UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON D.C. 20549
FORM 10-Q
[X] Quarterly Report Pursuant to Section 13 or 15 (d) of The
Securities Exchange Act of 1934
For the Quarterly period Ended June 30, 1997
[ ] Transition Report Pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934
For the transition period from ___________ to___________
Commission File No. 0-14517
Texas Regional Bancshares, Inc.
(Exact name of registrant as specified in its charter)
Texas 74-2294235
(State or other jurisdiction of (IRS employer
incorporation or organization) identification number)
P.O. Box 5910
3700 N. Tenth, Suite 301
McAllen, Texas 78502
(Address of principal executive offices)
956/631-5400
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15 (d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
YES [X] NO [ ]
Indicate the number of shares outstanding of each of the
issuer's classes of common stock, as of the latest
practicable date.
Class A Voting Common Stock 8,732,064 shares $1 par value,
outstanding as of July 10, 1997.
<PAGE>
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
The information called for by Item 1. are included herein.
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations.
The information called for by Item 2. are included herein.
PART II. OTHER INFORMATION
Item 4. Submission of Matters to a Vote of Security Holders.
During the annual meeting of shareholders held April 14, 1997 the following
persons were elected directors: Morris Atlas, Frank N. Boggus, Robert G. Farris,
Joe M. Kilgore, C. Kenneth Landrum, MD, G. E. Roney, Julie G. Uhlhorn, Paul G.
Veale Sr. and Jack Whetsel.
Item 6.
(a) Exhibits
27. Financial Data Schedule
(b) Reports on Form 8-K
None
<PAGE>
Texas Regional Bancshares, Inc. and Subsidiary
<TABLE>
<CAPTION>
CONSOLIDATED BALANCE SHEETS (Unaudited) June 30, December 31,
------------------- --------------
(Dollars in Thousands) 1997 1996 1996
- -----------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Assets
Cash and Due From Banks $ 43,657 $ 48,452 $ 56,100
Federal Funds Sold 15,585 55,265 10,515
- -----------------------------------------------------------------------------------------------
Total Cash and Cash Equivalents 59,242 103,717 66,615
Securities Available for Sale 222,107 214,212 192,301
Securities Held to Maturity (Estimated Market Value
of $99,910 and $133,291 at June 30, 1997 and 1996,
respectively, and $126,896 at December 31, 1996) 99,168 133,449 125,835
Loans, Net of Unearned Discount of $1,863 and $1,652 at
June 30, 1997 and 1996, respectively and $1,607 at
December 31, 1996 820,620 698,434 757,656
Less Allowance for Loan Losses (10,441) (9,947) (10,031)
- -----------------------------------------------------------------------------------------------
Net Loans 810,179 688,487 747,625
Premises and Equipment, Net 38,732 36,161 37,054
Accrued Interest Receivable 16,172 16,718 13,743
Other Real Estate 2,578 1,873 742
Intangibles 25,192 25,287 26,318
Other Assets 5,536 4,800 20,344
- -----------------------------------------------------------------------------------------------
Total Assets $1,278,906 $1,224,704 $1,230,577
===============================================================================================
Liabilities
Deposits
Demand $ 167,057 $ 175,830 $ 168,728
Savings 88,665 99,531 94,852
Money Market Checking and Savings 223,327 249,361 234,927
Time Deposits 653,305 563,880 593,228
- -----------------------------------------------------------------------------------------------
Total Deposits 1,132,354 1,088,602 1,091,735
Federal Funds Purchased and Securities
Sold Under Repurchase Agreements 206 - 632
Accounts Payable and Accrued Liabilities 10,005 16,578 10,062
- -----------------------------------------------------------------------------------------------
Total Liabilities 1,142,565 1,105,180 1,102,429
- -----------------------------------------------------------------------------------------------
Commitment and Contingencies
Shareholders' Equity
Preferred Stock; $1.00 Par Value, 10,000,000
Shares Authorized; None Issued and Outstanding - - -
Common Stock - Class A; $1.00 Par Value, 20,000,000
Shares Authorized; Issued and Outstanding,
8,708,898 at June 30, 1997 and 8,706,791
at June 30, 1996 and 8,708,898 at December 31,
1996, (Notes 2 and 4) 8,708 8,706 8,708
Paid-In Capital 78,605 78,582 78,605
Retained Earnings 48,753 31,909 40,315
Unrealized Gain (Loss) on Securities Available for Sale 275 327 520
- -----------------------------------------------------------------------------------------------
Total Shareholders' Equity 136,341 119,524 128,148
- -----------------------------------------------------------------------------------------------
Total Liabilities and Shareholders' Equity $1,278,906 $1,224,704 $1,230,577
===============================================================================================
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
2
<PAGE>
<TABLE>
<CAPTION>
Quarter Ended Six Months Ended
Texas Regional Bancshares, Inc. and Subsidiary June 30, June 30,
CONSOLIDATED STATEMENTS OF INCOME (Unaudited) ---------------- -------------------
(Dollars in Thousands, Except Per Share Data) 1997 1996 1997 1996
- ---------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Interest Income
Loans, Including Fees $19,763 $14,499 $38,409 $25,510
Investment Securities
Taxable 4,841 2,750 9,629 4,468
Tax-Exempt 355 436 750 507
Federal Funds Sold 270 534 582 704
- ---------------------------------------------------------------------------------------------
Total Interest Income 25,229 18,219 49,370 31,189
- ---------------------------------------------------------------------------------------------
Interest Expense
Deposits 10,855 7,634 21,350 12,909
Federal Funds Purchased and
Securities Sold Under Repurchase Agreements 15 6 21 12
- ---------------------------------------------------------------------------------------------
Total Interest Expense 10,870 7,640 21,371 12,921
- ---------------------------------------------------------------------------------------------
Net Interest Income 14,359 10,579 27,999 18,268
Provision for Loan Losses 463 316 1,076 777
- ---------------------------------------------------------------------------------------------
Net Interest Income After Provision
for Loan Losses 13,896 10,263 26,923 17,491
- ---------------------------------------------------------------------------------------------
Noninterest Income
Service Charges on Deposit Accounts 1,462 1,167 2,902 2,106
Other Service Charges 303 236 634 472
Trust Service Fees 435 385 825 751
Investment Securities Gains (Losses) 134 - 305 1
Data Processing Service Fees 272 226 534 446
Other Operating Income 165 131 465 315
- ---------------------------------------------------------------------------------------------
Total Noninterest Income 2,771 2,145 5,665 4,091
- ---------------------------------------------------------------------------------------------
Noninterest Expense
Salaries and Employee Benefits 4,014 3,323 8,033 6,060
Net Occupancy Expense 607 505 1,186 822
Equipment Expense 895 757 1,730 1,400
Other Real Estate (Income) Expense, Net 45 (30) 30 (40)
Intangible Asset Amortization 563 326 1,126 449
Impairment Loss (Note 5) 630 - 630 -
Other Noninterest Expense 2,110 1,826 4,118 3,330
- ---------------------------------------------------------------------------------------------
Total Noninterest Expense 8,864 6,707 16,853 12,021
- ---------------------------------------------------------------------------------------------
Income Before Income Tax Expense 7,803 5,701 15,735 9,561
Income Tax Expense 2,692 2,024 5,381 3,330
- ---------------------------------------------------------------------------------------------
Net Income $ 5,111 $ 3,677 $10,354 $ 6,231
=============================================================================================
Primary Earnings Per Common Share (Note 2)
Net Income $ 0.58 $ 0.49 $ 1.17 $ 0.90
Weighted Average Number of Common Shares
Outstanding (In Thousands) 8,861 7,562 8,863 6,926
- ---------------------------------------------------------------------------------------------
Fully Diluted Earnings Per Common Share (Note 2)
Net Income $ 0.58 $ 0.49 $ 1.17 $ 0.90
Weighted Average Number of Common Shares
Outstanding (In Thousands) 8,884 7,570 8,874 6,932
=============================================================================================
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
3
<PAGE>
Texas Regional Bancshares, Inc. and Subsidiary
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY (Unaudited)
For the Year Ended December 31, 1996 and the Six Months Ended June 30, 1997
<TABLE>
<CAPTION>
Unrealized
Gain (Loss) Total
Class A on Securities Share-
Common Paid-in Retained Available holders'
(Dollars in Thousands) Stock Capital Earnings for Sale Equity
- -----------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Balance, December 31, 1995 $6,196 $29,239 $27,168 $ 117 $ 62,720
Exercise of stock options,
2,107 shares of Class A
Common Stock 2 23 - - 25
Change in Unrealized Gain
(Loss) on Securities
Available for Sale - - - 403 403
Class A Common Stock
Cash Dividends - - (3,232) - (3,232)
Sale of 2,510,000 shares of
Class A Common Stock 2,510 49,343 - - 51,853
Net Income - - 16,379 - 16,379
- -----------------------------------------------------------------------------------------------
Balance, December 31, 1996 8,708 78,605 40,315 520 128,148
Change in Unrealized Gain
(Loss) on Securities
Available for Sale - - - (245) (245)
Class A Common Stock
Cash Dividends - - (1,916) - (1,916)
Net Income for the Six Months
Ended June 30, 1997 - - 10,354 - 10,354
- -----------------------------------------------------------------------------------------------
Balance, June 30, 1997 $8,708 $78,605 $48,753 $ 275 $136,341
===============================================================================================
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
4
<PAGE>
Texas Regional Bancshares, Inc. and Subsidiary
CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)
Six Months Ended June 31, 1997 and 1996
<TABLE>
<CAPTION>
(Dollars in Thousands) 1997 1996
- -----------------------------------------------------------------------------------------------
<S> <C> <C>
Cash Flows from Operating Activities
Net Income $10,354 $ 6,231
Adjustments to Reconcile Net Income to Net Cash Provided by
Operating Activities
Depreciation, Amortization and Accretion, Net 1,571 1,225
Provision for Loan Losses 1,076 777
Provision for Estimated Losses on Other Real Estate and Other Assets 19 -
Gain on Sales of Other Real Estate (48) (48)
Gain on Sales of Securities Available for Sale (305) (1)
Gain on Sales of Premises and Equipment (1) (1)
Impairment Loss (Note 5) 630 -
(Gain) Loss on Sale of Other Assets (2) 10
(Increase) Decrease in Accrued Interest Receivable and Other Assets 13,471 (1,784)
Increase (Decrease) in Accounts Payable and Accrued Liabilities (10) 4,316
- ------------------------------------------------------------------------------------------------
Net Cash Provided by Operating Activities 26,755 10,725
- ------------------------------------------------------------------------------------------------
Cash Flows from Investing Activities
Proceeds from Sales of Securities Available for Sale 31,657 59,330
Proceeds from Maturing Securities Available for Sale 34,275 16,464
Purchases of Securities Available for Sale (95,836) (49,365)
Proceeds from Maturing Securities Held to Maturity 26,660 28,200
Purchases of Securities Held to Maturity - (79,905)
Proceeds from Sale of Loans 46 4,424
Purchases of Loans (232) (1,608)
Loan Originations and Advances (66,429) (10,051)
Recoveries of Charged-Off Loans 493 250
Proceeds from Sale of Other Assets 137 105
Proceeds from Sale of Other Real Estate 563 846
Proceeds from Sale of Premises and Equipment 1 44
Purchases of Premises and Equipment (3,827) (3,206)
Net Cash Used in Acquisitions - (15,404)
- ------------------------------------------------------------------------------------------------
Net Cash Used In Investing Activities (72,492) (49,876)
- ------------------------------------------------------------------------------------------------
Cash Flows from Financing Activities
Net Increase (Decrease) in Demand, Savings, Money
Market Checking and Savings Deposit Accounts (19,458) 19,778
Net Increase in Time Deposits 60,077 38,700
Net Decrease in Securities Sold
Under Repurchase Agreements (426) (757)
Proceeds from Sale of Common Stock - 51,853
Cash Dividends Paid on Common Stock (Note 4) (1,829) (1,239)
- ------------------------------------------------------------------------------------------------
Net Cash Provided by Financing Activities 38,364 108,335
- ------------------------------------------------------------------------------------------------
Increase (Decrease) in Cash and Cash Equivalents (7,373) 69,184
Cash and Cash Equivalents at Beginning of Year 66,615 34,533
- ------------------------------------------------------------------------------------------------
Cash and Cash Equivalents at End of Quarter $59,242 $103,717
================================================================================================
Supplemental Disclosures of Cash Flow Information
Interest Paid $21,278 $ 11,899
Income Taxes Paid 6,237 4,344
Supplemental Schedule of Noncash Investing and Financing Activities
Foreclosure and Repossession in Partial Satisfaction of Loans Receivable 2,492 1,165
================================================================================================
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
5
<PAGE>
Texas Regional Bancshares, Inc. and Subsidiary
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
(1) BASIS OF PRESENTATION
The accompanying unaudited consolidated financial statements have been prepared
in accordance with the instructions to Form 10-Q and therefore do not include
all information and footnotes necessary for a fair presentation of financial
position, results of operations and cash flows in conformity with generally
accepted accounting principles. However, the unaudited consolidated financial
statements furnished reflect all adjustments which are, in the opinion of
management, necessary for a fair presentation of the results for the interim
periods. All such adjustments were of a normal and recurring nature. The
unaudited consolidated financial statements include Texas Regional Bancshares,
Inc. and its subsidiary (the "Company"). Intercompany balances and transactions
have been eliminated.
(2) EARNINGS PER COMMON SHARE COMPUTATIONS
Earnings per common share computations include the effects of common stock
equivalents applicable to the stock option contracts.
In February 1996, Financial Accounting Standards Board issued Statements No.
128, Earnings per Share, which is required to be adopted on December 31, 1997.
At that time, the Company will be required to change the method currently used
to compute earnings per share to restate all prior periods. Under the new
requirements for calculating primary earnings per share, the dilutive effect of
stock options will be excluded.
(3) INCOME TAX
Deferred income tax assets and liabilities are computed for differences between
the financial statements and the tax basis of assets and liabilities that have
future tax consequences using the currently enacted tax laws and rates that
apply to the periods in which they are expected to effect taxable income.
Valuation allowances are established, if necessary, to reduce the deferred tax
assets to the amount that will more likely than not be realized. Income tax
expense is the current tax payable or refundable for the period plus or minus
the net change in the deferred tax assets and liabilities.
(4) COMMON STOCK
On June 10, 1997, the Board of Directors approved a cash dividend of $0.11 per
share for shareholders of record on July 8, 1997 and payable on July 15, 1997.
The Company's Board of Directors has authorized a stock split of three shares of
its $1.00 par value Common Stock for each two shares outstanding. To effect the
split, the Board of Directors declared a stock dividend of one-half share of
Common Stock for each share of Common Stock outstanding, payable August 21,
1997, to stockholders of record on July 31, 1997. In lieu of issuing fractional
shares in connection with the split, the Company has elected to provide for a
cash payment. The quarterly cash dividend of $0.11 per share will remain
unchanged.
(5) IMPAIRMENT LOSS
An impairment loss of $630,000 was recorded during the three months ended June
30, 1997 to reflect the impairment of an existing bank building. Construction of
a new bank building in McAllen, Texas has started. The new bank building will be
the headquarters for Texas State Bank and Texas Regional Bancshares, Inc and is
being constructed next to our existing bank site. Upon completion of the new
bank building, the existing building will be demolished to make room for
parking. The amount of the impairment loss was the book value of the building at
June 30, 1997.
6
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
Net income for the three months ended June 30, 1997 was $5.1 million or $0.58
per share, reflecting a net increase of $1.4 million or $0.09 per share compared
to net income of $3.7 million or $0.49 per share for the three months ended June
30, 1996. Net income for the six months ended June 30, 1997 was $10.4 million or
$1.17 per share, reflecting a net increase of $4.1 million or $0.27 per share
compared to net income of $6.2 million or $0.90 per share for the six months
ended June 30, 1996. Earnings increased for the three months ended June 30, 1997
compared to the three months ended June 30, 1996 which reflected an improvement
in net interest income and noninterest income partially offset by an increase in
the provision for loan losses and noninterest expense. Earnings increased for
the six months ended June 30, 1997 compared to the six months ended June 30,
1996 which reflected an increase in net interest income and noninterest income
reduced by an increase in the provision for loan losses and noninterest expense.
A more detailed description of the results of operations is included in the
presentation that follows.
On May 14, 1996, Texas Regional Bancshares, Inc. completed its public offering
of 2.5 million shares of the Company's Class A Common Stock (priced at $22.25
per share). On May 14, 1996, Texas Regional Bancshares, Inc. also completed the
acquisition of First State Bank & Trust Co., Mission, Texas and The Border Bank,
Hidalgo, Texas, (the "Mergers"), through merger with Texas State Bank, (the
"Bank") the principal operating subsidiary of Texas Regional Bancshares, Inc.
The purchase price of the Mergers was financed with a combination of proceeds
from the 2.5 million share common equity offering and cash on the balance sheet
of the Company. The Mergers included the assumption of $241.8 million in loans
and the assumption of $450.4 million in deposit liabilities.
The following table presents selected financial data regarding results of
operations:
<TABLE>
<CAPTION>
Condensed Quarterly Income 1997 1996 Six Months Ended
Statements Taxable-Equivalent Basis* ----------------- ---------------------------- June 30,
(Dollars in Thousands, Second First Fourth Third Second -----------------
Except Per Share Data) Quarter Quarter Quarter Quarter Quarter 1997 1996
- ---------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
Interest Income $25,612 $24,542 $23,973 $24,086 $18,621 $50,154 $31,797
Interest Expense 10,870 10,501 10,260 10,067 7,640 21,371 12,921
- ---------------------------------------------------------------------------------------------------------
Net Interest Income 14,742 14,041 13,713 14,019 10,981 28,783 18,876
Provision for Loan Losses 463 613 794 549 316 1,076 777
Noninterest Income 2,771 2,894 2,811 2,493 2,145 5,665 4,091
Noninterest Expense 8,864 7,989 7,968 7,973 6,707 16,853 12,021
- ---------------------------------------------------------------------------------------------------------
Income Before Taxable-Equivalent
Adjustment and Income Tax 8,186 8,333 7,762 7,990 6,103 16,519 10,169
Taxable-Equivalent Adjustment 383 401 392 630 402 784 608
Applicable Income Tax Expense 2,692 2,689 2,377 2,205 2,024 5,381 3,330
- ---------------------------------------------------------------------------------------------------------
Net Income $ 5,111 $ 5,243 $ 4,993 $ 5,155 $ 3,677 $10,354 $ 6,231
=========================================================================================================
Net Income Per Common Share
Primary $ 0.58 $ 0.59 $ 0.56 $ 0.58 $ 0.49 $ 1.17 $ 0.90
Fully Diluted 0.58 0.59 0.56 0.58 0.49 1.17 0.90
=========================================================================================================
</TABLE>
* Taxable-Equivalent basis assuming a 35% tax rate.
The Company paid cash and used the purchase method in accounting for its recent
acquisitions which has resulted in the creation of intangible assets. These
intangible assets are deducted from capital in the determination of regulatory
capital. Thus, "cash" earnings represent the regulatory capital generated during
the year and can be viewed as net income excluding intangible amortization, net
of tax. While the definition of "cash" earnings may vary by company, we believe
this definition is appropriate as it measures the per share growth of regulatory
capital, which impacts the amount available for dividends and acquisitions.
7
<PAGE>
The following table reconciles reported net income to net income excluding
intangible assets amortization ("cash" earnings):
<TABLE>
<CAPTION>
Cash Earnings 1997 1996 Six Months Ended
Taxable-Equivalent Basis* ---------------- ------------------------ June 30,
(Dollars in Thousands, Second First Fourth Third Second ----------------
Except Per Share Data) Quarter Quarter Quarter Quarter Quarter 1997 1996
- -----------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
Reported Net Income $5,111 $5,243 $4,993 $5,155 $3,677 $10,354 $6,231
Intangible Amortization 563 563 610 534 326 1,126 449
Income Tax Adjustment (111) (111) (111) (111) (75) (222) (112)
- -----------------------------------------------------------------------------------------------
Cash Earnings $5,563 $5,695 $5,492 $5,578 $3,928 $11,258 $6,568
===============================================================================================
Cash Earnings Per Common Share
Primary $ 0.63 $ 0.64 $ 0.62 $ 0.63 $ 0.52 $ 1.27 $ 0.95
Fully Diluted 0.63 0.64 0.62 0.63 0.52 1.27 0.95
Cash Earnings Return on
Average Assets 1.77% 1.85% 1.79% 1.83% 1.67% 1.81% 1.65%
Cash Earnings Return on
Average Shareholders' Equity 16.67 17.68 17.31 18.16 16.79 17.17 16.69
==============================================================================================
</TABLE>
* Taxable-Equivalent basis assuming a 35% tax rate.
NET INTEREST INCOME
Taxable-equivalent net interest income was $14.7 million for the three months
ended June 30, 1997, an increase of $3.8 million or 34.2% compared to the three
months ended June 30, 1996 of $11.0 million. The Net Yield on Total
Interest-Earning Assets of 5.21% for the three months ended June 30, 1997
remained unchanged when compared to 5.21% for the three months ended June 30,
1996. The increase in net interest income for the three months ended June 30,
1997 compared to the three months ended June 30, 1996 was primarily attributable
to the increase in the volume of interest-earning assets exceeding the increase
in volume of interest-bearing liabilities. The Total Interest-Earning Assets
average balance for the six months ended June 30, 1997 of $1.1 billion increased
$410.4 million or 57.1% compared to the Total Interest Earning Assets average
balance of $718.8 million for the six months ended June 30, 1996. Total
Interest-Bearing Liabilities average balance of $939.3 million for the six
months ended June 30, 1997 increased $357.9 million or 61.6% compared to the
Total Interest-Bearing Liabilities average balance of $581.4 million for the six
months ended June 30, 1996. The net increase in Total Interest-Earning Assets
average balance compared to the net increase in Total InterestBearing
Liabilities average balance for the six months ended June 30, 1997 compared to
the six months ended June 30, 1996 is the primary reason for the improved
earnings and is a result of the Mergers and an increased volume of business
conducted by the Company.
8
<PAGE>
The following tables present for the three months ended June 30, 1997, and June
30, 1996 and the six months ended June 30, 1997, and June 30, 1996, the total
dollar amount of interest income from average interest-earning assets and the
resultant yields, reported on a tax-equivalent basis, as well as the
interest-bearing liabilities, expressed both in dollars and rates. Average
balances are derived from average daily balances and the yields and costs are
established by dividing income or expense by the average balance of the asset or
liability. Income and yield on interest-earning assets include amounts to
convert tax-exempt income to a taxable-equivalent basis, assuming a 35%
effective income tax rate.
<TABLE>
<CAPTION>
Three Months Ended
------------------------------------------------------
Summary of Interest-Earning Assets June 30, 1997 June 30, 1996
and Interest-Bearing Liabilities ------------------------- ---------------------------
Taxable-Equivalent Basis Average Yield/ Average Yield/
(Dollars in Thousands) Balance Interest Rate* Balance Interest Rate*
- ---------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Interest-Earning Assets
Loans
Commercial $ 278,686 $ 6,785 9.77% $219,886 $ 5,353 9.79%
Real Estate 441,470 11,309 10.27 316,383 7,968 10.13
Consumer 74,910 1,862 9.97 54,633 1,348 9.92
- ---------------------------------------------------------------------------------------------
Total Loans 795,066 19,956 10.07 590,902 14,669 9.98
- ---------------------------------------------------------------------------------------------
Investment Securities
Taxable 297,526 4,841 6.53 188,087 2,750 5.88
Tax-Exempt 23,895 545 9.15 28,688 669 9.38
- ---------------------------------------------------------------------------------------------
Total Investment Securities 321,421 5,386 6.72 216,775 3,419 6.34
- ---------------------------------------------------------------------------------------------
Federal Funds Sold 18,411 270 5.88 39,492 534 5.44
- ---------------------------------------------------------------------------------------------
Total Interest-Earning Assets $1,134,898 25,612 9.05 $847,169 18,622 8.84
- ---------------------------------------------------------------------------------------------
Interest-Bearing Liabilities
Savings $ 90,816 726 3.21 $ 71,487 557 3.13
Money Market Checking and Savings 220,985 1,538 2.79 190,602 1,328 2.80
Time Deposits 632,274 8,591 5.45 429,714 5,749 5.38
- ---------------------------------------------------------------------------------------------
Total Savings and Time Deposits 944,075 10,855 4.61 691,803 7,634 4.44
- ---------------------------------------------------------------------------------------------
Federal Funds Purchased and
Securities Sold Under Repurchase
Agreements 1,131 15 5.32 495 6 4.88
- ---------------------------------------------------------------------------------------------
Total Interest-Bearing Liabilities $ 945,206 10,870 4.61 $692,298 7,640 4.44
- ---------------------------------------------------------------------------------------------
Net Interest Income $14,742 $10,982
- ---------------------------------------------------------------------------------------------
Net Yield on Total
Interest-Earning Assets 5.21% 5.21%
=============================================================================================
</TABLE>
* Annualized
9
<PAGE>
<TABLE>
<CAPTION>
Six Months Ended
-------------------------------------------------------
Summary of Interest-Earning Assets June 30, 1997 June 30, 1996
and Interest-Bearing Liabilities ------------------------- --------------------------
Taxable-Equivalent Basis Average Yield/ Average Yield/
(Dollars in Thousands) Balance Interest Rate* Balance Interest Rate*
- -----------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Interest-Earning Assets
Loans
Commercial $ 276,352 $13,316 9.72% $197,088 $ 9,529 9.72%
Real Estate 434,855 21,847 10.13 278,005 13,897 10.05
Consumer 73,533 3,632 9.96 49,055 2,422 9.93
- -----------------------------------------------------------------------------------------------
Total Loans 784,740 38,795 9.97 524,148 25,848 9.92
- -----------------------------------------------------------------------------------------------
Investment Securities
Taxable 298,362 9,629 6.51 151,806 4,468 5.92
Tax-Exempt 25,199 1,148 9.19 16,804 777 9.30
- -----------------------------------------------------------------------------------------------
Total Investment Securities 323,561 10,777 6.72 168,610 5,245 6.26
- -----------------------------------------------------------------------------------------------
Federal Funds Sold 20,935 582 5.61 26,060 704 5.43
- -----------------------------------------------------------------------------------------------
Total Interest-Earning Assets $1,129,236 50,154 8.96 $718,818 31,797 8.90
- -----------------------------------------------------------------------------------------------
Interest-Bearing Liabilities
Savings $ 91,917 1,467 3.22 $ 54,420 810 2.99
Money Market Checking and Savings 224,407 3,133 2.82 163,186 2,257 2.78
Time Deposits 622,185 16,750 5.43 363,224 9,842 5.45
- -----------------------------------------------------------------------------------------------
Total Savings and Time Deposits 938,509 21,350 4.59 580,830 12,909 4.47
- -----------------------------------------------------------------------------------------------
Federal Funds Purchased and
Securities Sold Under Repurchase
Agreements 831 21 5.10 590 12 4.09
- -----------------------------------------------------------------------------------------------
Total Interest-Bearing Liabilities $ 939,340 21,371 4.59 $581,420 12,921 4.47
- -----------------------------------------------------------------------------------------------
Net Interest Income $28,783 $ 18,876
- -----------------------------------------------------------------------------------------------
Net Yield on Total
Interest-Earning Assets 5.14% 5.28%
===============================================================================================
</TABLE>
* Annualized
10
<PAGE>
The following table presents the effects of changes in volume, rate and
rate/volume on interest income and interest expense for major categories of
interest-earning assets and interest-bearing liabilities for the six month
period ended June 30, 1997 as compared to the six month period ended June 30,
1996. Nonaccrual loans are included in assets, thereby reducing yields. See
"NONPERFORMING ASSETS". The allocation of the rate/volume variance has been made
pro rata on the percentage that volume and rate variances produce in each
category.
<TABLE>
<CAPTION>
Analysis of Changes in Net Interest Income
Taxable-Equivalent Basis
Six Months Ended June 30, Due to Change in
1997 Compared to 1996 Net ---------------------------------------
(Dollars in Thousands) Change Volume Rate Rate/Volume
- ------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Interest Income
Loans, Including Fees $12,947 $12,855 $ 58 $ 34
Investment Securities
Taxable 5,161 4,314 432 415
Tax-Exempt 371 388 (11) (6)
Federal Funds Sold (122) (138) 21 (5)
- ------------------------------------------------------------------------------------------
Total Interest Income 18,357 17,419 500 438
- ------------------------------------------------------------------------------------------
Interest Expense
Deposits 8,441 7,950 310 181
Federal Funds Purchased
and Securities Sold
Under Repurchase Agreements 9 5 3 1
- ------------------------------------------------------------------------------------------
Total Interest Expense 8,450 7,955 313 182
- ------------------------------------------------------------------------------------------
Net Interest Income Before
Allocation Of Rate/Volume 9,907 9,464 187 256
- ------------------------------------------------------------------------------------------
Allocation of Rate/Volume - 226 30 (256)
- ------------------------------------------------------------------------------------------
Changes in Net Interest Income $ 9,907 $9,690 $217 $ -
==========================================================================================
</TABLE>
PROVISION FOR LOAN LOSSES
The provision for loan losses reflects management's judgement of the cost
associated with credit risk inherent in the loan portfolio. The provision for
loan losses for the three months ended June 30, 1997 of $463,000 reflects an
increase of $147,000 or 46.5% compared to $316,000 for the three months ended
June 30, 1996. The provision for loan losses for the six months ended June 30,
1997 of $1.1 million reflects an increase of $299,000 or 38.5% compared to
$777,000 for the six months ended June 30, 1996. See "ALLOWANCE FOR LOAN
LOSSES."
NONINTEREST INCOME
Noninterest income for the three months ended June 30, 1997 of $2.8 million
increased $626,000 or 29.2% compared to $2.1 million for the three months ended
June 30, 1996. Noninterest income for the six months ended June 30, 1997 of $5.7
million increased $1.6 million or 38.5% compared to $4.1 million for the six
months ended June 30, 1996. The increase in Noninterest Income for the three
months ended June 30, 1997 compared to the three months ended June 30, 1996 and
for the six months ended June 30, 1997 compared to the six months ended June 30,
1996 is primarily attributable to the Mergers, investment securities gains and
an increase in the volume of business conducted by the Company. The increase in
Total Service Charges was impacted by the Mergers and an increase in activity
levels and additional volume. The increase in Trust Service Fees is attributable
to increases in both the number of trust accounts and the book value of assets
managed. The increase in Data Processing Service Fees is attributable to an
increased volume of business.
11
<PAGE>
The following table summarizes the major noninterest income categories:
<TABLE>
<CAPTION>
1997 1996 Six Months
---------------- ------------------------- Ended June 30,
Noninterest Income Second First Fourth Third Second ----------------
(Dollars in Thousands) Quarter Quarter Quarter Quarter Quarter 1997 1996
- -----------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
Service Charges on Deposit Accounts $1,462 $1,440 $1,496 $1,380 $1,167 $2,902 $2,106
Other Service Charges 303 331 270 261 236 634 472
- -----------------------------------------------------------------------------------------------
Total Service Charges 1,765 1,771 1,766 1,641 1,403 3,536 2,578
Trust Service Fees 435 390 395 359 385 825 751
Investment Securities Gains (Losses) 134 171 244 156 - 305 1
Data Processing Service Fees 272 262 239 225 226 534 446
Other Operating Income 165 300 167 112 131 465 315
- -----------------------------------------------------------------------------------------------
Total $2,771 $2,894 $2,811 $2,493 $2,145 $5,665 $4,091
===============================================================================================
</TABLE>
NONINTEREST EXPENSE
Noninterest expense for the three months ended June 30, 1997 of $8.9 million
increased $2.2 million or 32.2% compared to the three months ended June 30, 1996
of $6.7 million. Noninterest expense for the six months ended June 30, 1997 of
$16.9 million increased $4.8 million or 40.2% compared to the six months ended
June 30, 1996 of $12.0 million. The increase in noninterest expense for the
three months ended June 30, 1997 compared to three months ended June 30, 1996
and for the six months ended June 30, 1997 compared to six months ended June 30,
1996 was primarily attributable to the Mergers, impairment loss and the
increased volume of business conducted by the Company.
The largest category of noninterest expense, Salaries and Employee Benefits
("Personnel"), of $4.0 million for the three months ended June 30, 1997
increased $691,000 or 20.8% compared to the three months ended June 30, 1996.
Personnel expense of $8.0 million for six months ended June 30, 1997 increased
$2.0 million or 32.6% compared to the $6.1 million for the six months ended June
30, 1996. Personnel expense increased for the three months ended June 30, 1997
compared to the three months ended June 30, 1996 and for the six months ended
June 30, 1997 compared to the six months ended June 30, 1996 primarily due to
the Mergers and staffing increases, staff for the Company's second banking
location in Weslaco, Texas, (the "New Weslaco Banking Location") and increases
in payroll taxes, medical insurance premiums and pension expenses for all
employees.
Net occupancy expense of $607,000 for the three months ended June 30, 1997
increased $102,000 or 20.2% compared to $505,000 for the three months ended June
30, 1996. Net occupancy expense of $1.2 million for the six months ended June
30, 1997 increased $364,000 or 44.3% compared to $822,000 for six months ended
June 30, 1996. The Net Occupancy expense increased for the three months ended
June 30, 1997 compared to the three months ended June 30, 1996 and for the six
months ended June 30, 1997 compared to the six months ended June 30, 1996
primarily due to the occupancy expenses associated with the Mergers and the New
Weslaco Banking Location.
Equipment expense of $895,000 for the three months ended June 30, 1997 increased
$138,000 or 18.2% compared to $757,000 for the three months ended June 30, 1996.
Equipment expenses of $1.7 million for the six months ended June 30, 1997
increased $330,000 or 23.6% compared to $1.4 million for the six months ended
June 30, 1996. Equipment expense increased for the three months ended June 30,
1997 as compared to the three months ended June 30, 1996 and for the six months
ended June 30, 1997 compared to the six months ended June 30, 1996 primarily due
to expenses associated with the Mergers and the New Weslaco Banking Location.
An impairment loss of $630,000 was recorded during the three months ended June
30, 1997 to reflect the impairment of an existing bank building. Construction of
a new bank building in McAllen, Texas has started. The new bank building will be
the headquarters for Texas State Bank and Texas Regional Bancshares, Inc and is
being constructed next to our existing bank site. Upon completion of the new
bank building, the existing building will be demolished to make room for
parking. The amount of the impairment loss was the book value of the building at
June 30, 1997.
12
<PAGE>
The following table displays the major noninterest expense categories:
<TABLE>
<CAPTION>
1997 1996 Six Months
--------------- ----------------------- Ended June 30,
Noninterest Expense Second First Fourth Third Second ----------------
(Dollars in Thousands) Quarter Quarter Quarter Quarter Quarter 1997 1996
- -----------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
Salaries and Employee Benefits
Salaries and Wages $3,205 $3,269 $3,021 $3,169 $2,680 $ 6,474 $ 4,843
Employee Benefits 809 750 831 833 643 1,559 1,217
- -----------------------------------------------------------------------------------------------
Total Salaries and Employee Benefits 4,014 4,019 3,852 4,002 3,323 8,033 6,060
- -----------------------------------------------------------------------------------------------
Net Occupancy Expense 607 579 584 545 505 1,186 822
- -----------------------------------------------------------------------------------------------
Equipment Expense 895 835 859 906 757 1,730 1,400
- -----------------------------------------------------------------------------------------------
Other Real Estate (Income) Expense, Net
Rent Income (30) (13) (21) (28) (25) (43) (58)
Gain on Sale - (48) (79) (76) (48) (48) (48)
Expense 75 46 64 70 43 121 66
Write-Downs - - 8 35 - - -
- -----------------------------------------------------------------------------------------------
Total Other Real Estate (Income)
Expense, Net 45 (15) (28) 1 (30) 30 (40)
- -----------------------------------------------------------------------------------------------
Intangible Amortization 563 563 610 534 326 1,126 449
- -----------------------------------------------------------------------------------------------
Other Noninterest Expense
Advertising and Public Relations 296 324 397 283 305 620 517
Data Processing and Check Clearing 229 219 256 310 225 448 376
Director Fees 87 98 91 95 83 185 157
Franchise Tax 156 94 55 56 60 250 134
Insurance 50 67 15 79 58 117 101
FDIC Insurance 35 33 - 1 1 68 2
Legal and Professional 409 296 445 244 332 705 590
Postage, Delivery and Freight 147 157 130 110 125 304 223
Stationery and Supplies 223 247 240 250 223 470 417
Telephone 98 99 113 93 73 197 140
Other Losses 115 113 131 238 136 228 258
Impairment Loss 630 - - - - 630 -
Miscellaneous Expenses 265 261 218 226 205 526 415
- -----------------------------------------------------------------------------------------------
Total Other Noninterest Expense 2,740 2,008 2,091 1,985 1,826 4,748 3,330
- -----------------------------------------------------------------------------------------------
Total $8,864 $7,989 $7,968 $7,973 $6,707 $16,853 $12,021
===============================================================================================
</TABLE>
BALANCE SHEET ANALYSIS
Total average assets for the three months ended June 30, 1997 of $1.3 billion
increased $316,000 million or 33.5% compared to the three months ended June 30,
1996 of $945.2 million. Total average assets for the six months ended June 30,
1997 of $1.3 billion increased $453.6 million or 56.7% compared to the six
months ended June 30, 1996 of $800.4 million. The increase in total assets was
primarily attributable to the Mergers, deposit growth and new capital.
Average total deposits for the three months ended June 30, 1997 of $1.1 billion
increased $273.1 million or 32.4% compared to the three months ended June 30,
1996 of $843.3 million. Average total deposits for the six months ended June 30,
1997 of $1.1 billion increased $395.8 million or 55.4% compared to the six
months ended June 30, 1996 of $714.9 million. The increase in average total
deposits is primarily attributable to the Mergers and deposit growth.
13
<PAGE>
The following table presents the consolidated average balance sheets:
<TABLE>
<CAPTION>
1997 1996 Six Months
-------------------- -------------------------------- Ended June 30,
Average Balance Sheets Second First Fourth Third Second --------------------
(Dollars in Thousands) Quarter Quarter Quarter Quarter Quarter 1997 1996
- ----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
Assets
Loans $ 795,066 $ 774,414 $ 727,308 $ 702,720 $590,902 $ 784,740 $524,148
Investment Securities
Taxable 297,526 299,198 312,409 311,355 188,087 298,362 151,806
Tax-Exempt 23,895 26,503 28,539 43,657 28,688 25,199 16,804
Federal Funds Sold 18,411 23,459 30,716 32,336 39,492 20,935 26,060
- ----------------------------------------------------------------------------------------------------------
Total Interest-Earning
Assets 1,134,898 1,123,574 1,098,972 1,090,068 847,169 1,129,236 718,818
Cash and Due from Banks 49,441 48,501 45,201 48,723 46,135 48,971 40,608
Bank Premises and Equipment,
Net 38,555 37,415 36,544 36,244 27,996 37,985 23,338
Other Assets 49,170 47,258 47,790 48,260 31,507 48,214 23,861
Allowance for Loan Losses (10,575) (10,237) (10,073) (10,061) (7,614) (10,406) (6,209)
- ----------------------------------------------------------------------------------------------------------
Total $1,261,489 $1,246,511 $1,218,434 $1,213,234 $945,193 $1,254,000 $800,416
==========================================================================================================
Liabilities
Demand Deposits
Commercial and Individual $ 165,287 $ 164,497 $ 160,368 $ 161,378 $146,191 $ 164,892 $128,681
Public Funds 7,074 7,436 7,214 6,100 5,301 7,255 5,347
- ----------------------------------------------------------------------------------------------------------
Total Demand Deposits 172,361 171,933 167,582 167,478 151,492 172,147 134,028
- ----------------------------------------------------------------------------------------------------------
Savings
Commercial and Individual 90,129 92,335 93,925 97,440 70,943 91,232 53,908
Public Funds 687 683 665 570 544 685 512
Money Market Checking
and Savings Accounts
Commercial and Individual 182,621 181,009 185,143 190,837 147,083 181,815 127,258
Public Funds 38,364 46,820 59,621 60,855 43,519 42,592 35,928
Time Deposits
Commercial and Individual 507,707 497,489 482,923 474,521 383,318 502,598 334,360
Public Funds 124,567 114,607 89,361 87,795 46,396 119,587 28,864
- ----------------------------------------------------------------------------------------------------------
Total Interest-Bearing
Deposits 994,075 932,943 911,638 912,018 691,803 938,509 580,830
- ----------------------------------------------------------------------------------------------------------
Total Deposits 1,116,436 1,104,876 1,079,220 1,079,496 843,295 1,110,656 714,858
- ----------------------------------------------------------------------------------------------------------
Federal Funds Purchased and
Securities Sold Under
Repurchase Agreements 1,131 531 432 416 495 831 590
Other Liabilities 10,108 10,480 12,548 11,096 7,305 10,294 5,840
Shareholders' Equity 133,814 130,624 126,234 122,226 94,098 132,219 79,128
- ----------------------------------------------------------------------------------------------------------
Total $1,261,489 $1,246,511 $1,218,434 $1,213,234 $945,193 $1,254,000 $800,416
==========================================================================================================
</TABLE>
14
<PAGE>
RISK ANALYSIS OF THE LOAN PORTFOLIO
Total loans at June 30, 1997 of $820.6 million increased $122.2 million or 17.5%
compared to June 30, 1996 levels of $698.4 million and increased $27.2 million
or 3.4% compared to March 31, 1997 levels of $793.4 million. The increase in
total loans in the three months ended June 30, 1997 compared to total loans at
June 30, 1996 is primarily attributable to the volume of business conducted by
the Company. The Company's loans are widely diversified by borrower and industry
group.
The following table presents the composition of the loan portfolio for the last
five quarters:
<TABLE>
<CAPTION>
1997 1996
-------------------- ----------------------------------
Loan Portfolio Composition Second First Fourth Third Second
(Dollars in Thousands) Quarter Quarter Quarter Quarter Quarter
- -----------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Commercial $209,300 $205,531 $198,752 $177,277 $178,171
Commercial Tax-Exempt 33,046 34,086 34,777 39,533 35,572
- -----------------------------------------------------------------------------------------------
Total Commercial Loans 242,346 239,617 233,529 216,810 213,743
- -----------------------------------------------------------------------------------------------
Agricultural 41,953 41,792 32,639 21,392 32,742
- -----------------------------------------------------------------------------------------------
Real Estate
Construction 55,704 54,443 47,400 45,053 44,520
Commercial Mortgage 274,061 254,501 243,198 224,010 217,514
Agricultural Mortgage 28,554 28,317 28,803 28,494 27,413
1-4 Family Mortgage 100,983 101,732 100,301 99,167 96,922
- -----------------------------------------------------------------------------------------------
Total Real Estate 459,302 438,993 419,702 396,724 386,369
- -----------------------------------------------------------------------------------------------
Consumer 77,019 73,031 71,786 70,875 65,580
- -----------------------------------------------------------------------------------------------
Total Loans $820,620 $793,433 $757,656 $705,801 $698,434
===============================================================================================
</TABLE>
NONPERFORMING ASSETS
Nonperforming assets are comprised of loans for which the accrual of interest
has been discontinued, loans for which the interest rate has been reduced to
less than normal rates due to a serious weakening in the borrower's financial
condition, and other assets which consist of real estate and other property
which have been acquired in partial or full satisfaction of loan obligations and
which are awaiting disposition. A loan is generally placed on nonaccrual status
when payment of principal or interest is contractually past due 90 days, or
earlier when concern exists as to the ultimate collection of principal and
interest. At the time a loan is placed on nonaccrual status, interest previously
accrued but uncollected is reversed and charged against current income. At June
30, 1997 nonaccrual loan relationships each in excess of $100,000 totaling $6.1
million accounted for 88.7% of the total nonaccrual loans. These nonaccrual
credits are secured primarily by real estate, and management believes that it is
unlikely that any material loss will be incurred.
Loans which are contractually past due 90 days or more which are both well
secured or guaranteed by financially responsible third parties and in are the
process of collection generally are not placed on nonaccrual status. The amount
of such loans past due 90 days or more at June 30, 1997 of $6.4 million reflects
an increase of $4.3 million compared to the June 30, 1996 level of $2.1 million
and reflects a decrease of $1.1 million or 14.2% compared to the March 31, 1997
level of $7.5 million. Included in the $6.4 million of loans past due 90 days or
more are two large credit relationships in process of collection totaling $3.8
million. The remaining $2.6 million of loans past due 90 days or more are
secured primarily by real estate and management believes that it is unlikely
that any material loss will be incurred.
Total cross-border credits of $7.6 million or 0.92% of total loans outstanding
at June 30, 1997 reflect improvement when compared to the total cross-border
credits at March 31, 1997 of $7.7 million. Total nonaccrual and accruing loans
past due 90 days or more cross-border credits were $3.0 million and $1.6
million, respectively, at June 30, 1997. The $1.6 million of accruing loans past
due 90 days or more cross-border credit at June 30, 1997 has since been paid.
15
<PAGE>
At June 30, 1997, the Company had a $6.8 million recorded investment in impaired
loans for which there was a related allowance for loan losses of $676,000. At
June 30, 1997, the Company has a $149,000 investment in impaired loans for which
there was no related allowance for loan losses. The average level of impaired
loans during the three months ended June 30, 1997 was $7.5 million. The Company
recorded interest income of $44,000 on its loans during the six months ended
June 30, 1997.
An analysis of the components of nonperforming assets for the last five quarters
is presented in the following table:
<TABLE>
<CAPTION>
1997 1996
-------------------- -----------------------------
Nonperforming Assets Second First Fourth Third Second
(Dollars in Thousands) Quarter Quarter Quarter Quarter Quarter
- -----------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Nonaccrual Loans $ 6,824 $ 6,469 $ 6,445 $3,801 $3,748
Renegotiated Loans - - 1 2 4
- -----------------------------------------------------------------------------------------------
Nonperforming Loans 6,824 6,469 6,446 3,803 3,752
Foreclosed Assets
(Primarily Other Real Estate) 2,767 1,078 945 1,551 1,976
- -----------------------------------------------------------------------------------------------
Total Nonperforming Assets 9,591 7,547 7,391 5,354 5,728
Accruing Loans 90 Days or More Past Due 6,436 7,497 4,089 3,446 2,107
- -----------------------------------------------------------------------------------------------
Total Nonperforming Assets and Accruing
Loans 90 Days or More Past Due $16,027 $15,044 $11,480 $8,800 $7,835
===============================================================================================
Nonperforming Loans as a % of Total Loans 0.83% 0.82% 0.85% 0.54% 0.54%
Nonperforming Assets as a % of Total
Loans and Foreclosed Assets 1.16 0.95 0.97 0.76 0.82
Nonperforming Assets as a % of Total Assets 0.75 0.60 0.60 0.44 0.47
Nonperforming Assets and Accruing
Loans 90 Days or More Past Due
as a % of Total Loans and Foreclosed Assets 1.95 1.89 1.51 1.24 1.12
===============================================================================================
</TABLE>
Management continues to emphasize maintaining a low level of nonperforming
assets and returning nonperforming assets to an earning status.
ALLOWANCE FOR LOAN LOSSES
The allowance for loan losses at June 30, 1997 of $10.4 million increased
$494,000 or 5.0% compared to the June 30, 1996 balance of $9.9 million and
increased $204,000 or 2.0% compared to the March 31, 1997 balance of $4.9
million. The allowance for loan losses was 1.27% of loans outstanding, net of
unearned discount at June 30, 1997, down from 1.42% at June 30, 1996. The
allowance for loan losses as a percentage of nonperforming assets was 108.8% at
June 30, 1997 from 173.7% at June 30, 1996.
16
<PAGE>
The following table summarizes the transactions in the allowance for loan
losses:
<TABLE>
<CAPTION>
1997 1996 Six Months
--------------- ------------------------- Ended June 30,
Allowance for Loan Loss Activity Second First Fourth Third Second ----------------
(Dollars in Thousands) Quarter Quarter Quarter Quarter Quarter 1997 1996
- -----------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance at Beginning of Period $10,237 $10,031 $9,921 $9,947 $4,890 $10,031 $4,542
Balance from Acquisitions - - - - 4,647 - 4,647
Provision for Loan Losses 463 613 794 549 316 1,076 777
Charge-Offs
Commercial 165 491 513 296 14 656 74
Agricultural 47 - 144 6 8 47 8
Real Estate 1 6 19 35 24 7 28
Consumer 223 226 120 380 53 449 159
- -----------------------------------------------------------------------------------------------
Total Charge-Offs 436 723 796 717 99 1,159 269
- -----------------------------------------------------------------------------------------------
Recoveries
Commercial 12 37 13 30 84 49 117
Agricultural 34 - - - - 34 -
Real Estate 60 219 58 37 59 279 66
Consumer 71 60 41 75 50 131 67
- -----------------------------------------------------------------------------------------------
Total Recoveries 177 316 112 142 193 493 250
- -----------------------------------------------------------------------------------------------
Net Charge-Offs (Recoveries) 259 407 684 575 (94) 666 19
- -----------------------------------------------------------------------------------------------
Balance at End of Period $10,441 $10,237 $10,031 $9,921 $9,947 $10,441 $9,947
- -----------------------------------------------------------------------------------------------
Ratio of Allowance for Loan
Losses to Loans Outstanding,
Net of Unearned Discount 1.27% 1.29% 1.32% 1.41% 1.42%
Ratio of Allowance For Loan
Losses to Nonperforming Assets 108.86 135.64 135.72 185.30 173.66
Ratio of Net Charge-Offs (Recoveries)
to Average Total Loans Outstanding,
Net of Unearned Discount 0.13 0.21 0.37 0.33 *
===============================================================================================
</TABLE>
* Not meaningful.
PREMISES AND EQUIPMENT, NET
Premises and equipment of $38.7 million at June 30, 1997 increased $2.6 million
or 7.1% compared to $36.2 million at June 30, 1996 and increased $1.7 million or
4.5% compared to $37.1 million at December 31, 1996. The net increase for June
30, 1997 compared to June 30, 1996, is primarily attributable to remodeling and
construction of new drive-in facilities for the Harlingen and Sharyland branch
locations, construction of a new branch facility in Edinburg, Texas and the new
headquarters bank building in McAllen, Texas.
DEPOSITS
Total deposits at June 30, 1997 of $1.1 billion increased $43.8 million or 4.0%
compared to the June 30, 1996 balance of $1.1 billion and increased $14.4
million or 1.3% compared to March 31, 1997 of $1.1 billion. Total public funds
deposits at June 30, 1997 of $170.3 million decreased $183,000 or 0.1% compared
to the June 30, 1996 level of $170.5 million and decreased $2.6 million or 1.5%
compared to the March 31, 1997 level of $172.3 million.
17
<PAGE>
The following table presents the composition of total deposits for the last five
quarters:
<TABLE>
<CAPTION>
1997 1996
--------------------- ------------------------------------
Total Deposits Second First Fourth Third Second
(Dollars in Thousands) Quarter Quarter Quarter Quarter Quarter
- -----------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Demand Deposits
Commercial and Individual $ 160,334 $ 167,362 $ 162,650 $ 159,545 $ 169,838
Public Funds 6,723 8,153 6,078 7,894 5,992
- -----------------------------------------------------------------------------------------------
Total Demand Deposits 167,057 175,515 168,728 167,439 175,830
- -----------------------------------------------------------------------------------------------
Interest-Bearing Deposits
Savings
Commercial and Individual 87,965 93,340 94,114 94,116 98,584
Public Funds 700 679 738 564 947
Money Market Checking and Savings
Commercial and Individual 192,889 182,413 181,495 180,051 182,527
Public Funds 30,438 36,409 53,432 68,819 66,834
Time Deposits
Commercial and Individual 520,890 501,995 490,294 475,846 467,194
Public Funds 132,415 127,624 102,934 79,395 96,686
- -----------------------------------------------------------------------------------------------
Total Interest-Bearing
Deposits 965,297 942,460 932,007 898,791 912,772
- -----------------------------------------------------------------------------------------------
Total Deposits $1,132,354 $1,117,975 $1,091,735 $1,066,230 $1,088,602
===============================================================================================
</TABLE>
CAPITAL AND LIQUIDITY
Shareholders' equity at June 30, 1997 of $136.3 million increased $16.8 million
or 14.1% compared to the June 30, 1996 level of $119.5 million and increased
$8.2 million or 6.4% compared to the December 31, 1996 level of $128.1 million.
The increase in shareholders' equity at June 30, 1997 compared to June 30, 1996
and December 31, 1996 was primarily attributable to net income, partially offset
by dividends.
The Company is dependent on dividend and interest income from the Bank and the
sale of stock for its liquidity. Applicable Federal Reserve Board regulations
provide that bank holding companies are permitted by regulatory authorities to
pay cash dividends on their common or preferred stock if consolidated earnings
and consolidated capital are within regulatory guidelines.
The risk-based capital standards as established by the Federal Reserve Board of
Governors apply to Texas Regional and Texas State Bank. The numerator of the
risk-based capital ratio for bank holding companies includes Tier I capital,
consisting of common shareholders' equity and qualifying cumulative and
noncumulative perpetual preferred stock; and Tier II capital, consisting of
other preferred stock, reserve for possible loan losses and certain subordinated
and term-debt securities. Goodwill is deducted from Tier I capital. At no time
is Tier II capital allowed to exceed Tier I capital in the calculation of total
capital. The denominator or asset portion of the risk-based ratio aggregates
generic classes of balance sheet and off-balance sheet exposures, each weighted
by one of four factors, ranging from 0% to 100%, based on the relative risk of
the exposure class.
Ratio targets are set for both Tier I and Total Capital (Tier I plus Tier II
capital). The minimum level of Tier I capital to total assets is 4.0% and the
minimum Total Capital ratio is 8.0%. The Federal Reserve Board has guidelines
for a Leverage Ratio that is designed as an additional evaluation of capital
adequacy of banks and bank holding companies. The Leverage Ratio is defined to
be the company's Tier I capital divided by its quarterly average total assets
less goodwill and other intangible assets. An insured depository institution is
"well capitalized" for purposes of FDICIA if its Total Capital Ratio is equal to
or greater than 10%, and Tier I Capital Ratio is equal to or greater than 6%,
and Leverage Capital Ratio is equal to or greater than 5%. The Company's Tier I
Capital Ratio was approximately 13.21% and 11.76% at June 30, 1997 and 1996,
respectively. The Company's Total Risk-Based Capital Ratio was approximately
14.46% and 13.00% at June 30, 1997 and 1996, respectively. The Company's
Leverage Capital Ratio was 8.96% and 10.21% at June 30, 1997 and 1996,
respectively. Based on capital ratios, the Company is within the definition of
"well capitalized" for Federal Reserve purposes as of June 30, 1997.
18
<PAGE>
The following table presents the Company's risk-based capital calculation:
Six Months
Ended June 30,
Risk-Based Capital ---------------------
(Dollars in Thousands) 1997 1996
- -------------------------------------------------------------------------------
Total Shareholders' Equity before unrealized
gains or losses on Securities Available for Sale $136,066 $119,197
Less Goodwill and Other Deductions 25,126 25,287
- -------------------------------------------------------------------------------
Total Tier I Capital 110,940 93,910
Total Tier II Capital 10,495 9,947
- -------------------------------------------------------------------------------
Total Qualifying Capital $121,435 $103,857
===============================================================================
Risk Adjusted Assets (Including Off-Balance
Sheet Exposure) $839,570 $798,636
===============================================================================
Tier I Capital Ratio 13.21% 11.76%
Total Capital Ratio 14.46 13.00
Leverage Capital Ratio 8.96 10.21
===============================================================================
Liability liquidity is provided by access to core funding sources, principally
various customers' interest bearing and noninterest bearing deposit accounts in
the Company's trade area. The Company does not have or solicit brokered
deposits. Federal funds purchased and short-term borrowings are additional
sources of liquidity. These sources of liquidity are short-term in nature, and
are not used to fund asset growth.
For the six months ended June 30, 1997, liquidity was enhanced by net cash
provided by operating activities of $26.8 million and net cash provided by
financing activities of $38.4 million. The increase in net cash provided by
financing activities was primarily attributable to the $40.6 million net
increase in deposits. The increase in cash and cash equivalents was offset by
$72.5 million net cash used in investing activities. The investing activities
consisted primarily of funding $66.7 million of purchases, originations and
advances of loans, $3.2 million of net purchases (ie. net of sales proceeds and
maturing bond proceeds) of securities available for sale and securities held to
maturity and purchasing $3.8 million of premises and equipment. As a result, net
cash and cash equivalents at June 30, 1997 of $59.2 million decreased $7.4
million or 11.1% compared to net cash and cash equivalents at December 31, 1996
of $66.6 million.
19
<PAGE>
SELECTED FINANCIAL DATA
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30, June 30,
------------------ -------------------
1997 1996 1997 1996
- -----------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Performance Ratios
Return On Average Assets (1) 1.63% 1.56% 1.66% 1.57%
Return On Average Shareholders' Equity (1) 15.32 15.72 15.79 15.84
Loan to Deposit Ratio 72.47 64.16 72.47 64.16
Demand Deposit to Total Deposit Ratio 14.75 16.15 14.75 16.15
Net Interest Income to Average Interest-
Earning Assets (2) 5.21 5.21 5.14 5.28
Total Average Loans to Total Average Deposits 71.21 70.07 70.66 73.32
Average Equity to Average Assets 10.61 9.96 10.54 9.89
Efficiency Ratio (2) 50.75 51.33 49.27 52.52
Common Stock Data
Dividend Payout Ratio 18.97 20.41 18.80 22.22
Number of Shares Outstanding at Month
End (in Thousands) 8,708 8,706 8,708 8,706
Other Statistics
Number of Common Shareholders of Record 600 633 600 633
Number of Full-Time Equivalent Employees 553 510 553 510
===============================================================================================
</TABLE>
(1) Annualized
(2) Taxable-Equivalent Basis Assuming a 35% Effective Income Tax Rate.
<TABLE>
<CAPTION>
COMMON STOCK TRADING DATA (NASDAQ National Market System)
- ----------------------------------------------------------------------------------------------
Trading Volume (1997)
<S> <C> <C> <C>
Price
June 30, 1997 $42.00 Book Value $15.66 April 370,997 shares
1997 price range $28.50 - $45.38 Price/Book Value 2.68x May 258,468 shares
June 742,332 shares
=============================================================================================
</TABLE>
20
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Texas Regional Bancshares, Inc.
July 21, 1997 /s/ G. E. Roney
Date G. E. Roney
Chairman of the Board,
President & Chief
Executive Officer
July 21, 1997 /s/ George R. Carruthers
Date George R. Carruthers
Executive Vice President
& Chief Financial Officer
<TABLE> <S> <C>
<ARTICLE> 9
<LEGEND>
This schedule contains summary financial information extracted from the
Consolidated Balance Sheets, Consolidated Statements of Income, included herein
and is qualified in its entirety by reference to such financial statements.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-END> JUN-30-1997
<CASH> 43,657
<INT-BEARING-DEPOSITS> 0
<FED-FUNDS-SOLD> 15,585
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 222,107
<INVESTMENTS-CARRYING> 99,168
<INVESTMENTS-MARKET> 99,910
<LOANS> 820,620
<ALLOWANCE> (10,441)
<TOTAL-ASSETS> 1,278,906
<DEPOSITS> 1,132,354
<SHORT-TERM> 0
<LIABILITIES-OTHER> 10,211
<LONG-TERM> 0
0
0
<COMMON> 8,708
<OTHER-SE> 127,633
<TOTAL-LIABILITIES-AND-EQUITY> 1,278,906
<INTEREST-LOAN> 38,409
<INTEREST-INVEST> 10,379
<INTEREST-OTHER> 582
<INTEREST-TOTAL> 49,370
<INTEREST-DEPOSIT> 21,350
<INTEREST-EXPENSE> 21,371
<INTEREST-INCOME-NET> 27,999
<LOAN-LOSSES> 1,076
<SECURITIES-GAINS> 305
<EXPENSE-OTHER> 16,853
<INCOME-PRETAX> 15,735
<INCOME-PRE-EXTRAORDINARY> 15,735
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 10,354
<EPS-PRIMARY> 1.17
<EPS-DILUTED> 1.17
<YIELD-ACTUAL> 5.21
<LOANS-NON> 6,824
<LOANS-PAST> 6,436
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 10,031
<CHARGE-OFFS> 1,159
<RECOVERIES> 493
<ALLOWANCE-CLOSE> 10,441
<ALLOWANCE-DOMESTIC> 0
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 0
</TABLE>
