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 September 30, 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
3900 N. Tenth, 11th Floor
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 14,411,583 shares, $1 par
value, outstanding as of November 10, 1998.
<PAGE>
PART I. FINANCIAL INFORMATION.
Item 1. Financial Statements
<TABLE>
<CAPTION>
Texas Regional Bancshares, Inc. and Subsidiaries
CONSOLIDATED BALANCE SHEETS (UNAUDITED) September 30, December 31,
-------------------------- --------------
(Dollars in Thousands) 1998 1997 1997
- ------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Assets
Cash and Due From Banks ................................. $ 49,257 $ 58,476 $ 62,268
Federal Funds Sold ...................................... 58,245 36,932 18,985
Time Deposits ........................................... 883 200 100
- ------------------------------------------------------------------------------------------------------
Total Cash and Cash Equivalents ....................... 108,385 95,608 81,353
Securities Available for Sale ........................... 457,654 291,934 324,177
Securities Held to Maturity (Estimated Market
Value of $20,866 and $112,504 at
September 30, 1998 and 1997,
respectively, and $93,311 at December 31, 1997) ....... 20,521 111,963 92,744
Loans, Net of Unearned Discount of $4,861 and
$2,750 at September 30, 1998 and 1997,
respectively and $2,753 at December 31, 1997 .......... 1,032,658 895,340 951,316
Less: Allowance for Loan Losses ......................... (12,555) (10,599) (11,291)
- ------------------------------------------------------------------------------------------------------
Net Loans ............................................. 1,020,103 884,741 940,025
Premises and Equipment, Net ............................. 69,324 45,347 52,443
Accrued Interest Receivable ............................. 14,071 16,982 16,033
Other Real Estate ....................................... 5,389 2,629 3,124
Intangibles ............................................. 27,637 24,629 24,066
Other Assets ............................................ 9,200 5,193 4,804
- ------------------------------------------------------------------------------------------------------
Total Assets .......................................... $ 1,732,284 $ 1,479,026 $ 1,538,769
======================================================================================================
Liabilities
Deposits
Demand ................................................ $ 239,735 $ 192,785 $ 208,423
Savings ............................................... 102,991 98,929 101,688
Money Market Checking and Savings ..................... 250,933 233,285 242,839
Time Deposits ......................................... 939,444 783,631 809,833
- ------------------------------------------------------------------------------------------------------
Total Deposits ...................................... 1,533,103 1,308,630 1,362,783
Federal Funds Purchased and Securities
Sold Under Repurchase Agreements ....................... 9,197 108 1,801
Accounts Payable and Accrued Liabilities ................ 16,626 13,126 12,630
- ------------------------------------------------------------------------------------------------------
Total Liabilities ..................................... 1,558,926 1,321,864 1,377,214
- ------------------------------------------------------------------------------------------------------
Commitments 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, 14,411,583,
at September 30, 1998, 14,398,741 at September 30,
1997 and 14,403,484 at December 31, 1997 (Note 5) ..... 14,412 14,399 14,403
Paid-In Capital ......................................... 87,586 87,044 87,078
Retained Earnings ....................................... 69,590 54,793 59,167
Accumulated Other Comprehensive Income .................. 1,770 926 907
- ------------------------------------------------------------------------------------------------------
Total Shareholders' Equity ............................ 173,358 157,162 161,555
- ------------------------------------------------------------------------------------------------------
Total Liabilities and Shareholders' Equity ............ $ 1,732,284 $ 1,479,026 $ 1,538,769
======================================================================================================
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
<PAGE>
<TABLE>
<CAPTION>
Texas Regional Bancshares, Inc. and Subsidiaries
CONSOLIDATED STATEMENTS of INCOME and Quarter Ended Nine Months Ended
COMPREHENSIVE INCOME (UNAUDITED) September 30, September 30,
----------------- -----------------
(Dollars in Thousands, Except Per Share Data) 1998 1997 1998 1997
- ---------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Interest Income
Loans, Including Fees ....................... $23,686 $21,742 $71,851 $63,343
Investment Securities
Taxable ................................... 6,398 5,737 18,722 16,945
Tax-Exempt ................................ 391 363 1,130 1,159
Time Deposits ............................... 16 3 67 11
Federal Funds Sold .......................... 636 752 1,337 1,662
- ---------------------------------------------------------------------------------------
Total Interest Income ..................... 31,127 28,597 93,107 83,120
- ---------------------------------------------------------------------------------------
Interest Expense
Deposits .................................... 15,167 13,205 43,060 36,777
Federal Funds Purchased and
Securities Sold Under
Repurchase Agreements .................... 71 2 183 23
- ---------------------------------------------------------------------------------------
Total Interest Expense .................... 15,238 13,207 43,243 36,800
- ---------------------------------------------------------------------------------------
Net Interest Income ........................... 15,889 15,390 49,864 46,320
Provision for Loan Losses ..................... 7,157 695 9,079 1,781
- ---------------------------------------------------------------------------------------
Net Interest Income After
Provision for Loan Losses ................ 8,732 14,695 40,785 44,539
- ---------------------------------------------------------------------------------------
Noninterest Income
Service Charges on Deposit Accounts ......... 2,110 1,751 5,880 5,173
Other Service Charges ....................... 506 409 1,608 1,166
Trust Service Fees .......................... 444 425 1,321 1,250
Investment Security Gains (Losses) .......... 2,137 215 2,557 520
Data Processing Service Fees ................ 391 260 1,076 794
Other Operating Income ...................... 266 171 997 666
- ---------------------------------------------------------------------------------------
Total Noninterest Income .................. 5,854 3,231 13,439 9,569
- ---------------------------------------------------------------------------------------
Noninterest Expense
Salaries and Employee Benefits .............. 4,847 4,171 13,904 13,371
Net Occupancy Expense ....................... 1,140 721 2,760 2,082
Equipment Expense ........................... 1,229 989 3,453 2,854
Other Real Estate (Income) Expense, Net ..... 56 95 50 121
Intangible Asset Amortization ............... 680 563 1,982 1,689
Impairment Loss ............................. -- -- -- 630
One Time Charge - Acquisitions (Note 6) ..... -- -- 728 --
Other Noninterest Expense ................... 2,630 2,419 7,870 7,194
- ---------------------------------------------------------------------------------------
Total Noninterest Expense ................. 10,582 8,958 30,747 27,941
- ---------------------------------------------------------------------------------------
Income Before Income Tax Expense .............. 4,004 8,968 23,477 26,167
Income Tax Expense ............................ 1,207 3,004 8,077 8,863
- ---------------------------------------------------------------------------------------
Net Income .................................... 2,797 5,964 15,400 17,304
Other Comprehensive Income -
Unrealized Gains (Losses) on Investment
Securities Available for Sale .............. 651 687 863 458
- ---------------------------------------------------------------------------------------
Comprehensive Income .......................... $ 3,448 $ 6,651 $16,263 $17,762
=======================================================================================
Basic Earnings Per Common Share (Note 3)
Net Income .................................. $ 0.19 $ 0.41 $ 1.07 $ 1.20
Weighted Average Number of Common Shares
Outstanding (In Thousands) ................ 14,412 14,396 14,408 14,369
- ---------------------------------------------------------------------------------------
Diluted Earnings Per Common Share (Note 3)
Net Income .................................. $ 0.19 $ 0.41 $ 1.05 $ 1.19
Weighted Average Number of Common Shares
Outstanding (In Thousands) ................ 14,635 14,626 14,644 14,600
=======================================================================================
</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 Nine Months Ended September 30,
1998
<TABLE>
<CAPTION>
Accumulated Total
Class A Other Share
Common Paid-in Retained Comprehensive holders'
(Dollars in Thousands) Stock Capital Earnings Income Equity
- ---------------------------------------------------------------------------------------------------------------
<S> <C> <C> <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
Exercise of stock options,
5,661 Shares of Class A
Common Stock ................................... 9 113 -- -- 122
Other Comprehensive Income
for 1998 ....................................... -- -- -- 863 863
Class A Common Stock Cash Dividends ............. -- -- (4,977) -- (4,977)
Cash Dividends Paid on Fractional Shares ........ -- (8) -- -- (8)
Tax Effect of Nonqualified Stock Options
Exercised ...................................... -- 403 -- -- 403
Net Income for the Nine Months
Ended September 30, 1998 ....................... -- -- 15,400 -- 15,400
- ---------------------------------------------------------------------------------------------------------------
Balance, September 30, 1998 ..................... $ 14,412 $ 87,586 $ 69,590 $ 1,770 $ 173,358
===============================================================================================================
</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)
Nine Months Ended September 30, 1998 and 1997
<TABLE>
<CAPTION>
(Dollars in Thousands) 1998 1997
- ------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Cash Flows from Operating Activities
Net Income ............................................................. $ 15,400 $ 17,304
Adjustments to Reconcile Net Income to Net Cash Provided by
Operating Activities
Depreciation, Amortization and Accretion, Net ...................... 2,199 2,525
Provision for Loan Losses .......................................... 9,079 1,781
Provision for Estimated Losses on Other Real Estate and Other Assets 22 43
Gain on Sales of Other Real Estate ................................. (286) (37)
Gain on Sale of Securities Available for Sale ...................... (2,564) (514)
Gain on Sale of Premises and Equipment ............................. (220) (1)
(Gain) Loss on Sale of Other Assets ................................ 22 (12)
Impairment Loss .................................................. -- 630
Decrease in Accrued Interest Receivable and Other Assets ........... 949 15,025
Decrease in Accounts Payable and Accrued Liabilities ............... 599 1,076
- ------------------------------------------------------------------------------------------------------------
Net Cash Provided by Operating Activities ................................ 25,200 37,820
- ------------------------------------------------------------------------------------------------------------
Cash Flows from Investing Activities
Proceeds from Sales of Securities Available for Sale ................... 345,260 55,737
Proceeds from Maturing Securities Available for Sale ................... 100,338 42,854
Purchases of Securities Available for Sale ............................. (513,171) (182,551)
Proceeds from Maturing Securities Held to Maturity ..................... 31,111 64,181
Purchases of Securities Held to Maturity ............................... -- (11,702)
Proceeds from Sale of Loans ............................................ 2,033 46
Purchases of Loans ..................................................... (39) (490)
Loan Originations and Advances ......................................... (71,535) (81,702)
Recoveries of Charged-Off Loans ........................................ 598 596
Proceeds from Sale of Other Assets ..................................... 532 205
Proceeds from Sale of Other Real Estate ................................ 2,343 879
Proceeds from Sale of Premises and Equipment ........................... 556 1
Purchases of Premises and Equipment .................................... (17,722) (8,107)
- ------------------------------------------------------------------------------------------------------------
Net Cash Used In Investing Activities .................................... (119,696) (120,053)
- ------------------------------------------------------------------------------------------------------------
Cash Flows from Financing Activities
Net Increase (Decrease) in Demand, Savings, Money
Market Checking and Savings Deposit Accounts ......................... 12,783 (26,554)
Net Increase in Time Deposits .......................................... 101,079 119,549
Net Increase (Decrease) in Securities Sold
Under Repurchase Agreements .......................................... 6,572 (524)
Cash Dividends Paid on Class A Common Stock (Note 5) ................... (4,583) (3,799)
Cash Dividends Paid on Fractional Shares ............................... (8) --
Tax Effect of Nonqualified Stock Options Exercised ..................... 403 --
Proceeds from the Sale of Common Stock ................................. 122 456
Net Cash and Cash Equivalents Received from Acquisition ................ 5,160 --
- ------------------------------------------------------------------------------------------------------------
Net Cash Provided by Financing Activities ................................ 121,528 89,128
- ------------------------------------------------------------------------------------------------------------
Increase in Cash and Cash Equivalents .................................... 27,032 6,895
Cash and Cash Equivalents at Beginning of Year ........................... 81,353 88,713
- ------------------------------------------------------------------------------------------------------------
Cash and Cash Equivalents at End of Quarter .............................. $ 108,385 $ 95,608
============================================================================================================
Supplemental Disclosures of Cash Flow Information
Interest Paid .......................................................... $ 42,524 $ 36,090
Income Taxes Paid ...................................................... 10,657 9,911
Supplemental Schedule of Noncash Investing and Financing Activities
Foreclosure and Repossession in Partial Satisfaction of Loans Receivable 4,953 2,913
============================================================================================================
</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 September 30, 1998, the Company had a $15.2 million recorded investment in
impaired loans for which there was a related allowance for loan losses of $1.3
million. At September 30, 1998, the Company had $149,000 in impaired loans for
which there was no related allowance for loan losses. The average level of
impaired loans during the three months ended September 30, 1998 was $18.2
million. The Company recorded interest income of $201,000 on its impaired loans
during the nine months ended September 30, 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 nine months ended September 30, 1998 and 1997.
(Dollars in thousands, except per share data) 1998 1997
- --------------------------------------------------------------------------------
Net income available to common shareholders ........ $ 15,400 $ 17,304
- --------------------------------------------------------------------------------
Weighted average number of common shares outstanding
used in basic EPS calculation .................... 14,407,793 14,369,497
Add assumed exercise of outstanding stock options as
adjustments for dilutive securities .............. 236,671 230,558
- --------------------------------------------------------------------------------
Weighted average number of common shares
outstanding used in diluted EPS calculations ..... 14,644,464 14,600,055
- --------------------------------------------------------------------------------
Basic EPS .......................................... $ 1.07 $ 1.20
Diluted EPS ........................................ 1.05 1.19
================================================================================
<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 September 8, 1998, the Board of Directors increased the quarterly cash
dividend from $0.11 to $0.125 per share. The dividend was paid on October 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 had assets of 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 had assets of
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-interests 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 $728,000 was
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 September 30, 1998 was $2.8 million, or
$0.19 per diluted share. This was down from $6.0 million or $0.41 per diluted
share, in the third quarter of 1997. Net income for the nine months ended
September 30, 1998 was $15.4 million or $1.05 per diluted share as compared to
$17.3 million or $1.19 per diluted share in the comparable period of 1997.
The decrease in net income for the nine months ended September 30, 1998 compared
to the same period in 1997 was due primarily to the write off and write down of
certain loans in the agricultural portfolio in the third quarter of 1998. Total
loans charged off or written down in the third quarter amounted to $6.7 million,
of which $4.8 million or 71.1% related to agriculture loans. Total interest
income in the amount of $1.2 million was also charged off of which $0.9 million
or 72.9% related to agriculture loans. During the third quarter $7.2 million was
added to the allowance for loan losses.
Noninterest income increased $3.9 million for the nine months ended September
30, 1998 compared to the same period in 1997, $2.6 million for the three months
ended September 30, 1998 compared to the same period in 1997 and $2.2 million
for the third quarter 1998 compared to the second quarter in 1998. The increases
in these periods were due to the sale of a portion of the Company's available
for sale investment portfolio in the third quarter 1998, which resulted in a
gain of $2.1 million.
A more detailed description of the results of operations is included in 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. are accounted for under the
pooling-of-interests 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 Company incurred a one-time charge of $0.03
per share primarily in the first quarter of 1998 related to the Brownsville
acquisitions.
The following table presents selected financial data regarding results of
operations:
<PAGE>
<TABLE>
<CAPTION>
Nine Months
Condensed Quarterly Income 1998 1997 Ended
Statements Taxable-Equivalent Basis* --------------------------- ---------------- September 30,
(Dollars in Thousands, Third Second First Fourth Third --------------
Except Per Share Data) Quarter Quarter Quarter Quarter Quarter 1998 1997
- ---------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
Interest Income ................... $31,499 $31,792 $30,915 $29,992 $28,976 $94,207 $84,308
Interest Expense .................. 15,238 14,038 13,967 13,818 13,207 43,243 36,800
- ---------------------------------------------------------------------------------------------------------
Net Interest Income ............... 16,261 17,754 16,948 16,174 15,769 50,964 47,508
Provision for Loan Losses ......... 7,157 981 941 1,166 695 9,079 1,781
Noninterest Income ................ 5,854 3,623 3,962 3,403 3,231 13,439 9,569
Noninterest Expense ............... 10,582 9,638 10,527 9,229 8,958 30,747 27,941
- ---------------------------------------------------------------------------------------------------------
Income Before Taxable-Equivalent
Adjustment and Income Tax ....... 4,376 10,758 9,442 9,182 9,348 24,577 27,355
Taxable-Equivalent Adjustment ..... 372 374 353 367 380 1,100 1,188
Applicable Income Tax Expense ..... 1,207 3,624 3,246 2,997 3,004 8,077 8,863
- ---------------------------------------------------------------------------------------------------------
Net Income ........................ $ 2,797 $ 6,760 $ 5,843 $ 5,818 $ 5,964 $15,400 $17,304
=========================================================================================================
Net Income Per Common Share
Basic ........................... $ 0.19 $ 0.47 $ 0.41 $ 0.40 $ 0.41 $ 1.07 $ 1.20
Diluted ......................... 0.19 0.46 0.40 0.40 0.41 1.05 1.19
=========================================================================================================
</TABLE>
* Taxable-Equivalent basis assuming a 35% tax rate
The Company has historically paid cash and used the purchase method of
accounting for the majority of its 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 represents
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 to be appropriate as it
measures the per share growth of regulatory capital, which impacts the amounts
available for dividends and acquisitions.
The following table reconciles reported earnings to net income excluding
intangible amortization (i.e. "cash" earnings):
<TABLE>
<CAPTION>
Nine Months
Cash Earnings 1998 1997 Ended
Taxable-Equivalent Basis* --------------------------------------- ------------------------- September 30,
Dollars in Thousands, Third Second First Fourth Third -----------------------
Except Per Share Data) Quarter Quarter Quarter Quarter Quarter 1998 1997
- ----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
Reported Net Income ............ $ 2,797 $ 6,760 $ 5,843 $ 5,818 $ 5,964 $ 15,400 $ 17,304
Intangible Amortization ........ 680 681 621 563 563 1,982 1,689
Income Tax Adjustment .......... (135) (135) (123) (111) (111) (393) (333)
- ----------------------------------------------------------------------------------------------------------------------------------
Cash Earnings .................. $ 3,342 $ 7,306 $ 6,341 $ 6,270 $ 6,416 $ 16,989 $ 18,660
==================================================================================================================================
Cash Earnings Per Common Share
Basic ........................ $ 0.23 $ 0.51 $ 0.44 $ 0.44 $ 0.45 $ 1.18 $ 1.30
Diluted ...................... 0.23 0.50 0.43 0.43 0.44 1.16 1.28
Cash Earnings Return on
Average Assets ................ 0.79% 1.81% 1.62% 1.65% 1.74% 1.39% 1.76%
Cash Earnings Return on
Average Shareholders' Equity .. 7.56 17.27 15.59 15.46 16.38 13.36 16.61
==================================================================================================================================
</TABLE>
* Taxable-Equivalent basis assuming a 35% effective income tax rate.
<PAGE>
NET INTEREST INCOME
Taxable equivalent net interest income of $16.3 million for the third quarter
1998 was down from $17.8 million in the prior quarter in 1998 and up from $15.8
million in the third quarter of 1997. Net interest income was unfavorably
impacted by nonaccrual loans, which averaged $18.2 million during the third
quarter as compared to $8.1 million in the second quarter. The increase in net
interest income in the third quarter 1998 compared with the same quarter 1997
and also for the nine months ended September 30, 1998 compared with the same
period in 1997, reflects the increase in the average volumes of interest-earning
assets exceeding the increase in average volumes of interest-bearing liabilities
and the Raymondville Acquisition, and was offset by a reduction in interest
income due to nonperforming loans, the reversal of previously accrued interest
and competition.
The net yield on total interest-earning assets, also referred to as net interest
margin, of 4.25% for the third quarter 1998 reflects a decrease of 48 basis
points from the same quarter in 1997 and reflects a decrease of 65 basis points
from 4.90% for the prior quarter in 1998. The decline in the net interest income
and net yield for the three months ended September 30, 1998 compared to the
prior quarter 1998 and the net yield for the third quarter 1997 was primarily
attributable to nonperforming loans and the reversal of $1.2 million in
previously accrued interest in the third quarter of 1998. Additionally, loan
yields declined and deposit costs increased, both as a result of competition.
Shown below are tables which compare 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.
<PAGE>
<TABLE>
<CAPTION>
Three Months Ended
Summary of Interest-Earning -------------------------------------------------------------------------------------------------
Assets and Interest-Bearing September 30, 1998 June 30, 1998 September 30, 1997
Liabilities ---------------------------- ---------------------------- ------------------------------
Taxable-Equivalent Basis Average Yield/ Average Yield/ Average Yield/
(Dollars in Thousands) Balance Interest Rate* Balance Interest Rate* Balance Interest Rate*
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Interest-Earning Assets
Loans
Commercial ................. $ 348,810 $ 6,851 7.79% $ 356,459 $ 8,413 9.47% $ 304,912 $ 7,466 9.71%
Real Estate ................ 561,721 13,649 9.64 554,606 13,592 9.83 497,714 12,247 9.76
Consumer ................... 115,939 3,350 11.46 111,476 2,807 10.10 85,226 2,217 10.32
- ------------------------------------------------------------------------------------------------------------------------------------
Total Loans .................. 1,026,470 23,850 9.22 1,022,541 24,812 9.73 887,852 21,930 9.80
- ------------------------------------------------------------------------------------------------------------------------------------
Investment Securities
Taxable .................... 415,429 6,399 6.11 376,057 6,021 6.42 355,967 5,738 6.40
Tax-Exempt ................. 30,594 599 7.77 28,420 581 8.20 25,319 552 8.65
- ------------------------------------------------------------------------------------------------------------------------------------
Total Investment Securities 446,023 6,998 6.22 404,477 6,602 6.55 381,286 6,290 6.54
- ------------------------------------------------------------------------------------------------------------------------------------
Time Deposits ................ 1,674 16 3.79 1,852 33 7.15 279 4 5.69
Federal Funds Sold ........... 45,114 635 5.58 25,197 345 5.49 53,693 752 5.56
- ------------------------------------------------------------------------------------------------------------------------------------
Total Interest-Earning
Assets ..................... $1,519,281 $ 31,499 8.23 $1,454,067 31,792 8.77 $1,323,110 28,976 8.69
- ------------------------------------------------------------------------------------------------------------------------------------
Interest-Bearing Liabilities
Savings ...................... $ 104,690 793 3.01 $ 106,929 776 2.91 $ 99,620 800 3.19
Money Market Checking and
Savings ..................... 258,497 1,920 2.95 256,978 1,851 2.89 236,859 1,718 2.88
Time Deposits ................ 903,768 12,454 5.47 842,550 11,327 5.39 767,257 10,688 5.53
- ------------------------------------------------------------------------------------------------------------------------------------
Total Savings and Time
Deposits .................... 1,266,955 15,167 4.75 1,206,457 13,954 4.64 1,103,736 13,206 4.75
- ------------------------------------------------------------------------------------------------------------------------------------
Federal Funds Purchased and
Securities Sold Under
Repurchase Agreements ..... 5,756 71 4.89 6,515 84 5.17 152 1 2.61
- ------------------------------------------------------------------------------------------------------------------------------------
Total Interest-Bearing
Liabilities ................ $1,272,711 15,238 4.75 $1,212,971 14,038 4.64 $1,103,888 13,207 4.75
- ------------------------------------------------------------------------------------------------------------------------------------
Net Interest Income .......... $ 16,261 $ 17,754 $ 15,769
- ------------------------------------------------------------------------------------------------------------------------------------
Net Yield on Total
Interest-Earning Assets ..... 4.25% 4.90% 4.73%
====================================================================================================================================
</TABLE>
* Annualized
<PAGE>
<TABLE>
<CAPTION>
Nine Months Ended
Summary of Interest-Earning --------------------------------------------------------------------------
Assets and Interest-Bearing September 30, 1998 September 30, 1997
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 ............................. $ 349,247 $ 23,274 8.91% $ 300,643 $ 21,856 9.72%
Real Estate ............................ 551,899 40,387 9.78 478,987 35,789 9.99
Consumer ............................... 109,376 8,694 10.63 81,481 6,272 10.29
- -----------------------------------------------------------------------------------------------------------------------------
Total Loans .............................. 1,010,522 72,355 9.57 861,111 63,917 9.92
- -----------------------------------------------------------------------------------------------------------------------------
Investment Securities
Taxable ................................ 394,769 18,723 6.34 352,471 16,946 6.43
Tax-Exempt ............................. 28,904 1,725 7.98 26,427 1,770 8.95
- -----------------------------------------------------------------------------------------------------------------------------
Total Investment Securities .............. 423,673 20,448 6.45 378,898 18,716 6.60
- -----------------------------------------------------------------------------------------------------------------------------
Time Deposits ............................ 1,566 67 5.72 289 12 5.55
Federal Funds Sold ....................... 32,092 1,336 5.57 40,259 1,662 5.52
- -----------------------------------------------------------------------------------------------------------------------------
Total Interest-Earning
Assets ................................. $1,467,853 94,206 8.58 $1,280,557 84,307 8.80
- -----------------------------------------------------------------------------------------------------------------------------
Interest-Bearing Liabilities
Savings .................................. $ 105,349 2,336 2.96 $ 102,741 2,448 3.19
Money Market Checking and
Savings ................................. 256,132 5,615 2.93 242,958 5,105 2.81
Time Deposits ............................ 861,812 35,109 5.45 716,284 29,224 5.45
- -----------------------------------------------------------------------------------------------------------------------------
Total Savings and Time
Deposits ................................ 1,223,293 43,060 4.71 1,061,983 36,777 4.63
- -----------------------------------------------------------------------------------------------------------------------------
Federal Funds Purchased and
Securities Sold Under
Repurchase Agreements ................. 4,772 183 5.13 613 23 5.02
- -----------------------------------------------------------------------------------------------------------------------------
Total Interest-Bearing
Liabilities ............................ $1,228,065 43,243 4.71 1,062,596 36,800 4.63
- -----------------------------------------------------------------------------------------------------------------------------
Net Interest Income ...................... $ 50,963 $ 47,507
- -----------------------------------------------------------------------------------------------------------------------------
Net Yield on Total
Interest-Earning Assets ................. 4.64% 4.96%
=============================================================================================================================
</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 nine months
ended September 30, 1998 as compared to the nine months ended September 30,
1997. Nonaccrual loans are included in assets, thereby reducing yields. The
allocation of the rate/volume variance has been made pro rata on the percentage
that volume and rate variances are produced in each category.
<PAGE>
Analysis of Changes in Net Interest Income
Taxable-Equivalent Basis
Nine Months Ended September 30,1998 Due to Change in
Compared to September 30, 1997 Net ------------------------------------
(In Thousands) Change Volume Rate Rate/Volume
- --------------------------------------------------------------------------------
Interest Income
Loans, Including Fees ....... $ 8,438 $ 11,086 $ (2,254) $ (394)
Investment Securities
Taxable ................... 1,777 2,034 (237) (20)
Tax-Exempt ................ (45) 166 (192) (19)
Time Deposits ............... 55 53 -- 2
Federal Funds Sold .......... (326) (337) 15 (4)
- --------------------------------------------------------------------------------
Total Interest Income ...... 9,899 13,002 (2,668) (435)
- --------------------------------------------------------------------------------
Interest Expense
Deposits .................... 6,283 5,586 635 62
Federal Funds Purchased
and Securities Sold
Under Repurchase Agreements 160 156 1 3
- --------------------------------------------------------------------------------
Total Interest Expense ........ 6,443 5,742 636 65
- --------------------------------------------------------------------------------
Net Interest Income Before
Allocation Of Rate/Volume ... 3,456 7,260 (3,304) (500)
- --------------------------------------------------------------------------------
Allocation of Rate/Volume ..... -- (415) (85) 500
- --------------------------------------------------------------------------------
Changes in Net Interest Income $ 3,456 $ 6,845 $ (3,389) $ --
================================================================================
PROVISION FOR LOAN LOSSES
The provision for loan losses for the three months ended September 30, 1998 of
$7.2 million is up from $0.7 million reported in last year's comparable period
because of the charge-off of loans during the three months ended September 30,
1998, as previously discussed. See Allowance for Loan Losses.
NONINTEREST INCOME
Noninterest income for the third quarter of 1998 of $5.9 million was up
substantially from $3.2 million reported in third quarter of 1997 primarily
because of the sale of a portion of the Company's available for sale investment
portfolio. Long-term interest rates were at or near 30 year lows for most of the
third quarter. This coupled with management's belief in the fundamental
underlying strength of the U.S., Texas and Rio Grande Valley economies,
presented an opportunity to realize some of the security gains. A total of $2.1
million in security gains was taken during the third quarter 1998 in the
available for sale portfolio.
Noninterest income also benefited from the Company's continuing strong deposit
growth in the third quarter 1998. Service charges on these deposit accounts were
up 21.0% from last year's comparable period. The following table summarizes the
major noninterest income categories:
<PAGE>
<TABLE>
<CAPTION>
Nine Months
1998 1997 Ended
-------------------------------- -------------------- September 30,
Noninterest Income Third Second First Fourth Third ----------------
(In Thousands) Quarter Quarter Quarter Quarter Quarter 1998 1997
- ------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
Service Charges on Deposit Accounts ....... $ 2,110 $ 1,941 $ 1,829 $ 1,836 $ 1,751 $ 5,880 $ 5,173
Other Service Charges ..................... 506 516 586 440 409 1,608 1,166
- ------------------------------------------------------------------------------------------------------------------------------
Total Service Charges ..................... 2,616 2,457 2,415 2,276 2,160 7,488 6,339
Trust Service Fees ........................ 444 430 447 441 425 1,321 1,250
Investment Securities Gains (Losses) ...... 2,137 198 222 214 215 2,557 520
Data Processing Service Fees .............. 391 344 341 286 260 1,076 794
Other Operating Income .................... 266 194 537 186 171 997 666
- ------------------------------------------------------------------------------------------------------------------------------
Total .................................... $ 5,854 $ 3,623 $ 3,962 $ 3,403 $ 3,231 $13,439 $ 9,569
==============================================================================================================================
</TABLE>
<PAGE>
NONINTEREST EXPENSE
Noninterest expense of $10.6 million in the third quarter of 1998 was up from
$9.6 million in the previous quarter and up 18.1% from $9.0 million in the third
quarter of 1997, primarily due to the opening of the Company's new headquarters
in McAllen, Texas, on July 13, 1998. This allowed the bank to consolidate
operations from four different buildings into one, enhancing productivity.
Total salaries and employee benefits for the three months ended September 30,
1998 increased $0.5 million from the previous quarter in 1998 and $0.7 million
from the third quarter of 1997 and reflects an increase in personnel hired late
in the second quarter of 1998 and into the third quarter of 1998 to fill
previously unfilled positions. Total Salaries and employee benefits for the nine
months ended September 30, 1998 compared with the same period in 1997 increased
4.0% which reflects the increase hirings in the third quarter of 1998 and the
Raymondville acquisition.
Net Occupancy expense of $1.1 million for the quarter ended September 30, 1998
increased $0.4 million or 58.1% compared to $0.7 million for the quarter ended
September 30, 1997 and increased $0.3 million or 35.4% compared to $0.8 million
for the three months ended June 30, 1998. The Net Occupancy expense increased
$0.7 million for the nine months ended September 30, 1998 compared to the nine
months ended September 30, 1997. All period increases were primarily due to the
occupancy expenses associated with the Raymondville Acquisition, the new
Edinburg branch which was opened for business in December 1997, and the new
corporate headquarters which opened in July 1998.
Equipment expense of $1.2 million for the quarter ended September 30, 1998
increased $0.2 million or 24.3% compared to $1.0 million for the quarter ended
September 30, 1997 and increased $0.1 million or 12.8% compared to the three
months ended June 30, 1998. Equipment expense increased $0.6 million for the
nine months ended September 30, 1998 as compared to the nine months ended
September 30, 1997. All period increases were primarily due to expenses
associated with the equipment acquired to service the Company's increasing
customer base, moving to the new corporate headquarters and the Raymondville
Acquisition.
The One Time Charge - Acquisitions cost of $0.7 million reflects expenses
related to business combinations accounted for by the pooling-of-interests
method.
Total Other Noninterest expense of $2.6 million for the quarter ended September
30, 1998 increased $0.2 million or 8.7% compared to $2.4 million for the quarter
ended September 30, 1997 and was comparable to the three months ended June 30,
1998. Total Other Noninterest expense increased $0.7 million for the nine months
ended September 30, 1998 as compared to the nine months ended September 30, 1997
primarily due to an increased volume of business conducted by the Company.
<PAGE>
The following table displays the major noninterest expense categories:
<TABLE>
<CAPTION>
Nine Months
1998 1997 Ended
-------------------------------- -------------------- September 30,
Noninterest Expense Third Second First Fourth Third --------------------
(Dollars in Thousands) Quarter Quarter Quarter Quarter Quarter 1998 1997
- -----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
Salaries and Employee Benefits
Salaries and Wages ............... $ 3,969 $ 3,444 $ 3,814 $ 3,584 $ 3,392 $ 11,227 $ 10,860
Employee Benefits ................ 878 946 853 737 779 2,677 2,511
- -----------------------------------------------------------------------------------------------------------------------
Total Salaries and
Employee Benefits ............. 4,847 4,390 4,667 4,321 4,171 13,904 13,371
- -----------------------------------------------------------------------------------------------------------------------
Net Occupancy Expense .............. 1,140 842 778 605 721 2,760 2,082
- -----------------------------------------------------------------------------------------------------------------------
Equipment Expense .................. 1,229 1,090 1,134 924 989 3,453 2,854
- -----------------------------------------------------------------------------------------------------------------------
Other Real Estate (Income)
Expense, Net
Rent Income .................... (6) (4) (14) (9) (12) (24) (62)
Gain (Loss) on Sale ............ (54) (199) (34) (78) 11 (287) (37)
Expense ........................ 102 137 103 71 72 342 196
Write-Downs .................... 14 5 -- -- 24 19 24
- -----------------------------------------------------------------------------------------------------------------------
Total Other Real Estate
(Income) Expense, Net ......... 56 (61) 55 (16) 95 50 121
- -----------------------------------------------------------------------------------------------------------------------
Intangible Asset Amortization ...... 680 681 621 563 563 1,982 1,689
- -----------------------------------------------------------------------------------------------------------------------
Impairment Loss .................... -- -- -- -- -- -- 630
- -----------------------------------------------------------------------------------------------------------------------
One Time Charge - Acquisitions ..... -- 46 682 -- -- 728 --
- -----------------------------------------------------------------------------------------------------------------------
Other Noninterest Expense
Advertising and Public Relations . 491 299 322 390 319 1,112 982
Data Processing and Check Clearing 301 286 295 286 257 882 834
Director Fees .................... 80 48 124 122 120 252 393
Franchise Tax .................... 132 191 137 133 133 460 400
Insurance ........................ 107 102 92 85 101 301 242
FDIC Insurance ................... 44 42 38 34 35 124 116
Legal Fees ....................... 280 333 348 333 323 961 717
Professional Fees ................ 166 156 173 205 181 495 570
Postage, Delivery and Freight .... 203 214 204 177 162 621 512
Stationery and Supplies .......... 269 424 341 272 258 1,034 784
Telephone ........................ 150 127 132 109 103 409 324
Other Losses ..................... 141 110 56 383 169 307 454
Miscellaneous Expenses ........... 266 318 328 303 258 912 866
- -----------------------------------------------------------------------------------------------------------------------
Total Other Noninterest Expense 2,630 2,650 2,590 2,832 2,419 7,870 7,194
- -----------------------------------------------------------------------------------------------------------------------
Total .......................... $ 10,582 $ 9,638 $ 10,527 $ 9,229 $ 8,958 $ 30,747 $ 27,941
=======================================================================================================================
</TABLE>
BALANCE SHEET ANALYSIS
Average interest earning assets of $1.5 billion for the three months ended
September 30, 1998 , increased by 14.8% from the $1.3 billion reported during
last year's comparable period. Average loans increased from $888 million in the
third quarter of 1997 to $1.0 billion in the third quarter of 1998 for an
increase of 15.6%, reflecting the growth of the Rio Grande Valley economy and
the Company's market share position. The net increase in both the average loans
and average investment securities was primarily attributable to the increased
volume of business conducted by the Company and partially attributable to the
Raymondville Acquisition.
<PAGE>
Average demand deposits increased 15.6% to $220 million for the third quarter
1998 compared to the third quarter 1997 and 13.1% to $218 million for the nine
months ended September 30, 1998 compared with the nine months ended September
30, 1997. Average total demand deposits in the third quarter 1998 decreased 2.4%
to $220 million from the second quarter 1998.
Average interest-bearing deposits increased 15.2% to $1.2 billion for the nine
months ended September 30, 1998 compared with the nine months ended September
30, 1997.
Management attributes the strong growth in average assets and deposits for the
three months ended September 30, 1998 compared to the three months ended
September 30, 1997 primarily to the on-going marketing efforts of the Company
and partially due to the Raymondville Acquisition.
Shown below is a table presenting the consolidated average balance sheets:
<TABLE>
<CAPTION>
Nine Months
1998 1997 Ended
----------------------------------------- -------------------------- September 30,
Average Balance Sheets Third Second First Fourth Third --------------------------
(In Thousands) Quarter Quarter Quarter Quarter Quarter 1998 1997
- ----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
Assets
Loans .................... $ 1,026,470 $ 1,022,541 $ 982,067 $ 920,005 $ 887,852 $ 1,010,522 $ 861,111
Investment Securities
Taxable ................ 415,429 376,057 392,570 382,206 355,967 394,769 352,471
Tax-Exempt ............. 30,594 28,420 27,666 26,012 25,319 28,904 26,427
Time Deposits ............ 1,674 1,852 1,167 101 279 1,566 289
Federal Funds Sold ....... 45,114 25,197 25,752 37,825 53,693 32,092 40,259
- ----------------------------------------------------------------------------------------------------------------------------------
Total Interest-Earning
Assets ................. 1,519,281 1,454,067 1,429,222 1,366,149 1,323,110 1,467,853 1,280,557
Cash and Due
from Banks ............. 50,440 58,515 58,155 55,450 55,469 55,675 55,536
Bank Premises
and Equipment, Net ..... 69,101 64,253 57,234 49,021 43,531 63,573 41,964
Other Assets ............. 57,111 58,283 52,292 49,056 50,220 55,913 50,101
Allowance for
Loan Losses ............ (12,263) (12,527) (11,775) (10,874) (11,131) (12,190) (11,156)
- ----------------------------------------------------------------------------------------------------------------------------------
Total .................... $ 1,683,670 $ 1,622,591 $ 1,585,128 $ 1,508,802 $ 1,461,199 $ 1,630,824 $ 1,417,002
- ----------------------------------------------------------------------------------------------------------------------------------
Liabilities
Demand Deposits
Commercial and
Individual ............ $ 214,208 $ 219,241 $ 202,143 $ 185,582 $ 185,301 $ 211,908 $ 186,132
Public Funds ............ 5,831 6,209 5,777 5,047 5,008 5,939 6,495
- ----------------------------------------------------------------------------------------------------------------------------------
Total Demand Deposits .... 220,039 225,450 207,920 190,629 190,309 217,847 192,627
- ----------------------------------------------------------------------------------------------------------------------------------
Savings
Commercial and
Individual ............ 103,784 106,124 103,715 98,733 98,974 104,541 102,069
Public Funds ........... 906 805 710 656 646 808 672
Money Market Checking
and Savings Accounts
Commercial and
Individual ............ 217,125 216,310 207,380 198,447 204,491 213,641 203,774
Public Funds ........... 41,372 40,668 45,479 47,418 32,368 42,491 39,184
Time Deposits
Commercial and
Individual ............ 708,867 662,010 665,812 661,291 629,647 679,054 590,624
Public Funds ........... 194,901 180,540 172,588 136,748 137,610 182,758 125,660
- ----------------------------------------------------------------------------------------------------------------------------------
Total Interest-Bearing
Deposits ............... 1,266,955 1,206,457 1,195,684 1,143,293 1,103,736 1,223,293 1,061,983
- ----------------------------------------------------------------------------------------------------------------------------------
Total Deposits ........... 1,486,994 1,431,907 1,403,604 1,333,922 1,294,045 1,441,140 1,254,610
- ----------------------------------------------------------------------------------------------------------------------------------
Federal Funds Purchased
and Securities Sold Under
Repurchase Agreements .. 5,756 6,515 2,004 2,111 152 4,772 613
Other Liabilities ........ 15,603 14,502 14,585 11,867 11,573 14,901 11,621
Shareholders' Equity ..... 175,317 169,667 164,935 160,902 155,429 170,011 150,158
- ----------------------------------------------------------------------------------------------------------------------------------
Total .................... $ 1,683,670 $ 1,622,591 $ 1,585,128 $ 1,508,802 $ 1,461,199 $ 1,630,824 $ 1,417,002
==================================================================================================================================
</TABLE>
<PAGE>
RISK ANALYSIS OF THE LOAN PORTFOLIO
Total loans of $1.0 billion at September 30, 1998 increased by 15.3% or $13.7
million from the $895 million level at September 30, 1997 and were up $19.6
million from the June 30, 1998 level. The Company's loans are widely diversified
by borrower industry group. The increases in loans were primarily attributable
to managements efforts to improve the mix of earnings and the Raymondville
Acquisition. Loan demand remains strong, reflecting the positive economic growth
in the Company's trade area. Agricultural loans have declined during the past
several quarters as management has curtailed new loan activity in this market
segment until there is relief from the Rio Grande Valley's ongoing drought,
which showed signs of improving toward the end of the third quarter. The
following table presents the composition of the loan portfolio for the last five
quarters:
<TABLE>
<CAPTION>
1998 1997
------------------------------------ ----------------------
Loan Portfolio Composition Third Second First Fourth Third
(In Thousands) Quarter Quarter Quarter Quarter Quarter
- ----------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Commercial ............ $ 283,565 $ 275,738 $ 270,730 $ 249,819 $ 232,083
Commercial Tax-Exempt . 26,244 27,196 29,426 29,024 31,330
- ----------------------------------------------------------------------------------------
Total Commercial Loans 309,809 302,934 300,156 278,843 263,413
- ----------------------------------------------------------------------------------------
Agricultural .......... 40,455 44,772 57,956 51,346 39,899
- ----------------------------------------------------------------------------------------
Real Estate
Construction ........ 57,216 61,556 65,413 69,477 59,661
Commercial Mortgage . 344,969 324,332 323,058 304,215 294,293
Agricultural Mortgage 33,584 35,044 35,068 31,949 30,630
1-4 Family Mortgage . 129,642 130,258 128,196 122,043 120,724
- ----------------------------------------------------------------------------------------
Total Real Estate ..... 565,411 551,190 551,735 527,684 505,308
- ----------------------------------------------------------------------------------------
Consumer .............. 116,983 114,122 107,929 93,443 86,720
- ----------------------------------------------------------------------------------------
Total Loans ........... $1,032,658 $1,013,018 $1,017,776 $ 951,316 $ 895,340
========================================================================================
</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 properties
which have been acquired in partial or full satisfaction of loan obligations
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 September 30, 1998 of $20.9 million reflected an
increase from the September 30, 1997 balance of $11.5 million and the June 30,
1998 level of $12.4 million. Nonperforming assets as a percentage of total loans
and foreclosed assets increased from 1.28% at September 30, 1997 to 2.02% at
September 30, 1998. Management continues to work vigorously to return
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 are in the
process of collection generally are not placed on nonaccrual status. The amount
of accruing loans 90 days or more past due at September 30, 1998 of $3.5 million
reflects an increase from the September 30, 1997 level of $3.1 million and a
decrease of $3.3 million from June 30, 1998.
Certain customers primarily in the agriculture business have been adversely
affected by the drought. After a careful review of the entire loan portfolio,
management concluded it prudent to charge off credits considered a loss and
write down others even though a significant portion of them were not past due.
Total credits charged off or written down in the third quarter amounted to $6.7
million, of which $4.8 million or 71.1% related to agricultural loans. Total
interest income of $1.2 million was also charged off of which $0.9 million or
72.8% related to agricultural loans. In October, 1998 approximately $4.0 million
of nonperforming assets was paid and interest was paid current on approximately
another $1.0 million. Management plans to aggressively work with these credits
with a goal of reflecting improvement in the fourth quarter.
<PAGE>
Total cross-border credits of $7.6 million, or 0.7% of total loans outstanding
at September 30, 1998, reflect a slight decrease when compared with the total
cross-border credits of $7.8 million at September 30, 1997 and $8.1 million at
June 30, 1998. Total nonaccrual cross-border credits of $2.6 million at
September 30, 1998 remain essentially unchanged when compared to the total
nonaccrual cross-border credits at September 30, 1997 and June 30, 1998.
An analysis of the components of nonperforming assets for the last five quarter
is presented in the following table:
<TABLE>
<CAPTION>
1998 1997
----------------------------- ------------------
Nonperforming Assets Third Second First Fourth Third
(Dollars in Thousands) Quarter Quarter Quarter Quarter Quarter
- --------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Nonaccrual Loans ........................... $15,151 $ 8,393 $ 7,887 $ 8,355 $ 8,615
Renegotiated Loans ......................... -- -- -- -- --
- --------------------------------------------------------------------------------------------------
Nonperforming Loans ........................ 15,151 8,393 7,887 8,355 8,615
Foreclosed Assets
(Primarily Other Real Estate) ............. 5,781 4,003 4,182 3,331 2,868
- --------------------------------------------------------------------------------------------------
Total Nonperforming Assets ................. 20,932 12,396 12,069 11,686 11,483
Accruing Loans 90 Days or More Past Due .... 3,547 6,862 5,683 3,287 3,139
- --------------------------------------------------------------------------------------------------
Total Nonperforming Assets and Accruing
Loans 90 Days or More Past Due ............ $24,479 $19,258 $17,752 $14,973 $14,622
- --------------------------------------------------------------------------------------------------
Nonperforming Loans as a % of Total Loans .. 1.47% 0.83% 0.77% 0.88% 0.96%
Nonperforming Assets as a % of Total
Loans and Foreclosed Assets ............... 2.02 1.22 1.18 1.22 1.28
Nonperforming Assets as a % of Total Assets 1.21 0.75 0.74 0.76 0.78
Nonperforming Assets and Accruing
Loans 90 Days or More Past Due
as a % of Total Loans and Foreclosed Assets 2.36 1.89 1.74 1.57 1.63
==================================================================================================
</TABLE>
ALLOWANCE FOR LOAN LOSSES
The allowance for loan losses at September 30, 1998 of $12.6 million increased
from $10.6 million at September 30, 1997 and $12.0 million at June 30, 1998. The
increase from the prior quarter in 1998 results from adding $7.2 to the
allowance and charging off $6.7 million. The allowance for loan losses as a
percent of loans was 1.22% at the end of the third quarter of 1998, up from
1.19% at the end of the second quarter 1998 and up from 1.18% at September 30,
1997. Management believes that the allowance for loan losses at September 30,
1998 adequately reflects the risks in the loan portfolio. Management
continuously evaluates the allowance for loan losses and makes adjustments as
conditions warrant.
<PAGE>
The following table summarizes the transactions in the allowance for loan
losses:
<TABLE>
<CAPTION>
Nine Months
1998 1997 Ended
----------------------------- ------------------ September 30,
Allowance for Loan Loss Activity Third Second First Fourth Third ----------------
(Dollars in Thousands) Quarter Quarter Quarter Quarter Quarter 1998 1997
- ---------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance at Beginning of Period ..... $12,038 $12,115 $11,291 $10,599 $11,187 $11,291 $10,806
Balance from Acquisitions .......... -- -- 308 -- -- 308 --
Provision for Loan Losses .......... 7,157 981 941 1,166 695 9,079 1,781
Charge-Offs
Commercial ....................... 789 300 228 170 950 1,317 1,608
Agricultural ..................... 4,810 630 13 275 155 5,453 202
Real Estate ...................... 637 111 120 27 25 868 32
Consumer ......................... 531 319 233 165 247 1,083 742
- ---------------------------------------------------------------------------------------------------------------
Total Charge-Offs .................. 6,767 1,360 594 637 1,377 8,721 2,584
- ---------------------------------------------------------------------------------------------------------------
Recoveries
Commercial ....................... 27 47 124 39 40 198 97
Agricultural ..................... -- -- -- 13 1 -- 35
Real Estate ...................... 3 195 2 70 1 200 280
Consumer ......................... 97 60 43 41 52 200 184
- ---------------------------------------------------------------------------------------------------------------
Total Recoveries ................... 127 302 169 163 94 598 596
- ---------------------------------------------------------------------------------------------------------------
Net Charge-Offs .................... 6,640 1,058 425 474 1,283 8,123 1,988
- ---------------------------------------------------------------------------------------------------------------
Balance at End of Period ........... 12,555 $12,038 $12,115 $11,291 $10,599 12,555 10,599
- ---------------------------------------------------------------------------------------------------------------
Ratio of Allowance for Loan
Losses to Loans Outstanding,
Net of Unearned Discount .......... 1.22% 1.19% 1.19% 1.19% 1.18%
Ratio of Allowance For Loan
Losses to Nonperforming Assets .... 59.98 97.11 100.38 96.62 92.30
Ratio of Net Charge-Offs
to Average Total Loans Outstanding,
Net of Unearned Discount .......... 0.65 0.42 0.18 0.20 0.57
===========================================================================================
</TABLE>
PREMISES AND EQUIPMENT, NET
Premises and equipment of $69.3 million at September 30, 1998 increased from
$45.3 million at September 30, 1997 and $67.1 million at June 30, 1998. The
increases were primarily attributable to the completion of the new corporate
headquarters tower in McAllen, Texas that opened as scheduled on July 13, 1998.
DEPOSITS
Total deposits at September 30, 1998 of $1.5 billion increased by 17.2% from the
September 30, 1997 level of $1.3 billion and increased by $66 million from the
June 30, 1998 level. Included was an increase in demand deposits from $193
million at September 30, 1997 to $240 million at September 30, 1998. The
increase in total deposits in the third quarter ended September, 1998 compared
to the same period in 1997 is primarily attributable to the Raymondville
Acquisition and business development efforts. The following table presents the
composition of total deposits for the last five quarters:
<PAGE>
<TABLE>
<CAPTION>
1998 1997
----------------------------------- -----------------------
Total Deposits Third Second First Fourth Third
(In Thousands) Quarter Quarter Quarter Quarter Quarter
- --------------------------------------------------------------------------------------------------
Demand Deposits
<S> <C> <C> <C> <C> <C>
Commercial and Individual ..... $ 233,475 $ 219,720 $ 223,048 $ 203,325 $ 189,253
Public Funds .................. 6,260 5,400 6,814 5,098 3,532
- --------------------------------------------------------------------------------------------------
Total Demand Deposits ........... 239,735 225,120 229,862 208,423 192,785
- --------------------------------------------------------------------------------------------------
Interest-Bearing Deposits
Savings
Commercial and Individual ..... 102,057 104,011 108,462 100,917 98,310
Public Funds .................. 934 886 714 771 619
Money Market Checking and Savings
Commercial and Individual ..... 206,090 215,331 213,813 203,292 199,056
Public Funds .................. 44,843 41,454 42,131 39,547 34,229
Time Deposits
Commercial and Individual ..... 724,606 684,303 667,222 647,959 644,426
Public Funds .................. 214,838 196,086 183,833 161,874 139,205
- --------------------------------------------------------------------------------------------------
Total Interest-Bearing
Deposits ...................... 1,293,368 1,242,071 1,216,175 1,154,360 1,115,845
- --------------------------------------------------------------------------------------------------
Total Deposits .................. $1,533,103 $1,467,191 $1,446,037 $1,362,783 $1,308,630
==================================================================================================
</TABLE>
<PAGE>
CAPITAL AND LIQUIDITY
Total shareholders' equity at September 30, 1998 was $173.4 million as compared
to $157.2 million at September 30, 1997 and $171.7 million at June 30, 1998. 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%, the Tier I Capital Ratio is equal to or greater than 6%,
and the Leverage Capital Ratio is equal to or greater than 5%.
<PAGE>
The Company's Tier I Capital Ratio was approximately 13.06% and 14.12% as of
September 30, 1998 and 1997, respectively. The Company's Total Risk-Based
Capital Ratio was approximately 14.20% and 15.26% as of September 30, 1998 and
1997, respectively. The Company's Leverage Capital Ratio was approximately 8.71%
and 9.17% at September 30, 1998 and 1997, respectively. Based on capital ratios,
the Company is within the definition of "well capitalized" for Federal Reserve
purposes as of September 30, 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 nine months ended September 30, 1998, liquidity was enhanced primarily
by net cash provided by operating activities of $25.2 million and financing
activities of $121.5 million offset by net cash used in investing activities of
$119.7 million. The increase in net cash provided by operating activities was
primarily attributable to $15.4 million net income and $9.1 million provision
for loan losses for the nine months ended September 30, 1998. The increase in
net cash provided by financing activities was primarily attributable to the
$101.1 million net increase in time deposits. As a result, net cash and cash
equivalents at September 30, 1998 of $108.4 million increased $27.0 million or
33.2% compared to net cash and cash equivalents at December 31, 1997 of $81.4
million.
<PAGE>
YEAR 2000 PROJECT
General
The Year 2000 problem affects all companies. This problem is rooted in storage
constraints of systems developed in the 1960's and 1970's. Many computer codes
used only two-digit year codes, e.g., 98 instead of four digits, 1998. Thus,
many computer applications interpret the year "00" as 1900 and accordingly need
to be modified to process in the next century.
In the early 1990's, management of Texas State Bank decided to process all data
in-house and offer data processing services to third party banks. As part of
this initiative, management decided to purchase all critical software and
support services from third party software vendors. All of the critical software
purchased had already been coded to recognize a four-digit date. There are no
in-house supported computer applications at Texas State Bank.
State of Readiness
In early 1997, Texas State Bank established an ongoing corporate-wide effort to
address the issues associated with the Year 2000. The Bank adopted the phased
approach to Year 2000 project management as outlined by the Federal Financial
Institutions Examination Council ("FFIEC"). The Bank's project goals are to meet
if not exceed all Year 2000 regulatory guidelines. This approach requires the
active involvement of management and the Board of Directors. This active
management involvement provides the sponsorship and commitment to ensure the
business issues and risks are adequately addressed and resolved. The FFIEC
phases used are Awareness Phase, Assessment Phase, Renovation Phase, Validation
Phase and Implementation Phase.
Awareness Phase: Define the problem and gain management support.
Texas State Bank established a Year 2000 Committee comprised of all levels of
management to address the Year 2000 project. An action plan was developed that
includes strategies for dealing with in-house and third party computer systems,
vendors, customers and business partners. An ongoing process to continually
evaluate customers, business partners and management practices and policies will
be phased in as the Year 2000 project evolves.
Assessment Phase: Assess the size and complexity of the problem. Evaluate risk
impact and establish contingency plans.
Texas State Bank has essentially completed the assessment phase. Information
Technology "(IT)" and Non IT systems have been identified. Systems have
generally been identified as Core Mission critical, Non Mission critical and
Business critical. Risk impact of material customers and other business partners
are identified and due diligence procedures developed. The impact of strategic
business initiatives, resources needs and time lines have been addressed. A
contingency plan for Texas State Bank was completed on June 22, 1998 and
addresses Core Mission critical and Business critical systems. Continually
assessing risk is a major goal in the Year 2000 process.
Renovation Phase: Upgrade or replace non-compliant systems.
Core Mission critical software and hardware vendors of Texas State Bank have
represented their products as being Year 2000 compliant. Texas State Bank is
currently testing these products to corroborate the vendor representations.
Certain Non Mission critical systems have been identified as not Year 2000
compliant. These systems will require the purchase of compliant systems from
third party vendors. Renovation timelines have been established and all upgrades
will be completed by June 30, 1999.
<PAGE>
Validation Phase: Testing current and upgraded systems.
Texas State Bank has created a Year 2000 Test Lab located in the Data Center to
test many of the internal and external Core Mission critical systems. Texas
State Bank completed all internal Core Mission critical testing by September 30,
1998. In addition, the Bank has requested and received vendor representations
that all Core Mission critical applications are Year 2000 compliant. Interface
testing with FEDLINE will begin in October 1998 and is scheduled to be completed
by December 31, 1998.
Implementation Phase: Systems must be Year 2000 ready prior to Year 2000.
In this phase, all systems should be fully renovated, tested and certified as
Year 2000. If systems fail to meet Year 2000 requirements, contingency plans
will be implemented. Texas State Bank anticipates that all systems will be fully
renovated and tested by June 30, 1999.
Estimated costs
Texas State Bank has estimated the cost of the Year 2000 project at $451,000.
The cost expensed was $31,000 in 1997 and is estimated to be $330,000 in 1998
and $90,000 in 1999.
Risk
Testing and planning do not ensure that any organization will be able to conduct
business around and after the Year 2000. Testing does not ensure that our
customers and other business partners will be able to conduct business. Texas
State Bank is performing due diligence on our customers and other business
partners. Where our customers and business partners are regulated, we take
comfort from knowing that this is a regulated entity and its regulator is doing
its own due diligence. Where our customers and business partners are not
regulated, Texas State Bank implemented processes for evaluating customers and
business partners readiness for the Year 2000. These processes will be
continuously monitored.
Contingency Plan
Texas State Bank has implemented procedures and continues to refine its
processes for evaluating its business readiness. Still, the possibility exists
that something can go wrong. Texas State Bank has prepared contingency plans to
ensure a smooth flow of funds in the event of unforeseen problems. The effect of
many business disruptions at the same time may impact Texas State Bank. Texas
State Bank will continue to review its contingency plans to reasonably address
these incidents.
<PAGE>
Selected financial and common stock trading data are summarized in the following
table:
SELECTED FINANCIAL DATA
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
------------------- -----------------
Ratio Analysis (Annualized) 1998 1997 1998 1997
- ------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Return On Average Assets ............................... 0.66% 1.62% 1.26% 1.63%
Return On Average Shareholders' Equity ................. 6.33 15.22 12.11 15.41
Dividend Payout Ratio(1) ............................... 64.40 24.18 32.32 25.22
Net Yield on Total Interest-Earning Assets* ............ 4.25 4.73 4.64 4.96
Efficiency Ratio* ...................................... 52.69 47.18 49.63 49.19
Total Average Loans to Total Average Deposits .......... 69.03 68.61 70.12 68.63
Average Equity to Average Assets ....................... 10.41 10.64 10.43 10.60
================================================================================================
</TABLE>
* Taxable-Equivalent Basis Assuming a 35% Effective Income Tax Rate
(1) Includes dividends declared from Brownsville Bancshares, Inc. and
TB&T Bancshares, Inc. acquisitions.
<TABLE>
<CAPTION>
COMMON STOCK TRADING DATA (Nasdaq National Market System)
- ----------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Trading Volume (1998)
Price
September 30, 1998 $22.625 Book Value $12.03 July 513,457 shares
1998 price range $21.00 - $35.625 Price/Book Value 1.88x August 718,873 shares
December 31, 1997 $30.50 September 591,877 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
measurement 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 September 30, 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 6.5 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
Certain of these statements contained herein that are not historical facts are
forward-looking statements as that term is defined for purposes of the Private
Securities Litigation Reform Act. The Company's actual results may differ
materially from those included in the forward-looking statements.
Forward-looking statements involve risks and uncertainties including, but not
limited to, the following: changes in general economic conditions, including the
performance of financial markets and interest rates; customer responsiveness to
new products; competitive, regulatory, or tax changes that affect the cost of or
demand for the Company's products and services; and other risks detailed from
time to time in the Company's filings with the Securities and Exchange
Commission. The Company disclaims any obligation to update statements herein.
<PAGE>
PART II. OTHER INFORMATION
Item 6.
(a) Exhibits
27. Financial Data Schedule
<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.
November 10, 1998 /s/ G. E. Roney
- ----------------------- ------------------------
Date G. E. Roney
Chairman of the Board,
President, Chief
Executive Officer &
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>
<CIK> 0000787648
<NAME> TEXAS REGIONAL BANCSHARES, INC.
<MULTIPLIER> 1,000
<CURRENCY> U.S. DOLLARS
<S> <C>
<PERIOD-START> JAN-01-1998
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-END> SEP-30-1998
<EXCHANGE-RATE> 1
<CASH> 49,257
<INT-BEARING-DEPOSITS> 883
<FED-FUNDS-SOLD> 58,245
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 457,654
<INVESTMENTS-CARRYING> 20,521
<INVESTMENTS-MARKET> 0
<LOANS> 1,032,658
<ALLOWANCE> (12,555)
<TOTAL-ASSETS> 1,732,284
<DEPOSITS> 1,533,103
<SHORT-TERM> 9,197
<LIABILITIES-OTHER> 16,626
<LONG-TERM> 0
0
0
<COMMON> 14,412
<OTHER-SE> 158,946
<TOTAL-LIABILITIES-AND-EQUITY> 1,732,284
<INTEREST-LOAN> 71,851
<INTEREST-INVEST> 19,852
<INTEREST-OTHER> 1,404
<INTEREST-TOTAL> 93,107
<INTEREST-DEPOSIT> 43,060
<INTEREST-EXPENSE> 43,243
<INTEREST-INCOME-NET> 49,864
<LOAN-LOSSES> 9,079
<SECURITIES-GAINS> 2,557
<EXPENSE-OTHER> 30,747
<INCOME-PRETAX> 23,477
<INCOME-PRE-EXTRAORDINARY> 23,477
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 15,400
<EPS-PRIMARY> 1.07
<EPS-DILUTED> 1.05
<YIELD-ACTUAL> 4.64
<LOANS-NON> 15,151
<LOANS-PAST> 3,547
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 11,291
<CHARGE-OFFS> 8,721
<RECOVERIES> 598
<ALLOWANCE-CLOSE> 12,555
<ALLOWANCE-DOMESTIC> 0
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 0
</TABLE>
