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 March 31, 1998
[ ] 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 14,409,145 shares $1 par value,
outstanding as of May 4, 1998.
<PAGE>
PART I. FINANCIAL INFORMATION.
Item 1. Financial Statements
Texas Regional Bancshares, Inc. and Subsidiaries
CONSOLIDATED BALANCE SHEETS (UNAUDITED)
<TABLE>
<CAPTION>
March 31, December 31,
-------------------------------- -------------
1998 1997 1997
-------- --------- ---------
(Dollars in Thousands)
<S> <C> <C> <C>
Assets
Cash and Due From Banks .............................. $ 67,826 $ 55,461 $ 62,268
Federal Funds Sold ................................... 22,820 37,309 18,985
Time Deposits ........................................ 2,072 295 100
----------- ----------- -----------
Total Cash and Cash Equivalents .................... 92,718 93,065 81,353
Securities Available for Sale ........................ 364,496 221,644 324,177
Securities Held to Maturity (Estimated Market
Value of $50,990 and $152,828 at
March 31, 1998 and 1997, respectively,
and $93,311 at December 31, 1997) .................. 50,577 152,952 92,744
Loans, Net of Unearned Discount of $3,460
and $2,257 at March 31, 1998 and 1997,
respectively and $2,753 at December 31, 1997 ....... 1,017,776 857,387 951,316
Less Allowance for Loan Losses ....................... (12,115) (11,000) (11,291)
----------- ----------- -----------
Net Loans .......................................... 1,005,661 846,387 940,025
Premises and Equipment, Net .......................... 61,510 40,889 52,443
Accrued Interest Receivable .......................... 18,407 17,405 16,033
Other Real Estate .................................... 4,020 1,079 3,124
Intangibles .......................................... 28,967 25,755 24,066
Other Assets ......................................... 5,505 4,829 4,804
----------- ----------- -----------
Total Assets ....................................... $ 1,631,861 $ 1,404,005 $ 1,538,769
=========== =========== ===========
Liabilities
Deposits
Demand ............................................. $ 229,862 $ 198,956 $ 208,423
Savings ............................................ 109,176 106,651 101,688
Money Market Checking and Savings .................. 255,944 237,039 242,839
Time Deposits ...................................... 851,055 701,610 809,833
----------- ----------- -----------
Total Deposits ................................... 1,446,037 1,244,256 1,362,783
Federal Funds Purchased and Securities
Sold Under Repurchase Agreements .................... 1,540 504 1,801
Accounts Payable and Accrued Liabilities ............. 17,846 13,057 12,630
----------- ----------- -----------
Total Liabilities .................................. 1,465,423 1,257,817 1,377,214
----------- ----------- -----------
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, 50,000,000
Shares Authorized; Issued and Outstanding,
14,403,484 at March 31, 1998 and December 31,1997
and 14,356,192 at March 31, 1997, (Notes 3 and 5) .. 14,403 14,356 14,403
Paid-In Capital ...................................... 87,468 86,620 87,078
Retained Earnings .................................... 63,420 46,384 59,167
Accumulated Other Comprehensive Income ............... 1,147 (1,172) 907
----------- ----------- -----------
Total Shareholders' Equity ......................... 166,438 146,188 161,555
----------- ----------- -----------
Total Liabilities and Shareholders' Equity ......... $ 1,631,861 $ 1,404,005 $ 1,538,769
=========== =========== ===========
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
<PAGE>
Texas Regional Bancshares, Inc. and Subsidiaries
CONSOLIDATED STATEMENTS of INCOME and COMPREHENSIVE INCOME (UNAUDITED)
<TABLE>
<CAPTION>
Three Months
Ended March 31,
----------------------------
1998 1997
--------- ---------
(Dollars in Thousands, Except Per Share Data)
<S> <C> <C>
Interest Income
Loans, Including Fees .................................... $23,521 $ 20,209
Investment Securities
Taxable ................................................ 6,303 5,548
Tax-Exempt ............................................. 364 419
Time Deposits ............................................ 18 2
Federal Funds Sold ....................................... 356 503
------- --------
Total Interest Income .................................. 30,562 26,681
------- --------
Interest Expense
Deposits ................................................. 13,939 11,589
Federal Funds Purchased and
Securities Sold Under Repurchase Agreements ............ 28 6
------- --------
Total Interest Expense ................................. 13,967 11,595
------- --------
Net Interest Income ........................................ 16,595 15,086
Provision for Loan Losses .................................. 941 623
------- --------
Net Interest Income After Provision for Loan Losses .... 15,654 14,463
------- --------
Noninterest Income
Service Charges on Deposit Accounts ...................... 1,829 1,685
Other Service Charges .................................... 586 396
Trust Service Fees ....................................... 447 390
Investment Security Gains (Losses) ....................... 222 171
Data Processing Service Fees ............................. 341 262
Other Operating Income ................................... 537 315
------- --------
Total Noninterest Income ............................... 3,962 3,219
------- --------
Noninterest Expense
Salaries and Employee Benefits ........................... 4,667 4,609
Net Occupancy Expense .................................... 778 665
Equipment Expense ........................................ 1,134 900
Other Real Estate (Income) Expense, Net .................. 55 (19)
Intangible Asset Amortization ............................ 621 563
One Time Charge - Acquisitions (Note 6) .................. 682 --
Other Noninterest Expense ................................ 2,590 2,349
------- --------
Total Noninterest Expense .............................. 10,527 9,067
------- --------
Income Before Income Tax Expense ........................... 9,089 8,615
Income Tax Expense ......................................... 3,246 2,914
------- --------
Net Income ................................................. 5,843 5,701
Other Comprehensive Income - Unrealized Gains (Losses)
on Investment Securities Available for Sale .............. 240 (1,640)
------- --------
Comprehensive Income ....................................... $ 6,083 $ 4,061
======= ========
Basic Earnings Per Common Share (Note 3)
Net Income ............................................... $ 0.41 $ 0.40
Weighted Average Number of Common Shares
Outstanding (In Thousands) ............................. 14,403 14,356
Diluted Earnings Per Common Share (Note 3)
Net Income ............................................... $ 0.40 $ 0.39
Weighted Average Number of Common Shares
Outstanding (In Thousands) ............................. 14,648 14,589
======= ========
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
<PAGE>
Texas Regional Bancshares, Inc. and Subsidiaries
CONSOLIDATED STATEMENTS of CHANGES in SHAREHOLDERS' EQUITY (UNAUDITED) For the
Year Ended December 31, 1997 And the Three Months Ended March 31, 1998
<TABLE>
<CAPTION>
Accumulated
Class A Other Total
Common Paid-in Retained Comprehensive Shareholders'
Stock Capital Earnings Income Equity
--------- ---------- ---------- ------------- -------------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C>
Balance, December 31, 1996 ..................... $10,000 $ 86,620 $ 46,225 $ 468 $ 143,313
Exercise of stock options,
35,814 shares of Class A
Common Stock .................................. 36 458 -- -- 494
Other Comprehensive Income
for 1997 ...................................... -- -- -- 439 439
Class A Common Stock Cash Dividends -
Texas Regional Bancshares, Inc. ............... -- -- (4,803) -- (4,803)
Common Stock Cash Dividends - Acquisitions ..... -- -- (1,006) -- (1,006)
Class A Common Stock 3-for-2 Stock Split ....... 4,367 -- (4,371) -- (4)
Net Income ..................................... -- -- 23,122 -- 23,122
------- -------- -------- ------ ---------
Balance, December 31, 1997 ..................... 14,403 87,078 59,167 907 161,555
Other Comprehensive Income
for 1998 ...................................... -- -- -- 240 240
Class A Common Stock
Cash Dividends ................................ -- -- (1,590) -- (1,590)
Cash Dividends Paid on Fractional Shares ....... -- (8) -- -- (8)
Tax Effect of Nonqualified Stock Options
Exercised ..................................... -- 398 -- -- 398
Net Income for the Three Months
Ended March 31, 1998 .......................... -- -- 5,843 -- 5,843
------- -------- -------- ------ ---------
Balance, March 31, 1998 ........................ $14,403 $ 87,468 $ 63,420 $1,147 $ 166,438
======= ======== ======== ====== =========
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
<PAGE>
Texas Regional Bancshares, Inc. and Subsidiaries
CONSOLIDATED STATEMENTS of CASH FLOWS (Unaudited)
Three Months Ended March 31, 1998 and 1997
<TABLE>
<CAPTION>
1998 1997
--------- --------
(Dollars in Thousands)
<S> <C> <C>
Cash Flows from Operating Activities
Net Income ................................................................... $ 5,843 $ 5,701
Adjustments to Reconcile Net Income to Net Cash Provided by
Operating Activities
Depreciation, Amortization and Accretion, Net ............................ 802 841
Provision for Loan Losses ................................................ 941 623
Provision for Estimated Losses on Other Real Estate and Other Assets ..... -- 19
Gain on Sales of Other Real Estate ....................................... (34) (48)
Gain on Sale of Securities Available for Sale ............................ (222) (171)
(Gain) Loss on Sale of Premises and Equipment ............................ (159) (1)
(Gain) Loss on Sale of Other Assets ...................................... (4) 5
(Increase) Decrease in Accrued Interest Receivable and Other Assets ...... (1,358) 13,968
Increase in Accounts Payable and Accrued Liabilities ..................... 2,408 2,616
-------- --------
Net Cash Provided by Operating Activities ...................................... 8,217 23,553
-------- --------
Cash Flows from Investing Activities
Proceeds from Sales of Securities Available for Sale ......................... 47,999 12,897
Proceeds from Maturing Securities Available for Sale ......................... 47,704 23,552
Purchases of Securities Available for Sale ................................... (74,124) (67,698)
Proceeds from Maturing Securities Held to Maturity ........................... 979 18,675
Purchases of Securities Held to Maturity ..................................... -- (2,335)
Proceeds from Sale of Loans .................................................. -- 39
Purchases of Loans ........................................................... (294) (232)
Loan Originations and Advances ............................................... (42,290) (39,829)
Recoveries of Charged-Off Loans .............................................. 169 320
Proceeds from Sale of Other Assets ........................................... 155 59
Proceeds from Sale of Other Real Estate ...................................... 167 315
Proceeds from Sale of Premises and Equipment ................................. 447 1
Purchases of Premises and Equipment .......................................... (7,583) (1,383)
-------- --------
Net Cash Provided by (Used In) Investing Activities ............................ (26,671) (46,619)
-------- --------
Cash Flows from Financing Activities
Net Increase (Decrease) in Demand, Savings, Money
Market Checking and Savings Deposit Accounts ............................... 14,106 (8,885)
Net Increase in Time Deposits ................................................ 12,690 37,505
Net Decrease in Securities Sold
Under Repurchase Agreements ................................................ (1,085) (128)
Cash Dividends Paid on Class A Common Stock (Note 5) ......................... (1,442) (1,074)
Cash Dividends Paid on Fractional Shares ..................................... (8) --
Tax Effect of Nonqualified Stock Options Exercised ........................... 398 --
Net Cash and Cash Equivalents Received from Acquisition ...................... 5,160 --
-------- --------
Net Cash Provided by Financing Activities ...................................... 29,819 27,418
-------- --------
Increase in Cash and Cash Equivalents .......................................... 11,365 4,352
Cash and Cash Equivalents at Beginning of Year ................................. 81,353 88,713
-------- --------
Cash and Cash Equivalents at End of Quarter .................................... $ 92,718 $ 93,065
======== ========
Supplemental Disclosures of Cash Flow Information
Interest Paid ................................................................ $ 13,656 $ 11,545
Income Taxes Paid ............................................................ 4,143 173
Supplemental Schedule of Noncash Investing and Financing Activities
Foreclosure and Repossession in Partial Satisfaction of Loans Receivable ..... $ 1,005 $ 503
======== ========
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
<PAGE>
Texas Regional Bancshares, Inc. and Subsidiaries
NOTES to UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
NOTE 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 subsidiaries (the "Company"). Intercompany balances and
transactions have been eliminated.
In June 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 130, ("Statement 130") "Reporting
Comprehensive Income." Statement 130 establishes standards for reporting and
display of comprehensive income and its components (revenues, expenses, gains,
and losses) in a full set of general-purpose financial statements. Statement 130
requires that an enterprise (a) classify items of other comprehensive income by
their nature in a financial statement and (b) display the accumulated balance of
other comprehensive income separately from retained earnings and additional
paid-in capital in the equity section of a statement of financial position.
Statement 130 is effective for fiscal years beginning after December 15, 1997.
The provisions of Statement 130 were adopted by the Company as of January 1,
1998. The adoption of Statement 130 did not have a material impact on the
Company's financial position, results of operation, or liquidity.
NOTE 2-IMPAIRED LOANS
At March 31, 1998, the Company had a $7.9 million recorded investment in
impaired loans for which there was a related allowance for loan losses of
$846,000. At March 31, 1998, the Company has no investments in impaired loans
for which there was no related allowance for loan losses. The average level of
impaired loans during the three months ended March 31, 1998 was $8.2 million.
The Company recorded interest income of $30,000 on its loans during the three
months ended March 31, 1998.
NOTE 3-EARNINGS PER COMMON SHARE COMPUTATIONS
The number of shares outstanding and related earnings per share ("EPS") amounts
have been restated to retroactively give effect for the 1997 three-for-two stock
split.
The table below presents a reconciliation of basic and diluted earnings per
share computations for the three months ended March 31, 1998 and 1997.
(Dollars in thousands, except per share data) 1998 1997
----------- -----------
Net income available to common shareholders .......... $ 5,843 $ 5,701
----------- -----------
Weighted average number of common shares outstanding
used in basic EPS calculation ...................... 14,403,484 14,356,192
Add assumed exercise of outstanding stock options as
adjustments for dilutive securities ................ 244,724 232,682
----------- -----------
Weighted average number of common shares
outstanding used in diluted EPS calculations ....... 14,648,208 14,588,874
----------- -----------
Basic EPS ............................................ $ 0.41 $ 0.40
Diluted EPS .......................................... 0.40 0.39
=========== ===========
<PAGE>
NOTE 4-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.
NOTE 5-COMMON STOCK
On March 10, 1998, the Board of Directors approved a cash dividend of $0.11 per
share for shareholders of record on April 8, 1998 and payable on April 15, 1998.
NOTE 6-ACQUISITIONS
On February 19,1998, the Company completed the acquisition of three bank holding
companies and their three subsidiary banks. The acquisition of Brownsville
Bancshares, Inc. and its subsidiary, Brownsville National Bank, includes two
banking locations in Brownsville, Cameron County, Texas, with assets of
approximately $100.1 million, equity of $12.1 million, loans of $42.6 million,
and deposits of $87.2 million. This acquisition was achieved by the exchange of
984,806 shares of Texas Regional stock for all of the outstanding shares of
Brownsville Bancshares, Inc. and cancellation of outstanding stock options.
Brownsville National Bank was merged with and into Texas State Bank.
The second acquisition was TB&T Bancshares, Inc. and its subsidiary, Texas Bank
and Trust of Brownsville, Cameron County, Texas. Texas Bank and Trust of
Brownsville assets totaled approximately $44.9 million, equity of $4.1 million,
loans of $21.9 million, and deposits of $40.3 million. This acquisition was
achieved by exchange of 308,039 shares of Texas Regional stock for all of the
outstanding shares of TB&T Bancshares, Inc., a portion of which are retained in
a holdback escrow account pending resolution of certain claims. Texas Bank and
Trust of Brownsville was merged with and into Texas State Bank.
The third acquisition was Raymondville Bancorp, Inc. and its subsidiary, Bank of
Texas. Bank of Texas is headquartered in Raymondville, Willacy County, Texas,
with one additional banking facility in Brownsville, Texas. The shareholder of
Raymondville Bancorp, Inc. received cash consideration of $9.6 million in this
acquisition, and Texas Regional paid $100,000 in consideration for a covenant
not to compete. Texas Regional discharged approximately $330,000 of existing
Raymondville Bancorp, Inc. indebtedness. Bank of Texas assets total
approximately $63.7 million, equity of $5.1 million, loans of $25.5 million, and
deposits of $56.5 million. Bank of Texas was merged with and into Texas State
Bank.
The acquisition of Brownsville Bancshares, Inc. and TB&T Bancshares, Inc. are
accounted for under the pooling-of-interest method of accounting, and as such,
the enclosed financial information has been restated for all periods presented
to include the results of operations and financial position of these acquired
entities. The acquisition of Raymondville Bancorp, Inc. was accounted for under
the purchase method of accounting; therefore, the results of operations are
included in the consolidated financial statements from the date of acquisition,
February 19, 1998. The One Time Charge - Acquisitions cost of $682,000 were
expenses related to effecting business combinations accounted for by the
pooling-of-interests method.
<PAGE>
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations.
Financial Review
Texas Regional Bancshares, Inc. and Subsidiaries
Results of Operations
Net income for the three months ended March 31, 1998 was $5.8 million or $0.40
per share, reflecting a net increase of $142,000 or $0.01 per share, compared to
net income of $5.7 million or $0.39 per share for the three months ended March
31, 1997 and reflects a net increase of $25,000 compared to net income of $5.8
million or $0.40 per share for the three months ended December 31, 1997.
Earnings performance for the three months ended March 31, 1998 compared to the
three months ended March 31, 1997 reflected an increase in net interest income
and an increase in noninterest income, partially offset by an increase in
provision for loan losses and noninterest expense. Earnings performance for the
three months ended March 31, 1998 compared to three months ended December 31,
1997 reflected an increase in net interest income and noninterest income offset
by an increase in noninterest expense. A more detailed description of the
results of operations is included in the material that follows.
On February 19,1998, Texas Regional Bancshares, Inc. (the "Corporation")
completed the acquisition of three bank holding companies and their three
subsidiary banks. Each of the three subsidiary banks acquired were merged with
and into Texas State Bank (the "Bank"), the principal operating subsidiary of
the Corporation (collectively, the "Company"). The acquisition of Brownsville
Bancshares, Inc. and TB&T Bancshares, Inc. were accounted for under the
pooling-of-interest method of accounting, and as such, the enclosed financial
information has been restated for all periods presented to include the results
of operations and financial position of these acquired entities. The acquisition
of Raymondville Bancorp, Inc. (the "Raymondville Acquisition") was accounted for
under the purchase method of accounting; therefore, the results of operations
are included in the consolidated financial statements from the date of
acquisition, February 19, 1998.
The following table presents selected financial data regarding results of
operations:
Condensed Quarterly Income
Statements Taxable-Equivalent Basis
(Dollars in Thousands,
Except Per Share Data)
<TABLE>
<CAPTION>
1998 1997
-------- ---------------------------------------------------------
First Fourth Third Second First
Quarter Quarter Quarter Quarter Quarter
-------- -------- --------- --------- ---------
<S> <C> <C> <C> <C> <C>
Interest Income ........................ $30,915 $29,992 $28,977 $28,237 $27,094
Interest Expense ....................... 13,967 13,818 13,207 11,998 11,595
------- ------- ------- ------- -------
Net Interest Income .................... 16,948 16,174 15,770 16,239 15,498
Provision for Loan Losses .............. 941 1,166 695 463 623
Noninterest Income ..................... 3,962 3,403 3,231 3,119 3,219
Noninterest Expense .................... 10,527 9,229 8,958 9,916 9,067
------- ------- ------- ------- -------
Income Before Taxable-Equivalent
Adjustment and Income Tax ............ 9,442 9,182 9,348 8,979 9,027
Taxable-Equivalent Adjustment .......... 353 367 380 395 413
Applicable Income Tax Expense .......... 3,246 2,997 3,004 2,945 2,914
------- ------- ------- ------- -------
Net Income ............................. $ 5,843 $ 5,818 $ 5,964 $ 5,639 $ 5,701
======= ======= ======= ======= =======
Net Income Per Common Share
Basic ................................ $ 0.41 $ 0.40 $ 0.41 $ 0.39 $ 0.40
Diluted .............................. 0.40 0.40 0.41 0.39 0.39
======= ======= ======= ======= =======
</TABLE>
* Taxable-Equivalent basis assuming a 35% tax rate.
<PAGE>
The Company paid cash and used the purchase method in accounting for certain
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.
The following table reconciles reported net income to net income excluding
intangible assets amortization ("cash" earnings):
Cash Earnings
Taxable-Equivalent Basis*
(Dollars in Thousands,
Except Per Share Data)
<TABLE>
<CAPTION>
1998 1997
--------- ----------------------------------------------------------------
First Fourth Third Second First
Quarter Quarter Quarter Quarter Quarter
<S> <C> <C> <C> <C> <C>
Reported Net Income ............. $ 5,843 $ 5,818 $ 5,964 $ 5,639 $ 5,701
Intangible Amortization ......... 621 563 563 563 563
Income Tax Adjustment ........... (123) (111) (111) (111) (111)
--------- --------- --------- --------- ---------
Cash Earnings ................... $ 6,341 $ 6,270 $ 6,416 $ 6,091 $ 6,153
========= ========= ========= ========= =========
Cash Earnings Per Common Share
Basic ......................... $ 0.44 $ 0.44 $ 0.45 $ 0.42 $ 0.43
Diluted ....................... 0.43 0.43 0.44 0.42 0.42
Cash Earnings Return on
Average Assets ................. 1.62% 1.65% 1.74% 1.74% 1.80%
Cash Earnings Return on
Average Shareholders' Equity ... 15.59 15.46 16.38 16.37 17.08
========= ========= ========= ========= =========
</TABLE>
* Taxable-Equivalent basis assuming a 35% effective income tax rate.
NET INTEREST INCOME
Taxable-equivalent net interest income was $16.9 million for the three months
ended March 31, 1998, a net increase of $1.5 million or 9.4% compared to the
three months ended March 31, 1997 of $15.5 million and reflects a net increase
of $774,000 or 4.8% compared to net interest income of $16.2 million for the
three months ended December 31, 1997. The increase in net interest income for
the three months ended March 31, 1998 compared to the three months ended March
31, 1997 and the three months ended December 31, 1997, primarily reflects the
increase in the volume of interest-earning assets exceeding the increase in
volume of interest-bearing liabilities, partially attributable to the
Raymondville Acquisition.
The net yield on total interest-earning assets, also referred to as net interest
margin, of 4.81% for the three months ended March 31, 1998 reflects a decrease
of 21 basis points compared to 5.02% for the three months ended March 31, 1997
and reflects a decrease of 15 basis points compared to 4.96% for the three
months ended December 31, 1997. The decline in the net interest margin for the
three months ended March 31, 1998 compared to the three months ended March 31,
1997 and three months ended December 31, 1997, was primarily attributable to the
increase in deposit costs as a result of competition.
The following table presents for the three months ended March 31, 1998, December
31, 1997 and March 31, 1997, 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.
<PAGE>
Summary of Interest-Earning
Assets and Interest-Bearing
Liabilities
Taxable-Equivalent Basis
(Dollars in Thousands)
<TABLE>
<CAPTION>
Three Months Ended
-----------------------------------------------------------------------------------------------------
March 31, 1998 December 31, 1997 March 31, 1997
--------------------------------- ------------------------------ -------------------------------
Average Yield/ Average Yield/ Average Yield/
Balance Interest Rate* Balance Interest Rate* Balance Interest Rate*
----------- --------- --------- --------- -------- -------- ---------- -------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Interest-Earning Assets
Loans
Commercial ............... $ 342,401 $ 8,010 9.49% $ 312,806 $ 7,484 9.49% $ 294,880 $ 7,059 9.71%
Real Estate .............. 539,122 13,146 9.89 517,403 12,909 9.90 462,752 11,369 9.96
Consumer ................. 100,544 2,537 10.23 89,796 2,352 10.39 78,029 1,974 10.26
---------- ------- ---------- ---------- ------- ---------- ---------- ------- ----------
Total Loans ................ 982,067 23,693 9.78 920,005 22,745 9.81 835,661 20,402 9.90
---------- ------- ---------- ---------- ------- ---------- ---------- ------- ----------
Investment Securities
Taxable .................. 392,570 6,303 6.51 382,206 6,179 6.41 350,226 5,548 6.42
Tax-Exempt ............... 27,666 545 7.99 26,012 533 8.13 28,283 638 9.13
---------- ------- ---------- ---------- ------- ---------- ---------- ------- ----------
Total Investment Securities 420,236 6,848 6.61 408,218 6,712 6.52 378,509 6,186 6.63
---------- ------- ---------- ---------- ------- ---------- ---------- ------- ----------
Time Deposits .............. 1,167 18 6.25 101 2 6.62 295 2 3.32
Federal Funds Sold ......... 25,752 356 5.61 37,825 533 5.59 38,311 503 5.33
---------- ------- ---------- ---------- ------- ---------- ---------- ------- ----------
Total Interest-Earning
Assets ................... $1,429,222 30,915 8.77 $1,366,149 29,992 8.71 $1,252,776 27,093 8.77
---------- ------- ---------- ---------- ------- ---------- ---------- ------- ----------
Interest-Bearing Liabilities
Savings .................... $ 104,425 767 2.98 $ 99,389 786 3.14 $ 105,306 830 3.20
Money Market Checking and
Savings ................... 252,859 1,844 2.96 245,865 2,037 3.29 245,654 1,720 2.84
Time Deposits .............. 838,400 11,328 5.48 798,039 10,966 5.45 683,881 9,039 5.36
---------- ------- ---------- ---------- ------- ---------- ---------- ------- ----------
Total Savings and Time
Deposits .................. 1,195,684 13,939 4.73 1,143,293 13,789 4.78 1,034,841 11,589 4.54
---------- ------- ---------- ---------- ------- ---------- ---------- ------- ----------
Federal Funds Purchased and
Securities Sold Under
Repurchase Agreements ... 2,004 28 5.67 2,111 29 5.45 540 6 4.51
---------- ------- ---------- ---------- ------- ---------- ---------- ------- ----------
Total Interest-Bearing
Liabilities .............. $1,197,688 13,967 4.73 $1,145,404 13,818 4.79 $1,035,381 11,595 4.54
---------- ------- ---------- ---------- ------- ---------- ---------- ------- ----------
Net Interest Income ........ $16,948 $16,174 $15,498
---------- ------- ---------- ---------- ------- ---------- ---------- ------- ----------
Net Yield on Total
Interest-Earning Assets ... 4.81% 4.96% 5.02%
========== ======= ========== ========== ======= ========== ========== ======= ==========
</TABLE>
* Annualized
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 three month
period ended March 31, 1998 as compared to the three month period ended March
31, 1997. 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.
<PAGE>
Analysis of Changes in Net Interest Income
Taxable-Equivalent Basis
Three Months Ended March 31,
1998 Compared to March 31, 1997
(In Thousands)
<TABLE>
<CAPTION>
Due to Change in
Net ----------------------------------------------
Change Volume Rate Rate/Volume
------- -------- ------- -----------
<S> <C> <C> <C> <C>
Interest Income
Loans, Including Fees ................ $ 3,291 $ 3,574 $(247) $ (36)
Investment Securities
Taxable ............................ 755 670 78 7
Tax-Exempt ......................... (93) (14) (80) 1
Time Deposits ........................ 16 7 2 7
Federal Funds Sold ................... (147) (165) 26 (8)
------- ------- ----- -----
Total Interest Income ............... 3,822 4,072 (221) (29)
------- ------- ----- -----
Interest Expense
Deposits ............................. 2,350 1,801 485 64
Federal Funds Purchased
and Securities Sold
Under Repurchase Agreements ........ 22 8 6 8
------- ------- ----- -----
Total Interest Expense ................. 2,372 1,809 491 72
------- ------- ----- -----
Net Interest Income Before
Allocation Of Rate/Volume ............ 1,450 2,263 (712) (101)
------- ------- ----- -----
Allocation of Rate/Volume .............. -- (85) (16) 101
------- ------- ----- -----
Changes in Net Interest Income ......... $ 1,450 $ 2,178 $(728) $--
======= ======= ===== =====
</TABLE>
PROVISION FOR LOAN LOSSES
The provision for loan losses for the three months ended March 31, 1998 of
$941,000 reflects an increase of $318,000 or 51.0% compared to $623,000 for the
three months ended March 31, 1997 and was primarily attributable to new loan
growth. See "Allowance For Loan Losses."
NONINTEREST INCOME
Noninterest income for the three months ended March 31, 1998 of $4.0 million
increased $743,000 or 23.1% compared to $3.2 million for the three months ended
March 31, 1997 and increased $559,000 or 16.4% compared to $3.4 million for the
three months ended December 31, 1997. The increase in noninterest income for the
three months ended March 31, 1998 compared to the three months ended March 31,
1997 and three months ended December 31, 1997 was primarily attributable to the
increased volume of business conducted by the Company, including the
Raymondville Acquisition. The Other Operating Income for the three months ended
March 31, 1998 of $537,000 includes a gain on the sale of bank real estate of
$158,000.
<PAGE>
The following table summarizes the major noninterest income categories:
Noninterest Income
(In Thousands)
<TABLE>
<CAPTION>
1998 1997
------ -----------------------------------------------------
First Fourth Third Second First
Quarter Quarter Quarter Quarter Quarter
<S> <C> <C> <C> <C> <C>
Service Charges on Deposit Accounts ....... $1,829 $1,836 $1,751 $1,737 $1,685
Other Service Charges ..................... 586 440 409 361 396
------ ------ ------ ------ ------
Total Service Charges ..................... 2,415 2,276 2,160 2,098 2,081
Trust Service Fees ........................ 447 441 425 435 390
Investment Securities Gains (Losses) ...... 222 214 215 134 171
Data Processing Service Fees .............. 341 286 260 272 262
Other Operating Income .................... 537 186 171 180 315
------ ------ ------ ------ ------
Total .................................... $3,962 $3,403 $3,231 $3,119 $3,219
====== ====== ====== ====== ======
</TABLE>
NONINTEREST EXPENSE
Noninterest expense for the three months ended March 31, 1998 of $10.5 million
increased $1.5 million or 16.1% compared to the three months ended March 31,
1997 of $9.1 million and increased $1.3 million or 14.1% compared to the three
months ended December 31, 1997 of $9.2 million. The increase for the three
months ended March 31, 1998 compared to the three months ended March 31, 1997
was primarily attributable to the increased volume of business conducted by the
Company, including the Raymondville Acquisition.
The largest category of noninterest expense, Salaries and Employee Benefits
("Personnel"), of $4.7 million for the three months ended March 31, 1998
reflected a slight increase of $58,000 or 1.3% compared to the three months
ended March 31, 1997 and an increase of $346,000 or 8.0% compared to the three
months ended December 31, 1997. Personnel expense increased for the three months
ended March 31, 1998 compared to the three months ended December 31, 1997
primarily due to staffing increases, including the staff acquired as a result of
the Raymondville Acquisitions.
Net Occupancy expense of $778,000 for the three months ended March 31, 1998
increased $113,000 or 17.0% compared to $665,000 for the three months ended
March 31, 1997 and increased $173,000 or 28.6% compared to $605,000 for the
three months ended December 31, 1997. The Net Occupancy expense increase for the
three months ended March 31, 1998 compared to the three months ended March 31,
1997 and three months ended December 31, 1997 was primarily due to the occupancy
expenses associated with the Raymondville Acquisition and the new Edinburg
branch which was opened for business in December 1997.
Equipment expense of $1.1 million for the three months ended March 31, 1998
increased $234,000 or 26.0% compared to $900,000 for the three months ended
March 31, 1997 and increased $210,000 or 22.7% compared to the three months
ended December 31, 1997. Equipment expense increased for the three months ended
March 31, 1998 as compared to the three months ended March 31, 1997 primarily
due to expenses associated with the equipment acquired to service the Company's
increasing customer base and partially due to the Raymondville Acquisition.
The One Time Charge - Acquisitions cost of $682,000 were expenses related to
effecting business combinations accounted for by the pooling-of-interests
method.
Other Noninterest expense of $2.6 million for the three months ended March 31,
1998 increased $241,000 or 10.3% compared to $2.3 million for the three months
ended March 31, 1997 and decreased $242,000 or 9.3% compared to the three months
ended December 31, 1997. Other Noninterest expense increased for the three
months ended March 31, 1998 as compared to the three months ended March 31, 1997
primarily due to an increased volume of business conducted by the Company.
<PAGE>
The following table displays the major noninterest expense categories:
Noninterest Expense
(Dollars in Thousands)
<TABLE>
<CAPTION>
1998 1997
--------- -----------------------------------------------------
First Fourth Third Second First
Quarter Quarter Quarter Quarter Quarter
-------- ------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
Salaries and Employee Benefits
Salaries and Wages ........................ $ 3,814 $ 3,584 $ 3,392 $ 3,706 $ 3,762
Employee Benefits ......................... 853 737 779 885 847
-------- ------- ------- ------- -------
Total Salaries and Employee Benefits ..... 4,667 4,321 4,171 4,591 4,609
-------- ------- ------- ------- -------
Net Occupancy Expense ....................... 778 605 721 696 665
-------- ------- ------- ------- -------
Equipment Expense ........................... 1,134 924 989 965 900
-------- ------- ------- ------- -------
Other Real Estate (Income) Expense, Net
Rent Income ............................... (14) (9) (12) (32) (18)
Gain on Sale .............................. (34) (78) 11 -- (48)
Expense ................................... 103 71 72 77 47
Write-Downs ............................... -- -- 24 -- --
-------- ------- ------- ------- -------
Total Other Real Estate (Income)
Expense, Net ........................... 55 (16) 95 45 (19)
-------- ------- ------- ------- -------
Intangible Asset Amortization ............... 621 563 563 563 563
-------- ------- ------- ------- -------
Impairment Loss ............................. -- -- -- 630 --
-------- ------- ------- ------- -------
One Time Charge - Acquisitions .............. 682 -- -- -- --
-------- ------- ------- ------- -------
Other Noninterest Expense
Advertising and Public Relations .......... 322 390 319 320 343
Data Processing and Check Clearing ........ 295 286 257 292 285
Director Fees ............................. 124 122 120 132 141
Franchise Tax ............................. 137 133 133 165 102
Insurance ................................. 92 85 101 62 79
FDIC Insurance ............................ 38 34 35 40 41
Legal Fees ................................ 348 333 323 265 129
Professional Fees ......................... 173 205 181 184 205
Postage, Delivery and Freight ............. 204 177 162 169 181
Stationery and Supplies ................... 341 272 258 255 271
Telephone ................................. 132 109 103 110 111
Other Losses .............................. 56 383 169 120 165
Miscellaneous Expenses .................... 328 303 258 312 296
-------- ------- ------- ------- -------
Total Other Noninterest Expense ......... 2,590 2,832 2,419 2,426 2,349
-------- ------- ------- ------- -------
Total ................................... $ 10,527 $ 9,229 $ 8,958 $ 9,916 $ 9,067
======== ======= ======= ======= =======
</TABLE>
BALANCE SHEET ANALYSIS
Average interest-earning assets of $1.4 billion for the three months ended March
31, 1998 increased $176.4 million or 14.1% compared to $1.3 billion for the
three months ended March 31, 1997 and $63.1 million or 4.6% compared to $1.4
billion for three months ended December 31, 1997. Management's continued focus
on lending has resulted in average loans increasing $146.4 million or 17.5% to
$982.1 million for the three months ended March 31, 1998 compared to the three
months ended March 31, 1997 levels of $835.7 million and increased $62.1 million
or 6.7% compared to the three months ended December 31, 1997 levels of $920.0
million. Total average investments increased $41.7 million to $420.2 million for
the three months ended March 31, 1998 compared to three months ended March 31,
1997 of $378.5 million and increased $12.0 million or 2.9% compared to the three
months ended December 31, 1997 levels of $408.2 million. Total average assets
increased $198.8 million or 14.3% to $1.6 billion for the three months ended
March 31, 1998 compared to three months ended March 31, 1997 levels of $1.4
billion and $76.3 million or 5.1% compared to the three months ended December
31, 1997 levels of $1.5 billion. The net increase in each of the categories
discussed was partially attributable to the Raymondville Acquisition. Average
interest-bearing deposits increased $160.8 million or 15.5% to $1.2 billion for
the three months ended March 31, 1998 compared to the three months ended March
31, 1997 levels of $1.0 billion and $52.4 million or 4.6% compared to the three
months ended December 31, 1997 levels of $1.1 billion.
<PAGE>
Average Total Demand Deposits increased $14.4 million or 7.5% to $207.9 million
for the three months ended March 31, 1998 compared to the three months ended
March 31, 1997 levels of $193.5 million and increased $17.3 million or 9.1%
compared to $190.6 million for the three months ended December 31, 1997.
Management attributes the strong growth in average assets and deposits for the
three months ended March 31, 1998 compared to the three months ended March 31,
1997 primarily to the on-going marketing efforts of the Company and partially
due to the Raymondville Acquisition. The following table presents the
consolidated average balance sheets:
Average Balance Sheets
(In Thousands)
<TABLE>
<CAPTION>
1998 1997
---------- -----------------------------------------------------------------
First Fourth Third Second First
Quarter Quarter Quarter Quarter Quarter
<S> <C> <C> <C> <C> <C>
Assets
Loans ................................ $ 982,067 $ 920,005 $ 887,852 $ 859,795 $ 835,661
Investment Securities
Taxable ............................ 392,570 382,206 355,967 351,496 350,226
Tax-Exempt ......................... 27,666 26,012 25,319 25,678 28,283
Federal Funds Sold ................... 25,752 37,825 53,693 28,449 38,311
Time Deposits ........................ 1,167 101 279 295 295
----------- ----------- ----------- ----------- -----------
Total Interest-Earning Assets ........ 1,429,222 1,366,149 1,323,110 1,265,713 1,252,776
Cash and Due from Banks .............. 58,155 55,450 55,469 56,176 54,956
Bank Premises and Equipment, Net ..... 57,234 49,021 43,531 41,727 40,635
Other Assets ......................... 52,292 49,056 50,220 50,876 48,932
Allowance for Loan Losses ............ (11,775) (10,874) (11,131) (11,333) (11,004)
----------- ----------- ----------- ----------- -----------
Total ................................ $ 1,585,128 $ 1,508,802 $ 1,461,199 $ 1,403,159 $ 1,386,295
----------- ----------- ----------- ----------- -----------
Liabilities
Demand Deposits
Commercial and Individual ........... $ 202,143 $ 185,582 $ 185,301 $ 186,947 $ 185,915
Public Funds ........................ 5,777 5,047 5,008 7,143 7,559
----------- ----------- ----------- ----------- -----------
Total Demand Deposits ................ 207,920 190,629 190,309 194,090 193,474
----------- ----------- ----------- ----------- -----------
Savings
Commercial and Individual .......... 103,715 98,733 98,974 102,612 104,623
Public Funds ....................... 710 656 646 687 683
Money Market Checking
and Savings Accounts
Commercial and Individual .......... 207,380 198,447 204,491 200,322 198,834
Public Funds ....................... 45,479 47,418 32,368 38,364 46,820
Time Deposits
Commercial and Individual .......... 660,936 661,291 629,647 580,711 569,176
Public Funds ....................... 177,464 136,748 137,610 124,665 114,705
----------- ----------- ----------- ----------- -----------
Total Interest-Bearing Deposits ...... 1,195,684 1,143,293 1,103,736 1,047,361 1,034,841
----------- ----------- ----------- ----------- -----------
Total Deposits ....................... 1,403,604 1,333,922 1,294,045 1,241,451 1,228,315
----------- ----------- ----------- ----------- -----------
Federal Funds Purchased and
Securities Sold Under
Repurchase Agreements .............. 2,004 2,111 152 1,148 540
Other Liabilities .................... 14,585 11,867 11,573 11,311 11,313
Shareholders' Equity ................. 164,935 160,902 155,429 149,249 146,127
----------- ----------- ----------- ----------- -----------
Total ................................ $ 1,585,128 $ 1,508,802 $ 1,461,199 $ 1,403,159 $ 1,386,295
=========== =========== =========== =========== ===========
</TABLE>
RISK ANALYSIS OF THE LOAN PORTFOLIO
Total loans at March 31, 1998 of $1.0 billion increased $160.4 million or 18.7%
compared to March 31, 1997 levels of $857.4 million and increased $66.5 million
or 7.0% compared to December 31, 1997 levels of $951.3 million. The increase in
total loans at March 31, 1998 compared to total loans at March 31, 1997 and
December 31 ,1997, was primarily attributable to Management's efforts to improve
the mix of earning assets and the Raymondville Acquisition. The Company's loans
are widely diversified by borrower and industry group. Loan demand remains
strong which is reflective of the positive economic growth in the Company's
trade area.
The following table presents the composition of the loan portfolio for the last
five quarters:
Loan Portfolio Composition
(In Thousands)
<TABLE>
<CAPTION>
1998 1997
----------- -----------------------------------------------------------
First Fourth Third Second First
Quarter Quarter Quarter Quarter Quarter
<S> <C> <C> <C> <C> <C>
Commercial ................... $ 270,730 $249,819 $232,083 $232,477 $227,594
Commercial Tax-Exempt ........ 29,426 29,024 31,330 33,046 34,086
---------- -------- -------- -------- --------
Total Commercial Loans ....... 300,156 278,843 263,413 265,523 261,680
---------- -------- -------- -------- --------
Agricultural ................. 57,956 51,346 39,899 42,064 41,912
---------- -------- -------- -------- --------
Real Estate
Construction ............... 65,413 69,477 59,661 57,549 55,932
Commercial Mortgage ........ 323,058 304,215 294,293 289,334 270,756
Agricultural Mortgage ...... 35,068 31,949 30,630 29,448 29,217
1-4 Family Mortgage ........ 128,196 122,043 120,724 117,720 118,765
---------- -------- -------- -------- --------
Total Real Estate ............ 551,735 527,684 505,308 494,051 474,670
---------- -------- -------- -------- --------
Consumer ..................... 107,929 93,443 86,720 83,332 79,125
---------- -------- -------- -------- --------
Total Loans .................. $1,017,776 $951,316 $895,340 $884,970 $857,387
========== ======== ======== ======== ========
</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.
Nonperforming assets at March 31, 1998 of $12.1 million increased $4.2 million
or 52.9% when compared to the March 31, 1997 balance of $7.9 million and
increased $383,000 or 3.2% when compared to the December 31, 1997 balance of
$11.7 million Nonperforming assets as a percentage of total loans and foreclosed
assets increased to 1.18% at March 31, 1998 compared to 0.92% at March 31, 1997.
Management continues to emphasize maintaining a low level of nonperforming
assets and returning nonperforming assets to an earning status.
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 March 31, 1998 of $5.7 million
reflects a decrease of $2.3 million compared to the March 31, 1997 level of $8.0
million and reflects an increase of $2.4 million or 72.9% compared to the
December 31, 1997 level of $3.3 million. The increase in loans past due 90 days
or more at March 31, 1998 compared to past due loans 90 days or more at December
31, 1997 is primarily attributable to loans secured by real estate. Management
believes that no material loss will be incurred.
<PAGE>
Total cross-border credits of $7.6 million or 0.75% of total loans outstanding
at March 31, 1998 reflect a slight decline when compared to the total
cross-border credits of $7.7 million at March 31, 1997 and December 31, 1997.
Total nonaccrual cross-border credits of $2.9 million at March 31, 1998 reflect
a decrease of $500,000 when compared to the $3.4 million balance at March 31,
1997 and remain unchanged when compared to the total nonaccrual cross-border
credits at December 31, 1997. The decrease in cross-border nonaccrual credits
was due to loan collections.
An analysis of the components of nonperforming assets for the last five quarters
is presented in the following table:
Nonperforming Assets
(Dollars in Thousands)
<TABLE>
<CAPTION>
1998 1997
--------- -----------------------------------------------------
First Fourth Third Second First
Quarter Quarter Quarter Quarter Quarter
<S> <C> <C> <C> <C> <C>
Nonaccrual Loans ................................ $ 7,887 $ 8,355 $ 8,615 $ 7,024 $ 6,665
Renegotiated Loans .............................. -- -- -- -- --
------- ------- ------- ------- -------
Nonperforming Loans ............................. 7,887 8,355 8,615 7,024 6,665
Foreclosed Assets
(Primarily Other Real Estate) .................. 4,182 3,331 2,868 2,930 1,228
------- ------- ------- ------- -------
Total Nonperforming Assets ...................... 12,069 11,686 11,483 9,954 7,893
Accruing Loans 90 Days or More Past Due ......... 5,683 3,287 3,139 6,658 8,004
------- ------- ------- ------- -------
Total Nonperforming Assets and Accruing
Loans 90 Days or More Past Due .................. $17,752 $14,973 $14,622 $16,612 $15,897
------- ------- ------- ------- -------
Nonperforming Loans as a % of Total Loans ....... 0.77% 0.88% 0.96% 0.79% 0.78%
Nonperforming Assets as a % of Total
Loans and Foreclosed Assets .................... 1.18 1.22 1.28 1.12 0.92
Nonperforming Assets as a % of Total Assets .... 0.74 0.76 0.78 0.70 0.56
Nonperforming Assets and Accruing
Loans 90 Days or More Past Due
as a % of Total Loans and Foreclosed Assets .... 1.74 1.57 1.63 1.87 1.85
======= ======= ======= ======= =======
</TABLE>
ALLOWANCE FOR LOAN LOSSES
The allowance for loan losses at March 31, 1998 of $12.1 million increased $1.1
million or 10.1% compared to the March 31, 1997 balance of $11.0 million and
increased $824,000 or 7.3% compared to the December 31, 1997 balance of $11.3
million. The allowance for loan losses at March 31, 1998 is 1.19% of loans
outstanding, net of unearned discount. Management believes that the allowance
for loan losses at March 31, 1998, adequately reflects the risks in the loan
portfolio. While management uses available information to recognize losses on
loans, there can be no assurance that future additions to the allowance will not
be necessary.
<PAGE>
The following table summarizes the transactions in the allowance for loan
losses:
Allowance for Loan Loss Activity
(Dollars in Thousands)
<TABLE>
<CAPTION>
1998 1997
---------- ----------------------------------------------------
First Fourth Third Second First
Quarter Quarter Quarter Quarter Quarter
<S> <C> <C> <C> <C> <C>
Balance at Beginning of Period ............... $11,291 $10,599 $11,187 $11,000 $10,806
Balance from Acquisitions .................... 308 -- -- -- --
Provision for Loan Losses .................... 941 1,166 695 463 623
Charge-Offs
Commercial ................................. 228 170 950 165 493
Agricultural ............................... 13 275 155 47 --
Real Estate ................................ 120 27 25 1 6
Consumer ................................... 233 165 247 244 251
------- ------- ------- ------- -------
Total Charge-Offs ............................ 594 637 1,377 457 750
------- ------- ------- ------- -------
Recoveries
Commercial ................................. 124 39 40 16 41
Agricultural ............................... -- 13 1 34 --
Real Estate ................................ 2 70 1 60 219
Consumer ................................... 43 41 52 71 61
------- ------- ------- ------- -------
Total Recoveries ............................. 169 163 94 181 321
------- ------- ------- ------- -------
Net Charge-Offs .............................. 425 474 1,283 276 429
------- ------- ------- ------- -------
Balance at End of
Period ...................................... $12,115 $11,291 $10,599 $11,187 $11,000
------- ------- ------- ------- -------
Ratio of Allowance for Loan
Losses to Loans Outstanding,
Net of Unearned Discount .................... 1.19% 1.19% 1.18% 1.26% 1.28%
Ratio of Allowance For Loan
Losses to Nonperforming Assets .............. 100.38 96.62 92.30 112.39 139.36
Ratio of Net Charge-Offs (Recoveries)
to Average Total Loans Outstanding,
Net of Unearned Discount .................... 0.18 0.20 0.57 0.13 0.21
======= ======= ======= ======= =======
</TABLE>
PREMISES AND EQUIPMENT, NET
Premises and equipment of $61.5 million at March 31, 1998 increased $20.6
million or 50.4% compared to $40.9 million at March 31, 1997 and increased $9.1
million or 17.3% compared to $52.4 million at December 31, 1997. The net
increase for March 31, 1998 compared to March 31, 1997, is primarily
attributable to the $15.1 million for construction in progress of the Company's
new headquarters in McAllen, Texas and partially attributable to the $3.3
million recorded for the Raymondville Acquisition. The net increase for March
31, 1998 compared to December 31, 1997 is primarily attributable to progress
payments of $6.0 million for the new headquarters bank building in McAllen and
partially attributable to the $3.3 million recorded for the Raymondville
Acquisition.
DEPOSITS
Total deposits at March 31, 1998 of $1.5 billion increased $201.8 million or
16.2% compared to the March 31, 1997 levels of $1.2 million and increased $83.3
million or 6.1% compared to December 31, 1997 levels of $1.4 billion. The
increase in total deposits at March 31, 1998 compared to March 31, 1997 is
primarily attributable to on-going marketing and business development efforts
and partially attributable to the $56.5 million of deposits recorded for the
Raymondville Acquisition.
<PAGE>
The following table presents the composition of total deposits for the last five
quarters:
Total Deposits
(In Thousands)
<TABLE>
<CAPTION>
1998 1997
------------ -------------------------------------------------------------
First Fourth Third Second First
Quarter Quarter Quarter Quarter Quarter
<S> <C> <C> <C> <C> <C>
Demand Deposits
Commercial and Individual .......... $ 223,048 $ 203,325 $ 189,253 $ 181,593 $ 190,785
Public Funds ....................... 6,814 5,098 3,532 6,755 8,171
---------- ---------- ---------- ---------- ----------
Total Demand Deposits ................ 229,862 208,423 192,785 188,348 198,956
---------- ---------- ---------- ---------- ----------
Interest-Bearing Deposits
Savings
Commercial and Individual .......... 108,462 100,917 98,310 100,171 105,972
Public Funds ....................... 714 771 619 700 679
Money Market Checking and Savings
Commercial and Individual .......... 213,813 203,292 199,056 210,395 200,630
Public Funds ....................... 42,131 39,547 34,229 30,438 36,409
Time Deposits
Commercial and Individual .......... 667,222 647,959 644,426 594,117 573,888
Public Funds ....................... 183,833 161,874 139,205 132,513 127,722
---------- ---------- ---------- ---------- ----------
Total Interest-Bearing
Deposits ........................... 1,216,175 1,154,360 1,115,845 1,068,334 1,045,300
---------- ---------- ---------- ---------- ----------
Total Deposits ....................... $1,446,037 $1,362,783 $1,308,630 $1,256,682 $1,244,256
========== ========== ========== ========== ==========
</TABLE>
CAPITAL AND LIQUIDITY
Shareholders' equity at March 31, 1998 of $166.4 million increased $20.3 million
or 13.9% compared to the March 31, 1997 level of $146.2 million and increased
$4.9 million or 3.0% compared to the December 31, 1997 level of $161.6 million.
The increase in shareholders' equity was primarily attributable to earnings,
reduced by dividends paid on Class A Common Stock.
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 12.97% and 13.79% as of March 31, 1998 and 1997,
respectively. The Company's Total Risk-Based Capital Ratio was approximately
14.13% and 15.04% as of March 31, 1998 and 1997, respectively. The Company's
Leverage Capital Ratio was approximately 8.77% and 8.93% at March 31, 1998 and
1997,
<PAGE>
respectively. Based on capital ratios, the Company is within the definition of
"well capitalized" for Federal Reserve purposes as of March 31, 1998.
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 three months ended March 31, 1998, liquidity was enhanced primarily by
net cash provided by operating activities of $8.2 million and financing
activities of $29.8 million offset by net cash used in investing activities of
$26.7 million. The increase in net cash provided by operating activities was
primarily attributable to $5.8 million net income for the three months ended
March 31, 1998. The increase in net cash provided by financing activities was
primarily attributable to the $26.8 million net increase in deposits. As a
result, net cash and cash equivalents at March 31, 1998 of $92.7 million
increased $11.4 million or 14.0% compared to net cash and cash equivalents at
December 31, 1997 of $81.4 million.
SELECTED FINANCIAL DATA
<TABLE>
<CAPTION>
Three Months Ended
-------------------------------------
March 31, December 31,
--------------------- -------------
Ratio Analysis (Annualized) 1998 1997 1997
Return On Average ----- ------ ------
<S> <C> <C> <C>
Assets ........................................... 1.49% 1.67% 1.53%
Return On Average Shareholders' Equity ........... 14.37 15.82 14.35
Dividend Payout Ratio ............................ 27.50 28.21 27.50
Net Yield on Total Interest-Earning Assets* ...... 4.81 5.02 4.96
Efficiency Ratio* ................................ 50.62 48.99 47.75
Total Average Loans to Total Average Deposits .... 69.97 68.03 68.97
Average Equity to Average Assets ................. 10.41 10.54 10.66
===== ===== =====
</TABLE>
* Taxable-Equivalent Basis Assuming a 35% Effective Income Tax Rate.
<TABLE>
<CAPTION>
COMMON STOCK TRADING DATA (Nasdaq National Market System)
- ----------------------------------------------------------------------------------------------
Trading Volume (1998)
<S> <C> <C> <C>
Price
March 31, 1998 $33.56 Book Value $11.56 January 673,093 shares
1998 price range $27.00 - $35.63 Price/Book Value 2.90% February 518,694 shares
December 31, 1997 $30.50 March 705,881 shares
==============================================================================================
</TABLE>
<PAGE>
Item 3. Quantitative and Qualitative Disclosures About Market Risk.
The funds management policy of the Company is to maintain a reasonably balanced
position of rate sensitive assets and liabilities to avoid adverse changes in
net interest income. Changes in net interest income occur when interest rates on
loans and investments change in a different time period from that of changes in
interest rates on liabilities, or when the mix and volume of interest-earning
assets and interest-bearing liabilities change. In order to measure earnings and
fair value sensitivity to changing rates, the Company uses three different
measure tools including static gap analysis, simulation earnings, and market
value sensitivity (fair value at risk).
The static gap represents the dollar amount of difference between rate sensitive
assets and rate sensitive liabilities within a given time period. Static gap
analysis is the simplest representation of the Company's interest rate
sensitivity. However, it cannot reveal the impact of factors such as
administered rates (e.g., the prime lending rate), pricing strategies on
consumer and business deposits, changes in balance sheet mix, or the effect of
various options embedded in balance sheet instruments. Accordingly, the Funds
Management Committee conducts simulations of net interest income under a variety
of market interest rate scenarios. These simulations which consider forecasted
balances sheet changes, and forecasted changes in interest rate spreads provide
the Committee with an estimate of earnings at risk for given changes in interest
rates.
At March 31, 1998, based on these simulations, earnings at risk to an immediate
100 basis points rise in market interest rates was estimated to be less than 4.2
percent of projected 1998 after-tax net income. An immediate 100 basis point
rise 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
exposures change continuously as a result of the Corporation'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 in 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.
The Company does not currently engage in trading activities or use derivative
instruments to control interest rate risk. Even though such activities may be
permitted with the approval of the Board of Directors, the Company does not
intend to engage in such activities in the immediate future.
Interest rate risk is the most significant market risk affecting the Company.
Other types of market risk, such as foreign currency exchange rate risk and
commodity price risk, do not arise in the normal course of the Company's
business activities.
FORWARD-LOOKING STATEMENTS
The Company may from time to time make forward-looking statements with respect
to earnings per share, credit quality, company objectives and other financial
and business matters. The Company cautions the reader that these forward-looking
statements are subject to numerous assumptions, risk and uncertainties,
including economic conditions; actions taken by the Federal Reserve Board;
legislative and regulatory actions and reforms; competition; as well as other
reasons, all of which change over time. Actual results may differ materially
from forward-looking statements.
<PAGE>
PART II. OTHER INFORMATION
Item 6.
(a) Exhibits
27. Financial Data Schedule
(b) Reports on Form 8-K
None
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.
May l3, 1998 /s/ G. E. Roney
Date G. E. Roney
Chairman of the Board,
President & Chief
Executive Officer
May 13, 1998 /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>
<CURRENCY> U.S. DOLLARS
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-END> MAR-31-1998
<EXCHANGE-RATE> 1
<CASH> 67,826
<INT-BEARING-DEPOSITS> 2,072
<FED-FUNDS-SOLD> 22,820
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 364,496
<INVESTMENTS-CARRYING> 50,577
<INVESTMENTS-MARKET> 50,990
<LOANS> 1,017,776
<ALLOWANCE> (12,115)
<TOTAL-ASSETS> 1,631,861
<DEPOSITS> 1,446,037
<SHORT-TERM> 1,540
<LIABILITIES-OTHER> 17,846
<LONG-TERM> 0
0
0
<COMMON> 14,403
<OTHER-SE> 152,035
<TOTAL-LIABILITIES-AND-EQUITY> 1,631,861
<INTEREST-LOAN> 23,521
<INTEREST-INVEST> 6,667
<INTEREST-OTHER> 374
<INTEREST-TOTAL> 30,562
<INTEREST-DEPOSIT> 13,939
<INTEREST-EXPENSE> 13,967
<INTEREST-INCOME-NET> 16,595
<LOAN-LOSSES> 941
<SECURITIES-GAINS> 222
<EXPENSE-OTHER> 10,527
<INCOME-PRETAX> 9,089
<INCOME-PRE-EXTRAORDINARY> 9,089
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 5,843
<EPS-PRIMARY> 0.41
<EPS-DILUTED> 0.40
<YIELD-ACTUAL> 4.81
<LOANS-NON> 7,887
<LOANS-PAST> 5,683
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 11,291
<CHARGE-OFFS> 594
<RECOVERIES> 169
<ALLOWANCE-CLOSE> 12,115
<ALLOWANCE-DOMESTIC> 0
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 0
</TABLE>
