - - 4,100
Proceeds from sales of available for sale securities - 1,404 -
Purchase of available for sale other securities (5,000) - -
Principal collected on mortgage-backed securities 3,223 1,426 2,087
Net decrease in notes receivable 4,698 6,993 7,551
Decrease in other assets (2,377) 3,926 2,048
Net cash provided by (used in) investing
activities
(121,213) 3,255 2,321
Financing activities:
Proceeds from issuance of subordinated debentures 68,000 - -
Proceeds from stock transactions 1,736 1,992 1,898
Payments of cash dividends (21,158) (21,016) (17,102)
Payments of cash dividends in lieu of
fractional shares (24) (24) (26)
Purchase of treasury stock (21,143) (10,419) (22,156)
Net cash provided by (used in) financing
Activities 27,411 (29,467) (37,386)
Increase (decrease) in cash and cash equivalents (182) 506 130
Cash at beginning of year 733 227 97
Cash at end of year $ 551 $ 733 $ 227
51
INTERNATIONAL BANCSHARES CORPORATION AND SUBSIDIARIES
Condensed Quarterly Income Statements
(Dollars in Thousands, Except Per Share Amounts)
(Unaudited)
Fourth Third Second First
Quarter Quarter Quarter Quarter
2001_____________________________________________________________________________________________
Interest income $ 88,155 $ 93,748 $101,936 $109,572
Interest expense 37,075 45,817 54,882 63,034
Net interest income 51,080 47,931 47,054 46,538
Provision for possible
loan losses 2,114 1,962 2,428 2,127
Non-interest income 18,772 20,196 18,810 18,754
Non-interest expense 37,199 33,928 33,488 30,826
Income before income
taxes 30,539 32,237 29,948 32,339
Income taxes 10,146 10,793 10,048 10,734
Net income $ 20,393 $ 21,444 $ 19,900 $ 21,605
Per common share:
Basic $ .78 $ .81 $ .75 $ 1.01
Diluted $ .76 $ .80 $ .73 $ 1.00
________________________________________________________________________________
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 $ .61 $ .70 $ .79 $ .89
Diluted $ .60 $ .69 $ .78 $ .89
________________________________________________________________________________
52
INTERNATIONAL BANCSHARES CORPORATION
OFFICERS AND DIRECTORS
OFFICERS DIRECTORS
DENNIS E. NIXON DENNIS E. NIXON
Chairman of the Board and President President
International Bank of Commerce
R. DAVID GUERRA R. DAVID GUERRA
Vice President President
International Bank of Commerce
EDUARDO J. FARIAS Branch in McAllen, Texas
Vice President
LEONARDO SALINAS
RICHARD CAPPS Investments
Vice President
LESTER AVIGAEL
IMELDA NAVARRO Retail Merchant
Treasurer Chairman of the Board
International Bank of Commerce
WILLIAM CUELLAR
Auditor IRVING GREENBLUM
Retail Merchant
LUISA D. BENAVIDES
Secretary RICHARD E. HAYNES
Attorney at Law
MARISA V. SANTOS Real Estate Investments
Assistant Secretary
SIOMA NEIMAN
International Entrepreneur
PEGGY J. NEWMAN
Investments
DANIEL B. HASTINGS, JR.
Licensed U.S. Custom Broker
President
Daniel B. Hastings, Inc.
Chairman of the Board
Sanchez Oil & Gas Corporation;
Investments
ANTONIO R. SANCHEZ, JR.
53