UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the quarterly period ended September 30, 1999
or
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from _________ to _________
Commission file number 000-14517
TEXAS REGIONAL BANCSHARES, INC.
(Exact name of registrant as specified in its charter)
TEXAS 74-2294235
State or other jurisdiction (I.R.S. Employer
of incorporation or organization) Identification No.)
POST OFFICE BOX 5910
3900 NORTH 10TH STREET, 11TH FLOOR
MCALLEN, TEXAS 78502-5910
(Address of principal executive offices) (Zip Code)
(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 [ ]
There were 14,405,996 shares of the registrant's Class A Voting Common Stock,
$1.00 par value, outstanding as of November 5, 1999.
<PAGE>
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
TEXAS REGIONAL BANCSHARES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS SEPTEMBER 30, DECEMBER 31,
(DOLLARS IN THOUSANDS, EXCEPT SHARE DATA) 1999 1998
--------------- ---------------
(UNAUDITED)
<S> <C> <C>
Assets
Cash and Due From Banks .................................................. $ 45,844 $ 58,274
Time Deposits ............................................................ 637 553
Federal Funds Sold ....................................................... 43,400 32,000
--------------- ---------------
Total Cash and Cash Equivalents ........................................ 89,881 90,827
Securities Available for Sale, at Fair Value ............................. 465,939 455,936
Securities Held to Maturity, at Amortized Cost (Fair Value of
$8,112 in 1999 and $14,650 in 1998) .................................... 8,010 14,331
Loans, Net of Unearned Discount of $5,404 in 1999 and $4,886 in 1998 ..... 1,228,889 1,089,505
Less: Allowance for Loan Losses .......................................... (15,079) (13,236)
--------------- ---------------
Net Loans .............................................................. 1,213,810 1,076,269
Premises and Equipment, Net .............................................. 69,521 69,827
Accrued Interest Receivable .............................................. 18,513 16,416
Other Real Estate ........................................................ 5,732 5,060
Goodwill and Identifiable Intangibles .................................... 24,856 26,894
Other Assets ............................................................. 10,933 6,772
--------------- ---------------
Total Assets ........................................................... $ 1,907,195 $ 1,762,332
--------------- ---------------
Liabilities
Deposits
Demand ................................................................. $ 242,416 $ 234,655
Savings ................................................................ 106,062 107,711
Money Market Checking and Savings ...................................... 284,460 301,238
Time Deposits .......................................................... 1,033,217 919,338
--------------- ---------------
Total Deposits ....................................................... 1,666,155 1,562,942
Federal Funds Purchased and Securities Sold Under Repurchase Agreements .. 46,162 7,407
Accounts Payable and Accrued Liabilities ................................. 11,158 14,709
--------------- ---------------
Total Liabilities ...................................................... 1,723,475 1,585,058
--------------- ---------------
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 14,405,996 Shares in 1999 and 14,405,027 Shares
In 1998 ............................................................. 14,406 14,405
Paid-In Capital ........................................................ 87,411 87,396
Retained Earnings ...................................................... 91,991 74,864
Accumulated Other Comprehensive Income (Loss) .......................... (10,088) 609
--------------- ---------------
Total Shareholders' Equity ........................................... 183,720 177,274
--------------- ---------------
Total Liabilities and Shareholders' Equity ............................. $ 1,907,195 $ 1,762,332
--------------- ---------------
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
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<PAGE>
<TABLE>
<CAPTION>
TEXAS REGIONAL BANCSHARES, INC. AND SUBSIDIARIES THREE MONTHS NINE MONTHS
CONSOLIDATED STATEMENTS OF INCOME AND COMPREHENSIVE ENDED SEPTEMBER 30, ENDED SEPTEMBER 30,
INCOME --------- --------- --------- ---------
(DOLLARS IN THOUSANDS, EXCEPT SHARE DATA) 1999 1998 1999 1998
--------- --------- --------- ---------
(UNAUDITED)
<S> <C> <C> <C> <C>
Interest Income
Loans, Including Fees .................................... $ 28,366 $ 23,686 $ 81,206 $ 71,851
Securities
Taxable ................................................ 6,753 6,398 19,829 18,722
Tax-Exempt ............................................. 515 391 1,511 1,130
Time Deposits ............................................ 4 16 13 67
Federal Funds Sold ....................................... 124 636 787 1,337
--------- --------- --------- ---------
Total Interest Income .................................. 35,762 31,127 103,346 93,107
--------- --------- --------- ---------
Interest Expense
Deposits ................................................. 15,127 15,167 44,150 43,060
Federal Funds Purchased and Securities
Sold Under Repurchase Agreements ....................... 293 71 494 183
--------- --------- --------- ---------
Total Interest Expense ................................. 15,420 15,238 44,644 43,243
--------- --------- --------- ---------
Net Interest Income Before Provision for Loan Losses ........ 20,342 15,889 58,702 49,864
Provision for Loan Losses ................................... 1,600 7,157 4,422 9,079
--------- --------- --------- ---------
Net Interest Income After Provision for Loan Losses ...... 18,742 8,732 54,280 40,785
--------- --------- --------- ---------
Noninterest Income
Service Charges on Deposit Accounts ...................... 2,469 2,110 6,851 5,880
Other Service Charges .................................... 519 457 1,838 1,567
Trust Service Fees ....................................... 480 444 1,456 1,321
Net Realized Gains on Sales of Securities
Available for Sale ..................................... 2 2,137 1 2,557
Data Processing Service Fees ............................. 540 391 1,553 1,074
Other Operating Income ................................... 275 315 939 1,038
--------- --------- --------- ---------
Total Noninterest Income ............................... 4,285 5,854 12,638 13,437
--------- --------- --------- ---------
Noninterest Expense
Salaries and Employee Benefits ........................... 5,433 4,847 15,951 13,904
Net Occupancy Expense .................................... 848 1,140 2,841 2,760
Equipment Expense ........................................ 1,337 1,229 3,788 3,453
Other Real Estate Expense, Net ........................... 83 56 279 50
Amortization of Goodwill and Identifiable Intangibles .... 680 680 2,039 1,982
One Time Charge - Acquisitions ........................... -- -- -- 728
Other Noninterest Expense ................................ 2,267 2,630 7,208 7,868
--------- --------- --------- ---------
Total Noninterest Expense .............................. 10,648 10,582 32,106 30,745
--------- --------- --------- ---------
Income Before Income Tax Expense ............................ 12,379 4,004 34,812 23,477
Income Tax Expense .......................................... 4,365 1,207 12,281 8,077
--------- --------- --------- ---------
Net Income .................................................. 8,014 2,797 22,531 15,400
Other Comprehensive Income (Loss), Net of Tax
Unrealized Gains (Losses) on Securities Available for Sale
Unrealized Holding Gains (Losses) Arising During Period (2,548) 2,040 (10,696) 2,525
Less: Reclassification Adjustment for Gains
Included in Net Income ............................... 1 1,389 1 1,662
--------- --------- --------- ---------
Total Other Comprehensive Income (Loss) .............. (2,549) 651 (10,697) 863
--------- --------- --------- ---------
Comprehensive Income ........................................ $ 5,465 $ 3,448 $ 11,834 $ 16,263
--------- --------- --------- ---------
Net Income Per Common Share
Basic .................................................... $ 0.56 $ 0.19 $ 1.56 $ 1.07
Diluted .................................................. 0.55 0.19 1.54 1.05
--------- --------- --------- ---------
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
Page 3
<PAGE>
<TABLE>
<CAPTION>
TEXAS REGIONAL BANCSHARES, INC. AND ACCUMULATED
SUBSIDIARIES OTHER
CONSOLIDATED STATEMENTS OF CHANGES COMMON COMPREHENSIVE TOTAL
IN SHAREHOLDERS' EQUITY STOCK - PAID-IN RETAINED INCOME SHAREHOLDERS'
(DOLLARS IN THOUSANDS) CLASS A CAPITAL EARNINGS (LOSS) EQUITY
------- ------- -------- ------------ -------------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Nine Months Ended September 30, 1999
Balance, Beginning of Period ................................ $14,405 $87,396 $ 74,864 $ 609 $ 177,274
Net Income .................................................. -- -- 22,531 -- 22,531
Unrealized Losses on Securities,
Net of Tax and Reclassification Adjustment ................ -- -- -- (10,697) (10,697)
------- ------- -------- ------------ -------------
Total Comprehensive Income ................................ -- -- 22,531 (10,697) 11,834
------- ------- -------- ------------ -------------
Exercise of Stock Options, 1,000 Shares of
Class A Common Stock ...................................... 1 10 -- -- 11
Tax Effect of Nonqualified Stock Options
Exercised ................................................. -- 5 -- -- 5
Class A Common Stock Cash Dividends ......................... -- -- (5,404) -- (5,404)
------- ------- -------- ------------ -------------
Balance, End of Period ...................................... $14,406 $87,411 $ 91,991 $ (10,088) $ 183,720
------- ------- -------- ------------ -------------
Disclosure of Reclassification Amount
Unrealized Holding Losses During Period ................... -- -- -- $ (10,696) --
Less: Reclassification Adjustment for
Gains Included in Net Income ............................ -- -- -- 1 --
------- ------- -------- ------------ -------------
Net Change in Unrealized Losses
on Securities Available for Sale ...................... -- -- -- $ (10,697) --
------- ------- -------- ------------ -------------
Nine Months Ended September 30, 1998
Balance, Beginning of Period ................................ $14,396 $86,888 $ 59,167 $ 907 $ 161,358
Net Income .................................................. -- -- 15,400 -- 15,400
Unrealized Gains on Securities,
Net of Tax and Reclassification Adjustment ................ -- -- -- 863 863
------- ------- -------- ------------ -------------
Total Comprehensive Income ................................ -- -- 15,400 863 16,263
------- ------- -------- ------------ -------------
Exercise of Stock Options, 5,661 Shares of
Class A Common Stock ...................................... 9 113 -- -- 122
Tax Effect of Nonqualified Stock Options
Exercised ................................................. -- 403 -- -- 403
Class A Common Stock Cash Dividends ......................... -- -- (4,974) -- (4,974)
Cash Dividends Paid on Fractional Shares .................... -- -- (8) -- (8)
------- ------- -------- ------------ -------------
Balance, End of Period ...................................... $14,405 $87,404 $ 69,585 $ 1,770 $ 173,164
------- ------- -------- ------------ -------------
Disclosure of Reclassification Amount
Unrealized Holding Gains During Period .................... -- -- -- $ 2,525 --
Less: Reclassification Adjustment for
Gains Included in Net Income ............................ -- -- -- 1,662 --
------- ------- -------- ------------ -------------
Net Change in Unrealized Gains on
Securities Available for Sale ......................... -- -- -- $ 863 --
------- ------- -------- ------------ -------------
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
Page 4
<PAGE>
<TABLE>
<CAPTION>
NINE MONTHS
TEXAS REGIONAL BANCSHARES, INC. AND SUBSIDIARES ENDED SEPTEMBER 30,
CONSOLIDATED STATEMENTS OF CASH FLOWS ------------------------
(DOLLARS IN THOUSANDS) 1999 1998
--------- ---------
(UNAUDITED)
<S> <C> <C>
Cash Flows from Operating Activities
Net Income ........................................................................................ $ 22,531 $ 15,400
Adjustments to Reconcile Net Income to
Net Cash Provided by Operating Activities
Depreciation, Amortization and Accretion, Net ................................................. 6,234 2,199
Provision for Loan Losses ..................................................................... 4,422 9,079
Provision for Estimated Losses on Other Real Estate and Other Assets .......................... 16 22
Gain on Sale of Securities Available for Sale ................................................. (1) (2,564)
Loss on Sale of Other Assets .................................................................. 37 22
Gain on Sale of Other Real Estate ............................................................. (152) (286)
Gain on Sale of Premises and Equipment ........................................................ (39) (220)
Change in Assets and Liabilities, Net of Effects from Merger
Decrease in Deferred Income Tax Asset ....................................................... 3,155 --
Increase (Decrease) in Deferred Income Tax Liability ........................................ (4,487) 1,058
(Increase) Decrease in Accrued Interest Receivable and Other Assets ......................... (3,360) 946
Increase (Decrease) in Accounts Payable and Accrued Liabilities ............................. 1,271 (459)
--------- ---------
Net Cash Provided by Operating Activities ............................................................ 29,627 25,197
--------- ---------
Cash Flows from Investing Activities
Proceeds from Sales of Securities Available for Sale .............................................. 27,041 345,260
Proceeds from Maturing Securities Available for Sale .............................................. 111,055 100,338
Purchases of Securities Available for Sale ........................................................ (164,986) (513,171)
Proceeds from Maturing Securities Held to Maturity ................................................ 6,300 31,111
Proceeds from Sale of Loans ....................................................................... 1,134 2,033
Purchases of Loans ................................................................................ (2,958) (39)
Loan Originations and Advances, Net ............................................................... (142,605) (69,818)
Recoveries of Charged-Off Loans ................................................................... 497 598
Proceeds from Sale of Premises and Equipment ...................................................... 241 556
Purchases of Premises and Equipment ............................................................... (4,118) (17,722)
Proceeds from Sale of Other Real Estate ........................................................... 797 626
Proceeds from Sale of Other Assets ................................................................ 449 532
Net Cash Provided By Mergers ...................................................................... -- 5,160
--------- ---------
Net Cash Used in Investing Activities ................................................................ (167,153) (114,536)
--------- ---------
Cash Flows from Financing Activities
Net Increase (Decrease) in Demand Deposits, Savings, Money
Market Checking and Savings Accounts ............................................................ (10,666) 12,783
Net Increase in Time Deposits ..................................................................... 113,879 101,079
Net Increase in Federal Funds Purchased
and Securities Sold Under Repurchase Agreements ................................................. 38,755 6,572
Cash Dividends Paid on Class A Common Stock ....................................................... (5,404) (4,580)
Cash Dividends Paid on Fractional Shares .......................................................... -- (8)
Tax Effect of Nonqualified Stock Options Exercised ................................................ 5 403
Proceeds from the Sale of Common Stock ............................................................ 11 122
--------- ---------
Net Cash Provided by Financing Activities ............................................................ 136,580 116,371
--------- ---------
Increase (Decrease) in Cash and Cash Equivalents ..................................................... (946) 27,032
Cash and Cash Equivalents at Beginning of Period ..................................................... 90,827 81,353
--------- ---------
Cash and Cash Equivalents at End of Period ........................................................... $ 89,881 $ 108,385
--------- ---------
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
Page 5
<PAGE>
<TABLE>
<CAPTION>
NINE MONTHS
TEXAS REGIONAL BANCSHARES, INC. AND SUBSIDIARIES ENDED SEPTEMBER 30,
CONSOLIDATED STATEMENTS OF CASH FLOWS -------------------
(DOLLARS IN THOUSANDS) 1999 1998
------- -------
(UNAUDITED)
<S> <C> <C>
Supplemental Disclosures of Cash Flow Information
Interest Paid ........................................................................................... $44,514 $42,524
Income Taxes Paid ....................................................................................... 14,053 10,657
Supplemental Schedule of Noncash Investing and Financing Activities
Foreclosure and Repossession in Partial Satisfaction of Loans Receivable ................................ 4,348 4,953
Financing Provided For Sales of Other Real Estate ....................................................... 2,379 1,717
Net increase in dividends payable ....................................................................... -- 394
The Company acquired Raymondville Bancorp, Inc. and its subsidiary, Bank of
Texas, on February 19, 1998. Assets acquired and liabilities assumed are as
follows:
Fair Value of Assets Acquired ......................................................................... -- 63,944
Cash Paid ............................................................................................. -- 9,600
Liabilities Assumed ................................................................................... -- 58,512
------- -------
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
Page 6
<PAGE>
TEXAS REGIONAL BANCSHARES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1: BASIS OF PRESENTATION
The accompanying unaudited consolidated financial statements were prepared
in accordance with instructions for Form 10-Q and, therefore, do not include all
information and footnotes necessary for a complete presentation of financial
position, results of operations, changes in shareholders' equity, and cash flows
in conformity with generally accepted accounting principles. However, the
consolidated financial statements include all adjustments that, in the opinion
of management, are necessary for a fair presentation. All such adjustments were
of a normal and recurring nature. The results of operations and cash flows for
the nine months ended September 30, 1999 and 1998 should not be considered
indicative of the results to be expected for the full year. These consolidated
financial statements should be read in conjunction with the consolidated
financial statements and notes thereto included in the Texas Regional
Bancshares, Inc. and Subsidiaries (the "Company") Annual Report on Form 10-K for
the year ended December 31, 1998.
The consolidated financial statements include the accounts of Texas
Regional Bancshares, Inc. and its wholly owned subsidiaries, Texas Regional
Delaware, Inc. and Texas State Bank (the "Bank"). The Company eliminates all
significant intercompany transactions and balances in consolidation. The Company
accounts for investments in the subsidiaries on the equity method in the
Parent's financial statements.
The Financial Accounting Standards Board's Statement No. 133 ("Statement
133"), "Accounting for Derivative Instruments and for Hedging Activities," was
issued in June 1998. Statement 133 requires companies to recognize all
derivatives as either assets or liabilities in the statement of financial
condition and measure those instruments at fair value. Statement 133 requires
that changes in fair value of a derivative be recognized currently in earnings
unless specific hedge accounting criteria are met. Statement 133 is effective
for fiscal years beginning after June 15, 1999. The Company is currently
determining the impact of Statement 133.
NOTE 2: RECLASSIFICATION
Certain amounts in the 1998 consolidated financial statements have been
reclassified to conform to the 1999 presentation. These reclassifications have
no effect on previously reported net income.
NOTE 3: IMPAIRED LOANS
The Company identifies loans to be reported as impaired when such loans
are on nonaccrual status or are considered troubled debt restructurings due to
the granting of a below-market rate of interest or a partial forgiveness of
indebtedness on an existing loan. The balance of impaired loans was $7.6 million
at September 30, 1999 for which there was a related allowance for loan losses of
$768,000. At September 30, 1999, the Company had $120,000 in impaired loans for
which there was no related allowance for loan losses. The average recorded
investment in impaired loans during the nine months ended September 30, 1999 was
$8.5 million. Interest income on impaired loans of $106,000 was recognized for
cash payments received during the nine months ended September 30, 1999.
NOTE 4: COMMON STOCK
On September 14, 1999, the Board of Directors approved a cash dividend of
$0.125 per share for shareholders of record on October 1, 1999 and payable on
October 15, 1999.
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<PAGE>
NOTE 5: EARNINGS PER COMMON SHARE COMPUTATIONS
The table below presents a reconciliation of basic and diluted
earnings per share computations.
<TABLE>
<CAPTION>
THREE MONTHS NINE MONTHS
ENDED SEPTEMBER 30, ENDED SEPTEMBER 30,
---------------------------- ----------------------------
(DOLLARS IN THOUSANDS, EXCEPT SHARE DATA) 1999 1998 1999 1998
----------- ----------- ----------- -----------
(UNAUDITED)
<S> <C> <C> <C> <C>
Net Income Available to Common Shareholders .................... $ 8,014 $ 2,797 $ 22,531 $ 15,400
----------- ----------- ----------- -----------
Weighted Average Number of Common Shares Outstanding
Used in Basic EPS Calculation ............................... 14,405,256 14,404,965 14,405,104 14,401,237
Add Assumed Exercise of Outstanding Stock Options as
Adjustments for Dilutive Securities ......................... 216,863 223,271 216,020 236,671
----------- ----------- ----------- -----------
Weighted Average Number of Common Shares
Outstanding Used in Diluted EPS Calculations ................ 14,622,119 14,628,236 14,621,124 14,637,908
----------- ----------- ----------- -----------
Basic EPS ...................................................... $ 0.56 $ 0.19 $ 1.56 $ 1.07
Diluted EPS .................................................... 0.55 0.19 1.54 1.05
----------- ----------- ----------- -----------
</TABLE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
FORWARD-LOOKING STATEMENTS. This Management's Discussion and Analysis
includes forward-looking statements, such as: statements of the Company's goals,
intentions and expectations; estimates of risks and of future costs and
benefits; and statements of the Company's ability to achieve financial and other
goals. These forward-looking statements are subject to significant uncertainties
because they are based upon: future interest rates and other economic
conditions; statements by suppliers of data processing equipment and services,
government agencies, and other third parties as to year 2000 compliance and
costs; future laws and regulations; and a variety of other matters. Because of
these uncertainties, actual future results may be materially different from the
results indicated by these forward-looking statements. In addition, the
Company's past results do not necessarily indicate its future results.
Management's discussion and analysis of the Company's consolidated
financial condition and results of operations at the dates and for the periods
indicated follows. This discussion should be read in conjunction with the
Company's consolidated financial statements and the accompanying notes.
GENERAL
Texas Regional Bancshares, Inc. (the "Company"), a Texas business
corporation incorporated in 1983 and headquartered in McAllen, Texas, is a bank
holding company within the meaning of the Bank Holding Company Act of 1956. The
Company is registered with the Board of Governors of the Federal Reserve System
("Federal Reserve Board"). Texas Regional Delaware, Inc., incorporated under the
laws of Delaware as a wholly owned second tier bank holding company subsidiary,
owns Texas State Bank (the "Bank"), the Company's primary operating subsidiary.
The Bank has two wholly owned subsidiaries: (i) TSB Securities, Inc.,
incorporated in 1997 to provide full service broker-dealer services and (ii) TSB
Properties, Inc., incorporated in 1998 to receive and liquidate foreclosed
assets.
Texas State Bank operates twenty banking locations in the Rio Grande
Valley including four banking locations in McAllen (including its main office),
four banking locations in Brownsville, three banking locations in Mission, two
banking locations in Weslaco, and one banking location each in Edinburg,
Harlingen, Hidalgo, Penitas, Raymondville, Rio Grande City and Roma. At
September 30, 1999, Texas Regional had consolidated total assets of $1.9
billion, loans (net of unearned discount) of $1.2 billion, deposits of $1.7
billion, and shareholders' equity of $183.7 million.
On February 19, 1998, the Company completed the acquisition of three
bank holding companies and their three subsidiary banks (the "Mergers"). The
acquisition of Brownsville Bancshares, Inc. and its subsidiary, Brownsville
National Bank, included 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. The Company achieved this
acquisition by the exchange of 984,806 shares of Company stock for all of the
outstanding
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shares of Brownsville Bancshares, Inc. and cancellation of outstanding stock
options. Brownsville National Bank merged with and into the 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 301,483 shares of Company stock for all of the
outstanding shares of TB&T Bancshares, Inc. Texas Bank and Trust of Brownsville
merged with and into the Bank.
The third acquisition was Raymondville Bancorp, Inc. and its
subsidiary, Bank of Texas. Bank of Texas was 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 the Company paid $100,000 in
consideration for a covenant not to compete. The Company discharged
approximately $330,000 of existing Raymondville Bancorp, Inc. indebtedness. Bank
of Texas had assets of approximately $63.9 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 the Bank.
The Company accounted for its acquisition of Brownsville Bancshares,
Inc. and TB&T Bancshares, Inc. 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. A One Time Charge-Acquisitions of $728,000
or $0.03 per diluted common share, net of federal income tax, reduced net income
for the nine months ended September 30, 1998. These expenses, primarily
professional fees and computer conversion costs, related to business
combinations accounted for by the pooling-of-interests method. The Company
accounted for its acquisition of Raymondville Bancorp, Inc. 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.
On October 1, 1999, the Company completed the acquisition of
Harlingen Bancshares, Inc. and its subsidiary, Harlingen National Bank. The
acquisition included its main office and three banking locations in Harlingen,
Cameron County, Texas; one banking location in La Feria, Cameron County, Texas;
and one banking location in Mercedes, Hidalgo County, Texas. As of September 30,
1999, Harlingen Bancshares, Inc. had total assets of $204.2 million, total
loans of $110.8 million, deposits of $183.7 million, and equity of $19.9
million. The shareholders of Harlingen Bancshares, Inc. received aggregate
consideration of $34.0 million, including $1.0 million deposited into escrow
pending the outcome of certain contingencies. Simultaneously, the shareholders
of Harlingen Bancshares, Inc. or their affiliates purchased certain assets of
Harlingen Bancshares, Inc. for book value totaling $2.4 million. Texas Regional
also agreed to pay $1.0 million over a term of ten years in consideration of a
covenant not to compete from certain principals of Harlingen Bancshares, Inc.
Texas Regional accounted for the acquisition under the purchase method of
accounting; therefore, the results of operations will be included in the
consolidated financial statements from the date of acquisition, October 1, 1999.
FINANCIAL CONDITION
CASH AND CASH EQUIVALENTS
The Company, through its main office and branches, offers a broad
range of commercial banking services to individuals and businesses in its
service area. It also acts as a correspondent to a number of banks in its
service area, providing check clearing, wire transfer, federal funds
transactions, loan participations and other correspondent services. The amount
of cash and cash equivalents held on any day is significantly influenced by
temporary changes in cash items in process of collection. The Company had cash
and cash equivalents totaling $89.9 million at September 30, 1999.
Comparatively, the Company had $90.8 million in cash and cash equivalents at
December 31, 1998, a decrease of $946,000 or 1.0%.
SECURITIES
Securities consist of U.S. Treasury, federal agency, mortgage-backed
and state, county and municipal securities. The Bank classifies debt and equity
securities into one of three categories: held to maturity, trading or available
for sale. At each reporting date, management reassesses the appropriateness of
the classification. Investments in debt securities are classified as Held to
Maturity and measured at amortized cost in the consolidated
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balance sheet only if management has the positive intent and ability to hold
those securities to maturity. Securities that are bought and held principally
for the purpose of selling them in the near term are classified as Trading and
measured at fair value in the consolidated balance sheet with unrealized holding
gains and losses included in earnings. Securities not classified as either Held
to Maturity or Trading are classified as Available for Sale and measured at fair
value in the consolidated balance sheet with unrealized holding gains and losses
reported in a separate component of shareholders' equity, net of applicable
income taxes until realized.
At September 30, 1999 and December 31, 1998, no securities were
classified as Trading. 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.
The following table presents the amortized cost and estimated fair
value of securities at September 30, 1999 and December 31, 1998 (dollars in
thousands):
<TABLE>
<CAPTION>
GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED FAIR
COST GAINS LOSSES VALUE
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Securities Available for Sale
September 30, 1999 (Unaudited)
U.S. Government Agency ................................... $ 322,834 $ 17 $ (10,875) $ 311,976
Mortgage-Backed .......................................... 113,983 -- (3,000) 110,983
States and Political Subdivisions ........................ 40,599 150 (1,695) 39,054
Other .................................................... 4,163 19 (256) 3,926
---------- ---------- ---------- ----------
Total .................................................. $ 481,579 $ 186 $ (15,826) $ 465,939
---------- ---------- ---------- ----------
December 31, 1998
U.S. Government Agency ................................... $ 313,647 $ 1,289 $ (966) $ 313,970
Mortgage-Backed .......................................... 101,670 206 (511) 101,365
States and Political Subdivisions ........................ 36,112 994 (118) 36,988
Other .................................................... 3,562 51 -- 3,613
---------- ---------- ---------- ----------
Total .................................................. $ 454,991 $ 2,540 $ (1,595) $ 455,936
---------- ---------- ---------- ----------
Securities Held to Maturity
September 30, 1999 (Unaudited)
U.S. Treasury ............................................ $ 5,004 $ 40 $ -- $ 5,044
States and Political Subdivisions ........................ 3,006 62 -- 3,068
---------- ---------- ---------- ----------
Total .................................................. $ 8,010 $ 102 $ -- $ 8,112
---------- ---------- ---------- ----------
December 31, 1998
U.S. Treasury ............................................ $ 10,013 $ 173 $ -- $ 10,186
States and Political Subdivisions ........................ 4,318 146 -- 4,464
---------- ---------- ---------- ----------
Total .................................................. $ 14,331 $ 319 $ -- $ 14,650
---------- ---------- ---------- ----------
</TABLE>
Net unrealized holding gains (losses), net of related tax effect, of
($10.1 million) and $609,000 at September 30, 1999 and December 31, 1998,
respectively, on securities available for sale are reported as a separate
component of shareholders' equity and as other comprehensive income.
Securities with carrying values of $444.9 million at September 30,
1999 and $351.7 million at December 31, 1998 were pledged to secure public
funds, trust assets on deposit and for other purposes required or permitted by
law.
Page 10
<PAGE>
LOANS
The Company manages its credit risk by establishing and implementing
strategies and guidelines appropriate to the characteristics of borrowers,
industries, geographic locations and risk products. Diversification of risk
within each of these areas is a primary objective. Policies and procedures are
developed to ensure that loan commitments conform to current strategies and
guidelines. Management continually refines the Company's credit policies and
procedures to address the risks in the current and prospective environment and
to reflect management's current strategic focus. The credit process is
controlled with continuous credit review and analysis, and review by internal
and external auditors and regulatory authorities. The Company's loans are widely
diversified by borrower and industry group.
The Company has collateral management policies in place so that
collateral lending of all types is approached on a basis consistent with safe
and sound standards. Valuation analysis is utilized to take into consideration
the potentially adverse economic conditions under which liquidation could occur.
Collateral accepted against the commercial loan portfolio includes accounts
receivable and inventory, marketable securities, equipment and agricultural
products. Autos, deeds of trust, life insurance and marketable securities are
accepted as collateral for the installment loan portfolio.
Management of the Company believes that the Company has benefited
from increased loan demand due to passage of the North American Free Trade
Agreement ("NAFTA") and the strong population growth in the Rio Grande Valley.
More recently, the continued devaluation of the Mexican peso relative to the
U.S. dollar has reduced retail sales to residents of Mexico. However, the
effects of NAFTA and the devaluation have also increased cross-border trade and
industrial development including activity at twin manufacturing plants located
on each side of the border (referred to as maquiladoras) which benefit the Rio
Grande Valley economy. Management believes the on-going Mexican financial
problems will not have a material adverse effect on the Company's growth and
earnings prospects, in part because the Company presently has a low percentage
of loans secured by Mexican assets or that otherwise rely on collateral located
in Mexico.
The extension of credits denominated in a currency other than that of
the country in which a borrower is located are called "cross-border" credits.
The Company has some dollar-denominated cross-border credits to individuals or
companies that are residents of, or domiciled in Mexico. The Company's total
cross-border credits at September 30, 1999 of $7.3 million represented 0.6% of
total loans. See "Nonperforming Assets" for additional information on
cross-border credits.
Total loans of $1.2 billion at September 30, 1999 increased $139.4
million or 12.8% compared to December 31, 1998 levels of $1.1 billion. The
increase in total loans for the nine months ended September 30, 1999 reflects
growth in all loan categories except Commercial Tax-Exempt and Agricultural
loans and is representative in part to the vitality of the Rio Grande Valley
economy. The following table presents the composition of the loan portfolio
(dollars in thousands):
SEPTEMBER 30, DECEMBER 31,
1999 1998
------------- -------------
(UNAUDITED)
Commercial ................................. $ 362,689 $ 312,051
Commercial Tax-Exempt ...................... 20,205 22,155
------------- -------------
Total Commercial Loans .................. 382,894 334,206
------------- -------------
Agricultural ............................... 44,806 52,302
------------- -------------
Real Estate
Construction ............................ 90,241 66,018
Commercial Mortgage ..................... 406,939 354,049
Agricultural Mortgage ................... 38,024 34,440
1-4 Family Mortgage ..................... 137,652 128,945
------------- -------------
Total Real Estate ..................... 672,856 583,452
------------- -------------
Consumer ................................... 128,333 119,545
------------- -------------
Total Loans ............................. $ 1,228,889 $ 1,089,505
------------- -------------
Page 11
<PAGE>
The Company's policy on maturity extensions and rollovers is based on
management's assessment of individual loans. Approvals for the extension or
renewal of loans without reduction of principal for more than one twelve-month
period are generally avoided, unless the loans are fully secured and properly
margined by cash or marketable securities, or are revolving lines subject to
annual analysis and renewal.
NONPERFORMING ASSETS
The Company has several procedures in place to assist in maintaining
the overall quality of its loan portfolio. The Bank has established underwriting
guidelines to be followed by its officers and monitors its delinquency levels
for any negative or adverse trends.
Nonperforming assets consist of nonaccrual loans, loans for which the
interest rate has been renegotiated below originally contracted rates and real
estate or other assets that have been acquired in partial or full satisfaction
of loan obligations. The Company's policy generally is to place a loan 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. The Company's classification of nonperforming loans includes
those loans for which management believes collection is doubtful. Management is
not aware of any specific borrower relationships that are not reported as
nonperforming where management has serious doubts as to the ability of such
borrowers to comply with the present loan repayment terms which would cause
nonperforming assets to increase materially.
Nonperforming assets of $13.8 million at September 30, 1999 decreased
$2.0 million, 12.5% compared to December 31, 1998 levels of $15.8 million.
Nonaccrual loans of $7.6 million at September 30, 1999 decreased $2.8 million or
26.8% compared to $10.4 million at December 31, 1998. The decrease in nonaccrual
loans during 1999 resulted from foreclosure on several credits secured primarily
by real estate. Cross-border nonaccrual loans at September 30, 1999 of $4.5
million increased by $2.0 million or 76.2% compared to $2.6 million at December
31, 1998. The increase in foreclosed assets during 1999 was primarily
attributable to a higher amount of foreclosure loans with real estate
collateral, net of write downs and liquidations. Management actively seeks
buyers for all Other Real Estate. See "Noninterest Expense" below.
Loans which are contractually past due 90 days or more, which are
both well secured or guaranteed by financially responsible third parties and in
the process of collection, generally are not placed on nonaccrual status. The
amount of such loans past due 90 days or more at September 30, 1999 and December
31, 1998 that are not classified as nonaccrual totaled $3.0 million and $3.1
million, respectively. The decrease in accruing loans past due 90 days or more
at September 30, 1999 as compared to the year ended December 31, 1998 is partly
attributable to several loans that are now current or have been paid off. The
ratio of Nonperforming Assets Plus Accruing Loans 90 Days or More Past Due as a
percent of Total Loans and Foreclosed Assets at September 30, 1999 decreased to
1.36% from 1.72% at December 31, 1998 due primarily to the decrease in
nonaccrual loans.
Page 12
<PAGE>
An analysis of the components of nonperforming assets follows
(dollars in thousands):
SEPTEMBER 30, DECEMBER 31,
1999 1998
------------- -------------
(UNAUDITED)
Nonaccrual Loans ............................... $ 7,624 $ 10,414
Renegotiated Loans ............................. -- --
------------- -------------
Nonperforming Loans ......................... 7,624 10,414
Foreclosed Assets .............................. 6,190 5,368
------------- -------------
Total Nonperforming Assets .................. 13,814 15,782
Accruing Loans 90 Days or More Past Due ........ 3,017 3,099
------------- -------------
Total Nonperforming Assets and Accruing Loans
90 Days or More Past Due .................. $ 16,831 $ 18,881
------------- -------------
Nonperforming Loans as a % of Total Loans ...... 0.62% 0.96%
Nonperforming Assets as a % of Total Loans and
Foreclosed Assets ........................... 1.12 1.44
Nonperforming Assets as a % of Total Assets .... 0.72 0.90
Nonperforming Assets Plus Accruing Loans 90 Days
or More Past Due as a % of Total Loans and
Foreclosed Assets ........................... 1.36 1.72
------------- -------------
Management regularly reviews and monitors the loan portfolio to
identify borrowers experiencing financial difficulties. Management believes
that, at September 30, 1999, all such loans had been identified and included in
the nonaccrual, renegotiated or 90 days or more past due loan totals reflected
in the table above. Management continues to emphasize maintaining a low level of
nonperforming assets and returning nonperforming assets to an earning status.
ALLOWANCE FOR LOAN LOSSES
Management analyzes the loan portfolio to determine the adequacy of
the allowance for loan losses and the appropriate provision required to maintain
an adequate allowance. In assessing the adequacy of the allowance, management
reviews the size, quality and risks of loans in the portfolio and considers
factors such as specific known risks, past experience, the status and amount of
nonperforming assets and economic conditions. A specific percentage is allocated
to total loans in good standing and not specifically reserved while additional
amounts are added for individual loans considered to have specific loss
potential. Loans identified as losses are charged-off. In addition, the loan
review committee of the Bank reviews the assessments of management in
determining the adequacy of the Bank's allowance for loan losses. Based on total
allocations, the provision is recorded to maintain the allowance at a level
deemed appropriate by management. 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.
The allowance for loan losses at September 30, 1999 totaled $15.1
million, representing a net increase of $1.8 million or 13.9% compared to $13.2
million at December 31, 1998. Management believes that the allowance for loan
losses at September 30, 1999 adequately reflects the risks in the loan
portfolio. Various regulatory agencies, as an integral part of their examination
process, periodically review the Bank's allowance for loan losses. Such agencies
may require the Bank to recognize additions to the allowance based on their
judgments of information available to them at the time of their examination.
Page 13
<PAGE>
The following table summarizes the activity in the allowance for loan
losses (dollars in thousands):
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
----------------------------- -----------------------------
1999 1998 1999 1998
----------- ----------- ----------- -----------
(Unaudited)
<S> <C> <C> <C> <C>
Balance at Beginning of Period ............................. $ 14,261 $ 12,038 $ 13,236 $ 11,291
Balance from Acquisitions .................................. -- -- -- 308
Provision for Loan Losses .................................. 1,600 7,157 4,422 9,079
Charge-Offs
Commercial .............................................. 631 789 1,918 1,317
Agricultural ............................................ -- 4,810 5 5,453
Real Estate ............................................. 21 637 69 868
Consumer ................................................ 445 531 1,084 1,083
----------- ----------- ----------- -----------
Total Charge-Offs ..................................... 1,097 6,767 3,076 8,721
----------- ----------- ----------- -----------
Recoveries
Commercial .............................................. 183 27 246 198
Agricultural ............................................ -- -- 5 --
Real Estate ............................................. 18 3 30 200
Consumer ................................................ 114 97 216 200
----------- ----------- ----------- -----------
Total Recoveries ...................................... 315 127 497 598
----------- ----------- ----------- -----------
Net Charge-Offs ............................................ 782 6,640 2,579 8,123
----------- ----------- ----------- -----------
Balance at End of Period ................................... $ 15,079 $ 12,555 $ 15,079 $ 12,555
----------- ----------- ----------- -----------
Ratio of Allowance for Loan Losses to
Loans Outstanding, Net of Unearned Discount ............. 1.23% 1.22% 1.23% 1.22%
Ratio of Allowance for Loan Losses to
Nonperforming Loans ..................................... 197.78 82.87 197.78 82.87
Ratio of Net Charge-Offs to Average Total
Loans Outstanding, Net of Unearned Discount ............. 0.26 2.57 0.30 1.07
----------- ----------- ----------- -----------
</TABLE>
PREMISES AND EQUIPMENT, NET
Premises and equipment of $69.6 million at September 30, 1999
decreased $306,000 or 0.4% compared to $69.8 million at December 31, 1998. The
decrease for the nine months ended September 30, 1999 resulted primarily from
depreciation and amortization, net of additions.
GOODWILL AND IDENTIFIABLE INTANGIBLES
Intangibles of $24.9 million at September 30, 1999 decreased $2.0
million or 7.6% compared to $26.9 million at December 31, 1998. The net decrease
for the nine months ended September 30, 1999 is attributable to amortization of
existing intangibles.
DEPOSITS
Total deposits of $1.7 billion at September 30, 1999 increased $103.2
million or 6.6% compared to December 31, 1998 levels of $1.6 billion. The
increase in total deposits for the nine months ended September 30, 1999 is
primarily attributable to growth in the volume of business conducted by the
Company and the vitality of the Rio Grande Valley economy. The following table
presents the composition of total deposits (dollars in thousands):
Page 14
<PAGE>
SEPTEMBER 30, DECEMBER 31,
1999 1998
--------------- ---------------
(Unaudited)
Demand Deposits
Commercial and Individual ............. $ 235,172 $ 227,220
Public Funds .......................... 7,244 7,435
--------------- ---------------
Total Demand Deposits ............... 242,416 234,655
--------------- ---------------
Interest-Bearing Deposits
Savings
Commercial and Individual ........... 105,666 106,446
Public Funds ........................ 396 1,265
Money Market Checking and Savings
Commercial and Individual ........... 235,714 236,157
Public Funds ........................ 48,746 65,081
Time Deposits
Commercial and Individual ........... 733,855 727,205
Public Funds ........................ 299,362 192,133
--------------- ---------------
Total Interest-Bearing Deposits ..... 1,423,739 1,328,287
--------------- ---------------
Total Deposits .................... $ 1,666,155 $ 1,562,942
--------------- ---------------
SHAREHOLDERS' EQUITY
Shareholders' equity increased by $6.4 million, or 3.6%, during the
nine months ended September 30, 1999 due to comprehensive income of $11.8
million less cash dividends of $5.4 million. Comprehensive income for the period
included net income of $22.5 million and unrealized loss on securities available
for sale, net of tax, of $10.7 million.
Bank holding companies are required to maintain capital ratios in
accordance with guidelines adopted by the Federal Reserve Board ("FRB"). The
guidelines are commonly known as Risk-Based Capital Guidelines. The table below
reflects various measures of regulatory capital (dollars in thousands):
<TABLE>
<CAPTION>
SEPTEMBER 30, 1999 DECEMBER 31, 1998
---------------------- ----------------------
AMOUNT RATIO AMOUNT RATIO
--------- --------- --------- ---------
(UNAUDITED)
<S> <C> <C> <C> <C>
Total Shareholders' Equity before unrealized
gains or losses on Securities Available for Sale ............................ $ 193,808 -- $ 176,665 --
Less Goodwill and Other Deductions ............................................. (24,856) -- (26,894) --
--------- --------- --------- ---------
Total Tier I Capital ........................................................... 168,952 -- 149,771 --
Total Tier II Capital .......................................................... 15,079 -- 13,236 --
--------- --------- --------- ---------
Total Qualifying Capital ....................................................... $ 184,031 -- $ 163,007 --
--------- --------- --------- ---------
Total Risk-Based Capital ....................................................... $ 184,031 13.87% $ 163,007 14.04%
Total Risk-Based Capital Minimum ............................................... 106,160 8.00 92,884 8.00
--------- --------- --------- ---------
Tier I Risk-Based Capital ...................................................... 168,952 12.73 149,771 12.90
Tier I Risk-Based Capital Minimum .............................................. 53,080 4.00 46,442 4.00
--------- --------- --------- ---------
Tier I Leverage Capital ........................................................ 168,952 9.12 149,771 8.84
Tier I Leverage Capital Minimum ................................................ 74,064 4.00 67,772 4.00
--------- --------- --------- ---------
</TABLE>
At September 30, 1999, the Company and the Bank met the criteria for
classification as a "well-capitalized" institution under the prompt corrective
action rules promulgated under the Federal Deposit Insurance Act. Designation as
a well-capitalized institution under these regulations does not constitute a
recommendation or endorsement of the Company or the Bank by Federal bank
regulators.
Page 15
<PAGE>
RESULTS OF OPERATIONS
NET INCOME
Net income available for common shareholders was $8.0 million and
$2.8 million and earnings per diluted common share were $0.55 and $0.19 for the
three months ended September 30, 1999 and 1998, respectively. Net income
increased due to sustained loan growth and a lower provision for loan losses.
The provision for loan losses was $1.6 million for the three months ended
September 30, 1999 compared to $7.2 million for the three months ended September
30, 1998. The $7.2 million provision for the three months ended September 30,
1998 was recorded to bring the allowance for loan losses back up to a level
deemed appropriate by management after considering loans charged off and written
down during the quarter. Total loans charged off or written down in the third
quarter of 1998 amounted to $6.8 million, of which $4.8 million or 71.1% related
to agricultural loans. Total interest income in the amount of $1.2 million was
also charged off of which $863,000 or 72.9% related to agricultural loans. These
charge-offs and write-downs were primarily the result of a severe drought and
its impact on agricultural growers, shippers, suppliers and consumers throughout
the Rio Grande Valley region. Return on assets averaged 1.70% and 0.66%,
respectively, while return on shareholders' equity averaged 17.39% and 6.34%,
respectively, for the three months ended September 30, 1999 and 1998.
For the nine months ended September 30, 1999, net income available
for common shareholders was $22.5 million compared to $15.4 million for the same
period in 1998, representing an increase of $7.1 million or 46.3%. The increase
in net income was primarily due to an increase in interest-earning assets and a
decrease in the provision for loan losses compared to the same period in 1998.
Earnings per diluted common share were $1.54 and $1.05, respectively, for the
nine months ended September 30, 1999 and 1998. The Company incurred a One Time
Charge-Acquisitions of $728,000 or $0.03 per diluted common share, net of
federal income tax, during the nine months ended September 30, 1998. These
expenses, primarily professional fees and computer conversion costs, related to
business combinations accounted for by the pooling of interests method. Return
on assets averaged 1.65% and return on shareholders' equity averaged 16.54% for
the nine months ended September 30, 1999 compared to 1.26% and 12.12%,
respectively, for the same period in 1998.
INTEREST INCOME
Interest income for the three months ended September 30, 1999 was
$35.8 million, an increase of $4.6 million or 14.9% from the three months ended
September 30, 1998. For the nine months ended September 30, 1999, interest
income was $103.3 million representing a $10.2 million or 11.0% increase from
the same period in 1998. This increase in interest income is due to a $178.2
million or 11.7% increase in average earning assets to $1.7 billion for the
three months ended September 30, 1999 from the same period last year. Average
earning assets increased by $192.1 million or 13.1% to $1.7 billion for the nine
months ended September 30, 1999.
Interest income on loans increased $4.7 million to $28.4 million for
the three months ended September 30, 1999. A $180.3 million increase in average
loans outstanding over the same period in 1998 propelled this increase. Interest
income on securities increased to $7.3 million, an $479,000 increase from the
prior comparable period. This increase was attributable to a $34.7 million
increase in average securities, up 7.8% when compared to the three months ended
September 30, 1998.
For the nine months ended September 30, 1999, interest income on
loans increased 13.0% to $81.2 million, up from $71.9 million for the same
period in 1998. Interest income on securities increased to $21.3 million, an
increase of $1.5 million or 7.5% from the prior period. These gains were
principally related to an increase of average interest-earning assets to $1.7
billion for the nine months ended September 30, 1999, an increase of 13.1% for
the same period last year.
INTEREST EXPENSE
Interest expense on deposits and other borrowings increased to $15.4
million for the three months ended September 30, 1999 compared to $15.2 million
for the same period in 1998. For the nine months ended September 30, 1999,
interest expense on deposits and other borrowings was $44.6 million compared to
$43.2 million for the same period in 1998 representing an increase of $1.4
million or 3.2%. The increase in interest expense was attributable to a $152.6
million and $162.6 million increase in average interest-bearing liabilities from
the three and nine month comparable period, respectively.
Page 16
<PAGE>
NET INTEREST INCOME
Net interest income, reported on a tax equivalent basis, was $20.7
million for the three months ended September 30, 1999, compared with $16.3
million for the same period in 1998, an increase of 27.4%. For the nine months
ended September 30, 1999, net interest income increased 17.4% from the same
period in 1998 to $59.8 million. The increase in net interest income during the
three and nine months ended September 30, 1999 was largely due to growth in
average interest-earning assets, primarily loans.
The net interest margin was 4.84% for the three months ended
September 30, 1999, compared with 4.25% for the same period in 1998. This
increase was attributable to a forty-six basis point decrease in the cost of
average interest-bearing liabilities to 4.29%, down from 4.75% for the same
period last year. In addition, the yield on average interest-earning assets
increased by twenty-two basis points to 8.45% for the three months ended
September 30, 1999. The net interest margin was 4.82% for the nine months ended
September 30, 1999, up from 4.64% for the same period in 1998. This increase was
attributable to a forty-two basis point decrease in the cost of interest-bearing
liabilities to 4.29%, down from 4.71% for the same period last year. The yield
on average interest-earning assets also decreased seventeen basis points to
8.41% for the nine months ended September 30, 1999, down from 8.58% for the same
period in 1998.
The following table presents for periods indicated the total dollar amount of
interest income from average interest-earning assets and the resultant yields,
reported on a tax-equivalent basis, and the interest expense on average
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 tax rate for 1999 and 1998 (dollars in thousands):
Page 17
<PAGE>
<TABLE>
<CAPTION>
THREE MONTHS ENDED
--------------------------------------------------------------------------------------
SEPTEMBER 30, 1999 SEPTEMBER 30, 1998
----------------------------------------- -----------------------------------------
AVERAGE YIELD/ AVERAGE YIELD/
TAXABLE-EQUIVALENT BASIS (1) BALANCE INTEREST RATE (2) BALANCE INTEREST RATE (2)
----------- ----------- ------------ ----------- ----------- ------------
(UNAUDITED)
<S> <C> <C> <C> <C> <C> <C>
Assets
Interest-Earning Assets
Loans
Commercial ........................ $ 421,228 $ 9,523 8.97% $ 348,810 $ 6,851 7.79%
Real Estate ....................... 655,815 15,567 9.42 561,721 13,649 9.64
Consumer .......................... 129,769 3,398 10.39 115,939 3,350 11.46
----------- ----------- ------------ ----------- ----------- ------------
Total Loans ..................... 1,206,812 28,488 9.37 1,026,470 23,850 9.22
----------- ----------- ------------ ----------- ----------- ------------
Securities
Taxable ........................... 438,350 6,753 6.11 415,429 6,398 6.11
Tax-Exempt ........................ 42,337 769 7.21 30,594 599 7.77
----------- ----------- ------------ ----------- ----------- ------------
Total Securities ................ 480,687 7,522 6.21 446,023 6,997 6.22
----------- ----------- ------------ ----------- ----------- ------------
Time Deposits ....................... 280 4 5.67 1,674 16 3.79
Federal Funds Sold .................. 9,728 124 5.06 45,114 636 5.59
----------- ----------- ------------ ----------- ----------- ------------
Total Interest-Earning Assets ..... 1,697,507 36,138 8.45% 1,519,281 31,499 8.23%
----------- ----------- ------------ ----------- ----------- ------------
Cash and Due from Banks ............... 48,971 -- -- 50,440 -- --
Premises and Equipment, Net ........... 69,601 -- -- 69,101 -- --
Other Assets .......................... 68,556 -- -- 57,114 -- --
Allowance for Loan Losses ............. (14,851) -- -- (12,263) -- --
----------- ----------- ------------ ----------- ----------- ------------
Total Assets ........................ $ 1,869,784 -- -- $ 1,683,673 -- --
----------- ----------- ------------ ----------- ----------- ------------
Liabilities
Interest-Bearing Liabilities
Savings ............................. $ 108,824 $ 610 2.22% $ 104,690 $ 793 3.01%
Money Market Checking
And Savings ....................... 296,953 2,113 2.82 258,497 1,920 2.95
Time Deposits ....................... 995,512 12,404 4.94 903,768 12,454 5.47
----------- ----------- ------------ ----------- ----------- ------------
Total Savings and
Time Deposits ................... 1,401,289 15,127 4.28 1,266,955 15,167 4.75
----------- ----------- ------------ ----------- ----------- ------------
Federal Funds Purchased
and Securities Sold
Under Repurchase
Agreements ........................ 24,008 293 4.84 5,756 71 4.89
----------- ----------- ------------ ----------- ----------- ------------
Total Interest-Bearing
Liabilities ..................... 1,425,297 15,420 4.29% 1,272,711 15,238 4.75%
----------- ----------- ------------ ----------- ----------- ------------
Demand Deposits ....................... 242,395 -- -- 220,039 -- --
Other Liabilities ..................... 19,303 -- -- 15,800 -- --
----------- ----------- ------------ ----------- ----------- ------------
Total Liabilities ................... 1,686,995 -- -- 1,508,550 -- --
----------- ----------- ------------ ----------- ----------- ------------
Shareholders' Equity .................. 182,789 -- -- 175,123 -- --
----------- ----------- ------------ ----------- ----------- ------------
Total Liabilities and
Shareholders' Equity .............. $ 1,869,784 -- -- $ 1,683,673 -- --
----------- ----------- ------------ ----------- ----------- ------------
Net Interest Income ...................... -- $ 20,718 -- -- $ 16,261 --
----------- ----------- ------------ ----------- ----------- ------------
Net Yield on Total Interest
Earning Assets ........................ -- -- 4.84% -- -- 4.25%
----------- ----------- ------------ ----------- ----------- ------------
</TABLE>
(1) For analytical purposes, income from tax-exempt assets, primarily
securities issues by state and local governments or authorities, is
adjusted by an increment that equates tax-exempt income to interest from
taxable assets (assuming a 35% tax rate).
(2) Annualized.
Page 18
<PAGE>
<TABLE>
<CAPTION>
NINE MONTHS ENDED
--------------------------------------------------------------------------------------
SEPTEMBER 30, 1999 SEPTEMBER 30, 1998
----------------------------------------- -----------------------------------------
AVERAGE YIELD/ AVERAGE YIELD/
TAXABLE-EQUIVALENT BASIS (1) BALANCE INTEREST RATE (2) BALANCE INTEREST RATE (2)
----------- ----------- ------------ ----------- ----------- ------------
(UNAUDITED)
<S> <C> <C> <C> <C> <C> <C>
Assets
Interest-Earning Assets
Loans
Commercial ........................ $ 413,350 $ 27,652 8.94% $ 349,247 $ 23,274 8.91%
Real Estate ....................... 622,698 44,011 9.45 551,899 40,387 9.78
Consumer .......................... 126,647 9,908 10.46 109,376 8,694 10.63
----------- ----------- ------------ ----------- ----------- ------------
Total Loans ..................... 1,162,695 81,571 9.38 1,010,522 72,355 9.57
----------- ----------- ------------ ----------- ----------- ------------
Securities
Taxable ........................... 432,249 19,829 6.13 394,769 18,722 6.34
Tax-Exempt ........................ 42,813 2,265 7.07 28,904 1,725 7.98
----------- ----------- ------------ ----------- ----------- ------------
Total Securities ................ 475,062 22,094 6.22 423,673 20,447 6.45
----------- ----------- ------------ ----------- ----------- ------------
Time Deposits ....................... 331 13 5.25 1,566 67 5.72
Federal Funds Sold .................. 21,835 787 4.82 32,092 1,337 5.57
----------- ----------- ------------ ----------- ----------- ------------
Total Interest-Earning Assets ..... 1,659,923 104,465 8.41% 1,467,853 94,206 8.58%
----------- ----------- ------------ ----------- ----------- ------------
Cash and Due from Banks ............... 54,113 -- -- 55,675 -- --
Premises and Equipment, Net ........... 69,676 -- -- 63,573 -- --
Other Assets .......................... 59,375 -- -- 55,913 -- --
Allowance for Loan Losses ............. (14,168) -- -- (12,190) -- --
----------- ----------- ------------ ----------- ----------- ------------
Total Assets ........................ $ 1,828,919 -- -- $ 1,630,824 -- --
----------- ----------- ------------ ----------- ----------- ------------
Liabilities
Interest-Bearing Liabilities
Savings ............................. $ 110,039 1,844 2.24% $ 105,349 $ 2,336 2.96%
Money Market Checking
and Savings ....................... 298,212 6,330 2.84 256,132 5,615 2.93
Time Deposits ....................... 968,140 35,976 4.97 861,812 35,109 5.45
----------- ----------- ------------ ----------- ----------- ------------
Total Savings and
Time Deposits ................... 1,376,391 44,150 4.29 1,223,293 43,060 4.71
----------- ----------- ------------ ----------- ----------- ------------
Federal Funds Purchased
and Securities Sold
Under Repurchase
Agreements ........................ 14,287 494 4.62 4,772 183 5.13
----------- ----------- ------------ ----------- ----------- ------------
Total Interest-Bearing
Liabilities ..................... 1,390,678 44,644 4.29% 1,228,065 43,243 4.71%
----------- ----------- ------------ ----------- ----------- ------------
Demand Deposits ....................... 242,412 -- -- 217,847 -- --
Other Liabilities ..................... 13,650 -- -- 15,098 -- --
----------- ----------- ------------ ----------- ----------- ------------
Total Liabilities ................... 1,646,740 -- -- 1,461,010 -- --
----------- ----------- ------------ ----------- ----------- ------------
Shareholders' Equity .................. 182,179 -- -- 169,814 -- --
----------- ----------- ------------ ----------- ----------- ------------
Total Liabilities and
Shareholders' Equity .............. $ 1,828,919 -- -- $ 1,630,824 -- --
----------- ----------- ------------ ----------- ----------- ------------
Net Interest Income ...................... -- $ 59,821 -- -- $ 50,963 --
----------- ----------- ------------ ----------- ----------- ------------
Net Yield on Total Interest
Earning Assets ........................ -- -- 4.82% -- -- 4.64%
----------- ----------- ------------ ----------- ----------- ------------
</TABLE>
(1) For analytical purposes, income from tax-exempt assets, primarily
securities issues by state and local governments or authorities, is
adjusted by an increment that equates tax-exempt income to interest from
taxable assets (assuming a 35% tax rate).
(2) Annualized.
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<PAGE>
The following table presents the effects of changes in volume, rate
and rate/volume on interest income and interest expense for major categories of
interest-earning assets and interest-bearing liabilities. 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. An analysis of changes
in net interest income follows (dollars in thousands):
<TABLE>
<CAPTION>
THREE MONTHS ENDED SEPTEMBER 30, NINE MONTHS ENDED SEPTEMBER 30,
1999 COMPARED TO 1998 1999 COMPARED TO 1998
-------------------------------------------- --------------------------------------------
DUE TO CHANGE IN DUE TO CHANGE IN
NET -------------------- RATE/ NET -------------------- RATE/
TAXABLE-EQUIVALENT BASIS (1) CHANGE VOLUME RATE VOLUME CHANGE VOLUME RATE VOLUME
-------- -------- -------- -------- -------- -------- -------- --------
(UNAUDITED)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Interest Income
Loans ........................... $ 4,638 $ 4,190 $ 381 $ 67 $ 9,216 $ 10,896 $ (1,460) $ (220)
Securities
Taxable ....................... 355 353 2 -- 1,107 1,777 (612) (58)
Tax-Exempt .................... 170 230 (43) (17) 540 830 (196) (94)
Time Deposits in Bank ........... (12) (13) 8 (7) (54) (53) (5) 4
Federal Funds Sold .............. (512) (499) (61) 48 (550) (427) (180) 57
-------- -------- -------- -------- -------- -------- -------- --------
Total Interest Income ......... 4,639 4,261 287 91 10,259 13,023 (2,453) (311)
-------- -------- -------- -------- -------- -------- -------- --------
Interest Expense
Deposits ........................ (40) 1,608 (1,490) (158) 1,090 5,389 (3,821) (478)
Federal Funds Purchased and
Securities Sold Under
Repurchase Agreements ......... 222 225 (1) (2) 311 365 (18) (36)
-------- -------- -------- -------- -------- -------- -------- --------
Total Interest Expense ........ 182 1,833 (1,491) (160) 1,401 5,754 (3,839) (514)
-------- -------- -------- -------- -------- -------- -------- --------
Net Interest Income Before
Allocation of Rate/Volume ....... 4,457 2,428 1,778 251 8,858 7,269 1,386 203
Allocation of Rate/Volume .......... -- (3) 254 (251) -- (570) 773 (203)
-------- -------- -------- -------- -------- -------- -------- --------
Changes in Net Interest Income ..... $ 4,457 $ 2,425 $ 2,032 $ -- $ 8,858 $ 6,699 $ 2,159 $ --
-------- -------- -------- -------- -------- -------- -------- --------
</TABLE>
(1) For analytical purposes, income from tax-exempt assets, primarily securities
issued by state and local governments or authorities, is adjusted by an
increment that equates tax-exempt income to interest from taxable assets
(assuming a 35% effective federal income tax rate for 1999 and 1998).
PROVISION FOR LOAN LOSSES
The Company recorded a provision for loan losses of $1.6 million for
the three months ended September 30, 1999, compared to $7.2 million in the three
months ended September 30, 1998. For the nine months ended September 30, 1999,
the Company recorded a provision for loan losses of $4.4 million compared to
$9.1 million for the same period in 1998. The provision for loan losses
reflected a decrease of $5.6 million or 77.6% for the three months ended
September 30, 1999 and a decrease of $4.7 million or 51.3% for the nine months
ended September 30, 1999. The primary reason for the decrease in provision for
loan losses was due to the charge-off of loans during the three months ended
September 30, 1998, as previously discussed. Net charge-offs totaled $782,000
and $6.7 million, respectively, for the three months ended September 30, 1999
and 1998 and decreased to .26% of average loans in 1999 compared to 2.57% of
average loans for 1998. During the nine months ended September 30, 1999 and
1998, net charge-offs totaled $2.6 million and $8.1 million, respectively, and
decreased to .30% of average loans in 1999 compared to 1.07% of average loans
for 1998.
Management charges provisions for loan losses to earnings to bring
the total allowance for loan losses to a level deemed appropriate. Management
bases its decision on many factors which include historical experience, the
volume and type of lending conducted by the Company, the amount of nonperforming
assets, regulatory policies, generally accepted accounting principles, and
general economic conditions, particularly as they relate to the Company's
lending area. See "Allowance for Loan Losses."
Page 20
<PAGE>
NONINTEREST INCOME
Noninterest Income totaled $4.3 million for the three months ended
September 30, 1999 compared to $5.9 million for 1998. Excluding Net Realized
Gains (Losses) on Sales of Securities Available for Sale, Noninterest Income
increased $566,000 or 15.2% from 1998. For the nine months ended September 30,
1999, Noninterest income totaled $12.6 million, down from $13.4 million for the
same period in 1998. Noninterest income for the nine months ended September 30,
1999, excluding Net Realized Gains (Losses) on Sales of Securities Available for
Sale increased $1.8 million or 16.1% over the same period in 1998.
Total Service Charges of $3.0 million for the three months ended September
30, 1999 increased $421,000 or 16.4% compared to $2.6 million for same period in
1998. Total Service Charges were $8.7 million for the nine months ended
September 30, 1999 compared to $7.4 million for the same period in 1998. The
increase in Total Service Charges is attributable to increased account
transaction fees generated by deposit growth experienced by the Company, an
increase in amount charged for overdrafts, and an increase in service charges on
commercial accounts.
Trust Service Fees of $480,000 for the three months ended September 30,
1999 increased $36,000 or 8.1% compared to $444,000 for comparable prior year
period. Trust Service Fees were $1.5 million for the nine months ended September
30, 1999 compared to $1.3 million for the same period in 1998. The increase in
Trust Service Fees is attributable to an increase in the number of trust
accounts managed. The fair market value of assets managed at September 30, 1999
was $345.5 million compared to $338.4 million at the end of the second quarter
and $257.1 million a year ago. Assets held by the trust department of the Bank
in fiduciary or agency capacities are not assets of the Company and are not
included in the consolidated balance sheets.
Net Realized Gains (Losses) on Sales of Securities Available for Sale
totaled $2,000 net gains for the three months ended September 30, 1999 decreased
$2.1 million or 99.9% compared to $2.1 million net gains for 1998. Net Realized
Gains (Losses) on Sales of Securities Available for Sale were $1,000 net gains
for the nine months ended September 30, 1999, down from $2.6 million net gains
during the same period in 1998. Market opportunities to realize bond profits
were limited as bond prices generally fell during the nine months ended
September 30, 1999. Unrealized holding losses on securities available for sale,
net of tax, totaled $10.1 million during the nine months ended September 30,
1999 (see "Shareholders' Equity").
Data Processing Service Fees of $540,000 for the three months ended
September 30, 1999 increased $149,000 or 38.1% compared to $391,000 for the same
period last year. During the nine months ended September 30, 1999, data
processing service fees increased $479,000 or 44.6% to $1.6 million compared to
$1.1 million during the same period in 1998. This increase arose from the
acquisition of additional banking clients and increased utilization of services
offered to existing clients during 1998. The Company obtained one additional
banking client during the past year.
Other Operating Income of $275,000 for the three months ended September
30, 1999 decreased $40,000 or 12.7% compared to $315,000 for the same 1998
period. Other Operating Income was $939,000 for the nine months ended September
30, 1999 compared to $1.0 million during the same period in 1998, a decrease of
$99,000 or 9.5%. Other Operating Income included a gain (loss) on sale of bank
real estate of $72,000 and $198,000 for the three- and nine-months ended
September 30, 1998, respectively.
NONINTEREST EXPENSE
Noninterest Expense of $10.6 million for the three months ended September
30, 1999 increased $66,000 or 0.6% compared to $10.6 million for 1998. For the
nine months ended September 30, 1999, noninterest expense totaled $32.1 million,
an increase of $1.4 million or 4.4%, from $30.7 million for the same period in
1998. The efficiency ratio of expense to total revenue improved to 42.26% for
the three months ended September 30, 1999 compared to 52.69% for the same period
in 1998. For the nine months ended September 30, 1999, the efficiency ratio
improved to 43.92% from 49.63% for 1998. The efficiency ratio is defined as
Noninterest Expense (excluding other real estate income and expense) divided by
the total of taxable-equivalent Net Interest Income and Noninterest Income
(excluding any gains and losses on sale of securities). Excluding One Time
Charge - Acquisitions of $728,000 in 1998, Noninterest Expense increased $2.1
million or 7.0% over the same nine-month period in 1998. The increase results
primarily from higher personnel costs and occupancy expenses associated with the
new corporate headquarters building in McAllen, Texas opened in mid-1998.
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<PAGE>
Salaries and Employee Benefits, the largest category of Noninterest
Expense, of $5.4 million for the three months ended September 30, 1999 increased
$586,000 or 12.1% compared to the same period last year of $4.8 million. Salary
and Employee Benefits for the nine months ended September 30, 1999 was $16.0
million, an increase of $2.0 million or 14.7% from the same period in 1998. The
number of full-time equivalent employees of 746 at September 30, 1999 increased
1.8% from 733 at September 30, 1998. Salaries and Employee Benefits averaged
1.15% of average assets for the three months ended September 30, 1999 compared
to 1.14% for the three months ended September 30, 1998. For the nine months
ended September 30, 1999, Salaries and Employee Benefits averaged 1.17% of
average assets compared to 1.14% for the same period in 1998.
Net Occupancy Expense of $848,000 for the three months ended September 30,
1999 decreased $292,000 or 25.6% compared to $1.1 million for 1998. Rental
income generated from the new corporate headquarters building in McAllen, Texas,
which opened mid-1998, contributed to the decrease in net Occupancy Expense
during the three months ended September 30, 1999. For the nine months ended
September 30, 1999, Net Occupancy Expense increased $81,000 or 2.9% from the
same period a year ago to $2.8 million.
Equipment Expense of $1.3 million for the three months ended September 30,
1999 increased $108,000 or 8.8% compared to $1.2 million for 1998. During the
nine months ended September 30, 1999, Equipment Expense totaled $3.8 million, an
increase of $335,000 or 9.7% over the same period in 1998. Expenses associated
with the new corporate headquarters building contributed to the increase in
Equipment Expense for the three and nine months ended September 30, 1999.
Other Real Estate Expense, Net, includes rent income from foreclosed
properties, gain or loss on sale of other real estate properties and direct
expenses of foreclosed real estate including property taxes, maintenance costs
and write-downs. Write-downs of other real estate are required if the fair value
of an asset acquired in a loan foreclosure subsequently declines below its
carrying value. Other Real Estate Expense, Net of $83,000 for the three months
ended September 30, 1999 increased $27,000 or 48.2% compared to $56,000 for the
three months ended September 30, 1998. Other Real Estate Expense, Net increased
$229,000 or 458.0% to $279,000 for the nine months ended September 30, 1999
compared to the same period in 1998. The net increase in the three and nine
months ended September 30, 1999 is primarily attributable to higher volumes in
Other Real Estate owned and increased direct expenses of foreclosed real estate
partially offset by increased operating income. Management is actively seeking
buyers for all Other Real Estate.
Amortization of Goodwill and Identifiable Intangibles of $680,000 for the
three months ended September 30, 1999 did not change from the same period 1998.
For the nine months ended September 30, 1999, Amortization of Goodwill and
Identifiable Intangibles totaled $2.0 million, an increase of $57,000 or 2.9%
from the same period in 1998. The increase in Amortization of Goodwill and
Identifiable Intangibles during the nine months ended September 30, 1999 was due
to the amortization of goodwill and core deposit premiums associated with the
1998 acquisitions.
One Time Charge - Acquisitions of $728,000 for the nine months ended
September 30, 1998, respectively, related primarily to professional fees and
computer conversion cost resulting from the Company's 1998 acquisitions.
Page 22
<PAGE>
A detailed summary of Noninterest Expense follows (dollars in thousands):
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
1999 1998 1999 1998
---------- ---------- ---------- ----------
(UNAUDITED)
<S> <C> <C> <C> <C>
Salaries and Wages ................................................. $ 4,315 $ 3,969 $ 12,679 $ 11,227
Employee Benefits .................................................. 1,118 878 3,272 2,677
---------- ---------- ---------- ----------
Total Salaries and Employee Benefits ............................ 5,433 4,847 15,951 13,904
---------- ---------- ---------- ----------
Net Occupancy Expense .............................................. 848 1,140 2,841 2,760
---------- ---------- ---------- ----------
Equipment Expense .................................................. 1,337 1,229 3,788 3,453
---------- ---------- ---------- ----------
Other Real Estate Expense, Net
Rent Income ..................................................... (131) (6) (315) (24)
(Gain) Loss on Sale ............................................. 20 (54) (152) (287)
Expenses ........................................................ 194 102 730 342
Write-Downs ..................................................... -- 14 16 19
---------- ---------- ---------- ----------
Total Other Real Estate Expense, Net .......................... 83 56 279 50
---------- ---------- ---------- ----------
Amortization of Goodwill and Identifiable Intangibles .............. 680 680 2,039 1,982
---------- ---------- ---------- ----------
One Time Charge - Acquisitions ..................................... -- -- -- 728
---------- ---------- ---------- ----------
Other Noninterest Expense
Advertising and Public Relations ................................ 307 460 857 1,025
Data Processing and Check Clearing .............................. 295 301 991 878
Director Fees ................................................... 95 80 276 252
Franchise Tax ................................................... 12 132 237 460
Insurance ....................................................... 103 107 271 301
FDIC Insurance .................................................. 46 44 138 124
Legal ........................................................... 45 176 413 718
Professional Fees ............................................... 464 270 860 740
Postage, Delivery and Freight ................................... 217 203 674 621
Printing, Stationery and Supplies ............................... 299 300 1,041 1,121
Telephone ....................................................... 140 150 413 409
Other (Gains) Losses ............................................ (59) 141 110 307
Miscellaneous Expense ........................................... 303 266 927 912
---------- ---------- ---------- ----------
Total Other Noninterest Expense ............................... 2,267 2,630 7,208 7,868
---------- ---------- ---------- ----------
Total Noninterest Expense .......................................... $ 10,648 $ 10,582 $ 32,106 $ 30,745
---------- ---------- ---------- ----------
</TABLE>
INCOME TAX EXPENSE
The Company recorded income tax expense of $4.4 million for the three
months ended September 30, 1999 compared to $1.2 million for the three months
ended September 30, 1998. For the nine months ended September 30, 1999, the
provision for income taxes was $12.3 million, an increase of $4.2 million or
52.0% from $8.1 million provided for the same period in 1998. The increase in
income tax expense is due primarily to an increased level of pretax income.
CAPITAL AND LIQUIDITY
Bank holding companies are required to maintain capital ratios in
accordance with guidelines adopted by the Federal Reserve Board ("FRB"). The
guidelines are commonly known as Risk-Based Capital Guidelines. On September 30,
1999, the Company exceeded all applicable capital requirements, having a total
risk-based capital ratio of 13.87%, a Tier I risk-based capital ratio of 12.73%,
and a leverage ratio of 9.12%.
Liquidity management assures that adequate funds are available to meet
deposit withdrawals, loan demand and maturing liabilities. Insufficient
liquidity can result in higher costs of obtaining funds, while excessive
liquidity can lead to a decline in earnings due to the cost of foregoing
alternative investments. The ability to renew and acquire additional deposit
liabilities is a major source of liquidity. The Company's principal sources of
funds are primarily
Page 23
<PAGE>
within the local markets of the Bank and consist of deposits, interest and
principal payments on loans and securities, sales of loans and securities and
borrowings.
Cash and assets which are readily marketable, or which can be pledged, or
which will mature in the near future provide asset liquidity. These include
cash, federal funds sold, time deposits, U.S. Treasury, U.S. Government Agency
and mortgage-backed securities. At September 30, 1999, the Company's liquidity
ratio, defined as cash, U.S. Treasury, U.S. Government Agency, mortgage-backed
securities, time deposits and federal funds sold as a percentage of deposits,
was 31.9% compared to 33.0% at December 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 nor does it
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 used, as necessary, to fund asset growth and meet short-term
liquidity needs.
During the nine months ended September 30, 1999, funds for $165.0 million
of securities purchases and $142.6 million of net loan growth came from various
sources, including a net increase in deposits of $103.2 million and $117.4
million in proceeds from maturing securities and $22.5 million of net income.
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.
EFFECTS OF INFLATION
Financial institutions are impacted differently by inflation than are
industrial companies. While industrial and manufacturing companies generally
have significant investments in inventories and fixed assets, financial
institutions ordinarily do not have such investments. As a result, financial
institutions are generally in a better position than industrial companies to
respond to inflationary trends by monitoring the spread between interest costs
and interest income yields through adjustments of maturities and interest rates
of assets and liabilities. In addition, inflation tends to increase demand for
loans from financial institutions as industrial companies attempt to maintain a
constant level of goods in inventory and assets. As consumers of goods and
services, financial institutions are affected by inflation as prices increase,
causing an increase in costs of salaries, employee benefits, occupancy expense
and similar items.
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 (the "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. The Bank has no computer applications developed in-house.
STATE OF READINESS
In early 1997, the 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
Page 24
<PAGE>
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.
The 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.
The 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 the 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 the Bank have
represented their products as being Year 2000 compliant. The 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 were completed by
June 30, 1999.
VALIDATION PHASE: TESTING CURRENT AND UPGRADED SYSTEMS.
The 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. The 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. The Data Center and
appropriate operating departments at March 31, 1999 had completed interface
testing with FEDLINE.
IMPLEMENTATION PHASE: SYSTEMS MUST BE YEAR 2000 READY BEFORE 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. All systems were fully renovated and tested by June 30,
1999.
ESTIMATED COSTS
The Bank has estimated the total cost of the Year 2000 project at
$500,000. The approximate cost expensed was $31,000 in 1997, $253,000 in 1998
and is estimated to be $216,000 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
the Bank's customers and other business partners will be able to conduct
business. The Bank is performing due diligence on its customers and other
business partners. Where our customers
Page 25
<PAGE>
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, the Bank implemented
processes for evaluating readiness of customers and business partners for the
Year 2000. These processes are continuously monitored.
CONTINGENCY PLAN
The Bank has implemented procedures and continues to refine its processes
for evaluating its business readiness. Still, the possibility exists that
something can go wrong. The 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 the Bank. These contingency
plans are reviewed continually to reasonably address these incidents.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISKS
Market risk is the exposure to loss resulting from changes in interest
rates, foreign currency exchange rates, commodity prices and equity prices. The
primary market risk to which the Company is exposed is interest rate risk.
Interest rate risk occurs when assets and liabilities reprice at different times
as interest rates change. For example, if fixed-rate loans are funded with
floating-rate deposits, the spread between loan and deposit rates will decline
or turn negative if rates increase. 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. The Company's interest rate risk
arises from transactions entered into for purposes other than trading. 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 managed within the funds management policy of the
Company. The principal objectives of the funds management policy is to avoid
fluctuating net interest margins and to maintain consistent growth of net
interest income through periods of changing interest rates. The Board of
Directors oversees implementation of strategies to control interest rate risk.
The Company may take steps to alter its net sensitivity position by offering
deposit and/or loan structures that tend to counter the natural rate risk
profile of the Company. Funding positions are kept within predetermined limits
designed to ensure that risk-taking is not excessive and that liquidity is
properly managed. Because of the volatility of market rates and uncertainties,
there can be no assurance of the effectiveness of management programs to achieve
a targeted moderation of risk.
In order to measure earnings and fair value sensitivity to changing rates,
the Company utilizes three different measurement tools including static gap
analysis, simulation earnings, and market value sensitivity (fair value at
risk). The primary analytical tool used by the Company to quantify interest rate
risk is a simulation model to project changes in net interest income that result
from forecast changes in interest rates. This analysis estimates a percentage of
change in net interest income from the stable rate scenario under scenarios of
rising and falling market interest rates over a twelve month time horizon. The
prime rate serves as a "driver" and is made to rise (or fall) evenly in 100
basis point increments over the 12-month forecast interval. These simulations
incorporate assumptions regarding balance sheet growth and mix, pricing and the
repricing and maturity characteristics of the existing and projected balance
sheet. The following table summarizes the simulated change in net interest
income over a 12-month period as of September 30, 1999 and December 31, 1998
(dollars in thousands):
Page 26
<PAGE>
INCREASE (DECREASE) IN
NET INTEREST INCOME
CHANGES IN INTEREST ESTIMATED NET --------------------------
RATES (BASIS POINTS) INTEREST INCOME AMOUNT PERCENT
- -------------------- --------------- ---------- --------
(UNAUDITED)
September 30, 1999
+100 $ 92,638 $ 1,568 1.7%
- 91,070 - -
-100 88,989 (2,081) (2.3)
December 31, 1998
+100 77,223 2,317 3.1
- 74,906 - -
-100 69,940 (4,966) (6.6)
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. An immediate 100 basis point decline 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. Because of
uncertainties as to the extent of customer behavior, refinance activity,
absolute and relative loan and deposit pricing levels, competitor pricing and
market behavior, product volumes and mix, and other unexpected changes in
economic events impacting movements and volatility in market rates, there can be
no assurance that simulation results are reliable indicators of net interest
income under such conditions.
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
The Company is involved in routine litigation in the normal course of its
business, which in the opinion of management, will not have a material adverse
effect on the financial condition or results of operations of the Company.
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS.
None
ITEM 3. DEFAULTS UPON SENIOR SECURITIES.
None
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
None
ITEM 5. OTHER INFORMATION.
None
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a)The following documents are filed as part of this Quarterly Report on Form
10-Q:
(1) Exhibits -- The following exhibits are filed as a part of this Quarterly
Report on Form 10-Q:
Page 27
<PAGE>
10.17 Amendment No. 3 to Texas Regional Bancshares, Inc. Employee Stock
Ownership Trust Agreement, adopted July 13, 1999.
10.18 Amendment No. 10 to Texas Regional Bancshares, Inc. Employee Stock
Ownership Plan (with 401(k) provisions), adopted July 13, 1999.
10.19 Second Amendment to Bank of Texas Profit Sharing Plan, adopted August 27,
1999.
27 Financial Data Schedule
(b) Reports of Form 8-K
No report on Form 8-K was filed by Texas Regional Bancshares, Inc. during
the three months ended September 30, 1999.
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.
(Registrant)
November 10, 1999 /s/ G. E. RONEY
- ------------------- -------------------------
Glen E. Roney
Chairman of the Board,
& Chief Executive Officer
November 10, 1999 /s/ R. T. PIGOTT, JR.
- ------------------- -------------------------
R. T. Pigott, Jr.
Executive Vice President
& Chief Financial Officer
Page 28
EXHIBIT 10.17
AMENDMENT NUMBER THREE TO
TEXAS REGIONAL BANCSHARES, INC.
EMPLOYEE STOCK OWNERSHIP TRUST AGREEMENT
This Amendment Number Three to the Texas Regional Bancshares, Inc.,
Employee Stock Ownership Trust Agreement is hereby adopted by Texas Regional
Bancshares, Inc. (hereafter referred to as the "Company"). Glen E. Roney, Frank
N. Boggus, and Morris Atlas join in the execution hereof to evidence their
acknowledgment of and consent to the terms of this Amendment Number Three. As
used herein, the Texas Regional Bancshares, Inc., Employee Stock Ownership Plan
(with 401(k) provisions) is herein called the "Plan" and the Texas Regional
Bancshares, Inc., Employee Stock Ownership Trust is herein called the "Trust".
WHEREAS, since the death of Joe M. Kilgore on February 10, 1999 there have
been only three persons serving as trustees of the Trust; and
WHEREAS, the Company has the power to amend the Texas Regional Bancshares,
Inc., Employee Stock Ownership Trust Agreement as provided in Section K of said
Agreement, and as provided in Section 21 of the Plan; and
WHEREAS, the Company has previously amended the Texas Regional Bancshares,
Inc. Employee Stock Ownership Trust Agreement as provided in Amendment Number
One and Amendment Number Two thereto (herein the Trust as amended by Amendment
Number One and Amendment Number Two shall be referred to as the "Agreement");
and
WHEREAS, it is believed by the Board of Directors of Texas Regional
Bancshares, Inc. that having three trustees, instead of four, will properly
serve the needs and purposes of the Company, the Plan, the Plan participants,
the Plan beneficiaries and the Trust;
NOW, THEREFORE, pursuant to section K of the Agreement, Texas Regional
Bancshares, Inc., acting pursuant to authority granted by the Board of Directors
of the Corporation, hereby amends the Agreement as follows:
1. The number of Trustees constituting the Board of Trustees of the Trust is
hereby reduced to three (3) and the continued appointment of the three
persons now serving as Trustees of the Trust, Glen E. Roney, Frank N.
Boggus, and Morris Atlas, is hereby ratified, confirmed and approved for
all purposes. As used in the Agreement and the Plan, such persons shall
for all purposes collectively constitute the Board of Trustees of the
Trust, are collectively referred to as the "Trustee" and are individually
referred to as an "Individual Trustee" as such terms are used in the
Agreement.
2. This Amendment Number Three was adopted by the Board of Directors of the
Company at a meeting duly called and held on July 13, 1999. Except as
amended hereby, the Agreement shall be and remain in full force and
effect.
IN WITNESS WHEREOF, the Company and the Board of Trustees have caused this
Amendment Number Three to the Agreement to be executed this 13th day of July,
1999.
TEXAS REGIONAL BANCSHARES, INC.
By: /s/ G.E.RONEY
-----------------------------
G.E. Roney
Chairman of the Board
<PAGE>
ACCEPTANCE OF TRUSTEES
Each of the undersigned hereby acknowledges and consents to this Amendment
Number Three to the Texas Regional Bancshares, Inc., Employee Stock Ownership
Trust Agreement, and by execution below confirms his acceptance of his
appointment as a Trustee of the Trust and agrees to be bound by the terms of
this Amendment and the Agreement amended hereby.
/s/ G.E. RONEY
-----------------------------
G.E. Roney
/s/ FRANK N. BOGGUS
-----------------------------
Frank N. Boggus
/s/ MORRIS ATLAS
-----------------------------
Morris Atlas
EXHIBIT 10.18
AMENDMENT NUMBER 10 TO
TEXAS REGIONAL BANCSHARES, INC.
EMPLOYEE STOCK OWNERSHIP PLAN (WITH 401(K) PROVISIONS)
WHEREAS, as a result of the merger pursuant to which Bank of Texas merged
with and into Texas Regional Bancshares, Inc.'s (the "Corporation") wholly owned
subsidiary, Texas State Bank, Texas State Bank has become the successor employer
to Bank of Texas for purposes of the Bank of Texas Profit Sharing Plan and
related Trust; and
WHEREAS, the former employees of Bank of Texas, as a result of becoming
employees of Texas State Bank pursuant to the merger, are now entitled to
participate in the Texas Regional Bancshares, Inc. Employee Stock Ownership Plan
(with 401(k) provisions); and
WHEREAS, the Bank of Texas Profit Sharing Plan has been submitted to the
Voluntary Compliance Resolution program offered by the Internal Revenue Service
for the purposes of correcting certain administrative and/or operational
problems; and
WHEREAS, upon resolution of said administrative and/or operational
problems in the Bank of Texas Profit Sharing Plan pursuant to the Voluntary
Compliance Resolution ("VCR") program, the Board of Directors desires to
coordinate and consolidate the employee benefit programs available to all
employees of the Corporation and its subsidiary;
NOW THEREFORE, IT IS HEREBY AGREED THAT effective as of the first day of
the calendar month immediately following the receipt by the Corporation of a
compliance statement from the Internal Revenue Service issued with respect to
the submission of the Bank of Texas Plan to the VCR program and the satisfaction
of any requirements of the Internal Revenue Service which are described in the
compliance statement, the Texas Regional Bancshares, Inc. Employee Stock
Ownership Plan (with 401(k) provisions) (the "ESOP"), is hereby amended as
follows:
(ii) the ESOP is hereby amended to restate Bank of Texas Profit Sharing
Plan (the "Bank of Texas Plan"), as the ESOP, and the Bank of Texas
Plan is hereby restated as the ESOP, it being acknowledged that such
restatement of the Bank of Texas Plan may be considered a transfer
of assets and liabilities to the ESOP and the Texas Regional
Bancshares, Inc., Employee Stock Ownership Trust (the "ESOT") and/or
a merger of the Bank of Texas Plan into the ESOP for purposes of
applicable provisions of the Internal Revenue Code but that the same
shall not constitute a termination of the Bank of Texas Plan or the
ESOP; and
(iii) the ESOP and the related ESOT are amended to the extent necessary to
permit the assets held by the Trust created pursuant the Bank of
Texas Plan, to be transferred to the ESOT and for the ESOP and ESOT
to assume all liabilities of the Bank of Texas Plan; and
(iv) the ESOP is further amended to provide that each employee or former
employee of Texas State Bank participating in the Bank of Texas
Plan, as a result of the restatement of the Bank of Texas Plan as
the ESOP and the transfer of assets to the ESOT, shall have and be
entitled to a participant account in the ESOP equal to the amount of
the account balance to which such participant was entitled as of the
effective date of the restatement of the Bank of Texas Plan (the
"Bank of Texas Plan Accounts"), which account balance shall (upon
transfer of assets of the Bank of Texas Plan to the ESOT) be
invested in the Money Market Fund of the ESOP until such time as the
participants who were formerly Bank of Texas Plan participants shall
otherwise direct the investment of his or her account balance.
<PAGE>
To the extent that the Bank of Texas Plan provided any early retirement
benefit, retirement-type subsidy or optional form of benefit not provided under
the ESOP, the ESOP is amended to apply the same early retirement benefit,
retirement-type subsidy or optional form of benefit to the Bank of Texas Plan
Accounts, to the extent required under Section 411(d)(6) of the Internal Revenue
Code.
Each participant in the Bank of Texas Plan shall be entitled to direct the
allocation of his or her account balance in the Bank of Texas Plan that is
transferred to the ESOP to any option presently available as an investment
option under the ESOP, and the officers of the Bank are hereby authorized and
directed to notify each such participant of the options available to him or her
and to solicit from each participant a designation both with respect to the
participant's vested account balance and with respect to any future
contributions made by or on behalf of such participant and attributable to the
Bank of Texas Plan.
EXECUTED on this the 13th day of July, 1999, to be effective as of the
effective date stated above.
TEXAS REGIONAL BANCSHARES, INC.
BY: /s/ GLEN E. RONEY
-----------------------------
Glen E. Roney
Chairman of the Board
EXHIBIT 10.19
SECOND AMENDMENT TO
BANK OF TEXAS PROFIT SHARING PLAN
WHEREAS, as a result of the merger pursuant to which Bank of Texas merged
with and into Texas Regional Bancshares, Inc.'s (the "Corporation") wholly-owned
subsidiary, Texas State Bank, Texas Regional Bancshares, Inc. has become the
successor sponsor of the Bank of Texas Profit Sharing Plan and related Trust
(the "Plan"); and
WHEREAS, Guy C. Fambrough and Fred R. Schmoker are the current Trustees
of the trust created pursuant to the Bank of Texas Profit Sharing Plan; and
WHEREAS, Guy C. Fambrough and Fred R. Schmoker are no longer employees
of Texas State Bank or Texas Regional Bancshares, Inc.; and
WHEREAS, Texas Regional Bancshares, Inc. desires to remove the current
Trustees and to appoint successor Trustees of the Plan;
NOW THEREFORE, IT IS HEREBY AGREED THAT effective as of September 27,
1999, Guy C. Fambrough and Fred R. Schmoker shall be removed as Trustees of the
Bank of Texas Profit Sharing Plan and Trust and from and after said date shall
have no further rights, powers, obligations, responsibilities or duties of a
Trustee of the Bank of Texas Profit Sharing Plan and Trust;
IT IS FURTHER AGREED that, effective immediately, G.E. Roney, Paul
Moxley and R.T. Pigott, Jr. shall be, and hereby are, appointed as successor
Trustees of the Bank of Texas Profit Sharing Plan and Trust and shall have
all of the rights, powers, obligations, responsibilities and duties provided
under the Bank of Texas Profit Sharing Plan and Trust and by law.
By their signatures below, G.E. Roney, Paul Moxley and R.T. Pigott, Jr.
accept their positions as Trustees of the Bank of Texas Profit Sharing Plan and
Trust and further accept all of the rights, powers, obligations,
responsibilities and duties imposed upon the Trustee under the Bank of Texas
Profit Sharing Plan and Trust and by law.
EXECUTED on this the 27th day of August, 1999, to be effective as provided
hereinabove.
TEXAS REGIONAL BANCSHARES, INC.
BY: /s/ G.E. RONEY
-----------------------------
G.E. Roney
Chairman of the Board
<PAGE>
ACCEPTANCE OF TRUSTEES
The undersigned, G.E. Roney, Paul Moxley and R.T. Pigott, Jr., by their
signatures below, hereby accept their appointment as Trustees under the Bank of
Texas Profit Sharing Plan and Trust and further accept all of the rights,
powers, obligations, responsibilities and duties imposed upon the Trustee under
the Bank of Texas Profit Sharing Plan and Trust and by law.
/s/ G.E. RONEY
-----------------------------
G.E. Roney
/s/ PAUL MOXLEY
-----------------------------
Paul Moxley
/s/ R.T. PIGOTT, JR.
-----------------------------
R.T. Pigott, Jr.
<TABLE> <S> <C>
<ARTICLE> 9
<LEGEND>
This schedule contains summary financial information extracted from the
Consolidated Balance Sheets and Consolidated Statements of Income and
Comprehensive Income, included herein and is qualified in its entirety by
reference to such financial statements.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-END> SEP-30-1999
<CASH> 45,844
<INT-BEARING-DEPOSITS> 637
<FED-FUNDS-SOLD> 43,400
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 465,939
<INVESTMENTS-CARRYING> 8,010
<INVESTMENTS-MARKET> 0
<LOANS> 1,228,889
<ALLOWANCE> 15,079
<TOTAL-ASSETS> 1,907,195
<DEPOSITS> 1,666,155
<SHORT-TERM> 46,162
<LIABILITIES-OTHER> 11,158
<LONG-TERM> 0
0
0
<COMMON> 14,406
<OTHER-SE> 169,314
<TOTAL-LIABILITIES-AND-EQUITY> 1,907,195
<INTEREST-LOAN> 81,206
<INTEREST-INVEST> 21,340
<INTEREST-OTHER> 800
<INTEREST-TOTAL> 103,346
<INTEREST-DEPOSIT> 44,150
<INTEREST-EXPENSE> 44,644
<INTEREST-INCOME-NET> 58,702
<LOAN-LOSSES> 4,422
<SECURITIES-GAINS> 1
<EXPENSE-OTHER> 32,106
<INCOME-PRETAX> 34,812
<INCOME-PRE-EXTRAORDINARY> 22,531
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 22,531
<EPS-BASIC> 1.56
<EPS-DILUTED> 1.54
<YIELD-ACTUAL> 4.82
<LOANS-NON> 7,624
<LOANS-PAST> 3,017
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 13,236
<CHARGE-OFFS> 3,076
<RECOVERIES> 497
<ALLOWANCE-CLOSE> 15,079
<ALLOWANCE-DOMESTIC> 12,452
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 2,627
</TABLE>
