UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-K
(Mark One)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 1998
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 of (I.R.S. Employer
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
Securities registered pursuant to Section 12(b) of the Act:
TITLE OF EACH CLASS NAME OF EACH EXCHANGE ON WHICH REGISTERED
--------------------- -------------------------------------------
None None
Securities registered pursuant to Section 12(g) of the Act:
CLASS A VOTING COMMON, $1.00 PAR VALUE PER SHARE
--------------------------------------------------
(Title of class)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes [X] No [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K (Sec. 229.405 of this chapter) is not contained herein, and
will not be contained, to the best of registrant's knowledge, in definitive
proxy or information statements incorporated by reference in Part III of this
Form 10-K or any amendment to this Form 10-K. [ ]
The aggregate market value of the voting stock held by non-affiliates of the
registrant as of March 8, 1999 (based on the closing price on such date as
reported on The Nasdaq Stock Market(R) was $325,696,957.
There were 14,411,583 shares of the registrant's Class A Voting Common Stock,
$1.00 par value, outstanding as of March 8, 1999.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Registrant's definitive Proxy Statement for its 1999 Annual
Meeting of Stockholders are incorporated into Part III, Items 10-13 of this
Form 10-K.
<PAGE>
PART I
ITEM 1. BUSINESS
GENERAL
Texas Regional Bancshares, Inc. ("Texas Regional" or 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 BHCA") and as such 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 acquired the Rio Grande City and Roma branches of First
National Bank of South Texas during 1995. The Company completed a secondary
public offering of 2.5 million shares of the Company's Class A Voting Common
Stock on May 14, 1996. Concurrently, Texas Regional also completed the
acquisition of First State Bank & Trust Co., Mission, Texas and The Border Bank,
Hidalgo, Texas, through merger with the Bank. On February 19, 1998, the Company
acquired Brownsville National Bank, Brownsville, Texas, Texas Bank and Trust,
Brownsville, Texas and Bank of Texas, Raymondville, Texas through merger with
the Bank.
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 December
31, 1998, Texas Regional had consolidated total assets of $1.8 billion, loans
outstanding (net of unearned discount) of $1.1 billion, total deposits of $1.6
billion, and shareholders' equity of $177.5 million.
The business strategy of Texas Regional is for the Bank to provide its
customers with the financial sophistication and breadth of products of a
regional bank, while retaining the local appeal and level of service of a
community bank. The Board of Directors and management of the Company have
maintained the Company's community orientation by tailoring products and
services to meet community and customer needs. Management believes that the
Company is well positioned in its market due to its responsive customer service,
the strong community involvement of management and employees, the recent trends
in the Texas banking environment and the vitality of the Rio Grande Valley
economy. Management's strategy is to provide a business culture in which
individual customers and small and medium sized businesses are accorded the
highest priority in all aspects of the Company's operations. Management believes
that individualized customer service will allow the Company to increase its
market share in loan and deposit volumes. As part of its operating and growth
strategies, the Company is working to continue to attract business from, and
provide service to, small and medium sized businesses, and expand operations in
the Rio Grande Valley.
For its business customers, Texas State Bank offers checking facilities,
certificates of deposit, short-term loans for working capital purposes,
construction financing, mortgage loans, term loans for fixed asset and expansion
needs, and other commercial loans. The services provided for individuals by the
Bank include checking accounts, savings accounts, certificates of deposit,
individual retirement accounts and consumer loan programs, including installment
loans for home repair and for purchases of consumer goods, including
automobiles, trucks and boats, and mortgage loans. The Bank also provides
travelers checks, money orders and safe deposit facilities, and offers trust
services.
<PAGE>
The Bank has also expanded the services that it provides to third party
correspondent banks. The Bank's data processing center, for example, presently
serves five banks in addition to providing data processing services for all of
the Bank's banking locations.
Management believes there may be opportunities to expand by acquiring
financial institutions or by acquiring assets and deposits that will allow the
Company to enter adjacent markets or further increase market share in existing
markets. Management intends to pursue acquisition opportunities in strategic
markets in circumstances in which management believes that its managerial,
operational and capital resources will enhance the performance of acquired
institutions. There are currently no agreements or understandings related to any
acquisition.
COMPETITION
The Company's operations are located in the Rio Grande Valley, which
consists of Cameron, Hidalgo, Willacy and Starr Counties. Cameron, Hidalgo and
Starr Counties are each directly adjacent to the Rio Grande River, which forms
part of the border between the United States and Mexico. The Company's twenty
banking locations are currently located in Cameron County (Brownsville and
Harlingen), Hidalgo County (Edinburg, Hidalgo, McAllen, Mission, Penitas and
Weslaco), Starr County (Rio Grande City and Roma) and Willacy County
(Raymondville).
The Bank encounters intense competition in its commercial banking
business, primarily from other banks located in its market area. The Bank also
competes with insurance, finance and mortgage companies, savings and loan
institutions, credit unions, money market funds and other financial
institutions. Competition is based upon interest rates offered on deposit
accounts, interest rates charged on loans and other credit and service charges,
the quality and scope of the services rendered, the convenience of banking
facilities, and, in the case of loans to commercial borrowers, relative lending
limits. A substantial number of the commercial banks in the Rio Grande Valley
are branches of much larger organizations affiliated with national, regional or
state-wide banking companies which are larger than the Bank in terms of capital,
resources and personnel. However, as a major independent community bank
headquartered in its primary market area, management believes that the Company's
community commitment and involvement in its primary market area, as well as its
commitment to quality and personalized banking services, are factors that
contribute to the Company's competitiveness.
REGULATION AND SUPERVISION
In addition to the generally applicable state and federal laws governing
businesses and employers, special federal and state laws applicable only to
financial institutions and their parent companies further extensively regulate
the Company and the Bank. Virtually all aspects of the Company's operations are
subject to specific requirements or restrictions and general regulatory
oversight, from laws regulating consumer finance transactions, such as the Truth
In Lending Act, the Home Mortgage Disclosure Act and the Equal Credit
Opportunity Act, to laws regulating collections and confidentiality, such as the
Fair Debt Collections Practices Act, the Fair Credit Reporting Act and the Right
to Financial Privacy Act. With few exceptions, state and federal banking laws
have as their principal objective either the maintenance of the safety and
soundness of the federal deposit insurance system or the protection of consumers
or classes of consumers, rather than the specific protection of shareholders of
the Company. To the extent the following material describes statutory or
regulatory provisions, it is qualified in its entirety by reference to the
particular statute or regulation.
REGULATION OF THE COMPANY
Texas Regional is a bank holding company within the meaning of the Bank
Holding Company Act of 1956 (the "BHCA"), as amended, and therefore is subject
to regulation and supervision by the Federal Reserve Board (the "FRB"). In
addition, the Company is required to file reports with and to furnish such other
information as the FRB may require pursuant to the BHCA, and to subject itself
to examination by the FRB. The FRB has the authority to issue bank holding
companies orders to cease and desist from unsound practices and violations of
conditions imposed by, or violation of agreements with, the FRB. The FRB is also
empowered to assess civil penalties against companies or individuals who violate
the BHCA or orders or regulations thereunder in amounts up to $1.0 million per
day, to order termination of non-banking activities of non-banking subsidiaries
of bank holding companies, and to order termination of ownership and control of
a non-banking subsidiary by a bank holding company. Certain violations may also
result in criminal penalties. The FRB and the Federal Deposit Insurance
Corporation (the "FDIC"), as appropriate, are authorized to exercise comparable
authority, under the Federal Deposit Insurance Act (the "FDI Act") and other
statutes, with respect to subsidiary banks.
<PAGE>
The FRB takes the position that a bank holding company is required to
serve as a source of financial and managerial strength to its subsidiary banks
and may not conduct its operations in an unsafe or unsound manner. In addition,
it is the FRB's position that, in serving as a source of strength to its
subsidiary banks, a bank holding company should stand ready to use available
resources to provide adequate capital funds to its subsidiary banks during
periods of financial stress or adversity and should maintain the financial
flexibility and capital-raising capacity to obtain additional resources for
assisting its subsidiary banks. A bank holding company's failure to meet its
obligations to serve as a source of strength to its subsidiary banks will
generally be considered by the FRB to be an unsafe and unsound banking practice
or a violation of the FRB regulations or both. Changes in the FDI Act made by
the Federal Deposit Insurance Corporation Improvement Act of 1991 (the "FDICIA")
now require an undercapitalized institution to submit to the FRB a capital
restoration plan with a guaranty, by each company having control of the bank, of
the bank's compliance with the plan.
The BHCA and the Change in Bank Control Act, together with regulations
promulgated by the FRB, require that, depending on the particular circumstances,
either FRB approval must be obtained or notice must be furnished to the FRB and
not disapproved prior to any person or company acquiring "control" of a bank
holding company, such as the Company, subject to certain exemptions for certain
transactions. Control is conclusively presumed to exist if an individual or
company acquires 25% or more of any class of voting securities of the bank
holding company. Control is rebuttably presumed to exist if a person acquires
10% or more but less than 25% of any class of voting securities and either the
company has registered securities under Section 12 of the Exchange Act or no
other person will own a greater percentage of that class of voting securities
immediately after the transaction. The regulations provide a procedure for
challenge of the rebuttable control presumption.
As a bank holding company, the Company is required to obtain approval
prior to merging or consolidating with any other bank holding company, acquiring
all or substantially all of the assets of any bank or acquiring ownership or
control of shares of a bank or bank holding company if, after the acquisition,
the Company would directly or indirectly own or control 5% or more of the voting
shares of such bank or bank holding company.
The Company is also prohibited from acquiring a direct or indirect
interest in or control of more than 5% of the voting shares of any company which
is not a bank or bank holding company and from engaging directly or indirectly
in activities other than those of banking, managing or controlling banks or
furnishing services to its subsidiary bank, except that it may engage in and may
own shares of companies engaged in certain activities found by the FRB to be so
closely related to banking or managing and controlling banks as to be a proper
incident thereto. These activities include, among others, operating a mortgage,
finance, credit card, or factoring company; performing certain data processing
operations; providing investment and financial advice; acting as an insurance
agent for certain types of credit-related insurance; leasing personal property
on a full payout, non-operating basis; and providing certain stock brokerage and
investment advisory services. In approving acquisitions or the addition of
activities, the FRB considers whether the acquisition or the additional
activities can reasonably be expected to produce benefits to the public, such as
greater convenience, increased competition, or gains in efficiency, that
<PAGE>
outweigh such possible adverse effects as undue concentration of resources,
decreased or unfair competition, conflicts of interest or unsound banking
practices. In considering any application for approval of an acquisition or
merger, the FRB is also required to consider the financial and managerial
resources of the companies and the banks concerned, as well as the applicant's
record of compliance with the Community Reinvestment Act (the "CRA"). The CRA
generally requires a financial institution to take affirmative action to
ascertain and meet the credit needs of its entire community, including low and
moderate income neighborhoods.
The BHCA generally imposes certain limitations on extensions of credit and
other transactions by and between banks that are a member of the Federal Reserve
System and other banks and non-bank companies in the same holding company. Under
the BHCA and the FRB's regulations, a bank holding company and its subsidiaries
are prohibited from engaging in certain tie-in arrangements in connection with
any extension of credit, lease or sale of property or furnishing of services.
The Company, as an affiliate of the Bank, is subject to certain
restrictions regarding transactions between a bank and companies with which it
is affiliated. These provisions limit extensions of credit (including guarantees
of loans) by the Bank to affiliates, investments in the stock or other
securities of the Company by the Bank, and the nature and amount of collateral
that the Bank may accept from any affiliate to secure loans extended to the
affiliate.
REGULATION OF THE BANK
Texas State Bank is a state-chartered bank subject to regulation by the
Texas Department of Banking. The Bank, whose deposits are insured by the Bank
Insurance Fund (the "BIF") of the FDIC, is also a member of the Federal Reserve
System, and therefore the FRB is the primary federal regulator for the Bank.
The requirements and restrictions applicable to the Bank under laws of the
United States and the State of Texas include (i) the requirement that reserves
be maintained, (ii) restrictions on the nature and amount of loans which can be
made, (iii) restrictions on the business activities in which the Bank may
engage, (iv) restrictions on the payment of dividends to shareholders, and (v)
the maintenance of minimum capital requirements.
The Company is dependent upon dividends received from the Bank for
discharge of the Company's obligations and for payment of dividends to the
Company's shareholders. However, the application of minimum capital requirements
and other rules and regulations applicable to the Bank restrict the amount of
dividends that it may declare without prior regulatory approval. The Texas
Banking Department and the FRB can each further limit payment of dividends if
the regulatory authority finds that the payment of dividends would constitute an
unsafe or unsound practice. Except to absorb losses in excess of undivided
profits and uncertified surplus, such certified surplus may not be reduced
without the prior written consent of the Banking Commissioner.
The laws of the State of Texas primarily govern interest rate limitations
for the Bank. The maximum annual interest rate that may be charged on most loans
made by the Bank is based on doubling the average auction rate, to the nearest
0.25%, for United States Treasury Bills, as computed by the Office of Consumer
Credit Commissioner of the State of Texas. However, the maximum rate does not
decline below 18% or rise above 24% (except for loans in excess of $250,000 that
are made for business, commercial, investment or other similar purposes
(excluding agricultural loans), in which case the maximum annual rate may not
rise above 28%, rather than 24%). On fixed rate closed-end loans, the maximum
non-usurious rate is to be determined at the time the rate is contracted; while
on floating rate and open-end loans (such as credit cards), the rate varies over
the term of the indebtedness. Federal law has preempted state usury laws (but
not late charge limitations) for loans secured by a first lien on residential
real property.
<PAGE>
Banks are affected by the credit policies of other monetary authorities,
including the FRB, which regulate the national supply of bank credit. Such
regulation influences overall growth of bank loans, investments, and deposits
and may also affect interest rates charged on loans and paid on deposits. The
monetary policies of the FRB have had a significant effect on the operating
results of commercial banks in the past and are expected to continue to do so in
the future.
FDICIA
FDICIA requires that federal bank regulatory authorities take "prompt
corrective action" with respect to any depository institution that does not meet
specified minimum capital requirements. The applicable regulations establish
five capital levels which require or permit the FRB and other regulatory
authorities to take supervisory action. The relevant classifications range from
"well capitalized" to "critically undercapitalized". Under these regulations, an
institution is considered well capitalized if it has a total risk-based capital
ratio of 10.0% or greater, a Tier I risk-based capital ratio of 6.0% or greater,
and a leverage ratio of 5.0% or greater, and it is not subject to an order,
written agreement, capital directive, or prompt corrective action directive to
meet and maintain a specific capital level for any capital measure. An
institution is considered adequately capitalized if it has a total risk-based
capital ratio of 8.0% or greater, a Tier I risk-based capital ratio of 4.0% or
greater and a leverage capital ratio of 3.0% or greater (if the institution is
rated composite 1 in its most recent report of examination, subject to
appropriate federal banking agency guidelines), and the institution does not
meet the definition of a well capitalized institution. An institution is
considered undercapitalized if it has a total risk-based capital ratio that is
less than 8.0%, a Tier I risk-based capital ratio that is less than 4.0%, or a
leverage ratio that is less than 4.0% (or a leverage ratio that is less than
3.0% if the institution is rated composite 1 in its most recent report of
examination, subject to appropriate federal banking agency guidelines). A
significantly undercapitalized institution is one which has a total risk-based
capital ratio that is less than 6.0%, a Tier I risk-based capital ratio that is
less than 3.0%, or a leverage ratio that is less than 3.0%. A critically
undercapitalized institution is one that has a ratio of tangible equity to total
assets that is equal to or less than 2.0%.
The FRB is authorized by the legislation to take various enforcement
actions against any significantly undercapitalized institution and any
undercapitalized institution that fails to submit an acceptable capital
restoration plan or fails to implement a plan accepted by the appropriate
agency. These powers include, among other things, requiring the institution to
be recapitalized, prohibiting asset growth, restricting interest rates paid,
requiring prior approval of capital distributions by any bank holding company
which controls the institution, requiring divestiture by the institution of its
subsidiaries or by the holding company of the institution itself, requiring a
new election of directors, and requiring the dismissal of directors and
officers. If imposed these restrictions, either individually or in aggregate,
could have a significantly adverse impact on the operations of the Bank.
With certain exceptions, an institution will be prohibited from making
capital distributions or paying management fees if the payment of such
distributions or fees will cause the institution to become undercapitalized.
Furthermore, undercapitalized institutions will be required to file capital
restoration plans with the appropriate federal regulator. Pursuant to FDICIA,
undercapitalized institutions also will be subject to restrictions on growth,
acquisitions, branching and engaging in new lines of business unless they have
an approved capital plan that permits otherwise. The FRB also may, among other
things, require an undercapitalized institution to issue shares or obligations,
which could be voting stock, to recapitalize the institution or, under certain
circumstances to divest itself of any subsidiary.
Critically undercapitalized institutions may be subject to more extensive
control and supervision and the FRB may prohibit any critically undercapitalized
institution from, among other things, entering into any material transaction not
in the ordinary course of business, amending its charter or bylaws, or engaging
in certain transactions with affiliates. In addition, critically
undercapitalized institutions generally will be prohibited from making payments
of principal or interest on outstanding subordinated debt. Within 90 days of an
institution becoming critically undercapitalized, the FRB must appoint a
receiver or
<PAGE>
conservator unless certain findings are made with respect to the prospect for
the institution's continued operation.
Management believes that the Company meets all capital adequacy
requirements to which it is subject at December 31, 1998. The Bank's capital
ratios exceeded the minimum requirements for "well capitalized" institutions
under the regulatory framework for prompt corrective action at December 31,
1998. As a result, the Company does not believe that FDICIA's prompt corrective
action regulations will have any material effect on the activities or operations
of the Bank.
FDICIA also requires the FDIC to establish a schedule to increase (over a
period of not more than 15 years) the reserve ratio of the BIF, which insures
deposits of Texas State Bank, to 1.25% of insured deposits, and impose higher
deposit insurance premiums on BIF members, if necessary, to achieve that ratio.
FDICIA also requires a risk-based assessment system for deposit insurance
premiums commencing January 1, 1994. Since BIF reached its designated reserve
ratio in mid-1995, the FDIC adjusted the BIF assessments, so that the assessment
rate now in effect ranges from a minimum of zero to a maximum of $0.27 per $100
of deposits.
FDICIA contains numerous other provisions, including accounting, auditing
and reporting requirements, the termination of the "too big to fail" doctrine
except in special cases, regulatory standards in areas such as asset quality,
earnings and compensation, and revised regulatory standards for the powers of
state chartered banks, real estate lending, bank closures and capital adequacy.
The Deposit Insurance Funds Act of 1996 (the "Funds Act") was enacted on
September 30, 1996. Among its provisions, the Funds Act authorizes the Financing
Corporation (the "FICO") to impose periodic assessments on depository
institutions that are members of BIF in addition to institutions that are
members of the Savings Association Insurance Fund (the "SAIF") in order to
spread the cost of the interest payments on the outstanding FICO bonds over a
larger number of institutions. Until this change in the law, only SAIF-member
institutions bore the cost of funding these interest payments. Thus, BIF-member
institutions will share in the cost of financing outstanding FICO bonds. An
institution's FICO assessments will fluctuate based on a defined rate applied to
deposits held in periods after the date the legislation was enacted. Currently,
the FICO BIF annual rate is 1.2 cents for each $100 of qualified deposits.
ACQUISITIONS
The BHC Act generally limits acquisitions by the Company to commercial
banks and companies engaged in activities that the Federal Reserve Board has
determined to be so closely related to banking as to be a proper incident
thereto. The Company's direct activities are generally limited to furnishing to
its subsidiaries services that qualify under the prescribed regulatory tests.
Prior Federal Reserve Board approval is required under the BHC Act for new
activities and acquisitions of most nonbanking companies.
The BHC Act, the Federal Bank Merger Act, and the Texas Banking Code
regulate the acquisition of commercial banks. The BHC Act requires the prior
approval of the Federal Reserve Board for the direct or indirect acquisition of
more than five percent of the voting shares of a commercial bank or bank holding
company. With respect to the Company's subsidiary bank, the approval of the
Texas Department of Banking is required for branching, purchasing the assets of
other banks and for bank mergers.
In reviewing bank acquisition and merger applications, the bank regulatory
authorities will consider, among other things, the competitive effect and public
benefits of the transactions, the capital position of the combined organization,
and the applicant's record under the Community Reinvestment Act and fair housing
laws.
<PAGE>
The Corporation regularly evaluates acquisition opportunities and
regularly conducts due diligence activities in connection with possible
acquisitions. As a result, acquisition discussions and, in some cases
negotiations, regularly take place and future acquisitions could occur.
INTERSTATE BANKING AND BRANCHING LEGISLATION
The Riegle-Neal Interstate Branching Efficiency Act of 1994 ("IBBEA"),
authorizes interstate acquisitions of banks and bank holding companies without
geographic limitation beginning one year after enactment. In addition, beginning
June 1, 1997 IBBEA authorizes a bank to merge with a bank in another state as
long as neither of the states has opted out of interstate branching between the
date of enactment of IBBEA and May 31, 1997. IBBEA further provides that states
may enact laws permitting interstate bank merger transactions prior to June 1,
1997. A bank may establish a de novo branch in a state in which the bank does
not maintain a branch if the state expressly permits de novo branching. Once a
bank has established branches in a state through an interstate merger
transaction, the bank may establish and acquire additional branches at any
location in the state where any bank involved in the merger transaction could
have established or acquired branches under applicable federal or state law. A
bank that has established a branch in a state through de novo branching may
establish and acquire additional branches in such state in the same manner and
to the same extent as a bank having a branch in such state as a result of an
interstate merger. If a state opts out of interstate branching within the
specified time period, no bank in any other state may establish a branch in the
opting out state, whether through an acquisition or de novo. On August 28, 1995,
Texas enacted legislation opting out of interstate branching.
ECONOMIC ENVIRONMENT
The earnings of the Bank are affected not only by general economic
conditions but also by the policies of various governmental regulatory
authorities. The FRB regulates the supply of credit in order to influence
general economic conditions, primarily through open market operations in United
States government obligations, varying the discount rate of financial
institution borrowings, varying reserve requirements against financial
institutions and their subsidiaries. The deregulation of interest rates has had
and is expected to continue to have an impact on the competitive environment in
which the Bank operates.
Governmental policies have had a significant effect on the operating
results of commercial banks in the past and are expected to continue to do so in
the future. However, the Company cannot accurately predict the nature or extent
of any effect that such policies may have on its future business and earnings.
PERSONNEL
The Company employed 727 full-time equivalent employees at December 31,
1998. Employees enjoy a variety of employee benefit programs, including an
employee stock ownership plan with 401(k) provisions, medical, accident, group
life and long-term disability plans, and paid vacations. The Company's employees
are not unionized, and management believes employee relations to be favorable.
ITEM 2. PROPERTIES
The executive offices of the Company, as well as the principal banking
quarters of Texas State Bank, are housed in an eleven-story office tower located
in McAllen, Texas. This new building, completed during 1998, also includes space
for lease to third party tenants and for future growth. The Company also owns
the Kerria Plaza building, adjacent to the new headquarters building, and leases
space to third party tenants.
<PAGE>
All of the Company's banking locations are owned, except for the Roma,
Texas banking location. The Brownsville, Edinburg, Harlingen, Hidalgo, McAllen,
Mission, Penitas and Weslaco, Texas banking locations include extensive
drive-through facilities.
Management believes that it will be desirable in the future to consider
the establishment of additional banking locations.
ITEM 3. 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 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
None
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS.
Since March 1994, the Corporation's Class A Voting Common Stock has traded
on The Nasdaq Stock Market(R) under the symbol TRBS. The following table shows
(i) high and low prices of the Common Stock as provided to the Company by The
Nasdaq Stock Market(R) for transactions occurring on The Nasdaq Stock Market
during the past two years, and (ii) the total number of shares involved in such
transactions.
The following information has been restated to retroactively give effect
to the three-for-two stock split declared and distributed by the Corporation
during the third quarter of 1997.
Price Per Share Cash
--------------------- Dividends Volume
Quarter Ended High Low Declared Traded
- ------------------------------------------------------------------------------
March 31, 1997 ...... $ 24.50 $ 21.17 $ 0.07 926,227
June 30, 1997 ....... 30.25 19.00 0.07 1,371,797
September 30, 1997... 31.50 24.50 0.11 1,691,818
December 31, 1997.... 31.50 26.00 0.11 1,049,074
March 31, 1998 ...... 35.63 27.00 0.11 1,897,668
June 30, 1998 ....... 35.13 29.25 0.11 1,421,623
September 30, 1998... 34.00 21.00 0.13 1,824,207
December 31, 1998.... 27.38 17.00 0.13 2,416,388
- ------------------------------------------------------------------------------
On December 31, 1998, there were 961 holders of record of the
Corporation's Class A Common Stock.
During the two years ended December 31, 1998, an aggregate of 57,500
shares purchased by the Texas Regional Bancshares, Inc. Employee Stock Ownership
Plan (with 401(k) provisions) are included in the foregoing table.
The final determination of the timing, amount and payment of dividends on
the Common Stock is at the discretion of the Company's Board of Directors. There
can be no assurance as to future dividends because they are dependent on future
earnings, capital requirements and financial conditions. The Company's principal
source of the funds to pay dividends on the Common Stock is dividends from Texas
<PAGE>
State Bank. The payment of dividends by the Bank is subject to certain
restrictions imposed by federal and state banking laws, regulations and
authorities. At December 31, 1998, an aggregate of $48.8 million was available
for payment of dividends by the Bank to the Company under the applicable
limitations and without regulatory approval.
ITEM 6. SELECTED FINANCIAL DATA
The following table sets for selected consolidated financial data for the
Company and its subsidiaries for, and as of, each of the years in the five-year
period ended December 31, 1998. This selected financial data has been derived
from the consolidated financial statements and accounting records of the
Company. The data presented below should be read in conjunction with the
consolidated financial statements, related notes and other financial information
included herein:
<TABLE>
<CAPTION>
Years Ended December 31,
(Dollars in Thousands, Except Per Share Data) 1998 1997 1996 1995 1994
- -----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Summary of Operations
Interest Income ............................. $ 125,649 $ 112,745 $ 88,075 $ 55,193 $ 43,472
Interest Expense ............................ 58,384 50,618 37,494 22,071 14,994
- -----------------------------------------------------------------------------------------------------------------------------
Net Interest Income ......................... 67,265 62,127 50,581 33,122 28,478
Provision for Loan Losses ................... 9,729 2,947 2,173 1,705 1,105
Noninterest Income .......................... 17,663 12,972 10,656 7,683 7,105
Noninterest Expense ......................... 41,102 37,170 32,096 23,065 20,773
- -----------------------------------------------------------------------------------------------------------------------------
Income Before Income Tax Expense ............ 34,097 34,982 26,968 16,035 13,705
Income Tax Expense .......................... 11,623 11,860 8,794 5,515 4,841
- -----------------------------------------------------------------------------------------------------------------------------
Net Income .................................. $ 22,474 $ 23,122 $ 18,174 $ 10,520 $ 8,864
- -----------------------------------------------------------------------------------------------------------------------------
Per Common Share Data
Net Income - Basic .......................... $ 1.56 $ 1.61 $ 1.40 $ 0.99 $ 0.89
Net Income - Diluted ........................ 1.54 1.58 1.38 0.99 0.89
Book Value at Year-End ...................... 12.31 11.22 9.98 7.27 6.38
Cash Dividends .............................. 0.47 0.40 0.29 0.29 0.14
Average Shares Outstanding (in Thousands)
Basic ............................... 14,409 14,378 12,943 10,583 9,962
Diluted ............................. 14,634 14,610 13,124 10,620 9,979
Year-End Balance Sheet Data
Total Assets ................................ $1,762,329 $1,538,769 $1,370,809 $ 778,359 $ 663,675
Loans ....................................... 1,089,505 951,316 818,598 511,414 398,606
Securities .................................. 470,267 416,921 371,002 182,761 185,448
Interest-Earning Assets ..................... 1,592,325 1,387,322 1,214,875 706,985 589,059
Deposits .................................... 1,562,942 1,362,783 1,215,636 685,810 589,909
Shareholders' Equity ........................ 177,468 161,555 143,313 76,990 67,543
Performance Ratios
Return on Average Assets .................... 1.36% 1.61% 1.59% 1.49% 1.39%
Return on Average Shareholders' Equity ...... 13.10 15.13 15.60 14.44 14.22
Net Interest Margin ......................... 4.61 4.89 5.06 5.21 4.99
Loan to Deposit Ratio ....................... 69.71 69.81 67.34 74.57 67.57
Demand Deposit to Total Deposit Ratio ....... 15.01 15.29 15.73 20.28 20.59
Asset Quality Ratios
Nonperforming Assets as a % of Total
Loans and Foreclosed Assets ......... 1.44% 1.22% 0.97% 0.82% 1.41%
Net Charge-Offs (Recoveries) to Average
Total Loans Outstanding,
Net of Unearned Discount .... 0.79 0.28 0.20 0.23 0.29
Allowance for Loan Losses as a Percentage of:
Loans ............................... 1.21 1.19 1.32 1.05 1.07
Nonperforming Loans ................. 127.10 135.14 158.87 220.24 143.28
Nonperforming Assets ................ 83.87 96.62 136.39 128.31 75.66
Capital Ratios at Year-End
Equity to Assets Ratio ...................... 10.07% 10.50% 10.45% 9.89% 10.18%
Tier I Capital Ratio ........................ 12.92 13.60 13.83 13.24 15.86
Total Capital Ratio ......................... 14.06 14.73 15.11 14.24 16.87
Leverage Capital Ratio ...................... 8.85 9.21 8.78 9.29 10.19
=============================================================================================================================
</TABLE>
<PAGE>
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
The following analysis of the financial condition and results of
operations of the Company should be read in conjunction with the Company's
Consolidated Financial Statements and Notes thereto and the other financial data
included herein. The ratios and percentages set forth below are calculated using
the detailed financial information contained in the Consolidated Financial
Statements and the Notes thereto, and the financial data included elsewhere in
this Form 10-K.
SELECTED CONSOLIDATED FINANCIAL INFORMATION
Net income for the year ended December 31, 1998 was $22.5 million, reflecting a
net decrease of $648,000 or a 2.8% decrease compared to net income of $23.1
million for the year ended December 31, 1997. The earnings per diluted common
share of $1.54 for the year ended December 31, 1998 decreased $0.04 or 2.5%
compared to the earnings per diluted common share of $1.58 for the year ended
December 31, 1997. Earnings performance for the year ended December 31, 1998
reflected gains in net interest income and an increase in noninterest income.
However, an increase in provision for loan losses and noninterest expenses
offset these positive factors. A more detailed description of the results of
operations is included in the material that follows.
On February 19, 1998, Texas Regional Bancshares, Inc., (the "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 shares of Brownsville Bancshares, Inc.
and cancellation of outstanding stock options. Brownsville National Bank merged
with and into Texas State Bank (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 308,039 shares of Company stock for all of the
outstanding shares of TB&T Bancshares, Inc., a portion of which are retained in
a holdback escrow account pending resolution of certain claims. Texas Bank and
Trust of Brownsville merged with and into Texas State 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 $63.7 million, equity of $5.1 million, loans of $25.5 million, and
deposits of $56.5 million. Bank of Texas was merged with and into Texas State
Bank.
The 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 year
ended December 31, 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.
<PAGE>
ANALYSIS OF RESULTS OF OPERATIONS
NET INTEREST INCOME
Net interest income is the difference between interest income earned on assets
and interest expense incurred for the funds supporting those assets. The largest
category of earning assets consists of loans. The second largest category of
earning assets is securities, followed by federal funds sold. For analytical
purposes, income from tax-exempt assets, primarily securities issued by state
and local governments or authorities, is adjusted by an increment which equates
tax-exempt income to interest from taxable assets.
Earning assets are financed by consumer and commercial deposits and short-term
borrowings. In addition to these interest-bearing funds, assets also are
supported by interest-free funds, primarily demand deposits and shareholders'
equity. Variations in the volume and mix of assets and liabilities, and their
relative sensitivity to interest rate movements, determine changes in net
interest income.
Taxable-equivalent net interest income was $68.7 million for the year ended
December 31, 1998, an increase of $5.1 million or 7.9% compared to the year
ended December 31, 1997, and taxable-equivalent net interest income of $63.7
million for the year ended December 31, 1997, increased $11.4 million or 21.9%
compared to the year ended December 31, 1996. Both net interest income and the
yield on earning assets were reduced by interest foregone on nonaccrual and
renegotiated loans. If interest on those loans had been accrued at the original
contractual rates, additional interest income would have approximated $2.2
million, $1.6 million and $807,000 for the years ended December 31, 1998, 1997
and 1996, respectively.
The net yield on total interest-earning assets, also referred to as net interest
margin, represents net interest income divided by average interest-earning
assets. Since a significant portion of the Company's funding is derived from
interest-free sources, primarily demand deposits and shareholders' equity, the
effective rate paid for all funds is lower than the rate paid on
interest-bearing liabilities alone. The net interest margin of 4.61% for the
year ended December 31, 1998 decreased 28 basis points compared to 4.89% for the
year ended December 31, 1997 while the net interest margin of 4.89% for the year
ended December 31, 1997 decreased 17 basis points compared to 5.06% for the year
ended December 31, 1996.
The decrease in the interest margin for the year ended December 31, 1998
reflected decreases in the rates earned on interest-earnings assets. The yield
on interest-earning assets of 8.52% for the year ended December 31, 1998
decreased 26 basis points compared to 8.78% for the year ended December 31, 1997
and yield on interest-earning assets of 8.78% for the year ended December 31,
1997 increased 8 basis points compared to 8.70% for the year ended December 31,
1996. The mix of average interest-earning assets for the year ended December 31,
1998 compared to the year ended December 31, 1997 was changed by total average
loans of $1.0 billion increasing $147.7 million or 16.9%, total average
securities of $432.8 million increasing $46.5 million or 12.1% and average
federal funds sold of $33.6 million decreasing $6.0 million or 15.2%. The
decrease in loan yield for 1998 reflects lower market rates in response to
recent Federal Reserve Bank actions and continued strong competition from local
financial institutions and, to a lesser extent, the charge-off of $900,000 in
interest income on agricultural loans during the three months ended September
30, 1998. The decrease in loan yield for 1997 reflects the general decrease in
average interest rates in 1997 compared to 1996. The decrease in securities
yield for the year ended December 31, 1998 resulted from sales and maturities of
higher yielding securities and reinvestment at lower rates. The increase in
securities yield in 1997 compared to 1996 resulted from lower yielding
securities maturing and the reinvesting of the proceeds into higher yields.
The rate paid on interest-bearing liabilities of 4.67% for the year ended
December 31, 1998 did not change from the year ended December 31, 1997 and the
rate on interest-bearing liabilities of 4.67% for the year ended December 31,
1997 increased 24 basis points compared to 4.43% for the year ended December 31,
1996. The rate paid on interest-bearing liabilities during 1998 did not change
due to competition from local financial institutions and time deposit
maturities, which prevent the Company from rapidly lowering deposit rates. The
increase in the rate paid on interest-bearing liabilities during 1997 resulted
from the general increase in average short-term interest rates and increased
competition from local financial institutions.
The following table presents for the last three calendar years the total dollar
amount of interest income from average interest-earning assets and the resultant
yields, reported on a tax-equivalent basis, and 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 1998, 1997,
and 1996.
<PAGE>
<TABLE>
<CAPTION>
Three-Year Financial Summary
Years Ended December 31,
--------------------------------------------------------------------------------------
1998 1997
------------------------------------------- ----------------------------------------
Taxable-Equivalent Basis(1) Average Yield/ Average Yield/
(Dollars in Thousands) Balance Interest Rate Balance Interest Rate
- ---------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Assets
Interest-Earning Assets
Loans
Commercial ............. $ 355,014 $ 32,085 9.04% $ 303,683 $ 29,398 9.68%
Real Estate ............ 556,800 54,158 9.73 489,611 48,650 9.94
Consumer ............... 111,713 11,474 10.27 82,545 8,615 10.44
- ---------------------------------------------------------------------------------------------------------------------------------
Total Loans .... 1,023,527 97,717 9.55 875,839 86,663 9.89
- ---------------------------------------------------------------------------------------------------------------------------------
Securities
Taxable ................ 402,457 25,138 6.25 359,898 23,124 6.43
Tax-Exempt ............. 30,310 2,357 7.78 26,323 2,303 8.75
- ---------------------------------------------------------------------------------------------------------------------------------
Total Securities 432,767 27,495 6.35 386,221 25,427 6.58
- ---------------------------------------------------------------------------------------------------------------------------------
Time Deposits .................. 1,300 76 5.85 242 14 5.79
- ---------------------------------------------------------------------------------------------------------------------------------
Federal Funds Sold ............. 33,617 1,829 5.44 39,657 2,195 5.53
- ---------------------------------------------------------------------------------------------------------------------------------
Total Interest-
Earning Assets . 1,491,211 127,117 8.52 1,301,959 114,299 8.78
- ---------------------------------------------------------------------------------------------------------------------------------
Cash and Due from Banks ................ 54,531 55,515
Premises and Equipment,
Net ............................ 64,937 43,728
Other Assets ........................... 55,863 49,840
Allowance for
Loan Losses .................... (12,410) (11,086)
- ---------------------------------------------------------------------------------------------------------------------------------
Total Assets ... $ 1,654,132 $ 1,439,956
=================================================================================================================================
Liabilities
Interest-Bearing Liabilities
Savings ........................ $ 105,243 2,986 2.84 $ 101,903 3,235 3.17
Money Market Checking
and Savings ............ 258,885 7,521 2.91 241,765 7,142 2.95
Time Deposits .................. 879,379 47,590 5.41 738,643 40,189 5.44
- ---------------------------------------------------------------------------------------------------------------------------------
Total Savings and
Time Deposits .. 1,243,507 58,097 4.67 1,082,311 50,566 4.67
- ---------------------------------------------------------------------------------------------------------------------------------
Federal Funds Purchased
and Securities Sold
Under Repurchase
Agreements ............. 5,772 287 4.97 988 52 5.26
- ---------------------------------------------------------------------------------------------------------------------------------
Total Interest-Bearing
Liabilities .... 1,249,279 58,384 4.67 1,083,299 50,618 4.67
- ---------------------------------------------------------------------------------------------------------------------------------
Demand Deposits ........................ 218,708 192,131
Other Liabilities ...................... 14,524 11,694
- ---------------------------------------------------------------------------------------------------------------------------------
Total Liabilities ...... 1,482,511 1,287,124
- ---------------------------------------------------------------------------------------------------------------------------------
Shareholders' Equity ................... 171,621 152,832
- ---------------------------------------------------------------------------------------------------------------------------------
Total Liabilities and
Shareholders'
Equity ......... $ 1,654,132 $ 1,439,956
=================================================================================================================================
Net Interest Income .................... $ 68,733 $ 63,681
=================================================================================================================================
Net Yield on Total Interest-
Earning Assets ................. 4.61% 4.89%
=================================================================================================================================
</TABLE>
<TABLE>
<CAPTION>
Three-Year Financial Summary
Years Ended December 31,
---------------------------------------------
1996
---------------------------------------------
Taxable-Equivalent Basis(1) Average Yield/
(Dollars in Thousands) Balance Interest Rate
- ----------------------------------------------------------------------------------------
<S> <C> <C> <C>
Assets
Interest-Earning Assets
Loans
Commercial ............. $ 240,056 $ 22,177 9.24%
Real Estate ............ 375,328 38,828 10.35
Consumer ............... 65,146 6,774 10.40
- ----------------------------------------------------------------------------------------
Total Loans .... 680,530 67,779 9.96
- ----------------------------------------------------------------------------------------
Securities
Taxable ................ 285,021 17,355 6.09
Tax-Exempt ............. 28,067 2,551 9.09
- ----------------------------------------------------------------------------------------
Total Securities 313,088 19,906 6.36
- ----------------------------------------------------------------------------------------
Time Deposits .................. 219 10 4.57
- ----------------------------------------------------------------------------------------
Federal Funds Sold ............. 38,263 2,054 5.37
- ----------------------------------------------------------------------------------------
Total Interest-
Earning Assets . 1,032,100 89,749 8.70
- ----------------------------------------------------------------------------------------
Cash and Due from Banks ................ 50,039
Premises and Equipment,
Net ............................ 33,256
Other Assets ........................... 37,692
Allowance for
Loan Losses .................... (8,925)
- ----------------------------------------------------------------------------------------
Total Assets ... $ 1,144,162
========================================================================================
Liabilities
Interest-Bearing Liabilities
Savings ........................ $ 88,150 2,754 3.12
Money Market Checking
and Savings ............ 223,855 6,277 2.80
Time Deposits .................. 533,774 28,441 5.33
- ----------------------------------------------------------------------------------------
Total Savings and
Time Deposits .. 845,779 37,472 4.43
- ----------------------------------------------------------------------------------------
Federal Funds Purchased
and Securities Sold
Under Repurchase
Agreements ............. 507 22 4.34
- ----------------------------------------------------------------------------------------
Total Interest-Bearing
Liabilities .... 846,286 37,494 4.43
- ----------------------------------------------------------------------------------------
Demand Deposits ........................ 171,501
Other Liabilities ...................... 9,868
- ----------------------------------------------------------------------------------------
Total Liabilities ...... 1,027,655
- ----------------------------------------------------------------------------------------
Shareholders' Equity ................... 116,507
- ----------------------------------------------------------------------------------------
Total Liabilities and
Shareholders'
Equity ......... $ 1,144,162
========================================================================================
Net Interest Income .................... $ 52,255
========================================================================================
Net Yield on Total Interest-
Earning Assets ................. 5.06%
========================================================================================
</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 which equates tax-exempt income to interest from
taxable assets (assuming a 35% effective federal income tax rate for 1998,
1997, and 1996).
<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.
<TABLE>
<CAPTION>
Taxable-Equivalent Basis(1)
Year Ended December 31, Due to Change in
1998 Compared to 1997 Net ----------------------------------
(Dollars in Thousands) Change Volume Rate Rate/Volume
- -----------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Interest Income
Loans, Including Fees .......... $ 11,054 $ 14,606 $ (2,978) $ (574)
Securities
Taxable ................ 2,014 2,737 (648) (75)
Tax-Exempt ............. 54 (349) (255) (40)
Time Deposits .................. 62 61 -- 1
Federal Funds Sold ............. (366) (334) (36) 4
- -----------------------------------------------------------------------------------------
Total Interest Income .. 12,818 17,419 (3,917) (684)
- -----------------------------------------------------------------------------------------
Interest Expense
Deposits ....................... 7,531 7,528 -- 3
Federal Funds Purchased and
Securities Sold Under
Repurchase Agreements .. 235 252 (3) (14)
- -----------------------------------------------------------------------------------------
Total Interest Expense . 7,766 7,780 (3) (11)
- -----------------------------------------------------------------------------------------
Net Interest Income Before Allocation of
Rate/Volume .................... 5,052 9,639 (3,914) (673)
- -----------------------------------------------------------------------------------------
Allocation of Rate/Volume .............. -- (545) (128) 673
- -----------------------------------------------------------------------------------------
Changes in Net Interest Income ......... $ 5,052 $ 9,094 $ (4,042) $ --
=========================================================================================
</TABLE>
<TABLE>
<CAPTION>
Taxable-Equivalent Basis(1)
Year Ended December 31, Due to Change in
1997 Compared to 1996 Net ----------------------------------
(Dollars in Thousands) Change Volume Rate Rate/Volume
- -----------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Interest Income
Loans, Including Fees .......... $ 18,884 $ 19,453 $ (476) $ (93)
Securities
Taxable ................ 5,769 4,560 969 240
Tax-Exempt ............. (248) (159) (95) 6
Time Deposits .................. 4 1 3 --
Federal Funds Sold ............. 141 75 61 5
- -----------------------------------------------------------------------------------------
Total Interest Income .. 24,550 23,930 462 158
- -----------------------------------------------------------------------------------------
Interest Expense
Deposits ....................... 13,094 10,478 2,030 586
Federal Funds Purchased and
Securities Sold Under
Repurchase Agreements .. 30 21 5 4
- -----------------------------------------------------------------------------------------
Total Interest Expense . 13,124 10,499 2,035 590
- -----------------------------------------------------------------------------------------
Net Interest Income Before Allocation of
Rate/Volume .................... 11,426 13,431 (1,573) (432)
- -----------------------------------------------------------------------------------------
Allocation of Rate/Volume .............. -- (380) (52) 432
- -----------------------------------------------------------------------------------------
Changes in Net Interest Income ......... $ 11,426 $ 13,051 $ (1,625) $ --
=========================================================================================
</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 which equates tax-exempt income to interest from taxable assets
(assuming a 35% effective federal income tax rate for 1998, 1997 and 1996).
<PAGE>
NET YIELD ON EARNING ASSETS
The following table presents net interest income, average earning assets and the
net yield by quarter for the past three years. Income and yield on earning
assets include amounts to convert tax-exempt income to a taxable-equivalent
basis, assuming a 35% effective federal income tax rate for 1998, 1997 and 1996.
<TABLE>
<CAPTION>
Net Yield on
Earning Assets Quarter
Taxable-Equivalent Basis(1) % Change ------------------------------------------------------
(Dollars in Thousands) Prior Year Year Fourth Third Second First
- -------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
1998
Net Interest Income .. 7.9% $ 68,733 $ 17,770 $ 16,261 $ 17,754 $ 16,948
Average Earning Assets 14.5 1,491,211 1,560,523 1,519,281 1,454,067 1,429,222
Net Yield ............ 4.61% 4.52% 4.25% 4.90% 4.81%
1997
Net Interest Income .. 21.9% $ 63,681 $ 16,174 $ 15,769 $ 16,240 $ 15,498
Average Earning Assets 26.1 1,301,959 1,366,149 1,322,415 1,265,715 1,252,776
Net Yield ............ 4.89% 4.70% 4.73% 5.15% 5.02%
1996
Net Interest Income .. 56.6% $ 52,255 $ 15,145 $ 15,450 $ 12,400 $ 9,260
Average Earning Assets 61.1 1,032,100 1,226,018 1,214,296 972,269 711,683
Net Yield ............ 5.06% 4.91% 5.06% 5.13% 5.23%
=============================================================================================================
</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 which equates tax-exempt income to interest from taxable assets
(assuming a 35% effective federal income tax rate for 1998, 1997 and 1996).
PROVISION FOR LOAN LOSSES
The Company recorded a provision for loan losses of $9.7 million for the year
ended December 31, 1998, compared to $2.9 million in the year ended December 31,
1997 and $2.2 million for the year ended December 31, 1996. Net charge-offs for
the year ended December 31, 1998 totaled $8.1 million compared to $2.5 million
for 1997 and $1.4 million for 1996. Charge offs of $5.5 million on agriculture
loans and loan growth of $138.2 million, to a lesser extent, factored heavily in
the increase of $6.8 million, or 230.1%, in the provision for loan losses for
the year ended December 31, 1998. The provision for loan losses reflected an
increase of $774,000 or 35.6% for the year ended December 31, 1997 due to loan
growth of $132.7 million during the year. 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."
NONINTEREST INCOME
Noninterest income totaled $17.7 million for the year ended December 31, 1998
compared to $13.0 million for 1997 and $10.7 million for 1996. Excluding net
realized gains on sales of securities available for sale, total noninterest
income increased $2.5 million or 20.6% from 1997 and $2.0 million or 19.3% from
1996. The noninterest income growth in 1998 and 1997 resulted primarily from the
increased volume of business conducted by the Company and, in part, because of
the Raymondville merger.
Total Service Charges of $10.1 million for the year ended December 31, 1998,
increased $1.5 million or 17.8% compared to $8.6 million for the year ended
December 31, 1997. Total Service Charges of $8.6 million for the year ended
December 31, 1997 increased $1.5 million or 20.8% compared to $7.1 million for
the year ended December 31, 1996. The increase in Total Service Charges for the
years ended December 31, 1998 and 1997 is attributable to increased account
transaction fees generated by deposit growth experienced by the Company and due
to the Raymondville merger.
Trust Service Fees of $1.8 million for the year ended December 31, 1998
increased $79,000 or 4.7% compared to $1.7 million for the year ended December
31, 1997. Trust Service Fees of $1.7 million for the year ended December 31,
1997
<PAGE>
increased $186,000 or 12.4% compared to $1.5 million for the year ended
December 31, 1996. The increase in Trust Service Fees in each of the years 1998
and 1997 is attributable to an increase in the number of trust accounts managed.
The fair market value of assets managed at December 31, 1998 of $328.7 million
increased $78.0 million or 31.1% compared to $250.8 million at December 31,
1997. 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 on Sales of Securities Available for Sale of $2.9 million for
the year ended December 31, 1998 increased $2.2 million or 296.5% compared to
$734,000 for 1997. Long-term interest rates reached or neared 30 year lows
during the latter half of 1998. This coupled with management's belief in the
fundamental underlying strength of the U.S., Texas and Rio Grande Valley
economies, presented an opportunity to realize some of the gains in the
securities available for sale portfolio. Net Realized Gains on Sales of
Securities Available for Sale totaled $734,000 for 1997 compared to $401,000 for
1996 as a result of sales designed to reduce asset sensitivity of callable bonds
and improve bond quality during 1997.
Data Processing Fees of $1.5 million for the year ended December 31, 1998
increased $435,000 or 40.3% compared to $1.1 million for the year ended December
31, 1997. This increase arose from the acquisition of additional banking clients
and increased utilization of services offered to existing clients during 1998.
Data Processing Fees of $1.1 million for the year ended December 31, 1997
increased $170,000 from $910,000 in 1996. The Company obtained two additional
banking clients during 1998 and none during 1997.
Other Operating Income of $1.3 million for the year ended December 31, 1998
increased $469,000 or 55.0% compared to $852,000 for the year ended December 31,
1997. Other Operating Income of $852,000 for the year ended December 31, 1997
increased $146,000 or 20.7% compared to $706,000 for 1996. The increase in Other
Operating Income for 1998 was primarily attributable to the increased volume of
deposit accounts and other business conducted by the Company.
A detailed summary of noninterest income during the last three years follows
below:
<TABLE>
<CAPTION>
Noninterest Income
Years Ended December 31, % Change From % Change From
(Dollars in Thousands) 1998 Prior Year 1997 Prior Year 1996
- -------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Service Charges on Deposit Accounts ........................ $ 8,025 14.5% $ 7,009 18.6% $ 5,911
Other Service Charges ...................................... 2,122 32.1 1,606 31.3 1,223
- -------------------------------------------------------------------------------------------------------------------
Total Service Charges .............................. 10,147 17.8 8,615 20.8 7,134
Trust Service Fees ......................................... 1,770 4.7 1,691 12.4 1,505
Net Realized Gains on Sales of Securities Available for Sale 2,910 296.5 734 83.0 401
Data Processing Service Fees ............................... 1,515 40.3 1,080 18.7 910
Other Operating Income ..................................... 1,321 55.0 852 20.7 706
- -------------------------------------------------------------------------------------------------------------------
Total .............................................. $17,663 36.2% $12,972 21.7% $10,656
===================================================================================================================
</TABLE>
NONINTEREST EXPENSE
Noninterest expense of $41.1 million for the year ended December 31, 1998
increased $3.9 million or 10.6% compared to $37.2 million for 1997. Noninterest
expense of $37.2 million for the year ended December 31, 1997 increased $5.1
million or 15.8% compared with $32.1 million for the year ended December 31,
1996. The increases for the years ended December 31, 1998 and 1997 were
primarily attributable to an increased volume of business conducted by the
Company and the Raymondville merger. Noninterest expense averaged 2.48% of total
assets for the year ended December 31, 1998 compared to 2.58% for the year ended
December 31, 1997 and 2.81% for the year ended December 31, 1996.
Salaries and Employee Benefits, the largest category of noninterest expense, of
$18.5 million for the year ended December 31, 1998 increased $834,000 or 4.7%
compared to the year ended December 31, 1997 levels of $17.7 million. Salaries
and Employee Benefits of $17.7 million for the year ended December 31, 1997
increased $1.5 million or 9.3% compared to the year ended December 31, 1996
levels of $16.2 million. Salaries and Employee Benefits increased for the year
ended December 31, 1998 primarily due to staffing increases, including the staff
acquired as a result of the Raymondville merger. Salaries and Employee Benefits
averaged 1.12% of total assets for the year ended December 31, 1998 compared to
1.23% for the year ended December 31, 1997 and 1.41% for the year ended December
31, 1996.
Net Occupancy Expense of $3.6 million for the year ended December 31, 1998
increased $944,000 or 35.1% compared to $2.7 million for 1997. Expenses
associated with the new corporate headquarters building in McAllen, Texas,
opened during 1998, contributed to the increase in Net Occupancy Expense during
the year ended December 31, 1998. Net Occupancy Expense of $2.7 million for the
year ended December 31, 1997 increased $355,000 or 15.2% when compared to Net
Occupancy Expense of $2.3 million for the year ended December 31, 1996. The
increase for the year ended December 31, 1997 is primarily attributable to the
occupancy expenses associated with mergers completed during 1996.
Equipment Expense of $4.6 million for the year ended December 31, 1998 increased
$821,000 or 21.7% compared to $3.8 million for 1997. Expenses associated with
the new corporate headquarters building contributed to the increase in Equipment
Expense during the year ended December 31, 1998. Equipment Expense of $3.8
million for the year ended December 31, 1997 increased $380,000 or 11.2% when
compared with $3.4 million for the year ended December 31, 1996. The Equipment
Expense increase incurred during the year ended December 31, 1997 is primarily
attributable to equipment obtained in mergers completed during 1996 and
equipment acquired to service the Company's increasing customer base.
<PAGE>
Other Real Estate (Income) 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. The category Other Real Estate (Income) Expense, Net reflects
net expense of $307,000 for the year ended December 31, 1998, which compares
unfavorably to net expense of $105,000 for the year ended December 31, 1997.
Other Real Estate (Income) Expense, Net of $105,000 for the year ended December
31, 1997 increased $198,000 or 212.9% compared to net income of $93,000 for the
year ended December 31, 1996. The net increase for the year ended December 31,
1998 is primarily attributable to higher volumes in Other Real Estate owned
offsetting increased operating income and gain on sale of foreclosed properties.
Management is actively seeking buyers for all Other Real Estate.
Amortization of Goodwill and Identifiable Intangibles of $2.7 million for the
year ended December 31, 1998 increased $408,000 or 18.1% compared to $2.3
million for 1997. Amortization of Goodwill and Identifiable Intangibles of $2.3
million for the year ended December 31, 1997 increased $659,000 or 41.4%
compared to $1.6 million for the year ended December 31, 1996. The increase in
Amortization of Goodwill and Identifiable Intangibles was due to the
amortization of goodwill and core deposit premiums associated with the 1998 and
1996 acquisitions.
An impairment loss of $630,000 was recorded during the three months ended June
30, 1997 to reflect the impairment of an existing bank building. The building
was razed to provide additional parking upon completion of a new building in
McAllen, Texas. The new bank building completed in 1998 serves as the
headquarters for Texas State Bank and Texas Regional Bancshares, Inc. The amount
of the impairment loss represented the book value of the building at June 30,
1997.
One Time Charge - Acquisitions of $728,000, related primarily to professional
fees and computer conversion cost resulting from the Company's 1998
acquisitions.
Other Noninterest Expense $10.7 million for the year ended December 31, 1998
increased $625,000 or 6.2% compared to $10.0 for 1997. Other Noninterest Expense
of $10.0 million for the year ended December 31, 1997 increased $1.3 million or
15.5% compared to $8.7 million for the year ended December 31, 1996. The
increase in Other Noninterest Expense for 1998 and 1997 was primarily
attributable to an increased volume of business, primarily due to the 1998 and
1996 acquisitions.
All Other Noninterest Expense categories, not previously discussed, reflect a
net increase for the year ended December 31, 1998 compared to the year ended
December 31, 1997 and was attributable to an increased volume of business.
The Efficiency Ratio of expense to total revenue averaged 48.86% for the year
ended December 31, 1998 compared to 48.82% for the year ended December 31, 1997
and 51.49% for the year ended December 31, 1996.
A detailed summary of noninterest expense during the last three years follows
below:
<TABLE>
<CAPTION>
Noninterest Expense
Years Ended December 31, % Change From % Change From
(Dollars in Thousands) 1998 Prior Year 1997 Prior Year 1996
- ----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Salaries and Wages ............................. $ 15,108 4.6% $ 14,442 11.2% $ 12,988
Employee Benefits .............................. 3,418 5.2 3,250 1.7 3,195
- ----------------------------------------------------------------------------------------------------------------
Total Salaries and Employee Benefits ........... 18,526 4.7 17,692 9.3 16,183
- ----------------------------------------------------------------------------------------------------------------
Net Occupancy Expense .......................... 3,631 35.1 2,687 15.2 2,332
- ----------------------------------------------------------------------------------------------------------------
Equipment Expense .............................. 4,599 21.7 3,778 11.2 3,398
- ----------------------------------------------------------------------------------------------------------------
Other Real Estate (Income) Expense, Net
Rent Income ............................ (154) 116.9 (71) (48.6) (138)
(Gain) Loss on Sale .................... (257) 123.5 (115) (43.4) (203)
Expenses ............................... 674 152.4 267 30.2 205
Write-Downs ............................ 44 83.3 24 (44.2) 43
- ----------------------------------------------------------------------------------------------------------------
Total Other Real Estate (Income)
Expense, Net ........... 307 192.4 105 (212.9) (93)
- ----------------------------------------------------------------------------------------------------------------
Amortization of Goodwill and Identifiable
Intangibles ............................ 2,660 18.1 2,252 41.4 1,593
- ----------------------------------------------------------------------------------------------------------------
Impairment Loss ................................ -- (100.0) 630 * --
- ----------------------------------------------------------------------------------------------------------------
One Time Charge - Acquisitions ................. 728 * -- * --
- ----------------------------------------------------------------------------------------------------------------
Other Noninterest Expense
Advertising and Public Relations ....... 1,536 12.0 1,372 6.2 1,292
Data Processing and Check Clearing ..... 1,183 5.6 1,120 (6.1) 1,193
Director Fees .......................... 333 (35.3) 515 (1.2) 521
Franchise Tax .......................... 600 12.6 533 89.7 281
Insurance .............................. 430 31.5 327 35.1 242
FDIC Insurance ......................... 166 10.7 150 63.0 92
Legal .................................. 1,255 19.5 1,050 47.1 714
Professional Fees ...................... 638 (17.7) 775 10.2 703
Postage, Delivery and Freight .......... 816 18.4 689 23.5 558
Stationery and Supplies ................ 1,325 25.5 1,056 4.0 1,015
Telephone .............................. 534 23.3 433 10.2 393
Other Losses ........................... 68 (91.9) 837 26.1 664
Miscellaneous Expense .................. 1,767 51.2 1,169 15.2 1,015
- ----------------------------------------------------------------------------------------------------------------
Total Other Noninterest Expense 10,651 6.2 10,026 15.5 8,683
- ----------------------------------------------------------------------------------------------------------------
Total .......................................... $ 41,102 10.6% $ 37,170 15.8% $ 32,096
================================================================================================================
* Not meaningful.
</TABLE>
<PAGE>
POSTRETIREMENT BENEFITS OTHER THAN PENSIONS
The Company provides the following postretirement benefits: (1) benefits
provided under the Texas Regional Bancshares, Inc. Employee Stock Ownership Plan
(with 401(k) provisions), (2) a nonqualified deferred compensation plan for the
benefit of Glen E. Roney, Chairman of the Board, President and Chief Executive
Officer, (3) four existing separate nonqualified deferred compensation plans for
the benefit of certain employees acquired through past mergers, (4) a 401 (k)
plan for the benefit of certain employees (limited to past contributions)
acquired through the Bank of Texas acquisition and (5) medical insurance on a
selected basis.
INCOME TAX
The Company recorded income tax expense of $11.6 million for the year ended
December 31, 1998 compared to $11.9 million for the year ended December 31,
1997. The decrease in income tax expense for the year ended December 31, 1998 is
due primarily to a decreased level of pretax income during the year ended
December 31, 1998.
NET INCOME
Net income was $22.5 million, $23.1 million and $18.2 million for the years
ended December 31, 1998, 1997 and 1996, respectively.
ANALYSIS OF FINANCIAL CONDITION
BALANCE SHEET COMPOSITION
The Company continues to experience growth in total assets, deposits and loans
attributable, in the opinion of management, to the vitality of the Rio Grande
Valley economy and due to the Raymondville merger. The continued devaluation of
the Mexican peso relative to the U.S. dollar has reduced retail sales to Mexican
nationals. However, the effects of NAFTA and the continued 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 does not
believe that the on-going Mexican financial problems will materially affect the
Company's growth and earnings prospects.
Average interest-earning assets of $1.5 billion increased $189.3 million or
14.5% for the year ended December 31, 1998 compared to $1.3 billion for the year
ended December 31, 1997 and increased $269.9 million or 26.1% compared to $1.0
billion for the year ended December 31, 1996. Average loans increased $147.7
million or 16.9% to $1.0 billion for the year ended December 31, 1998 compared
to December 31, 1997 levels of $875.8 million, while average securities of
$432.8 million increased $46.5 million or 12.1% for the year ended December 31,
1998 compared to December 31, 1997 levels of $386.2 million. Total average
assets increased $214.2 million or 14.9% to $1.7 billion for the year ended
December 31, 1998 compared to December 31, 1997 levels and $295.8 million or
25.9% to $1.4 billion for the year ended December 31, 1997 compared to December
31, 1996 levels of $1.1 billion.
Average interest-bearing deposits increased $161.2 million or 14.9% to $1.2
billion for the year ended December 31, 1998 compared to the year ended December
31, 1997 levels of $1.1 billion. Demand deposits also increased $26.6 million or
13.8% for the year ended December 31, 1998 to $218.7 million compared to the
year ended December 31, 1997 levels of $192.1 million.
<PAGE>
The following table presents the Company's average balance sheets during the
last three years:
<TABLE>
<CAPTION>
Average Balance Sheets
Years Ended December 31,
(Dollars in Thousands) 1998 1997 1996
- -------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Assets
Loans ............................................. $ 1,023,527 $ 875,839 $ 680,530
Securities
Taxable ................................... 402,457 359,898 285,021
Tax-Exempt ................................ 30,310 26,323 28,067
Time Deposits ..................................... 1,300 242 219
Federal Funds Sold ................................ 33,617 39,657 38,263
- -------------------------------------------------------------------------------------------------
Total Interest-Earning Assets ..... 1,491,211 1,301,959 1,032,100
Cash and Due From Banks ........................... 54,531 55,515 50,039
Bank Premises and Equipment, Net .................. 64,937 43,728 33,256
Other Assets ...................................... 55,863 49,840 37,692
Allowance for Loan Losses ......................... (12,410) (11,086) (8,925)
- -------------------------------------------------------------------------------------------------
Total ............................. $ 1,654,132 $ 1,439,956 $ 1,144,162
- -------------------------------------------------------------------------------------------------
Liabilities
Demand Deposits
Commercial and Individual ................. $ 212,488 $ 185,981 $ 165,409
Public Funds .............................. 6,220 6,150 6,092
- -------------------------------------------------------------------------------------------------
Total Demand Deposits ............. 218,708 192,131 171,501
- -------------------------------------------------------------------------------------------------
Savings
Commercial and Individual ................. 104,363 101,235 87,578
Public Funds .............................. 880 668 572
Money Market Checking and Savings
Commercial and Individual ................. 215,232 200,522 175,772
Public Funds .............................. 43,653 41,243 48,083
Time Deposits
Commercial and Individual ................. 691,913 610,211 475,059
Public Funds .............................. 187,466 128,432 58,715
- -------------------------------------------------------------------------------------------------
Total Interest-Bearing Deposits ... 1,243,507 1,082,311 845,779
- -------------------------------------------------------------------------------------------------
Total Deposits .................................... 1,462,215 1,274,442 1,017,280
Federal Funds Purchased and
Securities Sold Under Repurchase Agreements 5,772 988 507
Other Liabilities ................................. 14,524 11,694 9,868
Shareholders' Equity .............................. 171,621 152,832 116,507
- -------------------------------------------------------------------------------------------------
Total ............................. $ 1,654,132 $ 1,439,956 $ 1,144,162
=================================================================================================
</TABLE>
CASH AND DUE FROM BANKS
Texas State Bank, through its main office and branches, offers a broad range of
commercial banking services to individuals and businesses in its service area.
Texas State Bank 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 due from banks held on any one day is significantly influenced by
temporary changes in cash items in process of collection. At December 31, 1998,
cash and due from banks was $58.3 million.
<PAGE>
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 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 December 31, 1998, 1997 and 1996, 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 estimated market value of Securities Available for
Sale at December 31, 1998, 1997 and 1996:
<TABLE>
<CAPTION>
Securities Available for Sale % Change From % Change From
(Dollars in Thousands) 1998 Prior Year 1997 Prior Year 1996
- ----------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
U.S. Treasury ................... $ -- (100.0)% $ 7,002 (26.9)% $ 9,574
U.S. Government Agency .......... 313,970 13.0 277,764 62.1 171,345
Mortgage-Backed ................. 101,365 551.4 15,561 * 180
States and Political Subdivisions 36,988 77.0 20,898 (8.4) 22,811
Other ........................... 3,613 22.4 2,952 2.9 2,868
- ----------------------------------------------------------------------------------------------
Total ................... $455,936 40.6% $324,177 56.8% $206,778
==============================================================================================
</TABLE>
*Not meaningful.
The following table presents the maturities, amortized cost, estimated market
value and weighted average yields of the Securities Available for Sale at
December 31, 1998:
<TABLE>
<CAPTION>
Amortized Cost(1) Maturing
--------------------------------------------------------
After One After Five Estimated
Securities Available for Sale One Year Through Through After Amortized Market
(Dollars in Thousands) Or Less Five Years Ten Years Ten Years Cost(1) Value
- --------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
U.S. Government Agency .......... $ 12,603 $ 117,342 $ 181,880 $ 1,822 $ 313,647 $ 313,970
Mortgage-Backed ................. -- -- 9,263 92,407 101,670 101,365
States and Political Subdivisions 242 1,975 11,996 21,899 36,112 36,988
Other ........................... -- 125 250 3,187 3,562 3,613
- --------------------------------------------------------------------------------------------------------------------------
Total ................... $ 12,845 $ 119,442 $ 203,389 $ 119,315 $ 454,991 $ 455,936
==========================================================================================================================
Weighted Average Yields
(Taxable-Equivalent Basis)
- --------------------------------------------------------------------------------------------------------------------------
U.S. Government Agency .......... 5.35% 6.15% 6.22% 6.03% 6.16%
Mortgage-Backed ................. -- -- 5.92 6.09 6.07
States and Political Subdivisions 7.81 7.28 6.63 6.58 6.64
Other ........................... -- 7.60 6.45 5.75 5.86
- --------------------------------------------------------------------------------------------------------------------------
Total ................... 5.79% 6.22% 6.25% 6.17% 6.18%
==========================================================================================================================
</TABLE>
1 Amortized cost for Securities Available for Sale is stated at par plus any
remaining unamortized premium paid or less any remaining unamortized
discounts received.
<PAGE>
The following table presents amortized cost of Securities Held to Maturity at
December 31, 1998, 1997 and 1996:
<TABLE>
<CAPTION>
Securities Held to Maturity % Change From % Change From
(Dollars in Thousands) 1998 Prior Year 1997 Prior Year 1996
- ------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
U.S. Treasury ................... $ 10,013 (50.6)% $ 20,249 (54.9) $ 44,853
U.S. Government Agency .......... -- (100.0) 64,171 (41.4) 109,493
Mortgage-Backed Securities ...... -- (100.0) 750 (40.3) 1,257
States and Political Subdivisions 4,318 (42.2) 7,474 (12.3) 8,521
Other Securities ................ -- (100.0) 100 -- 100
- ------------------------------------------------------------------------------------------------
Total ................... $ 14,331 (84.5)% $ 92,744 (43.5) $164,224
================================================================================================
</TABLE>
All investments in states and political subdivisions are investments in entities
within the State of Texas. No single issuer accounted for as much as 10.0% of
total shareholders' equity at December 31, 1998. Of the obligations of states
and political subdivisions held by the Company at December 31, 1998, 70.4% were
rated A or better by Moody's Investor Services, Inc. and 56.7% of the non-rated
issues or $6.3 million are local issues purchased in private placement
transactions.
The following table presents the maturities, amortized cost, estimated market
value and weighted average yields of Securities Held to Maturity at December 31,
1998:
<TABLE>
<CAPTION>
Amortized Cost(1) Maturing
--------------------------------------------------
After One After Five Estimated
Securities Held to Maturity One Year Through Through After Amortized Market
(Dollars in Thousands) Or Less Five Years Ten Years Ten Years Cost(1) Value
- ----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
U.S. Treasury ................... $ 5,003 $ 5,010 $ -- $-- $ 10,013 $10,186
States and Political Subdivisions 799 2,113 1,406 -- 4,318 4,464
- ----------------------------------------------------------------------------------------------------------------
Total ................... $ 5,802 $ 7,123 $ 1,406 $-- $ 14,331 $14,650
================================================================================================================
Weighted Average Yields
(Taxable-Equivalent Basis)
- ----------------------------------------------------------------------------------------------------------------
U.S. Treasury ................... 6.56% 6.70% --% --% 6.63%
States and Political Subdivisions 7.35 8.15 9.57 -- 8.17
- ----------------------------------------------------------------------------------------------------------------
Total ................... 6.67% 7.13% 9.57% --% 7.18%
================================================================================================================
</TABLE>
(1) Amortized cost for Securities Held to Maturity is stated at par plus any
remaining unamortized premium paid or less any remaining unamortized
discount received.
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 by 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 devaluations 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.
<PAGE>
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. With
the completion of the Mergers, the Company has acquired 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 December 31,
1998 of $7.6 million were less than .7% of total loans. See "Nonperforming
Assets" for additional information on cross-border credits.
Total loans of $1.1 billion for the year ended December 31, 1998 increased
$138.2 million or 14.5% compared to the year ended December 31, 1997 levels of
$951.3 million and increased $132.7 million or 16.2% for the year ended December
31, 1997 compared to levels of $818.6 million at December 31, 1996. The increase
in total loans for the year ended December 31, 1998 is primarily attributable to
an increased volume of business conducted by the Company. The increase in total
loans for the year ended December 31, 1997 reflects growth in all loan
categories except Commercial Tax-Exempt loans and is representative in part to
the vitality of the Rio Grande Valley economy. A substantial portion of the
increase in loans classified as Real Estate-Commercial Mortgage loans consists
of loans secured by real estate and other assets to commercial customers. The
following table presents the composition of the loan portfolio at the end of
each of the last five years:
<TABLE>
<CAPTION>
Loan Portfolio Composition
December 31,
(Dollars in Thousands) 1998 1997 1996 1995 1994
- -----------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Commercial .................. $ 311,966 $ 249,819 $ 219,346 $ 131,006 $ 120,757
Commercial Tax-Exempt ....... 22,155 29,024 34,777 34,419 --
- -----------------------------------------------------------------------------------------------
Total Commercial Loans ...... 334,121 278,843 254,123 165,425 120,757
- -----------------------------------------------------------------------------------------------
Agricultural ................ 52,302 51,346 32,756 25,284 17,199
- -----------------------------------------------------------------------------------------------
Real Estate
Construction ........ 66,018 69,477 49,103 31,620 20,013
Commercial Mortgage . 354,134 304,215 259,041 146,584 128,979
Agricultural Mortgage 34,440 31,949 29,654 18,047 10,443
1-4 Family Mortgage . 128,945 122,043 116,485 75,911 64,792
- -----------------------------------------------------------------------------------------------
Total Real Estate ........... 583,537 527,684 454,283 272,162 224,227
- -----------------------------------------------------------------------------------------------
Consumer .................... 119,545 93,443 77,436 48,543 36,423
- -----------------------------------------------------------------------------------------------
Total Loans . $1,089,505 $ 951,316 $ 818,598 $ 511,414 $ 398,606
===============================================================================================
</TABLE>
The contractual maturity schedule of the loan portfolio at December 31, 1998
follows:
<TABLE>
<CAPTION>
Loan Maturities One After One Year After
December 31, 1998 Year Through Five
(Dollars in Thousands) Or Less Five Years Years Total
- ----------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Commercial .................. $ 163,122 $ 124,399 $ 24,445 $ 311,966
Commercial Tax-Exempt ....... 759 17,577 3,819 22,155
Agricultural ................ 43,211 9,091 -- 52,302
Real Estate
Construction ........ 49,225 12,795 3,998 66,018
Commercial Mortgage . 47,426 242,612 64,096 354,134
Agricultural Mortgage 4,003 25,248 5,189 34,440
1-4 Family Mortgage . 18,777 94,559 15,609 128,945
Consumer .................... 40,813 78,479 253 119,545
- ----------------------------------------------------------------------------------
Total ....... $ 367,336 $ 604,760 $ 117,409 $1,089,505
- ----------------------------------------------------------------------------------
Variable-Rate Loans ......... $ 148,382 $ 238,198 $ 86,077 $ 472,657
Fixed-Rate Loans ............ 218,954 366,562 31,332 616,848
- ----------------------------------------------------------------------------------
Total ....... $ 367,336 $ 604,760 $ 117,409 $1,089,505
==================================================================================
</TABLE>
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.
<PAGE>
NONPERFORMING ASSETS
The Bank 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.
Nonaccrual loans of $10.4 million at December 31, 1998 increased $2.1 million or
24.6% compared to $8.4 million at December 31, 1997 and nonaccrual loans at
December 31, 1997 of $8.4 million increased $1.6 million or 22.8% compared to
$6.8 million at December 31, 1996. The increases in nonaccrual loans during 1998
and 1997 are due to several diverse credits secured primarily by real estate.
Cross-border nonaccrual loans at December 31, 1998 of $7.6 million reflect a
decrease of $100,000 when compared to the $7.7 million at December 31, 1997.
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 for the years ended December 31, 1998,
1997 and 1996 that are not classified as nonaccrual totaled $3.1 million, $3.3
million and $5.3 million, respectively. The decrease in accruing loans past due
90 days or more at December 31, 1998 as compared to the year ended December 31,
1997 is partly attributable to loan collections.
Nonperforming Assets of $15.8 million at December 31, 1998 increased $4.1
million, 35.1% compared to December 31, 1997 levels of $11.7 million, and
increased $3.8 million or 47.5% compared to December 31, 1996 levels of $7.9
million. The increase in Foreclosed Assets during 1998 was primarily
attributable to a higher rate 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" above. The ratio of Nonperforming
Assets Plus Accruing Loans 90 Days or More Past Due as a percent of Total Loans
and Foreclosed Assets at December 31, 1998 increased to 1.72% from 1.57% at
December 31, 1997 due primarily to the increase in foreclosed assets.
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.
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 $10.4
million at December 31, 1998 and $8.4 million at December 31, 1997. The average
recorded investment in impaired loans during 1998 and 1997 was $11.2 million and
$10.8 million, respectively. The total allowance for loan losses related to
these loans was $1.4 million and $1.0 million on December 31, 1998 and 1997,
respectively. Interest income on impaired loans of $232,000, $238,000 and
$561,000 was recognized for cash payments received in 1998, 1997 and 1996,
respectively. If interest on these impaired loans had been accrued at the
original contractual rates, interest income would have been increased by
approximately $2.2 million, $1.6 million and $807,000 for the years ended
December 31, 1998, 1997 and 1996, respectively.
<PAGE>
An analysis of the components of nonperforming assets for the last five years
follows:
<TABLE>
<CAPTION>
Nonperforming Assets
December 31,
(Dollars in Thousands) 1998 1997 1996 1995 1994
- ----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Nonaccrual Loans ........................................ $10,414 $ 8,355 $ 6,801 $ 2,435 $ 2,970
Renegotiated Loans ...................................... -- -- 1 6 13
- ----------------------------------------------------------------------------------------------------------------
Nonperforming Loans ............................. 10,414 8,355 6,802 2,441 2,983
Foreclosed Assets ....................................... 5,368 3,331 1,121 1,749 2,666
- ----------------------------------------------------------------------------------------------------------------
Total Nonperforming Assets ...................... 15,782 11,686 7,923 4,190 5,649
Accruing Loans 90 Days or More Past Due ................. 3,099 3,287 5,328 781 410
- ----------------------------------------------------------------------------------------------------------------
Total Nonperforming Assets and
Accruing Loans 90 Days or More Past Due $18,881 $14,973 $13,251 $ 4,971 $ 6,059
================================================================================================================
Nonperforming Loans as a % of Total Loans ............... 0.96% 0.88% 0.83% 0.48% 0.75%
Nonperforming Assets as a % of Total Loans
and Foreclosed Assets ........................... 1.44 1.22 0.97 0.82 1.41
Nonperforming Assets as a % of Total Assets ............. 0.90 0.76 0.58 0.54 0.85
Nonperforming Assets Plus Accruing Loans
90 Days or More Past Due as a % of Total
Loans and Foreclosed Assets ..................... 1.72 1.57 1.62 0.97 1.51
================================================================================================================
</TABLE>
Management regularly reviews and monitors the loan portfolio to identify
borrowers experiencing financial difficulties. Management believes that, at
December 31, 1998, all such loans had been identified and included in the
nonaccrual, renegotiated or 90 days 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 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 year ended December 31, 1998 totaled $13.2
million, representing a net increase of $1.9 million or 17.2% compared to $11.3
million at December 31, 1997. Management believes that the allowance for loan
losses at December 31, 1998 adequately reflects the risks in the loan portfolio.
Various regulatory agencies, as an integral part of their examination process,
periodically review the Company's allowance for loan losses. Such agencies may
require the Company to recognize additions to the allowance based on their
judgments of information available to them at the time of their examination.
<PAGE>
The following table summarizes the activity in the allowance for loan losses for
the last five years:
<TABLE>
<CAPTION>
Allowance for Loan Loss Activity
Years Ended December 31,
(Dollars in Thousands) 1998 1997 1996 1995 1994
- --------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Balance at Beginning of Year .............. $11,291 $10,806 $ 5,376 $ 4,274 $ 4,244
Balance from Acquisitions ................. 308 -- 4,647 450 --
Provision for Loan Losses ................. 9,729 2,947 2,173 1,705 1,105
Charge-Offs
Commercial ........................ 1,600 1,778 968 869 219
Agricultural ...................... 5,453 477 158 416 781
Real Estate ....................... 875 59 82 138 206
Consumer .......................... 1,230 907 732 346 187
- --------------------------------------------------------------------------------------------------
Total Charge-Offs ......... 9,158 3,221 1,940 1,769 1,393
- --------------------------------------------------------------------------------------------------
Recoveries
Commercial ........................ 370 136 193 509 214
Agricultural ...................... 72 48 -- 66 4
Real Estate ....................... 376 350 165 60 32
Consumer .......................... 248 225 192 81 68
- --------------------------------------------------------------------------------------------------
Total Recoveries .......... 1,066 759 550 716 318
- --------------------------------------------------------------------------------------------------
Net Charge-Offs (Recoveries) .............. 8,092 2,462 1,390 1,053 1,075
- --------------------------------------------------------------------------------------------------
Balance at End of Year .................... $13,236 $11,291 $10,806 $ 5,376 $ 4,274
==================================================================================================
Ratio of Allowance for Loan
Losses to Loans Outstanding,
Net of Unearned Discount .......... 1.21% 1.19% 1.32% 1.05% 1.07%
Ratio of Allowance for Loan
Losses to Nonperforming Assets .... 83.87 96.62 136.39 128.31 75.66
Ratio of Net Charge-Offs (Recoveries)
to Average Total Loans Outstanding,
Net of Unearned Discount .......... 0.79 0.28 0.20 0.23 0.29
==================================================================================================
</TABLE>
The allocation of the allowance for loan losses by loan category and the
percentage of loans in each category to total loans at the end of each of the
last five years follows:
<TABLE>
<CAPTION>
1998 1997 1996 1995 1994
Allocation of the -------------------- ------------------- -------------------- ------------------ ---------------------
Allowance for % of Loans % of Loans % of Loans % of Loans % of Loans
Loan Losses in Each in Each in Each in Each in Each
December 31, Category Category Category Category Category
(Dollars in of Total of Total of Total of Total of Total
Thousands) Amount Loans Amount Loans Amount Loans Amount Loans Amount Loans
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Commercial .......... $ 4,301 30.7% $ 2,672 29.3% $ 2,264 31.0% $ 1,142 32.3% $ 1,287 30.3%
Agricultural ........ 589 4.8 1,427 5.4 421 4.0 360 4.9 582 4.3
Real Estate ......... 5,247 53.5 5,627 55.5 6,101 55.5 2,842 53.3 2,001 56.3
Consumer ............ 738 11.0 527 9.8 465 9.5 350 9.5 313 9.1
Unallocated ......... 2,361 -- 1,038 -- 1,555 -- 682 -- 91 --
- ------------------------------------------------------------------------------------------------------------------------------------
Total $13,236 100.0% $11,291 100.0% $10,806 100.0% $ 5,376 100.0% $ 4,274 100.0%
====================================================================================================================================
</TABLE>
PREMISES AND EQUIPMENT
Premises and equipment of $69.8 million at December 31, 1998 increased $17.4
million or 33.1% compared to $52.4 million at December 31, 1997 and increased
$12.2 million or 30.2% for December 31, 1997 compared to $40.3 million at
December 31, 1996. The increase for the year ended December 31, 1998 resulted
primarily from completion costs of the Company's new headquarters in McAllen of
$10.2 million, net of construction in progress of $9.4 million as of December
31, 1997. The net increase for the year ended December 31, 1997 was primarily
attributable to the construction in progress of the Company's new headquarters
in McAllen.
<PAGE>
GOODWILL AND IDENTIFIABLE INTANGIBLES
Intangibles of $26.9 million at December 31, 1998 increased $2.8 million or
11.8% compared to $24.1 million at December 31, 1997 and decreased $2.3 million
or 8.6% for December 31, 1997 compared to $26.3 million at December 31, 1996.
The net increase in 1998 was due to amortization of existing intangibles and the
acquisition of Raymondville Bancorp, Inc. The net decrease for the year ended
December 31, 1997 is attributable to amortization of existing intangibles.
DEPOSITS
Total deposits of $1.6 billion at December 31, 1998 increased $200.2 million or
14.7% compared to December 31, 1997 levels of $1.4 billion, and total deposits
of $1.4 billion for the year ended December 31, 1997 increased $147.1 million or
12.1% compared to December 31, 1996 levels of $1.2 billion. The increase in
total deposits for the year ended December 31, 1998 is attributable in part to
the vitality of the Rio Grande Valley economy. The increase in total deposits at
December 31, 1997 compared to December 31, 1996 is primarily attributable to
growth in the volume of business conducted by the Company. Total
noninterest-bearing deposits of $234.7 million for the year ended December 31,
1998 represented an increase of $26.2 million or 12.6% compared to the year
ended December 31, 1997 and increased $17.3 million or 9.0% for the year ended
December 31, 1997 compared to the year ended December 31, 1996. Total public
funds deposits (consisting of Public Funds Demand Deposits, Savings, Money
Market Checking and Savings and Time Deposits) of $265.9 million for the year
ended December 31, 1998 increased $58.6 million or 28.3% compared to December
31, 1997 levels of $207.3 million. The Bank actively seeks consumer and
commercial deposits, including deposits from correspondent banks and public
funds deposits. The following table presents the composition of total deposits
at the end of the last three years:
<TABLE>
<CAPTION>
Total Deposits
December 31, % Change From % Change From
(Dollars in Thousands) 1998 Prior Year 1997 Prior Year 1996
- -------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Demand Deposits
Commercial and Individual ............. $ 227,220 11.8% $ 203,325 9.9% $ 185,029
Public Funds .......................... 7,435 45.8 5,098 (17.0) 6,144
- -------------------------------------------------------------------------------------------------------------------
Total Demand Deposits ......... 234,655 12.6 208,423 9.0 191,173
- -------------------------------------------------------------------------------------------------------------------
Interest-Bearing Deposits
Savings
Commercial and Individual ..... 106,446 5.5 100,917 (5.2) 106,422
Public Funds .................. 1,265 64.1 771 4.5 738
Money Market Checking and Savings
Commercial and Individual ..... 236,157 16.2 203,292 1.8 199,789
Public Funds .................. 65,081 64.6 39,547 (26.0) 53,432
Time Deposits
Commercial and Individual ..... 727,205 12.2 647,959 15.5 561,050
Public Funds .................. 192,133 18.7 161,874 57.1 103,032
- -------------------------------------------------------------------------------------------------------------------
Total Interest-Bearing Deposits 1,328,287 15.1 1,154,360 12.7 1,024,463
- -------------------------------------------------------------------------------------------------------------------
Total Deposits ........ $1,562,942 14.7% $1,362,783 12.1% $1,215,636
===================================================================================================================
Weighted Average Rate on
Interest-Bearing Deposits ............. 4.67% 4.67% 4.43%
===================================================================================================================
</TABLE>
Time deposits of $100,000 or more are solicited from markets served by the Bank
and are not sought through brokered sources. Time deposits continue to be a
significant source of funds. The following table presents the maturities of time
deposits of $100,000 or more as of December 31, 1998 and 1997:
Maturities of Time
Deposits of $100,000 or More
December 31,
(Dollars in Thousands) 1998 1997
- -------------------------------------------------------------------------
Three Months or Less ............................. $254,936 $228,072
After Three through Six Months ................... 88,718 98,902
After Six through Twelve Months .................. 123,231 70,615
After Twelve Months .............................. 78,811 60,478
- -------------------------------------------------------------------------
Total .................................... $545,696 $458,067
=========================================================================
Weighted Average Rate on Time Deposits
of $100,000 or More ............................ 5.32% 5.50%
=========================================================================
<PAGE>
Mexico is a part of the trade territory of the Company and foreign deposits from
Mexican sources have traditionally been a source of funding. In December 1995,
the Mexican government announced a 20% devaluation of the Mexican peso relative
to the United States dollar, and the Mexican peso has since continued to decline
relative to the dollar. The Company does not anticipate any negative impact on
foreign deposits due to these recent devaluations of the peso. The increase in
foreign deposits is primarily attributable to Mexican deposits obtained from
acquisitions. The following table presents foreign deposits, primarily from
Mexican sources, as of December 31, 1998 and 1997:
Foreign Deposits
December 31,
(Dollars in Thousands) 1998 1997
- -----------------------------------------------------------------------
Demand Deposits ............................... $ 10,667 $ 8,066
- -----------------------------------------------------------------------
Interest-Bearing Deposits
Savings ............................... 21,638 20,373
Money Market Checking and Savings ..... 32,324 26,400
Time Deposits Under $100,000 .......... 66,104 57,645
Time Deposits of $100,000 or more ..... 133,641 99,486
- -----------------------------------------------------------------------
Total Interest-Bearing Deposits 253,707 203,904
- -----------------------------------------------------------------------
Total Foreign Deposits ........ $264,374 $211,970
=======================================================================
Percentage of Total Deposits .................. 16.92% 15.60%
=======================================================================
Weighted Average Rate on Foreign Deposits ..... 4.60% 4.75%
=======================================================================
LIQUIDITY
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 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.
See previous discussion regarding the maturity dates for "Loans," "Securities"
and "Deposits."
Asset liquidity is provided by cash and assets which are readily marketable, or
which can be pledged, or which will mature in the near future. These include
cash, federal funds sold and U.S. Government Agency and mortgage-backed
securities. At December 31, 1998, the Company's liquidity ratio, defined as
cash, U.S. Government Agency and mortgage-backed securities and federal funds
sold as a percentage of deposits, was 33.0% compared to 34.3% at December 31,
1997 and compared to 35.0% at December 31, 1996.
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 1998, funds for $720.0 million of securities purchases and $131.7 million
of net loan growth came from various sources, including a net increase in
deposits of $143.7 million, $378.4 million in proceeds from sale of securities,
$311.9 million in proceeds from maturing securities and $22.5 million of net
income.
The Federal Deposit Insurance Corporation Improvement Act of 1991 ("FDICIA")
requires that federal bank regulatory authorities take "prompt corrective
action" with respect to any depository institution which does not meet specified
minimum capital requirements. The applicable regulations establish five capital
levels which require or permit the Federal Reserve Board and other regulatory
authorities to take supervisory action. The relevant classifications range from
"well capitalized" to "critically undercapitalized." The classifications are
generally determined by applicable ratios of the institution, including Tier I
capital to risk-weighted assets, total capital to risk-weighted assets and
leverage ratios. Capital ratios for Texas State Bank as of December 31, 1998
exceeded the "well capitalized" requirements under the applicable regulations.
As a result, the Company does not believe that the prompt corrective action
regulations have any material effect on the activities or operations of the
Company or Texas State Bank.
The Corporation is dependent on dividends from its subsidiaries 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 and the Bank is classified
as "well capitalized" for purposes of FDICIA.
<PAGE>
The principal source of liquidity for the Corporation during 1998 was dividends
received from subsidiaries of $10.4 million. Uses of the funds received included
investments in subsidiaries of $8.0 million and common stock dividends paid of
$6.4 million.
The funds management policy of the Company is to maintain a reasonably balanced
position of rate sensitive assets and liabilities to avoid adverse changes in
net interest income. Changes in net interest income occur when interest rates on
loans and securities change in a different time period from that of changes in
interest rates on liabilities, or when the mix and volume of interest-earning
assets and interest-bearing liabilities change. The interest rate sensitivity
gap represents the dollar amount of difference between rate sensitive assets and
rate sensitive liabilities within a given time period ("GAP"). A GAP ratio is
determined by dividing rate sensitive assets by rate sensitive liabilities. A
ratio of 1.0 indicates a perfectly matched position, in which case the effect on
net interest income due to interest rate movements would be zero.
Rate sensitive liabilities maturing within one year exceeded rate sensitive
assets with comparable maturities at December 31, 1998 by $449.1 million.
Management monitors the rate sensitivity GAP on a regular basis and takes steps
when appropriate to improve the sensitivity. The cumulative rate sensitive GAP
to Total Assets at a period of twelve months or less was (25.5)% at December 31,
1998.
The following table summarizes interest rate sensitive assets and liabilities by
their repricing dates at December 31, 1998:
<TABLE>
<CAPTION>
Interest Rate Sensitivity Analysis
December 31, 1998 0-3 4-6 7-12 1-5 Over
(Dollars in Thousands) Months Months Months Years 5 Years Total
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Loans ......................................... $ 560,799 $ 46,844 $ 83,374 $ 362,098 $ 36,390 $1,089,505
Securities
Available for Sale .................... 10,233 1,658 974 119,620 323,451 455,936
Held to Maturity ...................... 699 5,003 100 7,122 1,407 14,331
Time Deposits ................................. 157 297 99 -- -- 553
Federal Funds Sold ............................ 32,000 -- -- -- -- 32,000
- ------------------------------------------------------------------------------------------------------------------------------------
Total Interest-Earning Assets . 603,888 53,802 84,547 488,840 361,248 1,592,325
- ------------------------------------------------------------------------------------------------------------------------------------
Savings ....................................... 107,711 -- -- -- -- 107,711
Money Market Checking and
Savings Accounts ...................... 301,238 -- -- -- -- 301,238
Time Deposits ................................. 416,549 159,022 199,434 144,322 11 919,338
Federal Funds Purchased and Securities
Sold Under Repurchase Agreements ...... 7,407 -- -- -- -- 7,407
- ------------------------------------------------------------------------------------------------------------------------------------
Total Interest-Bearing
Liabilities ........... 832,905 159,022 199,434 144,322 11 1,335,694
- ------------------------------------------------------------------------------------------------------------------------------------
Rate Sensitivity GAP(1) ....................... $ (229,017) $ (105,220) $ (114,887) $ 344,518 $ 361,237 $ 256,631
====================================================================================================================================
Cumulative Rate Sensitivity GAP ............... $ (229,017) $ (334,237) $ (449,124) $ (104,606) $ 256,631
====================================================================================================================================
Ratio of Cumulative Rate Sensitivity
GAP to Total Assets ................... (13.00)% (18.97)% (25.48)%
Ratio of Cumulative Rate Sensitive
Interest-Earning Assets to Cumulative
Rate Sensitive Interest-Bearing
Liabilities ........... 72.5:1 66.3:1 62.3:1
====================================================================================================================================
</TABLE>
(1) Rate sensitive interest-earning assets less rate sensitive interest-bearing
liabilities.
Gap analysis is the simplest representation of the Company's interest rate
sensitivity. However, it cannot reveal the impact of factors such as
administered rates (e.g., the prime lending rate), pricing strategies on
consumer and business deposits, changes in balance sheet mix, or the effect of
various options embedded in balance sheet instruments. Accordingly, the Funds
Management Committee conducts simulations of net interest income under a variety
of market interest rate scenarios. These simulations, which consider forecasted
balances sheet changes and forecasted changes in interest rate spreads, provide
the Committee with an estimate of earnings at risk for given changes in interest
rates. Assuming an immediate 100 basis point decline in interest rates based
upon the asset and liability mix at December 31, 1998, projected net interest
income for the following twelve months would decline by 6.6%. 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.
All the measurements of risk described above are made based upon the Company's
business mix and interest rate exposures at the particular point in time. The
exposures change continuously as a result of the Corporation's ongoing business
and its risk management initiatives. While management believes these measures
provide a meaningful representation of the Company's interest rate sensitivity,
they do not necessarily take in account all business developments that have an
effect on net income, such as changes in credit quality or the size and
composition of the balance sheet.
<PAGE>
The Company does not currently engage in trading activities or use derivative
instruments to control interest rate risk. Even though such activities may be
permitted with the approval of the Board of Directors, the Company does not
intend to engage in such activities in the immediate future.
Interest rate risk is the most significant market risk affecting the Company.
Other types of market risk, such as foreign currency exchange rate risk and
commodity price risk, do not arise in the normal course of the Company's
business activities.
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.
CAPITAL RESOURCES
Shareholders' equity of $177.5 million for the year ended December 31, 1998
reflects a net increase of approximately $15.9 million or 9.8% compared to
shareholders' equity of $161.6 million for the year ended December 31, 1997.
This net increase was primarily attributable to earnings in 1998.
The risk-based capital standards as established by the Federal Reserve Board of
Governors apply to Texas Regional and Texas State Bank. The numerator of the
risk-based capital ratio for bank holding companies includes Tier I capital,
consisting of common shareholders' equity and qualifying cumulative and
noncumulative perpetual preferred stock; and Tier II capital, consisting of
other preferred stock, reserve for possible loan losses and certain subordinated
and term-debt securities. Goodwill is deducted from Tier I capital. At no time
is Tier II capital allowed to exceed Tier I capital in the calculation of total
capital. The denominator or asset portion of the risk-based ratio aggregates
generic classes of balance sheet and off-balance sheet exposures, each weighted
by one of four factors, ranging from 0% to 100%, based on the relative risk of
the exposure class.
Ratio targets are set for both Tier I and total capital (Tier I plus Tier II
capital). The minimum level of Tier I capital to total assets is 4.0% and the
minimum total capital ratio is 8.0%. The Federal Reserve Board has guidelines
for a leverage ratio that is designed as an additional evaluation of capital
adequacy of banks and bank holding companies. The leverage ratio is defined to
be the company's Tier I capital divided by its quarterly average total assets
less goodwill and other intangible assets. An insured depository institution is
"well capitalized" for purposes of FDICIA if its Total Capital Ratio is equal to
or greater than 10.0%, and Tier I Capital Ratio is equal to or greater than
6.0%, and Leverage Capital Ratio is equal to or greater than 5.0%. The Company's
Tier I Capital Ratio was approximately 12.92% and 13.60% as of December 31, 1998
and 1997, respectively. The Company's Total Capital Ratio was approximately
14.06% and 14.73% as of December 31, 1998 and 1997, respectively. The Company's
Leverage Capital Ratio was 8.85% and 9.21% at December 31, 1998 and 1997,
respectively. Based on capital ratios, the Company is within the definition of
"well capitalized" for Federal Reserve purposes as of December 31, 1998.
The following table presents the Company's risk-based capital calculation:
Risk-Based Capital
December 31,
(Dollars in Thousands) 1998 1997
- -------------------------------------------------------------------------------
Total Shareholders' Equity before unrealized
gains or losses on Securities
Available for Sale ..................... $ 176,859 $ 160,648
Less Goodwill and Other Deductions ............. (26,894) (24,001)
- -------------------------------------------------------------------------------
Total Tier I Capital ........................... 149,965 136,647
Total Tier II Capital .......................... 13,236 11,291
- -------------------------------------------------------------------------------
Total Qualifying Capital ....................... $ 163,201 $ 147,938
===============================================================================
Risk Adjusted Assets (Including Off-Balance
Sheet Exposure) ..................... $ 1,161,053 $ 1,004,511
===============================================================================
Tier I Capital Ratio ........................... 12.92% 13.60%
Total Capital Ratio ............................ 14.06 14.73
Leverage Capital Ratio ......................... 8.85 9.21
===============================================================================
<PAGE>
YEAR 2000 PROJECT
GENERAL
The Year 2000 problem affects all companies. This problem is rooted in storage
constraints of systems developed in the 1960's and 1970's. Many computer codes
used only two-digit year codes, e.g., 98 instead of four digits, 1998. Thus,
many computer applications interpret the year "00" as 1900 and accordingly need
to be modified to process in the next century.
In the early 1990's, management of Texas State Bank (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 in-house supported computer applications.
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 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 will be 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. Interface testing
with FEDLINE had been completed by the Data Center and Trust Department at
December 31, 1998. The Wire Transfer Department and Customer Service Department
will be completed by March 31, 1999.
<PAGE>
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. The Bank anticipates that all systems will be 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 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.
CURRENT ACCOUNTING ISSUES
In June 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 130, ("Statement 130") "Reporting
Comprehensive Income." Statement 130 establishes standards for reporting and
display of comprehensive income and its components (revenues, expenses, gains,
and losses) in a full set of general-purpose financial statements. Statement 130
requires that an enterprise (a) classify items of other comprehensive income by
their nature in a financial statement and (b) display the accumulated balance of
other comprehensive income separately from retained earnings and additional
paid-in capital in the equity section of a statement of financial position.
Statement 130 is effective for fiscal years beginning after December 15, 1997.
The adoption of Statement 130 did not have a material impact on the Company's
financial position, results of operations, or liquidity.
In June 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 131, ("Statement 131") "Disclosures about
Segments of an Enterprise and Related Information." Statement 131 establishes
standards for the way that public business enterprises report information about
operation segments in annual financial statements and requires that those
enterprises report selected information about operation segments in interim
financial reports issued to shareholders. Statement 131 also establishes
standards for related disclosures about products and services, geographic areas,
and major customers. Statement 131 is effective for financial statements for
periods beginning after December 15, 1997. The Company did not identify any
reportable operating segments based on the requirements of Statement 131.
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 does not currently have derivative
instruments as defined by Statement 133.
<PAGE>
FOURTH QUARTER RESULTS
The fourth quarter net income for 1998 of $7.1 million or $0.48 per diluted
common share reflected an increase of $1.3 million or 21.6% compared to $5.8
million or $.40 per share for the fourth quarter of 1997. Results for the fourth
quarter of 1998 reflected increases in net interest income, noninterest income
and noninterest expense compared to the fourth quarter of 1997.
Net interest income of $17.8 million for the fourth quarter of 1998 increased
$1.6 million or 9.9% compared to $16.2 million for the fourth quarter of 1997,
reflecting an increased volume of earning assets in part to the vitality of the
Rio Grande Valley economy. Average earning assets of $1.6 billion for the fourth
quarter of 1998 increased $194.4 million or 14.2% compared to $1.4 billion for
the fourth quarter of 1997. Net interest margin for the fourth quarter of 1998
was 4.52% compared to 4.70 % for the fourth quarter of 1997.
The provision for loan losses charged against earnings in the fourth quarter of
1998 totaled $650,000 compared to $1.2 million for the fourth quarter of 1997,
reflecting a decrease of $516,000 or 44.3%. Net charge-offs (recoveries) of
$(31,000) for the fourth quarter of 1998 decreased $505,000 or 106.5% compared
to net charge-offs of $474,000 for the fourth quarter of 1997.
Noninterest income of $4.2 million for the fourth quarter of 1998 increased
$821,000 or 24.1% compared to $3.4 million for the fourth quarter of 1997,
primarily due to an increased volume of business. All components of noninterest
income reflected increases for fourth quarter of 1998 compared to fourth quarter
of 1997.
Noninterest expense of $10.4 million for the fourth quarter of 1998 increased
$1.1 million or 12.2% compared to $9.2 million for the fourth quarter of 1997,
primarily due to an increased volume of business. The Efficiency Ratio of
expense to total revenue averaged 46.66% for the fourth quarter of 1998 compared
to 47.75% for the fourth quarter of 1997.
The fourth quarter net income for 1998 of $7.1 million or $0.48 per diluted
common share reflected an increase of $4.3 million or 152.9% compared to $2.8
million or $0.19 per diluted common share for the third quarter of 1998.
Operating results for the fourth quarter of 1998 reflected an increase in net
interest income while provision for loan losses, noninterest income and
noninterest expense decreased from the third quarter of 1998.
Net interest income of $17.8 million for the fourth quarter of 1998 increased
$1.5 million or 9.3% compared to $16.3 million for the third quarter of 1998,
reflecting a continued increasing volume of earning assets. Average earning
assets of $1.6 billion for the fourth quarter of 1998 increased $41.2 million or
2.7% compared to $1.5 billion for the third quarter of 1998. The fourth quarter
of 1998 net interest margin was 4.52% compared to 4.25% in the third quarter of
1998.
The provision for loan losses charged against earnings in the fourth quarter of
1998 of $650,000 compared to $7.2 million for the third quarter of 1998,
reflecting a decrease of $6.5 million or 90.9%. Net charge-offs (recoveries) of
$(31,000) for the fourth quarter of 1998 decreased $6.7 million or 100.5%
compared to net charge-offs of $6.6 for the third quarter of 1998.
Noninterest income of $4.2 million for the fourth quarter of 1998 decreased $1.6
million or 27.8% compared to $5.9 million for the third quarter of 1998,
primarily due to realized gains on sales of securities in the third quarter. Net
Realized Gains on Sales of Available for Sale Securities of $353,000 for the
fourth quarter of 1998 reflect a net decrease of $1.8 million compared to $2.1
million for the third quarter of 1998.
Noninterest expense of $10.4 million for the fourth quarter of 1998 decreased
$227,000 or 2.1% compared to $10.6 million for the third quarter of 1998. The
Efficiency Ratio of expense to total revenue averaged 46.66% for the fourth
quarter of 1998 compared to 52.69% for the third quarter of 1998.
The nonaccrual and renegotiated loans at December 31, 1998 of $10.4 million
decreased $4.7 million or 31.3% compared to $15.2 million at September 30, 1998
primarily due to lower nonaccrual loan volumes.
<PAGE>
The following table presents a summary of operations for the last five quarters:
<TABLE>
<CAPTION>
Condensed Quarterly Income
Statements Taxable-Equivalent Basis * 1998 1997
(Dollars in Thousands, --------------------------------------------------------- -----------
Except Per Share Data) Fourth Third Second First Fourth
Quarter Quarter Quarter Quarter Quarter
- ---------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Interest Income .................... $ 32,911 $ 31,499 $ 31,792 $ 30,915 $ 29,992
Interest Expense ................... 15,141 15,238 14,038 13,967 13,818
- ---------------------------------------------------------------------------------------------------------------
Net Interest Income ................ 17,770 16,261 17,754 16,948 16,174
Provision for Loan Losses .......... 650 7,157 981 941 1,166
Noninterest Income ................. 4,224 5,854 3,623 3,962 3,403
Noninterest Expense ................ 10,355 10,582 9,638 10,527 9,229
- ---------------------------------------------------------------------------------------------------------------
Income Before Taxable-Equivalent
Adjustment and Income Tax .. 10,989 4,376 10,758 9,442 9,182
Taxable-Equivalent Adjustment ...... 369 372 374 353 367
Applicable Income Tax Expense ...... 3,546 1,207 3,624 3,246 2,997
- ---------------------------------------------------------------------------------------------------------------
Net Income ......................... $ 7,074 $ 2,797 $ 6,760 $ 5,843 $ 5,818
===============================================================================================================
Net Income Per Common Share
Basic ...................... $ 0.49 $ 0.19 $ 0.47 $ 0.41 $ 0.40
Diluted .................... 0.48 0.19 0.46 0.40 0.40
===============================================================================================================
Average Balances
Total Assets ............... $ 1,723,296 $ 1,683,670 $ 1,622,591 $ 1,585,128 $ 1,508,802
Loans ...................... 1,062,118 1,026,470 1,022,541 982,067 920,005
Securities ................. 459,752 446,023 404,477 420,236 408,218
Interest-Earning Assets .... 1,560,523 1,519,281 1,454,067 1,429,222 1,366,149
Deposits ................... 1,524,753 1,486,994 1,431,907 1,403,603 1,333,922
Shareholders' Equity ....... 176,399 175,317 169,667 164,935 160,902
- ---------------------------------------------------------------------------------------------------------------
Selected Financial Data
Return on Average Assets ... 1.63% 0.66% 1.67% 1.49% 1.53%
Return on Average
Shareholders' Equity 15.91 6.33 15.98 14.37 14.36
Net Interest Margin * ...... 4.52 4.25 4.90 4.81 4.70
Efficiency Ratio * ......... 46.66 52.69 45.80 50.62 47.75
Allowance for Loan Losses .. $ 13,236 $ 12,555 $ 12,038 $ 12,115 $ 11,291
Net Charge-Offs (Recoveries) (31) 6,640 1,058 425 474
Nonaccrual and
Renegotiated Loans . 10,414 15,151 8,393 7,887 8,355
Foreclosed Assets .......... 5,368 5,781 4,003 4,182 3,331
===============================================================================================================
</TABLE>
*Taxable-equivalent basis assuming a 35% tax rate.
FORWARD-LOOKING STATEMENTS
Certain of these statements contained herein that are not historical facts
are forward-looking statements as that term is defined for purposes of the
Private Securities Litigation Reform Act. The Company's actual results may
differ materially from those included in the forward-looking statements.
Forward-looking statements involve risks and uncertainties including, but not
limited to, the following: changes in general economic conditions, including the
performance of financial markets and interest rates; customer responsiveness to
new products; competitive, regulatory, or tax changes that affect the cost of or
demand for the Company's products and services; and other risks detailed from
time to time in the Company's filings with the Securities and Exchange
Commission. The Company disclaims any obligation to update statements herein.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
MANAGEMENTS REPORT ON RESPONSIBILITY FOR FINANCIAL REPORTING
To Our Shareholders
The management of Texas Regional Bancshares, Inc. and its subsidiaries has the
responsibility for preparing the accompanying consolidated financial statements
and for their integrity and objectivity. The statements were prepared in
accordance with generally accepted accounting principles. The consolidated
financial statements include amounts that are based on management's best
estimates and judgments. Management also prepared the other information in the
annual report and is responsible for its accuracy and consistency with the
consolidated financial statements.
Management maintains a comprehensive system of internal control to assure the
proper authorization of transactions, the safeguarding of assets, and the
reliability of the financial records. The system of internal control provides
for appropriate division of responsibility and is documented by written policies
and procedures that are communicated to employees. The Company maintains a
strong internal auditing program that independently assesses the effectiveness
of the internal controls and recommends possible improvements thereto.
Management believes that as of December 31, 1998, the Company maintains an
effective system of internal control.
The Audit Committee of the Board of Directors reviews the systems of internal
control and financial reporting. The Committee meets and consults regularly with
management, the internal auditors and the independent accountants to review the
scope and results of their work.
The accounting firm of KPMG LLP has performed an independent audit of the
Company's consolidated financial statements. Management has made available to
KPMG LLP all of the Company's financial records and related data, as well as the
minutes of shareholders' and directors' meetings. Furthermore, management
believes that all representations made to KPMG LLP during its audit were valid
and appropriate. The firm's report appears below.
Glen E. Roney R. T. Pigott, Jr.
Chairman of the Board, President Executive Vice President
& Chief Executive Officer & Chief Financial Officer
January 29, 1999
INDEPENDENT AUDITORS' REPORT
Board of Directors
Texas Regional Bancshares, Inc.
We have audited the accompanying consolidated balance sheets of Texas Regional
Bancshares, Inc. and subsidiaries as of December 31, 1998 and 1997, the related
consolidated statements of income and comprehensive income, changes in
shareholders' equity and cash flows for each of the years in the three-year
period ended December 31, 1998. These consolidated financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these consolidated financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Texas Regional
Bancshares, Inc. and subsidiaries at December 31, 1998 and 1997, and the results
of their operations and their cash flows for each of the years in the three-year
period ended December 31, 1998 in conformity with generally accepted accounting
principles.
KPMG LLP
Houston, Texas
January 29, 1999
<PAGE>
CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
Texas Regional Bancshares, Inc. and Subsidiaries
Consolidated Balance Sheets
December 31, 1998 and 1997
(Dollars in Thousands, Except Share Data) 1998 1997
- ----------------------------------------------------------------------------------------------
<S> <C> <C>
Assets
Cash and Due From Banks (Note 2) ....................... $ 58,274 $ 62,268
Time Deposits .......................................... 553 100
Federal Funds Sold ..................................... 32,000 18,985
- ----------------------------------------------------------------------------------------------
Total Cash and Cash Equivalents ................ 90,827 81,353
Securities Available for Sale, at Fair
Value (Note 3) ................................. 455,936 324,177
Securities Held to Maturity, at Amortized
Cost (Fair Value of $14,650
in 1998 and $93,281 in 1997) (Note 3) .......... 14,331 92,744
Loans, Net of Unearned Discount of $4,886
in 1998 and $2,753 in 1997 ..................... 1,089,505 951,316
Less: Allowance for Loan Losses ........................ (13,236) (11,291)
- ----------------------------------------------------------------------------------------------
Net Loans (Note 4) ............................. 1,076,269 940,025
Premises and Equipment, Net (Note 5) ................... 69,827 52,443
Accrued Interest Receivable ............................ 16,416 16,033
Other Real Estate ...................................... 5,060 3,124
Goodwill and Identifiable Intangibles .................. 26,894 24,066
Other Assets ........................................... 6,769 4,804
- ----------------------------------------------------------------------------------------------
Total Assets ................................... $ 1,762,329 $ 1,538,769
==============================================================================================
Liabilities
Deposits
Demand ......................................... $ 234,655 $ 208,423
Savings ........................................ 107,711 101,688
Money Market Checking and Savings .............. 301,238 242,839
Time Deposits (Note 6) ......................... 919,338 809,833
- ----------------------------------------------------------------------------------------------
Total Deposits ......................... 1,562,942 1,362,783
Federal Funds Purchased and Securities
Sold Under Repurchase Agreements (Note 7) ...... 7,407 1,801
Accounts Payable and Accrued Liabilities (Note 8) ...... 14,512 12,630
- ----------------------------------------------------------------------------------------------
Total Liabilities .............................. 1,584,861 1,377,214
- ----------------------------------------------------------------------------------------------
Commitments and Contingencies (Notes 11 and 12)
Shareholders' Equity (Note 17)
Preferred Stock; $1.00 Par Value, 10,000,000 Shares
Authorized; None Issued and Outstanding (Note 9) -- --
Common Stock - Class A; $1.00 Par Value, 50,000,000
Shares Authorized; Issued and Outstanding
14,411,583 Shares in 1998 and 14,403,484 in
1997 (Note 10) ................................. 14,412 14,403
Paid-In Capital ........................................ 87,586 87,078
Retained Earnings (Note 16) ............................ 74,861 59,167
Accumulated Other Comprehensive Income (Note 3) ........ 609 907
- ----------------------------------------------------------------------------------------------
Total Shareholders' Equity ..................... 177,468 161,555
- ----------------------------------------------------------------------------------------------
Total Liabilities and Shareholders' Equity ..... $ 1,762,329 $ 1,538,769
==============================================================================================
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
<PAGE>
CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
<TABLE>
<CAPTION>
Texas Regional Bancshares, Inc. and Subsidiaries
Consolidated Statements of Income and Comprehensive Income
Years Ended December 31, 1998, 1997 and 1996
(Dollars in Thousands, Except Per Share Data) 1998 1997 1996
- ------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Interest Income
Loans, Including Fees .................................... $ 97,064 $ 85,905 $ 66,988
Securities
Taxable .......................................... 25,138 23,124 17,355
Tax-Exempt ....................................... 1,542 1,507 1,668
Time Deposits ............................................ 76 14 10
Federal Funds Sold ....................................... 1,829 2,195 2,054
- ------------------------------------------------------------------------------------------------------
Total Interest Income ............................ 125,649 112,745 88,075
- ------------------------------------------------------------------------------------------------------
Interest Expense
Deposits ................................................. 58,097 50,566 37,472
Federal Funds Purchased and Securities Sold
Under Repurchase Agreements ...................... 287 52 22
- ------------------------------------------------------------------------------------------------------
Total Interest Expense ................... 58,384 50,618 37,494
- ------------------------------------------------------------------------------------------------------
Net Interest Income .............................................. 67,265 62,127 50,581
Provision for Loan Losses (Note 4) ............................... 9,729 2,947 2,173
- ------------------------------------------------------------------------------------------------------
Net Interest Income After Provision for Loan Losses ...... 57,536 59,180 48,408
- ------------------------------------------------------------------------------------------------------
Noninterest Income
Service Charges on Deposit Accounts ...................... 8,025 7,009 5,911
Other Service Charges .................................... 2,122 1,606 1,223
Trust Service Fees ....................................... 1,770 1,691 1,505
Net Realized Gains on Sales
of Securities Available for Sale ................. 2,910 734 401
Data Processing Service Fees ............................. 1,515 1,080 910
Other Operating Income ................................... 1,321 852 706
- ------------------------------------------------------------------------------------------------------
Total Noninterest Income ................. 17,663 12,972 10,656
- ------------------------------------------------------------------------------------------------------
Noninterest Expense
Salaries and Employee Benefits (Note 11) ................. 18,526 17,692 16,183
Net Occupancy Expense .................................... 3,631 2,687 2,332
Equipment Expense ........................................ 4,599 3,778 3,398
Other Real Estate (Income) Expense, Net .................. 307 105 (93)
Amortization of Goodwill and Identifiable Intangibles .... 2,660 2,252 1,593
Impairment Loss (Note 5) ................................. -- 630 --
One Time Charge - Acquisitions (Note 19) ................. 728 -- --
Other Noninterest Expense (Note 13) ...................... 10,651 10,026 8,683
- ------------------------------------------------------------------------------------------------------
Total Noninterest Expense ................ 41,102 37,170 32,096
- ------------------------------------------------------------------------------------------------------
Income Before Income Tax Expense ................................. 34,097 34,982 26,968
Income Tax Expense (Note 8) ...................................... 11,623 11,860 8,794
- ------------------------------------------------------------------------------------------------------
Net Income ....................................................... $ 22,474 $ 23,122 $ 18,174
Other Comprehensive Income -
Unrealized Gain (Loss) on Securities Available
for Sale (Note 3) .................................... (298) 439 403
- ------------------------------------------------------------------------------------------------------
Comprehensive Income ............................................. $ 22,176 $ 23,561 $ 18,577
======================================================================================================
Net Income Per Common Share (Note 14)
Basic .................................................... $ 1.56 $ 1.61 $ 1.40
Diluted .................................................. $ 1.54 $ 1.58 $ 1.38
======================================================================================================
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
<PAGE>
CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Texas Regional Bancshares, Inc. and Subsidiaries
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
Years Ended December 31, 1998, 1997 and 1996
<TABLE>
<CAPTION>
Accumulated Total
Class A Other Share-
Common Paid-In Retained Comprehensive holders'
(Dollars in Thousands) Stock Capital Earnings Income Equity
- -------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Balance, December 31, 1995 ........................... $ 7,488 $ 37,254 $ 31,901 $ 65 $ 76,708
Exercise of Stock Options,
2,107 Shares of Class A
Common Stock ................................. 2 23 -- -- 25
Other Comprehensive Income ........................... -- -- -- 403 403
Class A Common Stock Cash Dividends -
Texas Regional Bancshares, Inc. .............. -- -- (3,232) -- (3,232)
Common Stock Cash Dividends - Acquisitions ........... -- -- (618) -- (618)
Sale of 2,510,000 shares of
Class A Common Stock ......................... 2,510 49,343 -- -- 51,853
Net Income ........................................... -- -- 18,174 -- 18,174
- -------------------------------------------------------------------------------------------------------------------
Balance, December 31, 1996 ........................... 10,000 86,620 46,225 468 143,313
Exercise of Stock Options,
35,814 Shares of Class A
Common Stock ................................. 36 458 -- -- 494
Other Comprehensive Income ........................... -- -- -- 439 439
Class A Common Stock Cash Dividends -
Texas Regional Bancshares, Inc. .............. -- -- (4,803) -- (4,803)
Common Stock Cash Dividends - Acquisitions ........... -- -- (1,006) -- (1,006)
Class A Common Stock
3 for 2 Stock Split .......................... 4,367 -- (4,371) -- (4)
Net Income ........................................... -- -- 23,122 -- 23,122
- -------------------------------------------------------------------------------------------------------------------
Balance, December 31, 1997 ........................... 14,403 87,078 59,167 907 161,555
Exercise of Stock Options,
8,099 Shares of Class A
Common Stock ................................. 9 64 -- -- 73
Other Comprehensive Income (Loss) .................... -- -- -- (298) (298)
Class A Common Stock Cash Dividends .................. -- -- (6,772) -- (6,772)
Cash Dividends Paid on Fractional Shares ............. -- -- (8) -- (8)
Tax Effect of Nonqualified Stock Options
Exercised .................................... -- 444 -- -- 444
Net Income ........................................... -- -- 22,474 -- 22,474
- -------------------------------------------------------------------------------------------------------------------
Balance, December 31, 1998 ........................... $ 14,412 $ 87,586 $ 74,861 $ 609 $ 177,468
===================================================================================================================
The accompanying notes are an integral part of the consolidated financial statements
</TABLE>
<PAGE>
Consolidated Financial Statements (Continued)
<TABLE>
<CAPTION>
Texas Regional Bancshares, Inc. and Subsidiaries
CONSOLIDATED STATEMENTS OF CASH FLOWS
Years Ended December 31, 1998, 1997 and 1996
(Dollars in Thousands) 1998 1997 1996
- --------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Cash Flows from Operating Activities
Net Income ..................................................... $ 22,474 $ 23,122 $ 18,174
Adjustments to Reconcile Net Income to
Net Cash Provided by Operating Activities
Depreciation, Amortization and Accretion, Net ........ 3,149 3,360 3,035
Provision for Loan Losses ............................ 9,729 2,947 2,173
Provision for Estimated Losses on
Other Real Estate and Other Assets ........... 49 70 43
Gain on Sale of Securities Available for Sale ........ (2,910) (734) (401)
(Gain) Loss on Sale of Other Assets .................. 57 (13) 11
Gain on Sale of Other Real Estate .................... (257) (113) (92)
Gain on Sale of Premises and Equipment ............... (218) (2) (72)
Impairment Loss (Note 5) ............................. -- 630 --
Increase in Deferred Income Tax Liability ............ (571) (1,001) (1,138)
(Increase) Decrease in Accrued Interest Receivable and
Other Assets ................................. 1,557 17,339 (15,278)
Increase (Decrease) in Accounts Payable and
Accrued Liabilities .......................... (269) 1,587 (1,134)
- --------------------------------------------------------------------------------------------------------------
Net Cash Provided by Operating Activities .............................. 32,790 47,192 5,321
- --------------------------------------------------------------------------------------------------------------
Cash Flows from Investing Activities
Proceeds from Sales of Securities Available for Sale ......... 378,411 105,989 159,350
Proceeds from Maturing Securities Available for Sale ......... 274,617 47,450 84,467
Purchases of Securities Available for Sale ................... (719,971) (269,458) (184,726)
Proceeds from Maturing Securities Held to Maturity ........... 37,306 91,003 56,907
Purchases of Securities Held to Maturity ..................... -- (19,453) (112,654)
Proceeds from Sale of Loans .................................. 2,104 46 6,142
Purchases of Loans ........................................... (176) (1,051) (2,012)
Loan Originations and Advances, Net .......................... (131,715) (138,400) (73,859)
Recoveries of Charged-Off Loans .............................. 1,066 759 550
Proceeds from Sale of Fixed Assets ........................... 554 2 365
Proceeds from Sale of Other Assets ........................... 716 277 508
Proceeds from Sale of Other Real Estate ...................... 5,443 1,019 2,815
Purchases of Premises and Equipment .......................... (19,410) (16,304) (6,110)
Net Cash Provided By (Used in) Mergers ....................... 5,160 -- (15,404)
- --------------------------------------------------------------------------------------------------------------
Net Cash Used in Investing Activities .................................. (165,895) (198,121) (83,661)
- --------------------------------------------------------------------------------------------------------------
Cash Flows from Financing Activities
Net Increase (Decrease) in Demand Deposits, Money
Market Checking and Savings Accounts ................. 62,728 2,606 (4,827)
Net Increase in Time Deposits ................................ 80,973 144,542 74,260
Net Increase (Decrease) in Federal Funds Purchased
and Securities Sold Under Repurchase Agreements ...... 4,782 1,169 (125)
Proceeds from Sale of Class A Common Stock ................... 73 494 51,669
Cash Dividends Paid on Class A Common Stock .................. (6,413) (5,242) (3,967)
Cash Dividends Paid on Fractional Shares ..................... (8) -- --
Tax Effect of Nonqualified Stock Options Exercised ........... 444 -- --
- --------------------------------------------------------------------------------------------------------------
Net Cash Provided by Financing Activities .............................. 142,579 143,569 117,010
- --------------------------------------------------------------------------------------------------------------
Increase (Decrease) in Cash and Cash Equivalents ....................... 9,474 (7,360) 38,670
Cash and Cash Equivalents at Beginning of Year ......................... 81,353 88,713 50,043
- --------------------------------------------------------------------------------------------------------------
Cash and Cash Equivalents at End of Year ............................... $ 90,827 $ 81,353 $ 88,713
==============================================================================================================
</TABLE>
<PAGE>
CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
<TABLE>
<CAPTION>
Texas Regional Bancshares, Inc. and Subsidiaries
CONSOLIDATED STATEMENTS OF CASH FLOWS
Years Ended December 31, 1998, 1997 and 1996
(Dollars in Thousands) 1998 1997 1996
- -----------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Supplemental Disclosures of Cash Flow Information
Interest Paid .............................................. $ 58,385 $ 49,747 $ 36,158
Income Taxes Paid .......................................... 12,003 12,660 8,535
Supplemental Schedule of Noncash Investing and
Financing Activities
Foreclosure and Repossession in Partial
Satisfaction of Loans Receivable ........... 7,915 3,538 2,473
The Company Acquired Raymondville Bancorp, Inc. and its
subsidiary, Bank of Texas, on February 19, 1998. The
Company also Acquired First State Bank & Trust Co., Mission,
Texas and The Border Bank, Hidalgo, Texas on May 14, 1996
Assets Acquired and Liabilities Assumed are as follows:
Fair Value of Assets Acquired ...................... 63,944 -- 554,240
Cash Paid .......................................... 9,600 -- 99,500
Liabilities Assumed ................................ 58,512 -- 458,740
=====================================================================================================
The accompanying notes are an integral part of the consolidated financial statements.
</TABLE>
<PAGE>
Texas Regional Bancshares, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1998, 1997 and 1996
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Texas Regional Bancshares, Inc. (the "Parent" or "Corporation") and subsidiaries
(collectively, the "Company") is headquartered in McAllen, Texas. The Company
provides a broad array of customary banking services and operates twenty banking
offices throughout the Rio Grande Valley at December 31, 1998. The accounting
and reporting policies followed by the Company conform to generally accepted
accounting principles and to general practices within the banking industry.
PRINCIPLES OF CONSOLIDATION -
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 Corporation
accounts for investments in the subsidiaries on the equity method in the
Parent's financial statements.
USE OF ESTIMATES -
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosures of
contingent assets and liabilities at the date of the consolidated financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
TRUST ASSETS -
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.
CASH AND CASH EQUIVALENTS -
For purposes of the consolidated statements of cash flows, cash and cash
equivalents include cash on hand, amounts due from banks and investments with
original maturities of three months or less.
SECURITIES -
Securities that management has both the positive intent and ability to hold to
maturity are classified as securities held to maturity and are carried at cost,
adjusted for amortization of premium or accretion of discount using the interest
method. Securities that may be sold prior to maturity for asset/liability
management purposes, or that may be sold in response to changes in interest
rates, to changes in prepayment risk, to increase regulatory capital or other
similar factors, are classified as securities available for sale and carried at
fair value with any adjustments to fair value, after tax, reported as a separate
component of shareholders' equity and as other comprehensive income. Declines in
the fair value of individual held to maturity and available for sale securities
below their cost that are other than temporary result in write-downs of the
individual securities to their fair value. The related write-downs are included
in earnings as realized losses.
The Company reports interest and dividends on securities, including the
amortization of premiums and the accretion of discounts, in interest on
securities using the interest method. It records gains and losses on the sale of
securities on the trade date using the specific-identification method.
LOANS -
Loans that management has the intent and ability to hold for the foreseeable
future or until maturity or pay-off generally are reported at their outstanding
unpaid principal balances adjusted for charge-offs, the allowance for loan
losses, and any deferred fees or costs on originated loans or unamortized
premiums or discounts on purchased loans. The Company recognizes interest income
on discounted loans on the sum-of-the-months-digits method, which approximates
the interest method. Interest income accrues on the unpaid principal balance of
other loans. Interest income includes discounts and premiums amortized using the
interest method. Loan origination fees, net of certain direct origination costs,
are deferred and recognized as an adjustment of the yield (interest method).
<PAGE>
NONACCRUAL LOANS -
The Company discontinues the accrual of interest on loans at the time the loan
is 90 days delinquent unless the credit is well secured and in process of
collections. In all cases, loans must be placed on nonaccrual or charged-off at
an earlier date if collection of principal or interest is considered doubtful.
All interest accrued but not collected for loans that are placed on nonaccrual
or charged off is reversed against interest income. The interest on these loans
is accounted for on the cash basis or cost-recovery method, until qualifying for
a return to accrual status. Loans are returned to accrual status when all the
principal and interest amounts contractually due are reasonably assured of
repayment within a reasonable period and when the borrower has demonstrated
payment performance history.
ALLOWANCE FOR LOAN LOSSES -
The Company has established the allowance for loan losses through provisions for
loan losses charged against income. It charges off portions of loans deemed
uncollectible against the allowance for loan losses, and credits subsequent
recoveries, if any, to the allowance.
The allowance for loan losses related to impaired loans that are identified for
evaluation is based on discounted cash flows using the loan's initial effective
interest rate, or for collateral-dependent loans, the fair value, less selling
costs, of the collateral. By the time a loan becomes probable of foreclosure,
the Company charges it down to fair value, less estimated cost to sell.
Management's periodic evaluation of the adequacy of the allowance is based on
the Company's past loan loss experience, known and inherent risks in the
portfolio, adverse situations that may affect the borrower's ability to repay
(including the timing of future payments), the estimated value of any underlying
collateral, composition of the loan portfolio, and current economic conditions.
This evaluation is inherently subjective, as it requires material estimates that
are susceptible to significant change including the amounts and timing of future
cash flows expected to be received on impaired loans.
Management believes that the allowance for loan losses at December 31, 1998
adequately reflects the risks in the loan portifolio. Various regulatory
agenies, as an integral part of their examination process, periodically review
the Company's allowance for loan losses. Such agenies may require the Company to
recognize additions to the allowance based on their judgements of information
available to them at the time of their examination.
FORECLOSED ASSETS -
Foreclosed assets, which includes other foreclosed assets included in Other
Assets, include properties acquired through foreclosure in full or partial
satisfaction of the related loan.
The Company records foreclosed assets initially at the lower of fair value, net
of estimated selling costs, or cost, at the date of foreclosure. After
foreclosure, it carries the assets at the lower of (1) cost or (2) fair value,
less estimated costs to sell based on valuations periodically performed by
management. Revenue and expenses from operations and changes in the valuation
allowance are included in noninterest expense.
INCOME TAXES -
Deferred income tax assets and liabilities are determined using the liability
(or balance sheet) method. Under this method, the net deferred tax asset or
liability is determined based on the tax effects of the differences between the
book and tax basis of the various balance sheet assets and liabilities and gives
current recognition to changes in tax rates and laws. The Company files a
consolidated federal income tax return.
PREMISES AND EQUIPMENT -
Premises and equipment are stated at cost, net of accumulated depreciation and
amortization. Depreciable assets are depreciated over their estimated useful
lives. For financial reporting, depreciation is computed using the straight-line
method; in computing federal income tax, both the straight-line and accelerated
methods are used. Maintenance and repairs which do not extend the life of
premises and equipment are charged to noninterest expense.
GOODWILL AND IDENTIFIABLE INTANGIBLES -
Goodwill represents the excess of the purchase price over the estimated fair
value of identifiable net assets associated with acquisition transactions. The
Company amortizes goodwill on a straight-line basis over 15 years and
identifiable intangibles on a straight-line basis over their estimated periods
of benefit.
<PAGE>
YEAR 2000 -
The Company has developed and implemented a plan to deal with the Year 2000
problem. The plan provides for addressing Core Mission critical, Non Mission
critical and Business critical issues, complete with the assignment of
responsibility and target dates for completion. Core applications, such as
mainframe software and hardware, and some platform software have been certified
as Year 2000 compliant. Testing of these applications are scheduled to be
completed by March 31, 1999. The Year 2000 problem is the result of computer
programs being written using two digits rather that four to define the
applicable year. The Company is expensing all costs incurred as a result of
addressing the Year 2000 issue.
STOCK OPTION PLAN -
Prior to January 1, 1996, the Company accounted for its stock compensation
programs in accordance with the provisions of Accounting Principles Board
("APB") Opinion No. 25, "Accounting for Stock Issued to Employees," and related:
interpretations. As such, compensation expense would be recorded on the date of
grant only if the current market price of the underlying stock exceeded the
exercise price. On January 1, 1996, the Company adopted the Financial Accounting
Standards Board issued Statement of Financial Accounting Standards No. 123,
("Statement 123") "Accounting for Stock-Based Compensation," which permits
entities to recognize as expense over the vesting period the fair value of all
stock-based awards on the date of grant. Alternatively, Statement 123 also
allows entities to continue to apply the provisions of APB Opinion No. 25 and
provide pro forma net income and pro forma earnings per share disclosures for
employee stock option grants made in 1995 and future years as if the
fair-value-based method defined in Statement 123 had been applied. The Company
has elected to continue to apply the provisions of APB Opinion No. 25 and
provide the pro forma disclosure provisions of Statement 123.
EARNINGS PER COMMON SHARE COMPUTATIONS -
In February 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 128, ("Statement 128") "Earnings per Share."
Statement 128 specifies the computation, presentation, and disclosure
requirements for earnings per share (EPS) for entities with publicly held common
stock or potential common stock. Statement 128 replaces primary EPS and fully
diluted EPS on the face of the income statement for all entities with complex
capital structures and requires a reconciliation of the basic EPS computation to
the diluted EPS. Basic EPS is calculated by dividing net income available to
common shareholders, by the weighted average number of common shares
outstanding. The computation of diluted EPS assumes the issuance of common
shares for all dilutive potential common shares outstanding during the reporting
period. The dilutive effect of stock options are considered in earnings per
share calculations if dilutive, using the treasury stock method. Statement 128
is effective for financial statements issued for periods ending after December
15, 1997, including interim periods. The Company adopted Statement 128 in 1997,
accordingly, all prior-period earnings per share data presented in the
accompanying consolidated financial statements has been restated to conform to
the requirements of Statement 128. Adoption of Statement 128 did not have a
material effect on the Company's consolidated financial statements.
IMPAIRMENT OF LONG-LIVED ASSETS AND LONG-LIVED ASSETS TO BE DISPOSED OF -
The Company adopted the provisions of Statement of Financial Accounting
Standards No. 121, ("Statement 121") "Accounting for the Impairment of
Long-Lived Assets and for Long-Lived Assets to Be Disposed Of," on January 1,
1996. Statement 121 requires that Long-lived assets and certain identifiable
intangibles will be reviewed for impairment whenever events or changes in
circumstances indicate that the carrying amount of an asset may not be
recoverable. Recoverability of assets to be held and used is measured by a
comparison of the carrying amount of an asset to future net cash flows expected
to be generated by the asset. If such assets are considered impaired, the
impairment to be recognized will be measured by the amount by which the carrying
amounts of the assets exceed the fair value of the assets. Assets to be disposed
of will reported at the lower of the carrying amount or fair value less costs to
sell.
TRANSFERS AND SERVICING OF FINANCIAL ASSETS AND EXTINGUISHMENTS OF LIABILITIES -
In June 1996, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 125, ("Statement 125") "Accounting for
Transfers and Servicing of Financial Assets and Extinguishments of Liabilities."
In December 1996, the Financial Accounting Standards No. 127, ("Statement 127")
"Deferral of the Effective Date of Certain Provisions of FASB No. 125."
Statement 125 is effective for transfers and servicing of financial assets and
extinguishment of liabilities occurring after December 31, 1996 and is to be
applied prospectively. Statement 127 defers for a year the effective date for
all transfers of financial assets. Statement 125 provides accounting and
reporting standards for transfers and servicing of financial assets and
extinguishment of liabilities based on consistent application of a
financial-components approach that focuses on control. It distinguishes
transfers of financial assets that are sales from transfers that are secured
borrowings. Adoption of Statement 125 and 127 did not have a material impact on
the Company's financial position, results of operations, or liquidity.
<PAGE>
DISCLOSURE OF INFORMATION ABOUT CAPITAL STRUCTURE -
In February 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 129, ("Statement 129") "Disclosure of
Information about Capital Structure." Statement 129 lists required disclosures
about capital structure that had been included in a number of previously
existing separate statements and opinions. It applies to all entities, public
and nonpublic. Statement 129 is effective for financial statements issued for
periods ending after December 15, 1997. Adoption of Statement 129 did not have a
material effect or significantly alter the Company's consolidated financial
statements.
REPORTING COMPREHENSIVE INCOME -
In June 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 130, ("Statement 130") "Reporting
Comprehensive Income." Statement 130 establishes standards for reporting and
display of comprehensive income and its components (revenues, expenses, gains
and losses) in a full set of general-purpose financial statements. Statement 130
requires that an enterprise (a) classify items of other comprehensive income by
their nature in a financial statement and (b) display the accumulated balance of
other comprehensive income separately from retained earnings and additional
paid-in capital in the equity section of a statement of financial position.
Statement 130 is effective for fiscal years beginning after December 15, 1997.
Adoption of Statement 130 did not have a material impact on the Company's
consolidated financial statements.
DISCLOSURES ABOUT SEGMENTS OF AN ENTERPRISE AND RELATED INFORMATION -
In June 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 131, ("Statement 131") "Disclosures about
Segments of an Enterprise and Related Information." Statement 131 establishes
standards for the way that public business enterprises report information about
operation segments in annual financial statements and requires that those
enterprises report selected information about operation segments in interim
financial reports issued to shareholders. Statement 131 also establishes
standards for related disclosures about products and services, geographic areas,
and major customers. Statement 131 is effective for financial statements for
periods beginning after December 15, 1997. The Company did not identify any
reportable operating segments based on the requirements of Statement 131.
ACCOUNTING FOR DERIVATIVE INSTRUMENTS AND FOR HEDGING ACTIVITIES -
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 does not currently have derivative
instruments as defined by Statement 133.
(2) CASH AND DUE FROM BANKS
The Bank is required to maintain reserves with the Federal Reserve Bank. No
reserves were required at December 31, 1998 and the reserves required at
December 31, 1997 were $1.4 million.
<PAGE>
(3) SECURITIES
The amortized cost of securities and their estimated market values at December
31, 1998 and 1997 follow (dollars in thousands):
<TABLE>
<CAPTION>
Gross Gross Estimated
Amortized Unrealized Unrealized Market
Cost Gains Losses Value
- -------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
- -------------------------------------------------------------------------------------
Securities Available for Sale
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
- -------------------------------------------------------------------------------------
December 31, 1997
U.S. Treasury ................... $ 6,976 $ 26 $ -- $ 7,002
U.S. Government Agency .......... 277,385 680 (301) 277,764
Mortgage-Backed ................. 15,549 47 (35) 15,561
States and Political Subdivisions 19,927 975 (4) 20,898
Other ........................... 2,842 111 (1) 2,952
- -------------------------------------------------------------------------------------
Total ................... $322,679 $ 1,839 $ (341) $324,177
- -------------------------------------------------------------------------------------
<CAPTION>
GROSS GROSS ESTIMATED
AMORTIZED UNREALIZED UNREALIZED MARKET
COST GAINS LOSSES VALUE
- -------------------------------------------------------------------------------------
Securities Held to Maturity
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
- -------------------------------------------------------------------------------------
December 31, 1997
U.S. Treasury ................... $20,249 $ 236 $ (5) $20,480
U.S. Government Agency .......... 64,171 169 (38) 64,302
Mortgage-Backed ................. 750 -- (7) 743
States and Political Subdivisions 7,474 183 (1) 7,656
Other ........................... 100 -- -- 100
- -------------------------------------------------------------------------------------
Total ................... $92,744 $ 588 $ (51) $93,281
- -------------------------------------------------------------------------------------
</TABLE>
Net unrealized holding gains, net of related tax effect, of $609,000 and
$907,000 at December 31, 1998 and 1997, respectively, on securities available
for sale are reported as a separate component of shareholders' equity and as
other comprehensive income.
Gross realized gains and gross realized losses on sales of securities available
for sale were $3.0 million and $93,000, respectively, in 1998, $781,000 and
$47,000 respectively, in 1997 and $705,000 and $304,000, respectively, in 1996.
There were no sales of securities held to maturity in 1998, 1997 or 1996.
<PAGE>
The scheduled maturities of securities available for sale and securities held to
maturity at December 31, 1998 were as follows. Actual maturities will differ
from contractual maturities because borrowers may have the right to call or
prepay obligations with or without call or prepayment penalties.
SECURITIES
--------------------------------------------
AVAILABLE FOR SALE HELD TO MATURITY
------------------------ -------------------
ESTIMATED ESTIMATED
AMORTIZED MARKET AMORTIZED MARKET
(Dollars in Thousands) COST VALUE COST VALUE
- --------------------------------------------------------------------------------
Due in One Year or Less ........ $ 12,845 $ 12,865 $ 5,802 $ 5,846
Due From One to Five Years ..... 119,442 119,722 7,123 7,401
Due From Five To Ten Years ..... 203,389 203,839 1,406 1,403
Due After Ten Years ............ 119,315 119,510 -- --
- --------------------------------------------------------------------------------
Total .......... $454,991 $455,936 $ 14,331 $ 14,650
- --------------------------------------------------------------------------------
Securities with carrying values of $351.7 million at December 31, 1998 and
$291.2 million at December 31, 1997 were pledged to secure public funds, trust
assets on deposit and for other purposes required or permitted by law.
(4) Loans and Allowance for Loan Losses
The components of loans at December 31, 1998 and 1997 follows:
(Dollars in Thousands) 1998 1997
- --------------------------------------------------------------------------------
Commercial ............................... $ 311,966 $ 249,819
Commercial Tax-Exempt .................... 22,155 29,024
Agricultural ............................. 52,302 51,346
Real Estate
Construction ........................... 66,018 69,477
Commercial Mortgage .................... 354,134 304,215
Agricultural Mortgage .................. 34,440 31,949
1-4 Family Mortgage .................... 128,945 122,043
Consumer ................................. 119,545 93,443
- --------------------------------------------------------------------------------
Total .................... $1,089,505 $ 951,316
- --------------------------------------------------------------------------------
In the ordinary course of business, the Company's subsidiary bank makes loans to
its officers and directors, including entities related to those individuals.
These loans are made on substantially the same terms and conditions as those
prevailing at the time for comparable transactions with other persons and do not
involve more than the normal risk of collectibility or present other unfavorable
features. An analysis of these loans for the years ended December 31, 1998 and
December 31, 1997 follows:
(Dollars in Thousands) 1998 1997
- --------------------------------------------------------------------------------
Balance at Beginning of Year ................. $ 5,507 $ 4,371
Additions .................................... 2,286 4,339
Reductions
Collections .......................... (1,954) (3,203)
Charge-Offs .......................... -- --
- --------------------------------------------------------------------------------
Balance at End of Year ....................... $ 5,839 $ 5,507
- --------------------------------------------------------------------------------
A summary of the transactions in the allowance for loan losses for the years
ended December 31, 1998, 1997 and 1996 follows:
(Dollars in Thousands) 1998 1997 1996
- --------------------------------------------------------------------------------
Balance at Beginning of Year ............... $ 11,291 $ 10,806 $ 5,376
Balance from Acquisitions .................. 308 -- 4,647
Provision Charged to Expense ............... 9,729 2,947 2,173
Recovery of Amounts Previously Charged
to Allowance ....................... 1,066 759 550
Losses Charged to Allowance ................ (9,158) (3,221) (1,940)
- --------------------------------------------------------------------------------
Balance at End of Year ..................... $ 13,236 $ 11,291 $ 10,806
- --------------------------------------------------------------------------------
<PAGE>
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 $10.4
million at December 31, 1998 and $8.4 million at December 31, 1997. The average
recorded investment in impaired loans during 1998 and 1997 was $11.2 million and
$10.8 million, respectively. The total allowance for loan losses related to
these loans was $1.4 million and $1.0 million on December 31, 1998 and 1997,
respectively. Interest income on impaired loans of $232,000, $238,000 and
$561,000 was recognized for cash payments received during 1998, 1997 and 1996,
respectively. If interest on these impaired loans had been accrued at the
original contractual rates, interest income would have been increased by
approximately $2.2 million, $1.6 million and $807,000 for the years ended
December 31, 1998, 1997 and 1996, respectively.
(5) Premises and Equipment
A summary of premises and equipment and related accumulated depreciation and
amortization as of December 31, 1998 and December 31, 1997 follows:
Estimated
(Dollars in Thousands) Useful Lives 1998 1997
- --------------------------------------------------------------------------------
Land ......................................... $ 10,373 $ 8,066
Buildings and Leasehold Improvements ......... 2-40 years 56,569 31,842
Construction in Progress ..................... 168 9,407
Furniture and Equipment ..................... 3-10 years 22,896 18,376
- --------------------------------------------------------------------------------
Subtotal ..................................... 90,006 67,691
Less Accumulated Depreciation and Amortization (20,179) (15,248)
- --------------------------------------------------------------------------------
Total ........................ $ 69,827 $ 52,443
- --------------------------------------------------------------------------------
Depreciation and amortization expense for the years ended December 31, 1998,
1997 and 1996 was approximately $4.4 million, $3.4 million and $2.9 million,
respectively.
The Company recorded an impairment loss of $630,000 during the three months
ended June 30, 1997 to reflect the impairment of an existing bank building.
During 1998, construction of a new corporate headquarters building in McAllen,
Texas was completed adjacent to this site and the existing building was razed to
provide additional parking. The amount of the impairment loss was the book value
of the building at June 30, 1997.
(6) Time Deposits
Time deposits of $100,000 or more totaled $545.7 million and $458.1 million at
December 31, 1998 and 1997, respectively. Interest expense for the years ended
December 31, 1998, 1997 and 1996 on time deposits of $100,000 or more was
approximately $28.7 million, $23.3 million and $14.9 million, respectively.
(7) Federal Funds Purchased and Securities Sold Under Repurchase Agreements
The following table summarizes selected information regarding federal funds
purchased and securities sold under repurchase agreements as of and for the
years ended December 31, 1998, 1997 and 1996:
(Dollars in Thousands) 1998 1997 1996
- --------------------------------------------------------------------------------
Balance at End of Year ............... $ 7,407 $ 1,801 $ 632
Rate on Balance at End of Year ....... 4.52% 5.98% 3.92%
Average Daily Balance ................ $ 5,772 $ 980 $ 507
Average Interest Rate ................ 4.97% 5.27% 3.74%
Maximum Month-End Balance ............ $14,835 $11,100 $ 700
- --------------------------------------------------------------------------------
Securities sold under agreements to repurchase are comprised of customer deposit
agreements with maturities ranging from overnight to six months. These
obligations are not federally insured but are collateralized by a security
interest in various securities. These pledged securities are segregated and
maintained by a third party bank.
<PAGE>
(8) Income Tax
The components of income tax expense for the years ended December 31, 1998, 1997
and 1996 consisted of the following:
<TABLE>
<CAPTION>
(Dollars in Thousands) 1998 1997 1996
- ----------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Current Income Tax Expense
Federal ........................................... $ 12,091 $ 12,559 $ 8,496
State ............................................. 107 320 168
- ----------------------------------------------------------------------------------------------
Total Current Income Tax Expense .......... 12,198 12,879 8,664
- ----------------------------------------------------------------------------------------------
Deferred Income Tax Expense (Benefit)
Federal ........................................... (572) (999) 159
State ............................................. (3) (20) (29)
- ----------------------------------------------------------------------------------------------
Total Deferred Income Tax Expense (Benefit) (575) (1,019) 130
- ----------------------------------------------------------------------------------------------
Total Income Tax Expense .................. $ 11,623 $ 11,860 $ 8,794
- ----------------------------------------------------------------------------------------------
</TABLE>
Following is a reconciliation between the amount of reported income tax expense
for the years ended December 31, 1998, 1997 and 1996 and the amount computed by
multiplying the income before tax by the federal statutory tax rate:
<TABLE>
<CAPTION>
1998 1997 1996
----------------------- ----------------------- ---------------------
(Dollars in Thousands) Amount Rate Amount Rate Amount Rate
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Tax at Statutory Rate ................................... $ 11,934 35% $ 12,244 35% $ 9,439 35%
(Reductions) Additions
Tax-Exempt Interest ............................. (828) (2) (860) (3) (974) (4)
State Earned Surplus Tax, Net of Federal
Income Tax Effect ....................... 67 -- 221 1 91 1
Goodwill Amortization ........................... 404 1 344 1 223 1
Other - Net ..................................... 46 -- (89) -- 15 --
- -----------------------------------------------------------------------------------------------------------------------------------
Total Income Tax Expense ........ $ 11,623 34% $ 11,860 34% $ 8,794 33%
- -----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
The net deferred tax liability included with accounts payable and accrued
expenses in the accompanying consolidated balance sheets is comprised of the
following deferred tax assets and liabilities as of December 31, 1998 and
December 31, 1997.
(Dollars in Thousands) 1998 1997
- --------------------------------------------------------------------------------
Deferred Tax Liability
Premises and Equipment ........................... $ 5,039 $ 4,394
Intangibles ...................................... 3,170 2,764
Unrealized Gain on Securities Available for Sale . 335 499
Other ............................................ 779 424
- --------------------------------------------------------------------------------
Total Deferred Tax Liability ..... 9,323 8,081
- --------------------------------------------------------------------------------
Deferred Tax Asset
Allowance for Loan Losses ........................ 3,868 2,798
Unrealized Losses on Loans ....................... 61 834
Other Real Estate ................................ 28 55
Other ............................................ 579 542
- --------------------------------------------------------------------------------
Total Deferred Tax Assets Before Valuation Allowance ..... 4,536 4,229
Valuation Allowance ...................................... (35) (36)
- --------------------------------------------------------------------------------
Total Deferred Tax Assets less Valuation Allowance ....... 4,501 4,193
- --------------------------------------------------------------------------------
Net Deferred Tax Liability ....... $ 4,822 $ 3,888
- --------------------------------------------------------------------------------
For the years ended December 31, 1998 and December 31, 1997, the deferred tax
liability results primarily from the use of accelerated methods of depreciation
of equipment for tax purposes and the write-off of core deposits for financial
statement purposes. The deferred tax asset results from differences in the bad
debts written-off for financial statement purposes and the amount allowed under
tax law, and a difference in other real estate basis due to write-downs for
financial statement purposes for both years ended December 31, 1998 and 1997,
respectively.
Based upon the level of historical taxable income and projections for future
taxable income over the periods which the deferred tax assets are deductible,
management believes it is more likely than not the Company will realize the
benefits of these deductible differences, net of the existing valuation
allowances at December 31, 1998. The amount of the deferred tax asset considered
realizable, however, could be reduced in the near term if estimates of future
taxable income during the carryforward period are reduced.
<PAGE>
(9) PREFERRED STOCK
The Corporation has 10.0 million authorized shares of $1 par value Preferred
Stock. The Articles of Incorporation of the Corporation grant discretion to the
Board of Directors to establish series of Preferred Stock with such rights,
preferences and limitations as may be determined by resolution of the Board. No
shares of preferred stock are currently outstanding.
(10) COMMON STOCK
The Corporation has 50.0 million authorized shares of $1 par value Common Stock.
At December 31, 1998, 1997 and 1996, the number of common shares outstanding,
retroactively adjusted for the three-for-two stock split effected as a stock
dividend during 1997, are 14,411,583, 14,403,484 and 14,356,193, respectively.
On May 14, 1996, Texas Regional Bancshares, Inc. completed its secondary public
offering of 2.5 million shares of the Corporation's Class A Voting Common Stock.
On May 14, 1996 Texas Regional Bancshares, Inc. also completed the acquisition
of First State Bank & Trust Co., Mission, Texas, and the Border Bank, Hidalgo,
Texas, (the "Mergers"), through merger with Texas State Bank, the principal
operating subsidiary of Texas Regional Bancshares, Inc. The purchase price of
the Mergers was financed with a combination of proceeds from the 2.5 million
share common equity offering and cash on the balance sheet of the Company.
(11) EMPLOYEE BENEFITS
The Company has an Employee Stock Ownership Plan (with section 401(k)
provisions) (the "KSOP") covering substantially all of their employees. Employer
contributions to the KSOP are discretionary, and as such, determined at the sole
discretion of the Board of Directors. The KSOP covers employees who have
completed twelve consecutive months of credited service, as defined in the plan,
and attained age 21. A participant's account balance will be fully vested after
six years of credited service. Pension expense, which includes employer matching
as discussed below, for the years ended December 31, 1998, 1997 and 1996 was
$469,000, $652,000 and $814,000, respectively.
The Company acquired an existing 401(k) plan in connection with its acquisition
of the Bank of Texas. The plan is restricted to pre-acquisition participation by
qualified employees.
The Company has granted stock options providing for the purchase of Class A
Voting Common shares by certain key employees under five separate option plans
approved by the shareholders. The following discussion concerning stock option
plans has been restated to retroactively give effect for the three-for-two stock
split declared and distributed by the Corporation during the third quarter of
1997.
The 1985 Nonstatutory Stock Option Plan ("the 1985 NSO Plan") authorized the
award of stock options for 190,076 shares to the chief executive officer at a
price determined by a committee of directors on the grant date. Options to
acquire 190,076 shares at a weighted average exercise price of $8.00 per share
were outstanding and exercisable under 1985 NSO Plan expiring on May 10, 2000 at
December 31, 1998.
The 1985 Incentive Stock Option Plan ("the 1985 ISO Plan") provided for the
grant of options for 190,076 shares at an exercise price of fair market value on
the grant date to certain key employees of the Company. Options to acquire
21,065 shares at a weighted average exercise price of $8.00 per share were
outstanding and exercisable under 1985 ISO Plan expiring on May 10, 2000 at
December 31, 1998.
The 1995 Nonstatutory Stock Option Plan ("the 1995 NSO Plan") authorized the
award of options up to an aggregate maximum of 135,000 shares at an exercise
price of fair market value on the grant date. The Company granted options in
1996 with contractual terms of seven years and a vesting period of four years.
Options to acquire 123,375 shares at a weighted average exercise price of $11.50
per share were outstanding, with 90,938 exercisable, under 1995 NSO Plan
expiring on July 1, 2002 at December 31, 1998.
The 1997 Nonstatutory Stock Option Plan ("the 1997 NSO Plan") authorized the
award of options up to an aggregate maximum of 125,000 shares at an exercise
price of fair market value on the grant date. The Company granted options in
1998 with contractual terms of approximately five years and a vesting period of
approximately three years. Options to acquire 125,000 shares at a weighted
average exercise price of $33.56 per share were outstanding, with 29,738
exercisable, under the 1997 NSO Plan expiring on July 1, 2003 at December 31,
1998.
<PAGE>
The 1997 Incentive Stock Option Plan ("the 1997 ISO Plan") authorized the award
of options up to an aggregate maximum of 100,000 shares at an exercise price of
fair market value on the grant date. The Company granted options in 1998 with
contractual terms of approximately five years and a vesting period of
approximately three years. Options to acquire 100,000 shares at a weighted
average exercise price of $33.68 per share were outstanding, with 24,262
exercisable, under the 1997 ISO Plan expiring on July 1, 2003 at December 31,
1998.
The Company applies APB Opinion 25 and related interpretations in accounting for
its plans. Accordingly, no compensation cost has been recognized for its fixed
stock option plans. Had compensation cost for the Company's stock-based
compensation plans been determined based on the fair value at the grant dates
for awards under those plans consistent with the method of FASB Statement 123
adopted in 1995, the Company's net income and earnings per share would have been
reduced to the pro forma amounts indicated below:
<TABLE>
<CAPTION>
(Dollars in Thousands, Except Per Share Data) 1998 1997 1996
- --------------------------------------------------------------------------------------
<S> <C> <C> <C>
Net Income As reported $ 22,474 $ 23,122 $ 18,174
Pro forma 21,815 23,075 18,098
Basic earnings per share As reported 1.56 1.61 1.40
Pro forma 1.51 1.60 1.40
Diluted earnings per share As reported 1.54 1.58 1.38
Pro forma 1.49 1.58 1.38
- --------------------------------------------------------------------------------------
</TABLE>
The fair value of options at date of grant was estimated using the Black-Scholes
option pricing model with the following weighted-average assumptions:
1998 1997 1996
- --------------------------------------------------------------------------------
Expected life (years) .......... 3.46 -- --
Interest rate .................. 5.52% -- --
Volatility ..................... 30.00 -- --
Dividend yield ................. 1.49 -- --
- --------------------------------------------------------------------------------
No options were granted during the years ended December 31, 1997 and 1996. Pro
forma net income reflects options granted in 1998 and 1995.
A summary of the status of the Company's five fixed option plans as of December
31, 1998, 1997 and 1996, and changes during the years ending on those dates is
presented below:
<TABLE>
<CAPTION>
1998 1997 1996
---------------------- ---------------------- -----------------------
Weighted Weighted Weighted
Average Average Average
Shares Exercise Shares Exercise Shares Exercise
Fixed Options (000) Price (000) Price (000) Price
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Outstanding at beginning
of year ...................... 344 $ 9.29 391 $ 9.21 394 $ 9.20
Granted .............................. 234 33.63 -- -- -- --
Exercised ............................ (8) 9.05 (47) 8.58 (3) 8.00
Forfeited ............................ (10) 31.03 -- -- -- --
- ---------------------------------------------------------------------------------------------------------------------------
Outstanding at end of year ........... 560 19.07 344 $ 9.29 391 $ 9.21
- ---------------------------------------------------------------------------------------------------------------------------
Options exercisable at
year-end ..................... 356 -- 276 -- 290 --
Options available for grant
at year-end .................. 1 -- None -- None --
Weighted-average fair
value of options granted
during the year .............. 8.71 -- None -- None --
</TABLE>
<PAGE>
The following table summarizes information about fixed stock options outstanding
at December 31, 1998.
Options Outstanding Options Exercisable
------------------- ------------------------
Weighted
Average Weighted Weighted
Shares Remaining Average Shares Average
Range of Outstanding Contractual Exercise Exercisable Exercise
Exercise Prices (000) Life (Years) Price (000) Price
- --------------------------------------------------------------------------------
$ 8.00 211 1.4 $ 8.00 211 $ 8.00
$ 11.50 124 3.5 11.50 91 11.50
$ 27.38 9 4.5 27.38 -- 27.38
$ 33.88 216 4.5 33.88 54 33.88
- --------------------------------------------------------------------------------
$8.00 to $33.88 560 356
- --------------------------------------------------------------------------------
Effective as of December 14, 1993, the Company adopted a Deferred Compensation
Plan for the benefit of Glen E. Roney, Chief Executive Officer of the Company.
The Deferred Compensation Plan provides for a retirement benefit payable to Mr.
Roney (or his designated beneficiary or his estate if Mr. Roney dies prior to
payment of the full amount of deferred compensation) of $100,000 per year
commencing October 29, 2002, and continuing annually thereafter for fourteen
years. In the event payments are to commence after October 30, 2002, the Company
shall pay to Employee on the Late Retirement Date a lump sum equal to the amount
of money that would have been paid to Employee had payments commenced on October
30, 2002 (the "Catch-Up Amount"), and in addition, the Company shall pay to
Employee $100,000 per year commencing on October 30 of the year next following
the Late Retirement Date and continuing regularly on the same calendar day of
each year thereafter, (including the Catch-Up Amount and all other payments) the
aggregate sum of $1,500,000; and on the Late Retirement Date, the Company shall
pay Employee an amount intended to compensate for Employee's lost earnings
potential on the Catch-Up Amount. If Mr. Roney dies prior to commencement of the
retirement benefit, payments would commence immediately and be paid to his
designated beneficiary or his estate. The Company also adopted the Trust Under
Glen E. Roney Deferred Compensation Plan, in the form prescribed by applicable
regulations adopted by the Internal Revenue Service for nonqualified deferred
compensation plans. Among other things, the Plan and Trust provide for an
initial deposit into the Trust by the Company and subsequent deposits at the
discretion of the Board of Directors, and further provide for full funding of
the amount necessary to discharge the retirement benefit in the event of a
change of control, as that term is defined in the Trust.
With the consummation of the Mergers the Company acquired four existing separate
deferred compensation plans for the benefit of certain Texas State Bank
employees. The plans provide for retirement benefits to be paid to the specific
employee (or a designated beneficiary or estate if death occurs prior to payment
of the full amount of deferred compensation) on reaching age 65. One plan
entered into on December 10, 1963, commenced payments of approximately $13,000
each year on January 4, 1988, continuing annually thereafter through June 2003.
A second plan, entered into on September 1, 1979, provides for payments of
approximately $13,000 each year which was scheduled to commence on April 1,
1990, continuing annually thereafter through June 2005; however, the employee
elected to receive an amount less than that provided for in the plan over a
longer period of time. The third plan provides for a retirement benefit payable
of $50,000 per year commencing in March 1999 and continuing annually thereafter
for 20 years. The fourth plan provides for a retirement benefit payable of
$13,350 each year beginning March 15, 1995 and continuing annually thereafter
for fourteen years.
The Company has incurred deferred compensation expense of $152,000, $130,000 and
$87,000 for the years ended December 31, 1998, 1997 and 1996, respectively,
related to the five deferred compensation plans previously discussed.
The Bank owns and is the beneficiary of five life insurance policies on the
former employees covered by the deferred compensation plans. The life insurance
policies' face values are amounts equal to the total benefits paid under the
plan.
(12) COMMITMENTS AND CONTINGENCIES
In the normal course of business, the Company enters into various transactions
which, in accordance with generally accepted accounting principles, are not
included on the consolidated balance sheets. These transactions are referred to
as "off-balance sheet commitments." The Company enters into these transactions
to meet the financing needs of its customers. These transactions include
commitments to extend credit and letters of credit which involve elements of
credit risk in excess of the amounts recognized in the consolidated balance
sheets. The Company attempts to minimize its exposure to loss under these
commitments by subjecting them to the same credit approval and monitoring
procedures as its other credit facilities.
<PAGE>
The Company enters into contractual commitments to extend credit, normally with
fixed expiration dates or termination clauses, at specified rates and for
specific purposes. Customers use credit commitments to ensure that funds will be
available for working capital purposes, for capital expenditures and to ensure
access to funds at specified terms and conditions. Substantially all of the
Company's commitments to extend credit are contingent on customers maintaining
specific credit standards at the time of loan funding. Management assesses the
credit risk associated with certain commitments to extend credit in determining
the level of the allowance for possible loan losses.
Letters of credit are written for conditional commitments issued by the Company
to guarantee the performance of a customer to a third party. The Company's
policies generally require that letters of credit arrangements contain security
and debt covenants similar to those contained in loan agreements.
At December 31, 1998, the Company had outstanding commitments to extend credit
of approximately $167.7 million, which included standby letters of credit of
approximately $11.7 million.
Future minimum lease payments on operating leases as of December 31, 1998 are as
follows:
Office Office
(Dollars in Thousands) Space Equipment Total
- --------------------------------------------------------------------------------
1999 $ 36 $127 $163
2000 36 127 163
2001 36 127 163
2002 36 127 163
2003 38 127 165
- --------------------------------------------------------------------------------
Total $182 $635 $817
- --------------------------------------------------------------------------------
The Company is a defendant in various legal proceedings arising in connection
with its ordinary course of business. In the opinion of management, the
financial position of the Company will not be materially affected by the final
outcome of these legal proceedings.
(13) OTHER NONINTEREST EXPENSE
Other noninterest expense for the years ended December 31, 1998, 1997 and 1996
consisted of the following:
(Dollars in Thousands) 1998 1997 1996
- --------------------------------------------------------------------------------
Advertising and Public Relations ........ $ 1,536 $ 1,372 $ 1,292
Data Processing and Check Clearing ...... 1,183 1,120 1,193
Director Fees ........................... 333 515 521
Franchise Tax ........................... 600 533 281
Insurance ............................... 430 327 242
FDIC Insurance .......................... 166 150 92
Legal ................................... 1,255 1,050 714
Professional ............................ 638 775 703
Postage, Delivery and Freight ........... 816 689 558
Stationery and Supplies ................. 1,325 1,056 1,015
Telephone ............................... 534 433 393
Other Losses ............................ 68 837 664
Miscellaneous Expense ................... 1,767 1,169 1,015
- --------------------------------------------------------------------------------
Total ........................... $10,651 $10,026 $ 8,683
- --------------------------------------------------------------------------------
<PAGE>
(14) EARNINGS PER COMMON SHARE COMPUTATIONS
Basic earnings per share was computed by dividing net income available to common
shareholders by the weighted average number of common stock outstanding during
the year, retroactively adjusted for stock splits effected as a stock dividend.
Diluted earnings per share was computed by dividing net income by the weighted
average number of common stock and common stock equivalents outstanding during
the year, retroactively adjusted for stock splits effected as a stock dividend.
The Diluted earnings per share computations include the effects of common stock
equivalents applicable to stock option contracts.
The number of shares outstanding and related earnings per share amounts have
been restated to retroactively give effect for the three-for-two stock split
declared and distributed by the Corporation during the third quarter of 1997.
The table below presents a reconciliation of basic and diluted earnings per
share computations for the years ended December 31, 1998, 1997 and 1996 (Dollars
in thousands, except per share data.)
<TABLE>
<CAPTION>
1998 1997 1996
- ----------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Net income available to common shareholders ........ $ 22,474 $ 23,122 $ 18,174
- ----------------------------------------------------------------------------------------------
Weighted average number of common shares
outstanding used in basic EPS calculation .. 14,408,533 14,377,994 12,942,737
Add assumed exercise of outstanding stock options
as adjustments for dilutive securities ..... 225,679 231,566 181,243
- ----------------------------------------------------------------------------------------------
Weighted average number of common shares
outstanding used in diluted EPS calculations 14,634,212 14,609,560 13,123,980
- ----------------------------------------------------------------------------------------------
Basic EPS .......................................... $ 1.56 $ 1.61 $ 1.40
Diluted EPS ........................................ 1.54 1.58 1.38
- ----------------------------------------------------------------------------------------------
</TABLE>
(15) TEXAS REGIONAL BANCSHARES, INC. (PARENT ONLY)
CONDENSED FINANCIAL STATEMENTS
CONDENSED BALANCE SHEETS
December 31, 1998 and 1997
(Dollars in Thousands) 1998 1997
- --------------------------------------------------------------------------------
Assets
Cash in Subsidiary Bank ........................ $ 5,473 $ 9,694
- --------------------------------------------------------------------------------
Total Cash and Cash Equivalents .............. 5,473 9,694
Investments in Consolidated Subsidiaries ....... 173,766 153,217
Furniture and Equipment ........................ 45 56
Other Assets ................................... 30 95
- --------------------------------------------------------------------------------
Total Assets ................................. $179,314 $163,062
- --------------------------------------------------------------------------------
Liabilities
Accounts Payable and Accrued Liabilities ....... $ 45 $ 65
Dividends Payable .............................. 1,801 1,442
- --------------------------------------------------------------------------------
Total Liabilities ............................ 1,846 1,507
Shareholders' Equity ................................... 177,468 161,555
- --------------------------------------------------------------------------------
Total Liabilities and Shareholders' Equity ... $179,314 $163,062
- --------------------------------------------------------------------------------
<PAGE>
<TABLE>
<CAPTION>
CONDENSED STATEMENTS OF INCOME
Years Ended December 31, 1998, 1997 and 1996
(Dollars in Thousands) 1998 1997 1996
- --------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Income
Interest Income ................................................... $ -- $ 451 $ 417
Dividends Received ................................................ 10,439 17 --
- --------------------------------------------------------------------------------------------------------------
Total Income ...................................................... 10,439 468 417
- --------------------------------------------------------------------------------------------------------------
Expense
Occupancy Expense ................................................. 5 6 4
Equipment Expense ................................................. 17 17 14
Director Fees ..................................................... 103 113 125
Franchise Tax ..................................................... 189 198 78
Legal and Professional ............................................ 97 55 40
Shareholder Services .............................................. 101 96 126
Organizational Expense ............................................ 65 3 3
Other ............................................................. 84 48 51
- --------------------------------------------------------------------------------------------------------------
Total Expense ..................................... 661 536 441
- --------------------------------------------------------------------------------------------------------------
Income (Loss) Before Income Tax Expense and Equity
in Undistributed Net Income of Subsidiaries........................ 9,778 (68) (24)
Income Tax Benefit ........................................................ (239) (49) (2)
- --------------------------------------------------------------------------------------------------------------
Income (Loss) Before Equity in Undistributed Net
Income of Subsidiaries ............................................ 10,017 (19) (22)
Equity in Undistributed Net Income of Subsidiaries ........................ 12,457 23,141 18,196
- --------------------------------------------------------------------------------------------------------------
Net Income ........................................ $ 22,474 $ 23,122 $ 18,174
- --------------------------------------------------------------------------------------------------------------
CONDENSED STATEMENTS OF CASH FLOWS
Years Ended December 31, 1998, 1997 and 1996
(Dollars in Thousands) 1998 1997 1996
- --------------------------------------------------------------------------------------------------------------
Cash Flows from Operating Activities
Net Income ........................................................ $ 22,474 $ 23,122 $ 18,174
Adjustments to Reconcile Net Income to Net Cash
Provided by (Used in) Operating Activities
Depreciation and Amortization ............................. 11 14 15
Undistributed Net Income of Subsidiaries .................. (12,457) (23,141) (18,196)
(Increase) Decrease in Other Assets ....................... 65 16 (323)
Increase (Decrease) in Income Taxes Payable ............... (12) 6 6
Decrease in Deferred Income Taxes ......................... 34 2 --
Increase (Decrease) in Accounts Payable and Accrued
Liabilities .............................................. 12 3 13
- --------------------------------------------------------------------------------------------------------------
Net Cash Provided by (Used in) Operating Activities 10,127 22 (311)
- --------------------------------------------------------------------------------------------------------------
Cash Flows from Investing Activities
Investment in Subsidiaries ........................................ (8,000) (250) (40,000)
- --------------------------------------------------------------------------------------------------------------
Net Cash Used In Investing Activities ..................... (8,000) (250) (40,000)
- --------------------------------------------------------------------------------------------------------------
Cash Flows from Financing Activities
Cash Dividends Paid on Common Stock ............................... (6,421) (4,236) (2,981)
Proceeds from Sale of Class A Common Stock ........................ 73 494 51,878
- --------------------------------------------------------------------------------------------------------------
Net Cash Provided by (Used in) Financing Activities ....... (6,348) (3,742) 48,897
- --------------------------------------------------------------------------------------------------------------
Net Increase (Decrease) in Cash and Cash Equivalents ...................... (4,221) (3,970) 8,586
Cash and Cash Equivalents at Beginning of Year ............................ 9,694 13,664 5,078
- --------------------------------------------------------------------------------------------------------------
Cash and Cash Equivalents at End of Year .................................. $ 5,473 $ 9,694 $ 13,664
- --------------------------------------------------------------------------------------------------------------
Supplemental Disclosures of Cash Flow Information
Income Taxes Paid ................................................. $ 12,003 $ 12,660 $ 8,535
- --------------------------------------------------------------------------------------------------------------
</TABLE>
<PAGE>
(16) RESTRICTIONS ON RETAINED EARNINGS
The Bank is subject to certain restrictions on the amount of dividends that it
may declare without prior regulatory approval.
The amount of retained earnings in the Bank at December 31, 1998 was $67.5
million. On December 31, 1998, the aggregate amount of dividends, which legally
could be paid to the Corporation without prior approval of various regulatory
agencies, totaled $48.8 million.
(17) REGULATORY MATTERS
The Company is subject to various regulatory capital requirements administered
by the federal banking agencies. Failure to meet minimum capital requirements
can initiate certain mandatory, and possibly additional discretionary, actions
by regulators that, if undertaken, could have a direct material effect on the
Company's financial statements. Under capital adequacy guidelines and the
regulatory framework for prompt corrective action, the Company must meet
specific capital guidelines that involve quantitative measures of the Company's
assets, liabilities, and certain off-balance-sheet items as calculated under
regulatory accounting practices. The Company's capital amounts and
classification are also subject to qualitative judgments by the regulators about
components, risk weightings, and other factors.
Quantitative measures established by regulation to ensure capital adequacy
require the Company to maintain minimum amounts and ratios (set forth in the
table below) of Total and Tier I capital (as defined in the regulations) to
risk-weighted assets (as defined), and of Tier I capital (as defined) to average
assets (as defined). Management believes that the Company meets all capital
adequacy requirements to which it is subject at December 31, 1997.
At December 31, 1998, the most recent notification from the Federal Deposit
Insurance Corporation categorized the Company as adequately capitalized under
the regulatory framework for prompt corrective action. To be categorized as
adequately capitalized the Company must maintain minimum total risk-based, Tier
I risk-based, and Tier I leverage ratios as set forth in the table. There are no
conditions or events since that notification that management believes have
changed the institution's category. The Company's actual capital amounts and
ratios are also presented in the table.
<TABLE>
<CAPTION>
To Be Well
Capitalized Under
For Capital Prompt Corrective
Actual Adequacy Purposes: Action Provisions:
------------------- ---------------------------- -------------------------------
(Dollars in Thousands) Amount Ratio Amount Ratio Amount Ratio
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
December 31, 1998
Total Capital
(to Risk Weighted Assets) $163,201 14.06% >or= $92,884 >or= 8.0% >or= $116,105 >or= 10.0%
Tier I Capital
(to Risk Weighted Assets) 149,965 12.92 >or= 46,442 >or= 4.0 >or= 69,663 >or= 6.0
Tier I Capital
(to Average Assets) ..... 149,965 8.85 >or= 67,772 >or= 4.0 >or= 84,715 >or= 5.0
December 31, 1997
Total Capital
(to Risk Weighted Assets) $147,938 14.73% >or= $80,361 >or= 8.0% >or= $100,451 >or= 10.0%
Tier I Capital
(to Risk Weighted Assets) 136,647 13.60% >or= 40,180 >or= 4.0% >or= 60,271 >or= 6.0
Tier I Capital
(to Average Assets) ..... 136,647 9.21% >or= 59,353 >or= 4.0% >or= 74,191 >or= 5.0
- ------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
<PAGE>
(18) FAIR VALUE OF FINANCIAL INSTRUMENTS
DISCLOSURES ABOUT FAIR VALUE OF FINANCIAL INSTRUMENTS-
Statement of Financial Accounting Standards No. 107 ("Statement 107"),
"Disclosures about Fair Value of Financial Instruments", requires that the
Company disclose estimated fair values for its financial instruments. Fair value
estimates, methods and assumptions are set forth below for the Company's
financial instruments.
DEBT SECURITIES-
For securities held, estimated fair value equals quoted market price, if
available. If a quoted market price is not available, fair value is estimated
using quoted market prices for a similar security.
Securities not classified as Held to Maturity or Trading are classified as
Available for Sale and measured at fair value in the consolidated balance sheets
with unrealized holding gains and losses reported as a separate component of
shareholders' equity until realized.
The following table presents the amortized cost and estimated fair value of
securities classified as Available for Sale at December 31, 1998 and December
31, 1997:
1998 1997
-------------------- --------------------
Amortized Estimated Amortized Estimated
(Dollars in Thousands) Cost Fair Value Cost Fair Value
- --------------------------------------------------------------------------------
U.S. Treasury ...................... $ -- $ -- $ 6,976 $ 7,002
U.S. Government Agency ............. 313,647 313,970 277,385 277,764
Mortgage-Backed .................... 101,670 101,365 15,549 15,561
States and Political Subdivisions .. 36,112 36,988 19,927 20,898
Other .............................. 3,562 3,613 2,842 2,952
- --------------------------------------------------------------------------------
Total .............. $454,991 $455,936 $322,679 $324,177
- --------------------------------------------------------------------------------
The following table presents the carrying value and estimated fair value of
securities classified as Held to Maturity at December 31, 1998 and December 31,
1997:
1998 1997
------------------- -------------------
Carrying Estimated Carrying Estimated
(Dollars in Thousands) Amount Fair Value Amount Fair Value
- --------------------------------------------------------------------------------
U.S. Treasury ......................... $10,013 $10,186 $20,249 $20,480
U.S. Government Agency ................ -- -- 64,171 64,302
Mortgage-Backed ....................... -- -- 750 743
States and Political Subdivisions ..... 4,318 4,464 7,474 7,656
Other ................................. -- -- 100 100
- --------------------------------------------------------------------------------
Total ................. $14,331 $14,650 $92,744 $93,281
- --------------------------------------------------------------------------------
<PAGE>
LOANS-
The Company does not consider its loan portfolio to have the homogeneous
categories of loans for which the fair value could be estimated by using quoted
market prices for securities backed by similar loans. Therefore, the fair value
of all loans is estimated by discounting future cash flows using the current
rates at which similar loans would be made to borrowers with similar credit
ratings for the same remaining maturities. Assumptions regarding credit risk,
cash flows and discount rates are judgmentally determined using available market
information and specific borrower information.
The following table presents information for loans at or for the year ended
December 31, 1998 and December 31, 1997:
<TABLE>
<CAPTION>
1998 1997
-------------------------------------- --------------------------------------
Carrying Average Estimated Carrying Average Estimated
(Dollars in Thousands) Amount Yield Fair Value Amount Yield Fair Value
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Commercial and Agriculture
Adjustable ................. $ 237,920 8.85% $ 236,818 $ 207,972 9.76% $ 205,912
Fixed ...................... 148,503 9.64 150,643 122,217 9.99 122,712
Real Estate
Adjustable ................. 232,857 9.15 231,413 237,159 9.70 236,075
Fixed ...................... 350,680 9.89 357,376 290,525 10.13 292,926
Consumer ................................... 119,545 11.49 120,081 93,443 10.87 92,743
- ------------------------------------------------------------------------------------------------------------------------------------
Total Loans, Net of Unearned
Discount ........................... $1,089,505 9.65% $1,096,331 $ 951,316 10.00% $ 950,368
- ------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
DEPOSIT LIABILITIES-
The fair value of demand deposits, savings accounts and certain money market
deposits is the amount payable on demand at the reporting date. The fair value
of certificates of deposit is based on the discounted value of contractual cash
flows. The discount rate is estimated using the rates currently offered for
deposits of similar remaining maturities. The following table presents the
carrying value and estimated fair value of deposit liabilities at December 31,
1998 and December 31, 1997:
<TABLE>
<CAPTION>
1998 1997
----------------------- -----------------------
Carrying Estimated Carrying Estimated
(Dollars in Thousands) Amount Fair Value Amount Fair Value
- -------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Demand .......................... $ 234,655 $ 234,655 $ 208,423 $ 208,423
Savings ......................... 107,711 107,711 101,688 101,688
Money Market Checking and Savings 301,238 301,238 242,839 242,839
Time Deposits ................... 919,338 926,256 809,833 813,860
- -------------------------------------------------------------------------------------
Total Deposits .. $1,562,942 $1,569,860 $1,362,783 $1,366,810
- -------------------------------------------------------------------------------------
</TABLE>
The fair value estimates above do not include the benefit that results from the
low-cost funding provided by the deposit liabilities compared to the cost of
borrowing funds in the market. The Company has not attempted to determine the
amount of increase in net assets that would result from the benefit of
considering the low-cost funding provided by deposit liabilities.
COMMITMENTS TO EXTEND CREDIT, STANDBY LETTERS OF CREDIT AND FINANCIAL GUARANTEES
WRITTEN-
These financial instruments are not sold or traded, and estimated fair values
are not readily available. The carrying amount of commitments to extend credit
and standby letters of credit is the net unamortized deferred cost or income
arising from these unrecognized financial instruments. The estimated fair value
of these commitments is considered to be the carrying value. Financial
guarantees written consist of obligations for credit cards issued to certain
customers. Substantially all of the liability for financial guarantees written
is collateralized by deposits pledged to the Company.
<PAGE>
The following table presents the contract amount, carrying amount and estimated
fair value for commitments to extend credit, standby letters of credit and
financial guarantees written at December 31, 1998 and 1997:
<TABLE>
<CAPTION>
1998 1997
--------------------------------------- --------------------------------------
Contract Carrying Estimated Contract Carrying Estimated
(Dollars in Thousands) Amount Amount Fair Value Amount Amount Fair Value
- ----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Commitments to Extend Credit ......... $154,155 $ (2,209) $ (2,209) $117,873 $ (1,088) $ (1,088)
Standby Letters of Credit ............ 11,722 5 5 16,070 4 4
Financial Guarantees Written ......... 1,846 -- -- 3,645 -- --
- ----------------------------------------------------------------------------------------------------------------------------
</TABLE>
LIMITATIONS-
Fair value estimates are made at a specific point in time, based on relevant
market information and information about the financial instrument. These
estimates do not reflect any premium or discount that could result from offering
for sale at one time the Company's entire holdings of a particular financial
instrument. Because no market exists for a significant portion of the Company's
financial instruments, fair value estimates are based on judgments regarding
future expected loss experience, current economic conditions, risk
characteristics of various financial instruments and other factors. These
estimates are subjective in nature and involve uncertainties and matters of
significant judgment and therefore cannot be determined with precision. Changes
in assumptions could significantly affect the estimates.
Fair value estimates are based on existing on-and off-balance sheet financial
instruments without attempting to estimate the value of anticipated future
business and the value of assets and liabilities that are not considered
financial instruments. For example, the Company has a substantial trust
department that contributes net fee income annually. The trust department is not
considered a financial instrument, and its value has not been incorporated into
the fair value estimates. Other significant assets and liabilities that are not
considered financial assets or liabilities include the deferred tax liabilities,
property, plant, equipment and goodwill. In addition, the tax ramifications
related to the realization of the unrealized gains and losses can have a
significant effect on fair value estimates and have not been considered in many
of the estimates.
(19) ACQUISITION ACTIVITY
On February 19,1998, the Company completed the acquisition of three bank holding
companies and their three subsidiary banks. The acquisition of Brownsville
Bancshares, Inc. and its subsidiary, Brownsville National Bank, includes two
banking locations in Brownsville, Cameron County, Texas, with assets of
approximately $100.1 million, equity of $12.1 million, loans of $42.6 million,
and deposits of $87.2 million. This acquisition was achieved by the exchange of
984,806 shares of Company stock for all of the outstanding shares of Brownsville
Bancshares, Inc. and cancellation of outstanding stock options. Brownsville
National Bank merged with and into Texas State Bank.
The second acquisition was TB&T Bancshares, Inc. and its subsidiary, Texas Bank
and Trust of Brownsville, Cameron County, Texas. Texas Bank and Trust of
Brownsville had assets of approximately $44.9 million, equity of $4.1 million,
loans of $21.9 million, and deposits of $40.3 million. This acquisition was
achieved by exchange of 308,039 shares of Company stock for all of the
outstanding shares of TB&T Bancshares, Inc., a portion of which are retained in
a holdback escrow account pending resolution of certain claims. Texas Bank and
Trust of Brownsville merged with and into Texas State Bank.
The third acquisition was Raymondville Bancorp, Inc. and its subsidiary, Bank of
Texas. Bank of Texas is headquartered in Raymondville, Willacy County, Texas,
with one additional banking facility in Brownsville, Texas. The shareholder of
Raymondville Bancorp, Inc. received cash consideration of $9.6 million in this
acquisition, and the Company paid $100,000 in consideration for a covenant not
to compete. Texas Regional discharged approximately $330,000 of existing
Raymondville Bancorp, Inc. indebtedness. Bank of Texas had assets of
approximately $63.7 million, equity of $5.1 million, loans of $25.5 million, and
deposits of $56.5 million. Bank of Texas merged with and into Texas State Bank.
The acquisition of Brownsville Bancshares, Inc. and TB&T Bancshares, Inc. are
accounted for under the pooling-of-interests method of accounting, and as such,
the enclosed financial information has been restated for all periods presented
to include the results of operations and financial position of these acquired
entities. The acquisition of Raymondville Bancorp, Inc. was accounted for under
the purchase method of accounting; therefore, the results of operations are
included in the consolidated financial statements from the date of acquisition,
February 19, 1998. The One Time Charge - Acquisitions of $728,000 primarily
included professional fees and computer conversion costs related to effecting
business combinations accounted for by the pooling-of-interests method.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
None.
<PAGE>
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The information regarding directors and executive officers called for by
Item 10 is incorporated herein by reference to the sections entitled "Election
of Directors" and "Executive Officers" in the Company's Proxy Statement for its
Annual Meeting of Shareholders to be held April 26, 1999.
ITEM 11. EXECUTIVE COMPENSATION
The information regarding executive compensation called for by Item 11 is
incorporated herein by reference to the sections entitled "Executive Officers"
in the Company's Proxy Statement for its Annual Meeting of Shareholders to be
held April 26, 1999.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information regarding ownership of the Company's common stock by
certain beneficial owners and by management called for by Item 12 is
incorporated herein by reference to the sections entitled "Stock Ownership of
Management and Others" in the Company's Proxy Statement for its Annual Meeting
of Shareholders to be held April 26, 1999.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information regarding transactions between management and others and
the Company called for by Item 13 is incorporated herein by reference to the
sections entitled "Transactions with Management and Others" in the Company's
Proxy Statement for its Annual Meeting of Shareholders to be held April 26,
1999.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a) The following documents are filed as part of this Annual Report on
Form 10-K:
(1) The following consolidated financial statements of the registrant and its
subsidiaries, are included herein:
(i) Independent Auditors' Report
(ii) Consolidated Balance Sheets - December 31, 1998 and 1997
(iii) Consolidated Statements of Income and Comprehensive Income -
Years Ended December 31, 1998, 1997, and 1996
(iv) Consolidated Statements of Changes in Shareholders' Equity -
Years Ended December 31, 1998, 1997, and 1996
(v) Consolidated Statements of Cash Flows - Years Ended December 31,
1998, 1997, and 1996
(vi) Notes to Consolidated Financial Statements - December 31, 1998,
1997 and 1996
(2) Financial Statement Schedules are omitted because the required information
is not applicable.
(3) Exhibits -- The following exhibits are filed as a part of this Annual
Report on Form 10-K:
<PAGE>
2.1 Agreement and Plan of Reorganization dated as of October 15, 1997,
by and between Texas Regional Bancshares, Inc. and Raymondville
Bancorp, Inc. (incorporated by reference from 1998 Form 10-K,
Commission File No. 000-14517).
2.2 Agreement and Plan of Reorganization dated as of October 20, 1997,
by and between Texas Regional Bancshares, Inc. and Brownsville
Bancshares, Inc. (incorporated by reference from Form S-4,
Commission File No. 333-41959).
2.3 Agreement and Plan of Reorganization dated as of October 15, 1997,
by and between Texas Regional Bancshares, Inc. and TB&T Bancshares,
Inc. (incorporated by reference from Form S-4, Commission File No.
333-41945).
2.4 Agreement and Plan of Reorganization by and between Texas State
Bank, McAllen, Texas, First State Bank & Trust Co., Mission, Texas
("First State Bank"), Texas Regional Bancshares, Inc., and certain
shareholders of First State Bank, dated as of January 9, 1996
(incorporated by reference from Form 8-K, Commission File No.
000-14517).
2.5 Agreement and Plan of Reorganization by and between Texas State
Bank, McAllen, Texas, The Border Bank, Hidalgo, Texas ("Border
Bank"), Texas Regional Bancshares, Inc., and certain shareholders of
Border Bank, dated as of January 9, 1996 (incorporated by reference
from Form 8-K, Commission File No. 000-14517).
3.1 Articles of Incorporation of Texas Regional Bancshares, Inc.
(incorporated by reference from Form 10, Commission File No.
000-14517).
3.2 Amendment to Articles of Incorporation of Texas Regional Bancshares,
Inc., filed December 28, 1983 (incorporated by reference from Form
10, Commission File No. 000-14517).
3.3 Amendment to Articles of Incorporation of Texas Regional Bancshares,
Inc., filed June 25, 1986 (incorporated by reference from Form S-1,
Commission File No. 33-28340).
3.4 Amendment to Articles of Incorporation of Texas Regional Bancshares,
Inc., filed April 4, 1988 (incorporated by reference from Form S-1,
Commission File No. 33-28340).
3.5 Amendment to Articles of Incorporation of Texas Regional Bancshares,
Inc., filed April 12, 1991 (incorporated by reference from Form
10-K, Commission File No. 000-14517).
3.6 Amendment to Articles of Incorporation of Texas Regional Bancshares,
Inc., filed March 2, 1992 (incorporated by reference from Form 10-K,
Commission File No. 000-14517).
3.7 Resolution Eliminating from the Articles of Incorporation certain
preferred series of shares of Texas Regional Bancshares, Inc., filed
February 21, 1995 (incorporated by reference from 1994 Form 10-K,
Commission File No. 000-14517).
3.8 Bylaws of Texas Regional Bancshares, Inc., as amended (incorporated
by reference from Form S-1, Commission File No. 33-74992).
4 Relevant portions of Texas Regional Bancshares, Inc. Articles of
Incorporation and Bylaws (incorporated by reference from Form S-1,
Commission File No. 333-1467).
10.1 Incentive Stock Option Plan (incorporated by reference from Form 10,
Commission File No. 000-14517).
10.2 1985 Non-Statutory Stock Option Plan (incorporated by reference from
Form 10, Commission File No. 000-14517).
10.3 1995 Non-Statutory Stock Option Plan (incorporated by reference from
Form S-1, Commission File No. 333-1467).
10.4 Texas Regional Bancshares, Inc., 1997 Incentive Stock Option Plan
(incorporated by reference from Form S-4, Commission File No.
000-14517).
<PAGE>
10.5 Texas Regional Bancshares, Inc., 1997 Nonstatutory Stock Option Plan
(incorporated by reference from Form S-4, Commission File No.
000-14517).
10.6 Texas Regional Bancshares, Inc. Employees Stock Ownership Plan (with
401(k) provisions) (incorporated by reference from Form S-8,
Commission File No. 33-39386).
10.7 Amendment No. 1 to Texas Regional Bancshares, Inc. Employees Stock
Ownership Plan, adopted July 9, 1991 (incorporated by reference from
1991 Form 10-K, Commission File No. 000-14517).
10.8 Amendment No. 2 to Texas Regional Bancshares, Inc. Employees Stock
Ownership Plan, adopted May 12, 1992 (incorporated by reference from
1992 Form 10-K, Commission File No. 000-14517).
10.9 Amendment No. 3 to Texas Regional Bancshares, Inc. Employees Stock
Ownership Plan, adopted September 8, 1992, effective January 1, 1992
(incorporated by reference from Form S-1, Commission File No.
33-74992).
10.10 Amendment No. 4 to Texas Regional Bancshares, Inc. Employees Stock
Ownership Plan (with 401(k) provisions), adopted August 10, 1993
(incorporated by reference from Form S-1, Commission File No.
33-74992).
10.11 Amendment No. 5 to Texas Regional Bancshares, Inc. Employees Stock
Ownership Plan (with 401(k) provisions), adopted August 10, 1993
(incorporated by reference from 1994 Form 10-K, Commission File No.
000-14517).
10.12 Amendment No. 6 to Texas Regional Bancshares, Inc. Employee Stock
Ownership Plan (with 401(k) provisions), adopted as of August 8,
1995 (incorporated by reference from Form S-1, Commission File No.
333-1467).
10.13 Amendment No. 7 to Texas Regional Bancshares, Inc. Employees Stock
Ownership Plan (with 401(k) provisions), adopted May 21, 1996
(incorporated by reference from 1996 Form 10-K, Commission File No.
000-14517).
10.14 Amendment No. 8 to Texas Regional Bancshares, Inc. Employee Stock
Ownership Plan (with 401(k) provisions), adopted March 10, 1998
(incorporated by reference from 1998 Form 10-K, Commission File No.
000-14517).
10.15 Glen E. Roney Amended and Restated Deferred Compensation Plan dated
as of March 11, 1997 (incorporated by reference from Form S-4,
Commission File No. 333-41959).
10.16 Amendment No. 9 to Texas Regional Bancshares, Inc. Employee Stock
Ownership Plan (with 401(k) provisions), adopted June 9, 1998
(incorporated by reference from Form 10-Q for quarter ended June 30,
1998, Commission File No. 000-14517).
21 Subsidiaries of the Registrant.
27 Financial Data Schedule
(b) Reports on Form 8-K
No report on Form 8-K was filed by Texas Regional Bancshares, Inc. during
the three months ended December 31, 1998
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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)
By: /s/ G. E. RONEY
------------------------------------
Glen E. Roney
Chairman of the Board, President
and Chief Executive Officer
Date: March 22, 1999
Pursuant to the requirement of the Securities Exchange Act of 1934, this
report has signed below by the following persons on behalf of the Registrant and
in the capacities and on the date indicated.
SIGNATURE TITLE DATE
----------- ------- ------
/s/ Morris Atlas Director March 22, 1999
----------------------
Morris Atlas
/s/ Frank N. Boggus Director March 22, 1999
----------------------
Frank N. Boggus
/s/ Robert G. Farris Director March 22, 1999
------------------------
Robert G. Farris
/s/ C. Kenneth Landrum, M.D. Director March 22, 1999
- ----------------------------
C. Kenneth Landrum, M.D.
/s/ R. T. Pigott, Jr. Executive Vice President March 22, 1999
----------------------- & Chief Financial Officer
R. T. Pigott, Jr.
/s/ G. E. Roney Chairman of the Board, March 22, 1999
---------------------- President, Chief Executive
Glen E. Roney Officer & Director
/s/ Nancy Schultz Senior Vice President & March 22, 1999
---------------------- Secretary/Treasurer
Nancy F. Schultz
/s/ Ann Sefcik Controller & Assistant March 22, 1999
---------------------- Secretary
Ann Sefcik
/s/ Julie G. Uhlhorn Director March 22, 1999
-----------------------
Julie G. Uhlhorn
/s/ Jack Whetsel Director March 22, 1999
-----------------------
Jack Whetsel
INDEX TO EXHIBITS FILED HEREWITH
NO. SEQUENTIALLY NUMBERED EXHIBIT
----- ------------------------------
21 Subsidiaries of the Registrant.
27 Financial Data Schedule
EXHIBIT 21
Texas Regional Bancshares, Inc.
List of Subsidiaries
March 8, 1999
<TABLE>
<CAPTION>
Percentage of
Jurisdiction of Voting
Incorporation/ Securities
Name Domicile Organization Owned
- ---------------------------------------------------------------------------------------
<S> <C> <C> <C>
Texas Regional Delaware, Inc. Wilmington, DE Delaware 100%
Texas State Bank McAllen, TX Texas 100%
TSB Securities, Inc. McAllen, TX Texas 100%
TSB Properties, Inc. McAllen, TX Texas 100%
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 9
<LEGEND>
This schedule contains summary financial information extracted from the
Consolidated Balance Sheets and Consolidated Statements of Income, included
herein and is qualified in its entirety by reference to such financial
statements.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-END> DEC-31-1998
<CASH> 58,274
<INT-BEARING-DEPOSITS> 553
<FED-FUNDS-SOLD> 32,000
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 445,936
<INVESTMENTS-CARRYING> 14,331
<INVESTMENTS-MARKET> 0
<LOANS> 1,089,505
<ALLOWANCE> 13,236
<TOTAL-ASSETS> 1,762,329
<DEPOSITS> 1,562,942
<SHORT-TERM> 7,407
<LIABILITIES-OTHER> 14,512
<LONG-TERM> 0
0
0
<COMMON> 14,412
<OTHER-SE> 163,056
<TOTAL-LIABILITIES-AND-EQUITY> 1,762,329
<INTEREST-LOAN> 97,064
<INTEREST-INVEST> 26,680
<INTEREST-OTHER> 1,905
<INTEREST-TOTAL> 125,649
<INTEREST-DEPOSIT> 58,097
<INTEREST-EXPENSE> 58,384
<INTEREST-INCOME-NET> 67,265
<LOAN-LOSSES> 9,729
<SECURITIES-GAINS> 2,910
<EXPENSE-OTHER> 41,102
<INCOME-PRETAX> 34,097
<INCOME-PRE-EXTRAORDINARY> 22,474
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 22,474
<EPS-PRIMARY> 1.56
<EPS-DILUTED> 1.54
<YIELD-ACTUAL> 4.61
<LOANS-NON> 10,414
<LOANS-PAST> 3,099
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 11,291
<CHARGE-OFFS> 9,158
<RECOVERIES> 1,066
<ALLOWANCE-CLOSE> 13,236
<ALLOWANCE-DOMESTIC> 10,875
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 2,361
</TABLE>
