UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-Q
(Mark One)
[X] Quarterly Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
For the quarterly period ended June 30, 1999
or
[ ] Transition Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
For the transition period from _________ to _________
Commission file number 000-14517
TEXAS REGIONAL BANCSHARES, INC.
(Exact name of registrant as specified in its charter)
Texas 74-2294235
(State or other jurisdiction (I.R.S. Employer
of incorporation or organization) Identification No.)
Post Office Box 5910
3900 North 10th Street, 11th Floor
McAllen, Texas 78502-5910
(Address of principal executive offices) (Zip Code)
(956) 631-5400
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes [X] No [ ]
There were 14,411,583 shares of the registrant's Class A Voting Common Stock,
$1.00 par value, outstanding as of July 23, 1999.
<PAGE>
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
<TABLE>
<CAPTION>
Texas Regional Bancshares, Inc. and Subsidiaries
Consolidated Balance Sheets June 30, December 31,
(Dollars in Thousands, Except Share Data) 1999 1998
- ---------------------------------------------------------------------------------------------------------
(Unaudited)
<S> <C> <C>
Assets
Cash and Due From Banks ................................................ $ 51,505 $ 58,274
Time Deposits .......................................................... 237 553
Federal Funds Sold ..................................................... 15,280 32,000
- ---------------------------------------------------------------------------------------------------------
Total Cash and Cash Equivalents ...................................... 67,022 90,827
Securities Available for Sale, at Fair Value ........................... 474,407 455,936
Securities Held to Maturity, at Amortized Cost (Fair Value of
$8,456 in 1999 and $14,650 in 1998) .................................. 8,314 14,331
Loans, Net of Unearned Discount of $5,771 in 1999 and $4,886 in 1998 ... 1,179,339 1,089,505
Less: Allowance for Loan Losses ........................................ (14,261) (13,236)
- ---------------------------------------------------------------------------------------------------------
Net Loans ............................................................ 1,165,078 1,076,269
Premises and Equipment, Net ............................................ 69,588 69,827
Accrued Interest Receivable ............................................ 19,128 16,416
Other Real Estate ...................................................... 5,872 5,060
Goodwill and Identifiable Intangibles .................................. 25,535 26,894
Other Assets ........................................................... 9,624 6,769
- ---------------------------------------------------------------------------------------------------------
Total Assets ......................................................... $ 1,844,568 $ 1,762,329
=========================================================================================================
Liabilities
Deposits
Demand ............................................................... $ 244,960 $ 234,655
Savings .............................................................. 110,645 107,711
Money Market Checking and Savings .................................... 296,427 301,238
Time Deposits ........................................................ 980,357 919,338
- ---------------------------------------------------------------------------------------------------------
Total Deposits ..................................................... 1,632,389 1,562,942
Federal Funds Purchased and Securities Sold Under Repurchase Agreements 13,831 7,407
Accounts Payable and Accrued Liabilities ............................... 18,113 14,512
- ---------------------------------------------------------------------------------------------------------
Total Liabilities .................................................... 1,664,333 1,584,861
- ---------------------------------------------------------------------------------------------------------
Commitments and Contingencies
Shareholders' Equity
Preferred Stock; $1.00 Par Value, 10,000,000 Shares Authorized;
None Issued and Outstanding ........................................ -- --
Common Stock - Class A; $1.00 Par Value, 50,000,000 Shares Authorized;
Issued and Outstanding 14,411,583 Shares in 1999 and 1998 .......... 14,412 14,412
Paid-In Capital ...................................................... 87,586 87,586
Retained Earnings .................................................... 85,776 74,861
Accumulated Other Comprehensive Income (Loss) ........................ (7,539) 609
- ---------------------------------------------------------------------------------------------------------
Total Shareholders' Equity ......................................... 180,235 177,468
- ---------------------------------------------------------------------------------------------------------
Total Liabilities and Shareholders' Equity ........................... $ 1,844,568 $ 1,762,329
=========================================================================================================
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
PAGE 2
<PAGE>
<TABLE>
<CAPTION>
Three Months Six Months
Texas Regional Bancshares, Inc. and Subsidiaries Ended June 30, Ended June 30,
Consolidated Statements of Income and Comprehensive Income ------------------------------------------------------
(Dollars in Thousands, Except Share Data) 1999 1998 1999 1998
- -----------------------------------------------------------------------------------------------------------------------------
(Unaudited)
<S> <C> <C> <C> <C>
Interest Income
Loans, Including Fees .......................................... $ 27,064 $ 24,644 $ 52,840 $ 48,165
Securities
Taxable ...................................................... 6,689 6,021 13,076 12,324
Tax-Exempt ................................................... 510 375 996 739
Time Deposits .................................................. 4 33 9 51
Federal Funds Sold ............................................. 324 345 663 701
- -----------------------------------------------------------------------------------------------------------------------------
Total Interest Income ........................................ 34,591 31,418 67,584 61,980
- -----------------------------------------------------------------------------------------------------------------------------
Interest Expense
Deposits ....................................................... 14,754 13,954 29,023 27,893
Federal Funds Purchased and Securities
Sold Under Repurchase Agreements ............................. 108 84 201 112
- -----------------------------------------------------------------------------------------------------------------------------
Total Interest Expense ....................................... 14,862 14,038 29,224 28,005
- -----------------------------------------------------------------------------------------------------------------------------
Net Interest Income Before Provision for Loan Losses .............. 19,729 17,380 38,360 33,975
Provision for Loan Losses ......................................... 1,499 981 2,822 1,922
- -----------------------------------------------------------------------------------------------------------------------------
Net Interest Income After Provision for Loan Losses ............ 18,230 16,399 35,538 32,053
- -----------------------------------------------------------------------------------------------------------------------------
Noninterest Income
Service Charges on Deposit Accounts ............................ 2,311 1,941 4,382 3,770
Other Service Charges .......................................... 623 516 1,277 1,102
Trust Service Fees ............................................. 495 430 976 877
Net Realized Gains (Losses) on Sales of
Securities Available for Sale ................................ (1) 198 (1) 420
Data Processing Service Fees ................................... 518 344 1,013 685
Other Operating Income ......................................... 251 194 706 731
- -----------------------------------------------------------------------------------------------------------------------------
Total Noninterest Income ..................................... 4,197 3,623 8,353 7,585
- -----------------------------------------------------------------------------------------------------------------------------
Noninterest Expense
Salaries and Employee Benefits ................................. 5,551 4,390 10,518 9,057
Net Occupancy Expense .......................................... 1,008 842 1,993 1,620
Equipment Expense .............................................. 1,228 1,090 2,451 2,224
Other Real Estate (Income) Expense, Net ........................ 103 (61) 196 (6)
Amortization of Goodwill and Identifiable Intangibles .......... 679 681 1,359 1,302
One Time Charge - Acquisitions ................................. -- 46 -- 728
Other Noninterest Expense ...................................... 2,350 2,650 4,941 5,240
- -----------------------------------------------------------------------------------------------------------------------------
Total Noninterest Expense .................................... 10,919 9,638 21,458 20,165
- -----------------------------------------------------------------------------------------------------------------------------
Income Before Income Tax Expense .................................. 11,508 10,384 22,433 19,473
Income Tax Expense ................................................ 4,043 3,624 7,916 6,870
- -----------------------------------------------------------------------------------------------------------------------------
Net Income ........................................................ 7,465 6,760 14,517 12,603
Other Comprehensive Income (Loss), Net of Tax -
Unrealized Gains (Losses) on Securities Available for Sale
Unrealized Holding Gains (Losses) Arising During Period ...... (6,829) 101 (8,149) 485
Less: Reclassification Adjustment for Gains (Losses)
Included in Net Income ..................................... (1) 129 (1) 273
- -----------------------------------------------------------------------------------------------------------------------------
Total Other Comprehensive Income (Loss) .................... (6,828) (28) (8,148) 212
- -----------------------------------------------------------------------------------------------------------------------------
Comprehensive Income .............................................. $ 637 $ 6,732 $ 6,369 $ 12,815
=============================================================================================================================
Net Income Per Common Share
Basic .......................................................... $ 0.52 $ 0.47 $ 1.01 $ 0.87
Diluted ........................................................ 0.51 0.46 0.99 0.86
=============================================================================================================================
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
PAGE 3
<PAGE>
<TABLE>
<CAPTION>
Texas Regional Bancshares, Inc. and Accumulated
Subsidiaries Other
Consolidated Statements of Changes Common Comprehensive Total
In Shareholders' Equity Stock - Paid-In Retained Income Shareholders'
(Dollars in Thousands) Class A Capital Earnings (Loss) Equity
- ---------------------------------------------------------------------------------------------------------------------------------
(Unaudited)
<S> <C> <C> <C> <C> <C>
Six Months Ended June 30, 1999
Balance, Beginning of Period ..................... $ 14,412 $ 87,586 $ 74,861 $ 609 $ 177,468
Net Income ....................................... -- -- 14,517 -- 14,517
Unrealized Losses on Securities,
Net of Tax and Reclassification Adjustment ..... -- -- -- (8,148) (8,148)
- ---------------------------------------------------------------------------------------------------------------------------------
Total Comprehensive Income ..................... -- -- 14,517 (8,148) 6,369
- ---------------------------------------------------------------------------------------------------------------------------------
Class A Common Stock Cash Dividends .............. -- -- (3,602) -- (3,602)
- ---------------------------------------------------------------------------------------------------------------------------------
Balance, End of Period ........................... $ 14,412 $ 87,586 $ 85,776 $ (7,539) $ 180,235
=================================================================================================================================
Disclosure of Reclassification Amount
Unrealized Holding Losses During Period ........ $ (8,149)
Less Reclassification Adjustment for
Losses Included in Net Income ................ (1)
- ---------------------------------------------------------------------------------------------------------------------------------
Net Change in Unrealized Losses
on Securities Available for Sale ........... $ (8,148)
=================================================================================================================================
Six Months Ended June 30, 1998
Balance, Beginning of Period ..................... $ 14,403 $ 87,078 $ 59,167 $ 907 $ 161,555
Net Income ....................................... -- -- 12,603 -- 12,603
Unrealized Gains on Securities,
Net of Tax and Reclassification Adjustment ..... -- -- -- 212 212
- ---------------------------------------------------------------------------------------------------------------------------------
Total Comprehensive Income ..................... -- -- 12,603 212 12,815
- ---------------------------------------------------------------------------------------------------------------------------------
Exercise of Stock Options, 5,661 Shares of
Class A Common Stock ............................. 6 88 94
Tax Effect of Nonqualified Stock Options
Exercised ...................................... -- 398 -- -- 398
Class A Common Stock Cash Dividends .............. -- -- (3,176) -- (3,176)
Cash Dividends Paid on Fractional Shares ......... -- -- (8) -- (8)
- ---------------------------------------------------------------------------------------------------------------------------------
Balance, End of Period ........................... $ 14,409 $ 87,564 $ 68,586 $ 1,119 $ 171,678
=================================================================================================================================
Disclosure of Reclassification Amount
Unrealized Holding Gains During Period ......... $ 485
Less Reclassification Adjustment for Gains
Included in Net Income ....................... 273
- ---------------------------------------------------------------------------------------------------------------------------------
Net Change in Unrealized Gains on
Securities Available for Sale .............. $ 212
=================================================================================================================================
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
PAGE 4
<PAGE>
<TABLE>
<CAPTION>
Texas Regional Bancshares, Inc. and Subsidiaries Six Months
Consolidated Statements of Cash Flows Ended June 30,
(Dollars in Thousands) -----------------------
1999 1998
- -----------------------------------------------------------------------------------------------------
(Unaudited)
<S> <C> <C>
Cash Flows from Operating Activities
Net Income ............................................................. $ 14,517 $ 12,603
Adjustments to Reconcile Net Income to
Net Cash Provided by Operating Activities
Depreciation, Amortization and Accretion, Net ...................... 4,136 3,112
Provision for Loan Losses .......................................... 2,822 1,922
Provision for Estimated Losses on Other Real Estate and Other Assets 16 7
(Gain) Loss on Sale of Securities Available for Sale ............... 1 (420)
Loss on Sale of Other Assets ....................................... 21 33
Gain on Sale of Other Real Estate .................................. (172) (233)
Gain on Sale of Premises and Equipment ............................. (39) (159)
Change in Assets and Liabilities, Net of Effects from Merger
Decrease in Deferred Income Tax Asset ............................ 3,552 --
Decrease in Deferred Income Tax Liability ........................ (4,487) (1,533)
Increase in Accrued Interest Receivable and Other Assets ......... (4,612) (4,339)
Increase in Accounts Payable and Accrued Liabilities ............. 923 188
- -----------------------------------------------------------------------------------------------------
Net Cash Provided by Operating Activities ................................. 16,678 11,181
- -----------------------------------------------------------------------------------------------------
Cash Flows from Investing Activities
Proceeds from Sales of Securities Available for Sale ................... 2,206 118,237
Proceeds from Maturing Securities Available for Sale ................... 100,626 50,149
Purchases of Securities Available for Sale ............................. (126,668) (156,375)
Proceeds from Maturing Securities Held to Maturity ..................... 6,000 30,981
Proceeds from Sale of Loans ............................................ 690 2,033
Purchases of Loans ..................................................... (2,647) (297)
Loan Originations and Advances, Net .................................... (91,491) (41,000)
Recoveries of Charged-Off Loans ........................................ 182 471
Proceeds from Sale of Premises and Equipment ........................... 220 461
Purchases of Premises and Equipment .................................... (2,879) (14,201)
Proceeds from Sale of Other Real Estate ................................ 650 307
Proceeds from Sale of Other Assets ..................................... 359 426
Net Cash Provided By Mergers ........................................... -- 5,160
- -----------------------------------------------------------------------------------------------------
Net Cash Used in Investing Activities ..................................... (112,752) (3,648)
- -----------------------------------------------------------------------------------------------------
Cash Flows from Financing Activities
Net Increase in Demand Deposits, Savings, Money
Market Checking and Savings Accounts ................................. 8,428 5,926
Net Increase in Time Deposits .......................................... 61,019 42,024
Net Increase in Federal Funds Purchased
and Securities Sold Under Repurchase Agreements ...................... 6,424 1,776
Cash Dividends Paid on Class A Common Stock ............................ (3,602) (3,033)
Cash Dividends Paid on Fractional Shares ............................... -- (8)
Tax Effect of Nonqualified Stock Options Exercised ..................... -- 398
Proceeds from the Sale of Common Stock ................................. -- 94
- -----------------------------------------------------------------------------------------------------
Net Cash Provided by Financing Activities ................................. 72,269 47,177
- -----------------------------------------------------------------------------------------------------
Increase (Decrease) in Cash and Cash Equivalents .......................... (23,805) 54,710
Cash and Cash Equivalents at Beginning of Period .......................... 90,827 81,353
- -----------------------------------------------------------------------------------------------------
Cash and Cash Equivalents at End of Period ................................ $ 67,022 $ 136,063
=====================================================================================================
</TABLE>
PAGE 5
<PAGE>
<TABLE>
<CAPTION>
Texas Regional Bancshares, Inc. and Subsidiaries Six Months
Consolidated Statements of Cash Flows Ended June 30,
(Dollars in Thousands) ---------------------------
1999 1998
- -------------------------------------------------------------------------------------------------------------------
(Unaudited)
<S> <C> <C>
Supplemental Disclosures of Cash Flow Information
Interest Paid .................................................................... $29,237 $27,723
Income Taxes Paid ................................................................ 9,460 8,148
Supplemental Schedule of Noncash Investing and Financing Activities
Foreclosure and Repossession in Partial Satisfaction of Loans Receivable ......... 4,006 2,528
Financing Provided For Sales of Other Real Estate ................................ 2,371 1,445
Net Increase in Securities Trades not Settled .................................... 7,500 --
Net Increase in Dividends Payable ................................................ -- 143
The Company acquired Raymondville Bancorp, Inc. and its subsidiary, Bank of
Texas, on February 19, 1998. Assets acquired and liabilities assumed are as
follows:
Fair Value of Assets Acquired .................................................. -- 63,944
Cash Paid ...................................................................... -- 9,600
Liabilities Assumed ............................................................ -- 58,512
====================================================================================================================
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
PAGE 6
<PAGE>
TEXAS REGIONAL BANCSHARES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1: BASIS OF PRESENTATION
The accompanying unaudited consolidated financial statements were prepared
in accordance with instructions for Form 10-Q and, therefore, do not include all
information and footnotes necessary for a complete presentation of financial
position, results of operations, changes in shareholders' equity, and cash flows
in conformity with generally accepted accounting principles. However, the
consolidated financial statements include all adjustments that, in the opinion
of management, are necessary for a fair presentation. All such adjustments were
of a normal and recurring nature. The results of operations and cash flows for
the six months ended June 30, 1999 and 1998 should not be considered indicative
of the results to be expected for the full year. These consolidated financial
statements should be read in conjunction with the consolidated financial
statements and notes thereto included in the Texas Regional Bancshares, Inc. and
Subsidiaries (the "Company") Annual Report on Form 10-K for the year ended
December 31, 1998.
The consolidated financial statements include the accounts of Texas
Regional Bancshares, Inc. and its wholly owned subsidiaries, Texas Regional
Delaware, Inc. and Texas State Bank (the "Bank"). The Company eliminates all
significant intercompany transactions and balances in consolidation. The Company
accounts for investments in the subsidiaries on the equity method in the
Parent's financial statements.
The Financial Accounting Standards Board's Statement No. 133 ("Statement
133"), "Accounting for Derivative Instruments and for Hedging Activities," was
issued in June 1998. Statement 133 requires companies to recognize all
derivatives as either assets or liabilities in the statement of financial
condition and measure those instruments at fair value. Statement 133 requires
that changes in fair value of a derivative be recognized currently in earnings
unless specific hedge accounting criteria are met. Statement 133 is effective
for fiscal years beginning after June 15, 1999. The Company does not currently
have derivative instruments as defined by Statement 133.
NOTE 2: IMPAIRED LOANS
The Company identifies loans to be reported as impaired when such loans
are on nonaccrual status or are considered troubled debt restructurings due to
the granting of a below-market rate of interest or a partial forgiveness of
indebtedness on an existing loan. The balance of impaired loans was $6.5 million
at June 30, 1999 for which there was a related allowance for loan losses of
$871,000. At June 30, 1999, the Company had $59,000 in impaired loans for which
there was no related allowance for loan losses. The average recorded investment
in impaired loans during the six months ended June 30, 1999 was $7.3 million.
Interest income on impaired loans of $45,000 was recognized for cash payments
received during the six months ended June 30, 1999.
NOTE 3: COMMON STOCK
On June 8, 1999, the Board of Directors approved a cash dividend or $0.125
per share for shareholders of record on July 1, 1999 and payable on July 15,
1999.
PAGE 7
<PAGE>
NOTE 4: EARNINGS PER COMMON SHARE COMPUTATIONS
The table below presents a reconciliation of basic and diluted earnings
per share computations.
<TABLE>
<CAPTION>
Three Months Six Months
Ended June 30, Ended June 30,
(Dollars in Thousands, Except Share Data) 1999 1998 1999 1998
- --------------------------------------------------------------------------------------------------------------------------------
(Unaudited)
<S> <C> <C> <C> <C>
Net Income Available to Common Shareholders .................. $ 7,465 $ 6,760 $ 14,517 $ 12,603
- --------------------------------------------------------------------------------------------------------------------------------
Weighted Average Number of Common Shares Outstanding
Used in Basic EPS Calculation ............................. 14,411,583 14,408,312 14,411,583 14,405,898
Add Assumed Exercise of Outstanding Stock Options as
Adjustments for Dilutive Securities ....................... 220,738 242,241 216,143 243,482
- --------------------------------------------------------------------------------------------------------------------------------
Weighted Average Number of Common Shares
Outstanding Used in Diluted EPS Calculations .............. 14,632,321 14,650,553 14,627,726 14,649,380
- --------------------------------------------------------------------------------------------------------------------------------
Basic EPS .................................................... $ 0.52 $ 0.47 $ 1.01 $ 0.87
Diluted EPS .................................................. 0.51 0.46 0.99 0.86
- --------------------------------------------------------------------------------------------------------------------------------
</TABLE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
Forward-Looking Statements. This Management's Discussion and Analysis
includes forward-looking statements, such as: statements of the Company's goals,
intentions and expectations; estimates of risks and of future costs and
benefits; and statements of the Company's ability to achieve financial and other
goals. These forward-looking statements are subject to significant uncertainties
because they are based upon: future interest rates and other economic
conditions; statements by suppliers of data processing equipment and services,
government agencies, and other third parties as to year 2000 compliance and
costs; future laws and regulations; and a variety of other matters. Because of
these uncertainties, the actual future results may be materially different from
the results indicated by these forward-looking statements. In addition, the
Company's past results do not necessarily indicate its future results.
The following presents management's discussion and analysis of the
Company's consolidated financial condition and results of operations at the
dates and for the periods indicated. This discussion should be read in
conjunction with the Company's consolidated financial statements and the
accompanying notes.
GENERAL
Texas Regional Bancshares, Inc. (the "Company"), a Texas business
corporation incorporated in 1983 and headquartered in McAllen, Texas, is a bank
holding company within the meaning of the Bank Holding Company Act of 1956. The
Company is registered with the Board of Governors of the Federal Reserve System
("Federal Reserve Board"). Texas Regional Delaware, Inc., incorporated under the
laws of Delaware as a wholly owned second tier bank holding company subsidiary,
owns Texas State Bank (the "Bank"), the Company's primary operating subsidiary.
The Bank has two wholly owned subsidiaries: (i) TSB Securities, Inc.,
incorporated in 1997 to provide full service broker-dealer services and (ii) TSB
Properties, Inc., incorporated in 1998 to receive and liquidate foreclosed
assets.
Texas State Bank operates twenty banking locations in the Rio Grande
Valley including four banking locations in McAllen (including its main office),
four banking locations in Brownsville, three banking locations in Mission, two
banking locations in Weslaco, and one banking location each in Edinburg,
Harlingen, Hidalgo, Penitas, Raymondville, Rio Grande City and Roma. At June 30,
1999, Texas Regional had consolidated total assets of $1.8 billion, loans (net
of unearned discount) of $1.2 billion, deposits of $1.6 billion, and
shareholders' equity of $180.2 million.
On February 19, 1998, the Company completed the acquisition of three bank
holding companies and their three subsidiary banks (the "Mergers"). The
acquisition of Brownsville Bancshares, Inc. and its subsidiary, Brownsville
National Bank, included two banking locations in Brownsville, Cameron County,
Texas, with assets of approximately $100.1 million, equity of $12.1 million,
loans of $42.6 million, and deposits of $87.2 million. The Company achieved this
acquisition by the exchange of 984,806 shares of Company stock for all of the
outstanding
PAGE 8
<PAGE>
shares of Brownsville Bancshares, Inc. and cancellation of outstanding stock
options. Brownsville National Bank merged with and into the Bank.
The second acquisition was TB&T Bancshares, Inc. and its subsidiary, Texas
Bank and Trust of Brownsville, Cameron County, Texas. Texas Bank and Trust of
Brownsville had assets of approximately $44.9 million, equity of $4.1 million,
loans of $21.9 million, and deposits of $40.3 million. This acquisition was
achieved by exchange of 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 the Bank.
The third acquisition was Raymondville Bancorp, Inc. and its subsidiary,
Bank of Texas. Bank of Texas was headquartered in Raymondville, Willacy County,
Texas, with one additional banking facility in Brownsville, Texas. The
shareholder of Raymondville Bancorp, Inc. received cash consideration of $9.6
million in this acquisition, and the Company paid $100,000 in consideration for
a covenant not to compete. The Company discharged approximately $330,000 of
existing Raymondville Bancorp, Inc. indebtedness. Bank of Texas had assets of
approximately $63.9 million, equity of $5.1 million, loans of $25.5 million, and
deposits of $56.5 million. Bank of Texas was merged with and into the Bank.
The Company accounted for its acquisition of Brownsville Bancshares, Inc.
and TB&T Bancshares, Inc. under the pooling-of-interests method of accounting,
and as such, the enclosed financial information has been restated for all
periods presented to include the results of operations and financial position of
these acquired entities. A One Time Charge-Acquisitions of $728,000 or $0.03 per
diluted common share, net of federal income tax, reduced net income for the six
months ended June 30, 1998. These expenses, primarily professional fees and
computer conversion costs, related to business combinations accounted for by the
pooling-of-interests method. The Company accounted for its acquisition of
Raymondville Bancorp, Inc. under the purchase method of accounting; therefore,
the results of operations are included in the consolidated financial statements
from the date of acquisition, February 19, 1998.
The Company has entered into a definitive agreement to acquire Harlingen
Bancshares, Inc. and its subsidiary, Harlingen National Bank. At March 31, 1999,
Harlingen Bancshares, Inc. had assets of $225.3 million, equity of $21.0
million, loans of $127.8 million, and deposits of $203.4 million. The definitive
agreement calls for a cash consideration of approximately $34.0 million for all
outstanding shares of Harlingen Bancshares, Inc. and is subject to approval by
the appropriate regulators and satisfaction of certain other conditions. The
purchase is expected to close during the third quarter of 1999 and to be
accounted under the purchase method of accounting.
FINANCIAL CONDITION
CASH AND CASH EQUIVALENTS
The Company, through its main office and branches, offers a broad range of
commercial banking services to individuals and businesses in its service area.
It also acts as a correspondent to a number of banks in its service area,
providing check clearing, wire transfer, federal funds transactions, loan
participations and other correspondent services. The amount of cash and cash
equivalents held on any day is significantly influenced by temporary changes in
cash items in process of collection. The Company had cash and cash equivalents
totaling $67.0 million at June 30, 1999. Comparatively, the Company had $90.8
million in cash and cash equivalents at December 31, 1998, a decrease of $23.8
million or 26.2%.
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.
PAGE 9
<PAGE>
At June 30, 1999 and December 31, 1998, no securities were classified as
Trading. The Company does not currently engage in trading activities or use
derivative instruments to control interest rate risk. Even though such
activities may be permitted with the approval of the Board of Directors, the
Company does not intend to engage in such activities in the immediate future.
The following table presents the amortized cost and estimated fair value
of securities at June 30, 1999 and December 31, 1998 (dollars in thousands):
<TABLE>
<CAPTION>
Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
- -----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Securities Available for Sale
June 30, 1999 (Unaudited)
U.S. Government Agency .......................... $326,172 $ 217 $ (8,973) $317,416
Mortgage-Backed ................................. 115,550 -- (2,086) 113,464
States and Political Subdivisions ............... 40,211 245 (1,133) 39,323
Other ........................................... 4,162 45 (3) 4,204
- -----------------------------------------------------------------------------------------------------------------------------
Total ......................................... $486,095 $ 507 $(12,195) $474,407
=============================================================================================================================
December 31, 1998
U.S. Government Agency .......................... $313,647 $ 1,289 $ (966) $313,970
Mortgage-Backed ................................. 101,670 206 (511) 101,365
States and Political Subdivisions ............... 36,112 994 (118) 36,988
Other ........................................... 3,562 51 -- 3,613
- -----------------------------------------------------------------------------------------------------------------------------
Total ......................................... $454,991 $ 2,540 $ (1,595) $455,936
=============================================================================================================================
Securities Held to Maturity
June 30, 1999 (Unaudited)
U.S. Treasury ................................... $ 5,006 $ 63 $ -- $ 5,069
States and Political Subdivisions ............... 3,308 79 -- 3,387
- -----------------------------------------------------------------------------------------------------------------------------
Total ......................................... $ 8,314 $ 142 $ -- $ 8,456
=============================================================================================================================
December 31, 1998
U.S. Treasury ................................... $ 10,013 $ 173 $ -- $ 10,186
States and Political Subdivisions ............... 4,318 146 -- 4,464
- -----------------------------------------------------------------------------------------------------------------------------
Total ......................................... $ 14,331 $ 319 $ -- $ 14,650
=============================================================================================================================
</TABLE>
Net unrealized holding gains (losses), net of related tax effect, of ($7.5
million) and $609,000 at June 30, 1999 and December 31, 1998, respectively, on
securities available for sale are reported as a separate component of
shareholders' equity and as other comprehensive income.
Securities with carrying values of $428.4 million at June 30, 1999 and
$351.7 million at December 31, 1998 were pledged to secure public funds, trust
assets on deposit and for other purposes required or permitted by law.
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
PAGE 10
<PAGE>
internal and external auditors and regulatory authorities. The Company's loans
are widely diversified by borrower and industry group.
The Company has collateral management policies in place so that collateral
lending of all types is approached on a basis consistent with safe and sound
standards. Valuation analysis is utilized to take into consideration the
potentially adverse economic conditions under which liquidation could occur.
Collateral accepted against the commercial loan portfolio includes accounts
receivable and inventory, marketable securities, equipment and agricultural
products. Autos, deeds of trust, life insurance and marketable securities are
accepted as collateral for the installment loan portfolio.
Management of the Company believes that the Company has benefited from
increased loan demand due to passage of the North American Free Trade Agreement
("NAFTA") and the strong population growth in the Rio Grande Valley. More
recently, the continued devaluation of the Mexican peso relative to the U.S.
dollar has reduced retail sales to residents of Mexico. However, the effects of
NAFTA and the devaluation have also increased cross-border trade and industrial
development including activity at twin manufacturing plants located on each side
of the border (referred to as maquiladoras) which benefit the Rio Grande Valley
economy. Management believes the on-going Mexican financial problems will not
have a material adverse effect on the Company's growth and earnings prospects,
in part because the Company presently has a low percentage of loans secured by
Mexican assets or that otherwise rely on collateral located in Mexico.
The extension of credits denominated in a currency other than that of the
country in which a borrower is located are called "cross-border" credits. The
Company has some dollar-denominated cross-border credits to individuals or
companies that are residents of, or domiciled in Mexico. The Company's total
cross-border credits at June 30, 1999 of $7.4 million represented 0.6% of total
loans. See "Nonperforming Assets" for additional information on cross-border
credits.
Total loans of $1.2 billion at June 30, 1999 increased $89.8 million or
8.2% compared to December 31, 1998 levels of $1.1 billion. The increase in total
loans for the six months ended June 30, 1999 reflects growth in all loan
categories except Commercial Tax-Exempt and Agricultural loans and is
representative in part to the vitality of the Rio Grande Valley economy. The
following table presents the composition of the loan portfolio (dollars in
thousands):
June 30, December 31,
1999 1998
- -----------------------------------------------------------------------------
(Unaudited)
Commercial ............................ $ 345,962 $ 311,966
Commercial Tax-Exempt ................. 19,943 22,155
- -----------------------------------------------------------------------------
Total Commercial Loans ............. 365,905 334,121
- -----------------------------------------------------------------------------
Agricultural .......................... 44,826 52,302
- -----------------------------------------------------------------------------
Real Estate
Construction ....................... 85,018 66,018
Commercial Mortgage ................ 383,878 354,134
Agricultural Mortgage .............. 36,830 34,440
1-4 Family Mortgage ................ 133,024 128,945
- -----------------------------------------------------------------------------
Total Real Estate ................ 638,750 583,537
- -----------------------------------------------------------------------------
Consumer .............................. 129,858 119,545
- -----------------------------------------------------------------------------
Total Loans ........................ $1,179,339 $1,089,505
=============================================================================
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 11
<PAGE>
NONPERFORMING ASSETS
The Company has several procedures in place to assist in maintaining the
overall quality of its loan portfolio. The Bank has established underwriting
guidelines to be followed by its officers and monitors its delinquency levels
for any negative or adverse trends.
Nonperforming assets consist of nonaccrual loans, loans for which the
interest rate has been renegotiated below originally contracted rates and real
estate or other assets that have been acquired in partial or full satisfaction
of loan obligations. The Company's policy generally is to place a loan on
nonaccrual status when payment of principal or interest is contractually past
due 90 days, or earlier when concern exists as to the ultimate collection of
principal and interest. At the time a loan is placed on nonaccrual status,
interest previously accrued but uncollected is reversed and charged against
current income. The Company's classification of nonperforming loans includes
those loans for which management believes collection is doubtful. Management is
not aware of any specific borrower relationships that are not reported as
nonperforming where management has serious doubts as to the ability of such
borrowers to comply with the present loan repayment terms which would cause
nonperforming assets to increase materially.
Nonperforming assets of $12.6 million at June 30, 1999 decreased $3.1
million, 19.9% compared to December 31, 1998 levels of $15.8 million. Nonaccrual
loans of $6.5 million at June 30, 1999 decreased $3.9 million or 37.5% compared
to $10.4 million at December 31, 1998. The decrease in nonaccrual loans during
1999 resulted from foreclosure on several credits secured primarily by real
estate. Cross-border nonaccrual loans at June 30, 1999 of $2.6 million reflect
no change from December 31, 1998. 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" below.
Loans which are contractually past due 90 days or more, which are both
well secured or guaranteed by financially responsible third parties and in the
process of collection, generally are not placed on nonaccrual status. The amount
of such loans past due 90 days or more at June 30, 1999 and December 31, 1998
that are not classified as nonaccrual totaled $4.2 million and $3.1 million,
respectively. The increase in accruing loans past due 90 days or more at June
30, 1999 as compared to the year ended December 31, 1998 is partly attributable
to several diverse loans secured primarily by real estate. The ratio of
Nonperforming Assets Plus Accruing Loans 90 Days or More Past Due as a percent
of Total Loans and Foreclosed Assets at June 30, 1999 decreased to 1.42% from
1.72% at December 31, 1998 due primarily to the increase in total loans.
An analysis of the components of nonperforming assets follows (dollars in
thousands):
June 30, December 31,
1999 1998
- ------------------------------------------------------------------------------
(Unaudited)
Nonaccrual Loans .................................. $ 6,510 $10,414
Renegotiated Loans ................................ -- --
- ------------------------------------------------------------------------------
Nonperforming Loans ............................ 6,510 10,414
Foreclosed Assets ................................. 6,129 5,368
- ------------------------------------------------------------------------------
Total Nonperforming Assets ..................... 12,639 15,782
Accruing Loans 90 Days or More Past Due ........... 4,161 3,099
- ------------------------------------------------------------------------------
Total Nonperforming Assets and Accruing Loans
90 Days or More Past Due ..................... $16,800 $18,881
==============================================================================
Nonperforming Loans as a % of Total Loans ......... 0.55% 0.96%
Nonperforming Assets as a % of Total Loans and
Foreclosed Assets .............................. 1.07 1.44
Nonperforming Assets as a % of Total Assets ....... 0.69 0.90
Nonperforming Assets Plus Accruing Loans 90 Days
or More Past Due as a % of Total Loans and
Foreclosed Assets .............................. 1.42 1.72
==============================================================================
PAGE 12
<PAGE>
Management regularly reviews and monitors the loan portfolio to identify
borrowers experiencing financial difficulties. Management believes that, at June
30, 1999, all such loans had been identified and included in the nonaccrual,
renegotiated or 90 days or more past due loan totals reflected in the table
above. Management continues to emphasize maintaining a low level of
nonperforming assets and returning nonperforming assets to an earning status.
ALLOWANCE FOR LOAN LOSSES
Management analyzes the loan portfolio to determine the adequacy of the
allowance for loan losses and the appropriate provision required to maintain an
adequate allowance. In assessing the adequacy of the allowance, management
reviews the size, quality and risks of loans in the portfolio and considers
factors such as specific known risks, past experience, the status and amount of
nonperforming assets and economic conditions. A specific percentage is allocated
to total loans in good standing and not specifically reserved while additional
amounts are added for individual loans considered to have specific loss
potential. Loans identified as losses are charged-off. In addition, the loan
review committee of the Bank reviews the assessments of management in
determining the adequacy of the Bank's allowance for loan losses. Based on total
allocations, the provision is recorded to maintain the allowance at a level
deemed appropriate by management. While management uses available information to
recognize losses on loans, there can be no assurance that future additions to
the allowance will not be necessary.
The allowance for loan losses at June 30, 1999 totaled $14.3 million,
representing a net increase of $1.0 million or 7.7% compared to $13.2 million at
December 31, 1998. Management believes that the allowance for loan losses at
June 30, 1999 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.
The following table summarizes the activity in the allowance for loan
losses (dollars in thousands):
<TABLE>
<CAPTION>
Three Months Ended June 30, Six Months Ended June 30,
1999 1998 1999 1998
- ---------------------------------------------------------------------------------------------------------------------------
(Unaudited)
<S> <C> <C> <C> <C>
Balance at Beginning of Period ......................... $13,673 $12,115 $13,236 $11,291
Balance from Acquisitions .............................. -- -- -- 308
Provision for Loan Losses .............................. 1,499 981 2,822 1,922
Charge-Offs
Commercial .......................................... 674 300 1,287 528
Agricultural ........................................ -- 630 5 643
Real Estate ......................................... 28 111 48 231
Consumer ............................................ 281 319 639 552
- ---------------------------------------------------------------------------------------------------------------------------
Total Charge-Offs ................................. 983 1,360 1,979 1,954
- ---------------------------------------------------------------------------------------------------------------------------
Recoveries
Commercial .......................................... 22 47 63 171
Agricultural ........................................ 2 -- 5 --
Real Estate ......................................... 2 195 12 197
Consumer ............................................ 46 60 102 103
- ---------------------------------------------------------------------------------------------------------------------------
Total Recoveries .................................. 72 302 182 471
- ---------------------------------------------------------------------------------------------------------------------------
Net Charge-Offs ........................................ 911 1,058 1,797 1,483
- ---------------------------------------------------------------------------------------------------------------------------
Balance at End of Period ............................... $14,261 $12,038 $14,261 $12,038
===========================================================================================================================
Ratio of Allowance for Loan Losses to
Loans Outstanding, Net of Unearned Discount ......... 1.21% 1.19% 1.21% 1.19%
Ratio of Allowance for Loan Losses to
Nonperforming Loans ................................. 219.06 143.43 219.06 143.43
Ratio of Net Charge-Offs to Average Total
Loans Outstanding, Net of Unearned Discount ......... 0.31 0.42 0.32 0.30
===========================================================================================================================
</TABLE>
PAGE 13
<PAGE>
PREMISES AND EQUIPMENT, NET
Premises and equipment of $69.6 million at June 30, 1999 decreased
$239,000 or 0.3% compared to $69.8 million at December 31, 1998. The decrease
for the six months ended June 30, 1999 resulted primarily from depreciation and
amortization, net of additions.
GOODWILL AND IDENTIFIABLE INTANGIBLES
Goodwill and identifiable intangibles of $25.5 million at June 30, 1999
decreased $1.4 million or 5.1% compared to $26.9 million at December 31, 1998.
The net decrease for the six months ended June 30, 1999 is attributable to
amortization of existing intangible assets.
DEPOSITS
Total deposits of $1.6 billion at June 30, 1999 increased $69.4 million or
4.4% compared to December 31, 1998 levels of $1.6 billion. The increase in total
deposits for the six months ended June 30, 1999 is primarily attributable to
growth in the volume of business conducted by the Company and the vitality of
the Rio Grande Valley economy. The following table presents the composition of
total deposits (dollars in thousands):
June 30, December 31,
1999 1998
- ------------------------------------------------------------------------------
(Unaudited)
Demand Deposits
Commercial and Individual ............. $ 238,444 $ 227,220
Public Funds .......................... 6,516 7,435
- ------------------------------------------------------------------------------
Total Demand Deposits ............... 244,960 234,655
- ------------------------------------------------------------------------------
Interest-Bearing Deposits
Savings
Commercial and Individual ........... 109,492 106,446
Public Funds ........................ 1,153 1,265
Money Market Checking and Savings
Commercial and Individual ........... 249,640 236,157
Public Funds ........................ 46,787 65,081
Time Deposits
Commercial and Individual ........... 710,162 727,205
Public Funds ........................ 270,195 192,133
- ------------------------------------------------------------------------------
Total Interest-Bearing Deposits ..... 1,387,429 1,328,287
- ------------------------------------------------------------------------------
Total Deposits .................... $1,632,389 $1,562,942
==============================================================================
SHAREHOLDERS' EQUITY
Shareholders' equity increased by $2.8 million, or 1.6%, during the six
months ended June 30, 1999 due to comprehensive income of $6.4 million less cash
dividends of $3.6 million. Comprehensive income for the period included net
income of $14.5 million and unrealized loss on securities available for sale,
net of tax, of $8.1 million.
Bank holding companies are required to maintain capital ratios in
accordance with guidelines adopted by the Federal Reserve Board ("FRB"). The
guidelines are commonly known as Risk-Based Capital Guidelines. The table below
reflects various measures of regulatory capital (dollars in thousands):
PAGE 14
<PAGE>
<TABLE>
<CAPTION>
June 30, 1999 December 31, 1998
-----------------------------------------------------------
Amount Ratio Amount Ratio
- ---------------------------------------------------------------------------------------------------------------------
(Unaudited)
<S> <C> <C>
Total Shareholders' Equity before unrealized
gains or losses on Securities Available for Sale..... $187,774 $176,859
Less Goodwill and Other Deductions...................... (25,535) (26,894)
- ---------------------------------------------------------------------------------------------------------------------
Total Tier I Capital.................................... 162,239 149,965
Total Tier II Capital................................... 14,261 13,236
- ---------------------------------------------------------------------------------------------------------------------
Total Qualifying Capital................................ $176,500 $163,201
=====================================================================================================================
Total Risk-Based Capital................................ $176,500 13.79% $163,201 14.06%
Total Risk-Based Capital Minimum........................ 102,419 8.00 92,884 8.00
- ---------------------------------------------------------------------------------------------------------------------
Tier I Risk-Based Capital............................... 162,239 12.67 149,965 12.92
Tier I Risk-Based Capital Minimum....................... 51,209 4.00 46,442 4.00
- ---------------------------------------------------------------------------------------------------------------------
Tier I Leverage Capital................................. 162,239 8.93 149,965 8.85
Tier I Leverage Capital Minimum......................... 72,644 4.00 67,772 4.00
=====================================================================================================================
</TABLE>
At June 30, 1999, the Company and the Bank met the criteria for
classification as a "well-capitalized" institution under the prompt corrective
action rules promulgated under the Federal Deposit Insurance Act. Designation as
a well-capitalized institution under these regulations does not constitute a
recommendation or endorsement of the Company or the Bank by Federal bank
regulators.
RESULTS OF OPERATIONS
NET INCOME
Net income available for common shareholders was $7.5 million and $6.8
million and earnings per diluted common share were $0.51 and $0.46 for the three
months ended June 30, 1999 and 1998, respectively. The Company incurred a One
Time Charge-Acquisitions of $46,000 or $0.01 per diluted common share, net of
federal income tax, during the quarter ended June 30, 1998. These expenses,
primarily professional fees and computer conversion costs, related to business
combinations accounted for by the pooling-of-interests method. Net income
increased due to sustained loan growth, strong asset quality and strict expense
control. Return on assets averaged 1.63% and 1.67%, respectively, while return
on shareholders' equity averaged 16.27% and 15.98%, respectively, for the three
months ended June 30, 1999 and 1998.
For the six months ended June 30, 1999, net income available for common
shareholders was $14.5 million compared to $12.6 million for the same period in
1998, representing an increase of $1.9 million or 15.2%. Earnings per diluted
common share were $0.99 and $0.86, respectively, for the six months ended June
30, 1999 and 1998. The Company incurred a One Time Charge-Acquisitions of
$728,000 or $0.03 per diluted common share, net of federal income tax, during
the six months ended June 30, 1998. Return on assets averaged 1.62% and return
on shareholders' equity averaged 16.08% for the six months ended June 30, 1999
compared to 1.58% and 15.19%, respectively, for the same period in 1998.
INTEREST INCOME
Interest income for the three months ended June 30, 1999 was $34.6
million, an increase of $3.2 million or 10.1% from the three months ended June
30, 1998. For the six months ended June 30, 1999, interest income was $67.6
million, a $5.6 million or 9.0% increase from the same period in 1998. This
increase in interest income is due to a $222.4 million or 15.3% increase in
average earning assets to $1.7 billion for the three months ended June 30, 1999
from the same period last year. Average earning assets increased by $199.1
million or 13.8% to $1.6 billion for the six months ended June 30, 1999.
Interest income on loans increased $2.4 million to $27.1 million for the
three months ended June 30, 1999. A $143,000 increase in average loans
outstanding over the same period in 1998 propelled this increase. Interest
income on securities increased to $7.2 million, a $803,000 increase from the
prior comparable period. This increase was attributable to a $79.1 million
increase in average securities, up 19.6% when compared to the three months ended
June 30, 1998.
PAGE 15
<PAGE>
For the six months ended June 30, 1999, interest income on loans increased
9.7% to $52.8 million, up from $48.2 million for the same period in 1998.
Interest income on securities increased to $14.1 million, an increase of $1.0
million or 7.7% from the prior period. These gains were principally related to
an increase of average earning assets to $1.6 billion for the six months ended
June 30, 1999, an increase of 13.8% for the same period last year.
INTEREST EXPENSE
Interest expense on deposits and other borrowings was $14.9 million for
the three months ended June 30, 1999 compared to $14.0 million for the same
period in 1998. For the six months ended June 30, 1999, interest expense on
deposits and other borrowings was $29.2 million compared to $28.0 million for
the same period in 1998. The increase in interest expense was attributable to a
$205.6 million and $188.3 million increase in average interest-bearing
liabilities from the three and six month comparable period, respectively.
NET INTEREST INCOME
Net interest income, reported on a tax equivalent basis, was $20.1 million
for the three months ended June 30, 1999, compared with $17.8 million for the
same period in 1998, an increase of 13.2%. For the six months ended June 30,
1999, net interest income increased 12.7% from the same period in 1998 to $39.1
million. The increase in net interest income during the three and six months
ended June 30, 1999 was largely due to growth in average interest-earning
assets, primarily loans.
The net interest margin was 4.81% for the three months ended June 30,
1999, compared with 4.90% for the same period in 1998. This nominal decrease was
attributable to a forty basis point decrease in the yield on average interest
earning assets to 8.37%, down from 8.77% for the same period last year. The cost
of interest-bearing liabilities also decreased thirty eight basis points to
4.26% for the three months ended June 30, 1999. The net interest margin was
4.81% for the six months ended June 30, 1999, down from 4.85% for the same
period in 1998. This decrease was attributable to a thirty seven basis point
decrease in the yield on average interest earning assets of 8.40%, down from
8.77% for the same period last year. The cost of interest-bearing liabilities
also decreased forty basis points to 4.29% for the six months ended June 30,
1999.
The following table presents for periods indicated the total dollar amount
of interest income from average interest-earning assets and the resultant
yields, reported on a tax-equivalent basis, and the interest expense on average
interest-bearing liabilities, expressed both in dollars and rates. Average
balances are derived from average daily balances and the yields and costs are
established by dividing income or expense by the average balance of the asset or
liability. Income and yield on interest-earning assets include amounts to
convert tax-exempt income to a taxable-equivalent basis, assuming a 35%
effective tax rate for 1999 and 1998 (dollars in thousands):
PAGE 16
<PAGE>
<TABLE>
<CAPTION>
Three Months Ended
---------------------------------------------------------------------------------------
June 30, 1999 June 30, 1998
---------------------------------------------------------------------------------------
Average Yield/ Average Yield/
Taxable-Equivalent Basis (1) Balance Interest Rate (2) Balance Interest Rate (2)
- -------------------------------------------------------------------------------------------------------------------------------
(Unaudited)
<S> <C> <C> <C> <C> <C> <C>
Assets
Interest-Earning Assets
Loans
Commercial......................... $ 418,128 $ 9,221 8.85% $ 356,459 $ 8,413 9.47%
Real Estate........................ 619,561 14,587 9.44 554,606 13,592 9.83
Consumer........................... 127,597 3,375 10.61 111,476 2,807 10.10
- -------------------------------------------------------------------------------------------------------------------------------
Total Loans...................... 1,165,286 27,183 9.36 1,022,541 24,812 9.73
- -------------------------------------------------------------------------------------------------------------------------------
Securities
Taxable............................ 440,068 6,689 6.10 376,057 6,021 6.42
Tax-Exempt......................... 43,556 765 7.04 28,420 581 8.20
- -------------------------------------------------------------------------------------------------------------------------------
Total Securities................. 483,624 7,454 6.18 404,477 6,602 6.55
- -------------------------------------------------------------------------------------------------------------------------------
Time Deposits........................ 355 4 4.52 1,852 33 7.15
Federal Funds Sold................... 27,245 324 4.77 25,197 345 5.49
- -------------------------------------------------------------------------------------------------------------------------------
Total Interest-Earning Assets...... 1,676,510 34,965 8.37% 1,454,067 31,792 8.77%
- -------------------------------------------------------------------------------------------------------------------------------
Cash and Due from Banks................ 54,891 58,515
Premises and Equipment, Net............ 69,613 64,253
Other Assets........................... 51,504 58,283
Allowance for Loan Losses.............. (14,193) (12,527)
- -------------------------------------------------------------------------------------------------------------------------------
Total Assets......................... $ 1,838,325 $ 1,622,591
===============================================================================================================================
Liabilities
Interest-Bearing Liabilities
Savings.............................. $ 111,935 $ 622 2.23% $ 106,929 $ 776 2.91%
Money Market Checking
And Savings........................ 297,491 2,078 2.80 256,978 1,851 2.89
Time Deposits........................ 981,061 12,054 4.93 842,550 11,327 5.39
- -------------------------------------------------------------------------------------------------------------------------------
Total Savings and
Time Deposits.................... 1,390,487 14,754 4.26 1,206,457 13,954 4.64
- -------------------------------------------------------------------------------------------------------------------------------
Federal Funds Purchased
and Securities Sold
Under Repurchase
Agreements......................... 10,345 108 4.19 6,515 84 5.17
- -------------------------------------------------------------------------------------------------------------------------------
Total Interest-Bearing
Liabilities...................... 1,400,832 14,862 4.26% 1,212,972 14,038 4.64%
- -------------------------------------------------------------------------------------------------------------------------------
Demand Deposits........................ 246,995 225,449
Other Liabilities...................... 6,451 14,503
- -------------------------------------------------------------------------------------------------------------------------------
Total Liabilities.................... 1,654,278 1,452,924
- -------------------------------------------------------------------------------------------------------------------------------
Shareholders' Equity................... 184,047 169,667
- -------------------------------------------------------------------------------------------------------------------------------
Total Liabilities and
Shareholders' Equity............... $ 1,838,325 $ 1,622,591
===============================================================================================================================
Net Interest Income....................... $ 20,103 $ 17,754
===============================================================================================================================
Net Yield on Total Interest
Earning Assets......................... 4.81% 4.90%
===============================================================================================================================
</TABLE>
(1) For analytical purposes, income from tax-exempt assets, primarily
securities issued by state and local governments or authorities, is
adjusted by an increment that equates tax-exempt income to interest from
taxable assets (assuming a 35% tax rate).
(2) Annualized.
PAGE 17
<PAGE>
<TABLE>
<CAPTION>
Six Months Ended
-------------------------------------------------------------------------------------------
June 30, 1999 June 30, 1998
-------------------------------------------------------------------------------------------
Average Yield/ Average Yield/
Taxable-Equivalent Basis (1) Balance Interest Rate (2) Balance Interest Rate (2)
- -----------------------------------------------------------------------------------------------------------------------------------
(Unaudited)
<S> <C> <C> <C> <C> <C> <C>
Assets
Interest-Earning Assets
Loans
Commercial ....................... $ 409,255 $ 18,129 8.93% $ 349,469 $ 16,423 9.48%
Real Estate ...................... 605,956 28,444 9.47 546,907 26,738 9.86
Consumer ......................... 125,060 6,510 10.50 106,040 5,344 10.16
- -----------------------------------------------------------------------------------------------------------------------------------
Total Loans .................... 1,140,271 53,083 9.39 1,002,416 48,505 9.76
- -----------------------------------------------------------------------------------------------------------------------------------
Securities
Taxable .......................... 429,148 13,076 6.14 384,268 12,324 6.47
Tax-Exempt ....................... 43,055 1,496 7.01 28,045 1,126 8.10
- -----------------------------------------------------------------------------------------------------------------------------------
Total Securities ............... 472,203 14,572 6.22 412,313 13,450 6.58
- -----------------------------------------------------------------------------------------------------------------------------------
Time Deposits ...................... 357 9 5.08 1,676 51 6.14
Federal Funds Sold ................. 27,989 663 4.78 25,308 701 5.59
- -----------------------------------------------------------------------------------------------------------------------------------
Total Interest-Earning Assets .... 1,640,820 68,327 8.40% 1,441,713 62,707 8.77%
- -----------------------------------------------------------------------------------------------------------------------------------
Cash and Due from Banks .............. 56,727 58,336
Premises and Equipment, Net .......... 69,714 60,763
Other Assets ......................... 54,705 55,304
Allowance for Loan Losses ............ (13,821) (12,153)
- -----------------------------------------------------------------------------------------------------------------------------------
Total Assets ....................... $ 1,808,145 $ 1,603,963
===================================================================================================================================
Liabilities
Interest-Bearing Liabilities
Savings ............................ $ 110,657 1,233 2.25% $ 105,684 $ 1,543 2.94%
Money Market Checking
and Savings ...................... 298,852 4,218 2.85 254,930 3,695 2.92
Time Deposits ...................... 954,227 23,572 4.98 840,486 22,655 5.44
- -----------------------------------------------------------------------------------------------------------------------------------
Total Savings and
Time Deposits .................. 1,363,736 29,023 4.29 1,201,100 27,893 4.68
- -----------------------------------------------------------------------------------------------------------------------------------
Federal Funds Purchased
and Securities Sold
Under Repurchase
Agreements ....................... 9,346 201 4.34 4,272 112 5.29
- -----------------------------------------------------------------------------------------------------------------------------------
Total Interest-Bearing
Liabilities .................... 1,373,082 29,224 4.29% 1,205,372 28,005 4.69%
- -----------------------------------------------------------------------------------------------------------------------------------
Demand Deposits ...................... 242,421 216,733
Other Liabilities .................... 10,579 14,544
- -----------------------------------------------------------------------------------------------------------------------------------
Total Liabilities .................. 1,626,082 1,436,649
- -----------------------------------------------------------------------------------------------------------------------------------
Shareholders' Equity ................. 182,063 167,314
- -----------------------------------------------------------------------------------------------------------------------------------
Total Liabilities and
Shareholders' Equity ............. $ 1,808,145 $ 1,603,963
===================================================================================================================================
Net Interest Income ..................... $ 39,103 $ 34,702
===================================================================================================================================
Net Yield on Total Interest
Earning Assets ....................... 4.81% 4.85%
===================================================================================================================================
</TABLE>
(1) For analytical purposes, income from tax-exempt assets, primarily
securities issued by state and local governments or authorities, is
adjusted by an increment that equates tax-exempt income to interest from
taxable assets (assuming a 35% tax rate).
(2) Annualized.
PAGE 18
<PAGE>
The following table presents the effects of changes in volume, rate and
rate/volume on interest income and interest expense for major categories of
interest-earning assets and interest-bearing liabilities. Nonaccrual loans are
included in assets, thereby reducing yields (see "Nonperforming Assets"). The
allocation of the rate/volume variance has been made pro-rata on the percentage
that volume and rate variances produce in each category. An analysis of changes
in net interest income follows (dollars in thousands):
<TABLE>
<CAPTION>
Three Months Ended June 30, Six Months Ended June 30,
1999 Compared To 1998 1999 Compared to 1998
-------------------------------------------------------------------------------------------
Due to Change in Due to Change in
Net -------------------- Rate/ Net ------------------- Rate/
Taxable-Equivalent Basis (1) Change Volume Rate Volume Change Volume Rate Volume
- ---------------------------------------------------------------------------------------------------------------------------------
(Unaudited)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Interest Income
Loans ........................... $ 2,371 $ 3,464 $ (959) $ (134) $ 4,578 $ 6,671 $(1,840) $ (253)
Securities
Taxable ....................... 668 1,025 (305) (52) 752 1,439 (615) (72)
Tax-Exempt .................... 184 309 (82) (43) 370 603 (152) (81)
Time Deposits in Bank ........... (29) (27) (12) 10 (42) (40) (9) 7
Federal Funds Sold .............. (21) 28 (45) (4) (38) 74 (101) (11)
- ---------------------------------------------------------------------------------------------------------------------------------
Total Interest Income ......... 3,173 4,799 (1,403) (223) 5,620 8,747 (2,717) (410)
- ---------------------------------------------------------------------------------------------------------------------------------
Interest Expense
Deposits ........................ 800 2,129 (1,153) (176) 1,130 3,777 (2,331) (316)
Federal Funds Purchased and
Securities Sold Under
Repurchase Agreements ......... 24 49 (16) (9) 89 133 (20) (24)
- ---------------------------------------------------------------------------------------------------------------------------------
Total Interest Expense ........ 824 2,178 (1,169) (185) 1,219 3,910 (2,351) (340)
- ---------------------------------------------------------------------------------------------------------------------------------
Net Interest Income Before
Allocation of
Rate/Volume ..................... 2,349 2,621 (234) (38) 4,401 4,837 (366) (70)
Allocation of Rate/Volume .......... -- (293) 255 38 -- (525) 455 70
- ---------------------------------------------------------------------------------------------------------------------------------
Changes in Net Interest Income ..... $ 2,349 $ 2,328 $ 21 $ -- $ 4,401 $ 4,312 $ 89 $ --
=================================================================================================================================
</TABLE>
(1) For analytical purposes, income from tax-exempt assets, primarily
securities issued by state and local governments or authorities, is
adjusted by an increment that equates tax-exempt income to interest from
taxable assets (assuming a 35% effective federal income tax rate for 1999
and 1998).
PROVISION FOR LOAN LOSSES
The Company recorded a provision for loan losses of $1.5 million for the
three months ended June 30, 1999, compared to $981,000 in the three months ended
June 30, 1998. For the six months ended June 30, 1999, the Company recorded a
provision for loan losses of $2.8 million compared to $1.9 million for the same
period in 1998. The provision for loan losses reflected an increase of $518,000
or 52.8% for the three months ended June 30, 1999 and an increase of $900,000 or
46.8% for the six months ended June 30, 1999 necessary to maintain the total
allowance for loan losses at an adequate level consistent with the Company's
methodology. Net charge-offs totaled $911,000 and $1.1 million, respectively,
for the three months ended June 30, 1999 and 1998 and decreased to .31% of
average loans in 1999 compared to .42% of average loans for 1998. During the six
months ended June 30, 1999 and 1998, net charge-offs totaled $1.8 million and
$1.5 million, respectively, and increased to .32% of average loans in 1999
compared to .30% of average loans for 1998.
Management charges provisions for loan losses to earnings to bring the
total allowance for loan losses to a level deemed appropriate. Management bases
its decision on many factors which include historical experience, the volume and
type of lending conducted by the Company, the amount of nonperforming assets,
regulatory policies, generally accepted accounting principles, and general
economic conditions, particularly as they relate to the Company's lending area.
See "Allowance for Loan Losses."
NONINTEREST INCOME
Noninterest Income totaled $4.2 million for the three months ended June
30, 1999 compared to $3.6 million for 1998. Excluding Net Realized Gains
(Losses) on Sales of Securities Available for Sale, Noninterest Income increased
$773,000 or 22.6% from 1998. For the six months ended June 30, 1999, Noninterest
income totaled $8.4 million, up from $7.6 million for the same period in 1998.
Noninterest income for the six months ended
PAGE 19
<PAGE>
June 30, 1999, excluding Net Realized Gains (Losses) on Sales of Securities
Available for Sale increased $1.2 million or 16.6% over the same period in 1998.
Total Service Charges of $2.9 million for the three months ended June 30,
1999 increased $477,000 or 19.4% compared to $2.5 million for same period in
1998. Total Service Charges were $5.7 million for the six months ended June 30,
1999 compared to $4.9 million for the same period in 1998. The increase in Total
Service Charges is attributable to increased account transaction fees generated
by deposit growth experienced by the Company.
Trust Service Fees of $495,000 for the three months ended June 30, 1999
increased $65,000 or 15.1% compared to $430,000 for comparable prior year
period. Trust Service Fees were $976,000 for the six months ended June 30, 1999
compared to $877,000 for the same period in 1998. The increase in Trust Service
Fees is attributable to an increase in the number of trust accounts managed. The
fair market value of assets managed at June 30, 1999 of $338.4 million compared
to $328.9 million at the end of the first quarter and $235.2 million a year ago.
Assets held by the trust department of the Bank in fiduciary or agency
capacities are not assets of the Company and are not included in the
consolidated balance sheets.
Net Realized Gains (Losses) on Sales of Securities Available for Sale
totaled $1,000 net losses for the three months ended June 30, 1999 decreased
$199,000 or 100.5% compared to $198,000 net gains for 1998. Net Realized Gains
(Losses) on Sales of Securities Available for Sale were $1,000 net losses for
the six months ended June 30, 1999, down from $420,000 net gains during the same
period in 1998. Market opportunities to realize bond profits were limited as
bond prices generally fell during the first half of 1999. Unrealized holding
losses on securities available for sale totaled $7.5 million during the six
months ended June 30, 1999 (see "Shareholders' Equity").
Data Processing Fees of $518,000 for the three months ended June 30, 1999
increased $174,000 or 50.6% compared to $344,000 for the same period last year.
During the six months ended June 30, 1999, data processing fees increased
$328,000 or 47.9% to $1.0 million compared to $685,000 during the same period in
1998. This increase arose from the acquisition of additional banking clients and
increased utilization of services offered to existing clients during 1998. The
Company obtained three additional banking clients during the past year.
Other Operating Income of $251,000 for the three months ended June 30,
1999 increased $57,000 or 29.4% compared to $194,000 for the same 1998 period.
Other Operating Income was $706,000 for the six months ended June 30, 1999
compared to $731,000 during the same quarter in 1998, a decrease of $25,000 or
3.4%. Other Operating Income included a gain on sale of bank real estate of
$158,000 for the three- and six-months ended June 30, 1998.
NONINTEREST EXPENSE
Noninterest Expense of $10.9 million for the three months ended June 30,
1999 increased $1.3 million or 13.3% compared to $9.6 million for 1998. For the
six months ended June 30, 1999, noninterest expense totaled $21.5 million, an
increase of $1.3 million or 6.4%, from $20.2 million for the same period in
1998. The efficiency ratio of expense to total revenue improved to 44.51% for
the three months ended June 30, 1999 compared to 45.80% for the same period in
1998. For the six months ended June 30, 1999, the efficiency ratio improved to
44.80% from 48.18% for 1998. The efficiency ratio is defined as Noninterest
Expense (excluding other real estate income and expense) divided by the total of
taxable-equivalent Net Interest Income and Noninterest Income (excluding any
gains and losses on sale of securities). Excluding One Time Charge -
Acquisitions of $728,000 in 1998, Noninterest Expense increased $2.0 million or
10.4% over the same six-month period in 1998. The increase results primarily
from higher personnel costs and occupancy expenses associated with the new
corporate headquarters building in McAllen, Texas opened in mid-1998.
Salaries and Employee Benefits, the largest category of Noninterest
Expense, of $5.6 million for the three months ended June 30, 1999 increased $1.2
million or 26.4% compared to the same period last year of $4.4 million. Salary
and Employee Benefits for the six months ended June 30, 1999 was $10.5 million,
an increase of $1.5 million or 16.1% from the same period in 1998. The number of
full-time equivalent employees of 770 at June 30, 1999 increased 6.2% from 725
at June 30, 1998. Salaries and Employee Benefits averaged 1.21% of average
assets for the three months ended June 30, 1999 compared to 1.08% for the three
months ended June 30, 1998. For the six months ended June 30, 1999, Salaries and
Employee Benefits averaged 1.16% of average assets compared to 1.13% for the
same period in 1998.
Net Occupancy Expense of $1.0 million for the three months ended June 30,
1999 increased $166,000 or 19.7% compared to $842,000 for 1998. For the six
months ended June 30, 1999, Net Occupancy Expense increased $373,000 or 23.0%
from the same period a year ago to $2.0 million. Expenses associated with the
new
PAGE 20
<PAGE>
corporate headquarters building in McAllen, Texas, opened mid-1998, contributed
to the increase in Net Occupancy Expense during the three and six months ended
June 30, 1999.
Equipment Expense of $1.2 million for the three months ended June 30, 1999
increased $138,000 or 12.7% compared to $1.1 million for 1998. During the six
months ended June 30, 1999, Equipment Expense totaled $2.5 million, an increase
of $227,000 or 10.2% over the same period in 1998. Expenses associated with the
new corporate headquarters building contributed to the increase in Equipment
Expense for the three and six months ended June 30, 1999.
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. Other Real Estate (Income) Expense, Net of $103,000 expense for
the three months ended June 30, 1999 decreased $164,000 or 268.9% compared to
$61,000 income for the three months ended June 30, 1998. Other Real Estate
(Income) Expense, Net decreased $202,000 or 3,366.7% to $196,000 expense for the
six months ended June 30, 1999 compared to the same period in 1998. The net
decrease for the first half of 1999 is primarily attributable to higher volumes
in Other Real Estate owned and increased direct expenses of foreclosed real
estate offsetting increased operating income. Management is actively seeking
buyers for all Other Real Estate.
Amortization of Goodwill and Identifiable Intangibles of $679,000 or the
three months ended June 30, 1999 decreased $2,000 or 0.3% compared to $681,000
for 1998. For the six months ended June 30, 1999, Amortization of Goodwill and
Identifiable Intangibles totaled $1.4 million, an increase of $57,000 or 4.4%
from the same period in 1998. The increase in Amortization of Goodwill and
Identifiable Intangibles was due to the amortization of goodwill and core
deposit premiums associated with the 1998 acquisitions.
One Time Charge - Acquisitions of $46,000 and $728,000 for the three and
six months ended June 30, 1998, respectively, related primarily to professional
fees and computer conversion cost resulting from the Company's 1998
acquisitions.
PAGE 21
<PAGE>
A detailed summary of Noninterest Expense follows (dollars in thousands):
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30, June 30,
-----------------------------------------------------------
1999 1998 1999 1998
- --------------------------------------------------------------------------------------------------------------------------
(Unaudited)
<S> <C> <C> <C> <C>
Salaries and Wages ........................................ $ 4,491 $ 3,444 $ 8,364 $ 7,258
Employee Benefits ......................................... 1,060 946 2,154 1,799
- --------------------------------------------------------------------------------------------------------------------------
Total Salaries and Employee Benefits ................... 5,551 4,390 10,518 9,057
- --------------------------------------------------------------------------------------------------------------------------
Net Occupancy Expense ..................................... 1,008 842 1,993 1,620
- --------------------------------------------------------------------------------------------------------------------------
Equipment Expense ......................................... 1,228 1,090 2,451 2,224
- --------------------------------------------------------------------------------------------------------------------------
Other Real Estate Income (Expense), Net
Rent Income ............................................ (129) (4) (183) (18)
(Gain) Loss on Sale .................................... 35 (199) (172) (233)
Expenses ............................................... 196 137 536 240
Write-Downs ............................................ 1 5 15 5
- --------------------------------------------------------------------------------------------------------------------------
Total Other Real Estate Income (Expense), Net ........ 103 (61) 196 (6)
- --------------------------------------------------------------------------------------------------------------------------
Amortization of Goodwill and Identifiable Intangibles ..... 679 681 1,359 1,302
- --------------------------------------------------------------------------------------------------------------------------
One Time Charge - Acquisitions ............................ -- 46 -- 728
- --------------------------------------------------------------------------------------------------------------------------
Other Noninterest Expense
Advertising and Public Relations ....................... 279 299 660 621
Data Processing and Check Clearing ..................... 323 286 681 581
Director Fees .......................................... 102 48 181 172
Franchise Tax .......................................... 13 191 135 328
Insurance .............................................. 134 102 235 194
FDIC Insurance ......................................... 46 42 92 80
Legal .................................................. 188 333 369 681
Professional Fees ...................................... 175 156 394 329
Postage, Delivery and Freight .......................... 221 214 457 418
Stationery and Supplies ................................ 313 424 632 765
Telephone .............................................. 131 127 273 259
Other Losses ........................................... 18 110 45 166
Miscellaneous Expense .................................. 407 318 787 646
- --------------------------------------------------------------------------------------------------------------------------
Total Other Noninterest Expense ...................... 2,350 2,650 4,941 5,240
- --------------------------------------------------------------------------------------------------------------------------
Total Noninterest Expense ................................. $ 10,919 $ 9,638 $ 21,458 $ 20,165
==========================================================================================================================
</TABLE>
INCOME TAX EXPENSE
The Company recorded income tax expense of $4.0 million for the three
months ended June 30, 1999 compared to $3.6 million for the three months ended
June 30, 1998. For the six months ended June 30, 1999, the provision for income
taxes was $7.9 million, an increase of $1.0 million or 15.2% from $6.9 million
provided for the same period in 1998. The increase in income tax expense is due
primarily to an increased level of pretax income.
CAPITAL AND LIQUIDITY
Bank holding companies are required to maintain capital ratios in
accordance with guidelines adopted by the Federal Reserve Board ("FRB"). The
guidelines are commonly known as Risk-Based Capital Guidelines. On June 30,
1999, the Company exceeded all applicable capital requirements, having a total
risk-based capital ratio of 13.79%, a Tier I risk-based capital ratio of 12.67%,
and a leverage ratio of 8.93%.
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.
Cash and assets which are readily marketable, or which can be pledged, or
which will mature in the near future provide asset liquidity. These include
cash, federal funds sold and U.S. Government Agency and mortgage-
PAGE 22
<PAGE>
backed securities. At June 30, 1999, the Company's liquidity ratio, defined as
cash, U.S. Treasury, U.S. Government Agency, mortgage-backed securities, time
deposits and federal funds sold as a percentage of deposits, was 31.5% compared
to 33.0% at December 31, 1998.
Liability liquidity is provided by access to core funding sources,
principally various customers' interest-bearing and noninterest-bearing deposit
accounts in the Company's trade area. The Company does not have nor does it
solicit brokered deposits. Federal funds purchased and short-term borrowings are
additional sources of liquidity. These sources of liquidity are short-term in
nature, and are used, as necessary, to fund asset growth and meet short-term
liquidity needs.
During the six months ended June 30, 1999, funds for $126.7 million of
securities purchases and $91.5 million of net loan growth came from various
sources, including a net increase in deposits of $69.4 million and $106.6
million in proceeds from maturing securities and $14.5 million of net income.
The Company is dependent on dividend and interest income from the Bank and
the sale of stock for its liquidity. Applicable Federal Reserve Board
regulations provide that bank holding companies are permitted by regulatory
authorities to pay cash dividends on their common or preferred stock if
consolidated earnings and consolidated capital are within regulatory guidelines.
EFFECTS OF INFLATION
Financial institutions are impacted differently by inflation than are
industrial companies. While industrial and manufacturing companies generally
have significant investments in inventories and fixed assets, financial
institutions ordinarily do not have such investments. As a result, financial
institutions are generally in a better position than industrial companies to
respond to inflationary trends by monitoring the spread between interest costs
and interest income yields through adjustments of maturities and interest rates
of assets and liabilities. In addition, inflation tends to increase demand for
loans from financial institutions as industrial companies attempt to maintain a
constant level of goods in inventory and assets. As consumers of goods and
services, financial institutions are affected by inflation as prices increase,
causing an increase in costs of salaries, employee benefits, occupancy expense
and similar items.
YEAR 2000 PROJECT
GENERAL
The Year 2000 problem affects all companies. This problem is rooted in
storage constraints of systems developed in the 1960's and 1970's. Many computer
codes used only two-digit year codes, e.g., 98 instead of four digits, 1998.
Thus, many computer applications interpret the year "00" as 1900 and accordingly
need to be modified to process in the next century.
In the early 1990's, management of Texas State Bank (the "Bank") decided
to process all data in-house and offer data processing services to third party
banks. As part of this initiative, management decided to purchase all critical
software and support services from third party software vendors. All of the
critical software purchased had already been coded to recognize a four-digit
date. The Bank has no computer applications developed in-house.
STATE OF READINESS
In early 1997, the Bank established an ongoing corporate-wide effort to
address the issues associated with the Year 2000. The Bank adopted the phased
approach to Year 2000 project management as outlined by the Federal Financial
Institutions Examination Council ("FFIEC"). The Bank's project goals are to meet
if not exceed all Year 2000 regulatory guidelines. This approach requires the
active involvement of management and the Board of Directors. This active
management involvement provides the sponsorship and commitment to ensure the
business issues and risks are adequately addressed and resolved. The FFIEC
phases used are Awareness Phase, Assessment Phase, Renovation Phase, Validation
Phase and Implementation Phase.
PAGE 23
<PAGE>
AWARENESS PHASE: DEFINE THE PROBLEM AND GAIN MANAGEMENT SUPPORT.
The Bank established a Year 2000 Committee comprised of all levels of
management to address the Year 2000 project. An action plan was developed that
includes strategies for dealing with in-house and third party computer systems,
vendors, customers and business partners. An ongoing process to continually
evaluate customers, business partners and management practices and policies will
be phased in as the Year 2000 project evolves.
ASSESSMENT PHASE: ASSESS THE SIZE AND COMPLEXITY OF THE PROBLEM. EVALUATE
RISK IMPACT AND ESTABLISH CONTINGENCY PLANS.
The Bank has essentially completed the assessment phase. Information
Technology "(IT)" and Non IT systems have been identified. Systems have
generally been identified as Core Mission critical, Non Mission critical and
Business critical. Risk impact of material customers and other business partners
are identified and due diligence procedures developed. The impact of strategic
business initiatives, resources, needs and time lines have been addressed. A
contingency plan for the Bank was completed on June 22, 1998 and addresses Core
Mission critical and Business critical systems. Continually assessing risk is a
major goal in the Year 2000 process.
RENOVATION PHASE: UPGRADE OR REPLACE NON-COMPLIANT SYSTEMS.
Core Mission critical software and hardware vendors of the Bank have
represented their products as being Year 2000 compliant. The Bank is currently
testing these products to corroborate the vendor representations. Certain Non
Mission critical systems have been identified as not Year 2000 compliant. These
systems will require the purchase of compliant systems from third party vendors.
Renovation timelines have been established and all upgrades were completed by
June 30, 1999.
VALIDATION PHASE: TESTING CURRENT AND UPGRADED SYSTEMS.
The Bank has created a Year 2000 Test Lab located in the Data Center to
test many of the internal and external Core Mission critical systems. The Bank
completed all internal Core Mission critical testing by September 30, 1998. In
addition, the Bank has requested and received vendor representations that all
Core Mission critical applications are Year 2000 compliant. The Data Center and
appropriate operating departments at March 31, 1999 had completed interface
testing with FEDLINE.
IMPLEMENTATION PHASE: SYSTEMS MUST BE YEAR 2000 READY BEFORE YEAR 2000.
In this phase, all systems should be fully renovated, tested and certified
as Year 2000. If systems fail to meet Year 2000 requirements, contingency plans
will be implemented. All systems were fully renovated and tested by June 30,
1999.
ESTIMATED COSTS
The Bank has estimated the total cost of the Year 2000 project at
$500,000. The approximate cost expensed was $31,000 in 1997, $253,000 in 1998
and is estimated to be $216,000 in 1999.
RISK
Testing and planning do not ensure that any organization will be able to
conduct business around and after the Year 2000. Testing does not ensure that
the Bank's customers and other business partners will be able to conduct
business. The Bank is performing due diligence on its customers and other
business partners. Where our customers 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.
PAGE 24
<PAGE>
CONTINGENCY PLAN
The Bank has implemented procedures and continues to refine its processes
for evaluating its business readiness. Still, the possibility exists that
something can go wrong. The Bank has prepared contingency plans to ensure a
smooth flow of funds in the event of unforeseen problems. The effect of many
business disruptions at the same time may impact the Bank. These contingency
plans are reviewed continually to reasonably address these incidents.
Item 3. Quantitative and Qualitative Disclosures about Market Risks
Market risk is the exposure to loss resulting from changes in interest
rates, foreign currency exchange rates, commodity prices and equity prices. The
primary market risk to which the Company is exposed is interest rate risk.
Interest rate risk occurs when assets and liabilities reprice at different times
as interest rates change. For example, if fixed-rate loans are funded with
floating-rate deposits, the spread between loan and deposit rates will decline
or turn negative if rates increase. Other types of market risk, such as foreign
currency exchange rate risk and commodity price risk, do not arise in the normal
course of the Company's business activities. The Company's interest rate risk
arises from transactions entered into for purposes other than trading. The
Company does not currently engage in trading activities or use derivative
instruments to control interest rate risk. Even though such activities may be
permitted with the approval of the Board of Directors, the Company does not
intend to engage in such activities in the immediate future.
Interest rate risk is managed within the funds management policy of the
Company. The principal objectives of the funds management policy is to avoid
fluctuating net interest margins and to maintain consistent growth of net
interest income through periods of changing interest rates. The Board of
Directors oversees implementation of strategies to control interest rate risk.
The Company may take steps to alter its net sensitivity position by offering
deposit and/or loan structures that tend to counter the natural rate risk
profile of the Company. Funding positions are kept within predetermined limits
designed to ensure that risk-taking is not excessive and that liquidity is
properly managed. Because of the volatility of market rates and uncertainties,
there can be no assurance of the effectiveness of management programs to achieve
a targeted moderation of risk.
In order to measure earnings and fair value sensitivity to changing rates,
the Company utilizes three different measurement tools including static gap
analysis, simulation earnings, and market value sensitivity (fair value at
risk). The primary analytical tool used by the Company to quantify interest rate
risk is a simulation model to project changes in net interest income that result
from forecast changes in interest rates. This analysis estimates a percentage of
change in net interest income from the stable rate scenario under scenarios of
rising and falling market interest rates over a twelve month time horizon. The
prime rate serves as a "driver" and is made to rise (or fall) evenly in 100
basis point increments over the 12-month forecast interval. These simulations
incorporate assumptions regarding balance sheet growth and mix, pricing and the
repricing and maturity characteristics of the existing and projected balance
sheet. The following table summarizes the simulated change in net interest
income over a 12-month period as of June 30, 1999 and December 31, 1998 (dollars
in thousands):
Increase (Decrease) in
Net Interest Income
Changes in Interest Estimated Net ---------------------------
Rates (Basis Points) Interest Income Amount Percent
- ----------------------------------------------------------------------------
(Unaudited)
June 30, 1999
+100 $82,657 $1,529 1.9%
- 81,128 - -
-100 78,110 (3,018) (3.7)
December 31, 1998
+100 77,223 2,317 3.1
- 74,906 - -
-100 69,940 (4,966) (6.6)
- ----------------------------------------------------------------------------
All the measurements of risk described above are made based upon the
Company's business mix and interest rate exposures at the particular point in
time. An immediate 100 basis point decline in interest rates is a hypothetical
rate scenario, used to calibrate risk, and does not necessarily represent
management's current view of future market developments. Because of
uncertainties as to the extent of customer behavior, refinance activity,
PAGE 25
<PAGE>
absolute and relative loan and deposit pricing levels, competitor pricing and
market behavior, product volumes and mix, and other unexpected changes in
economic events impacting movements and volatility in market rates, there can be
no assurance that simulation results are reliable indicators of net interest
income under such conditions.
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
The Company is involved in routine litigation in the normal course of its
business, which in the opinion of management, will not have a material adverse
effect on the financial condition or results of operations of the Company.
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS.
None
ITEM 3. DEFAULTS UPON SENIOR SECURITIES.
None
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
The Annual Meeting of Shareholders of the Corporation was held on April
26, 1999. The following matter was submitted to a vote of the Corporation's
shareholders.
Election of all seven director nominees was approved.
<TABLE>
<CAPTION>
=======================================================================================================
Nominee Total Votes For Total Votes Withheld Total Votes Against
-------------------------------------------------------------------------------------------------------
<S> <C> <C>
Morris Atlas 12,944,723 23,562 -
Frank N. Boggus 12,958,799 9,486 -
Robert G. Farris 12,958,799 9,486 -
C. Kenneth Landrum, M.D. 12,958,799 9,486 -
Glen E. Roney 12,957,943 10,342 -
Julie G. Uhlhorn 12,958,799 9,486 -
Jack Whetsel 12,958,799 9,486 -
=======================================================================================================
</TABLE>
ITEM 5. OTHER INFORMATION.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) The following documents are filed as part of this Quarterly Report on
Form 10-Q:
(1) Exhibits -- The following exhibits are filed as a part of this
Quarterly Report on Form 10-Q:
27 Financial Data Schedule
(b) Reports of Form 8-K
No report on Form 8-K was filed by Texas Regional Bancshares, Inc. during
the three months ended June 30, 1999.
PAGE 26
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
TEXAS REGIONAL BANCSHARES, INC.
(Registrant)
July 27, 1999 /s/ G. E. Roney
- -------------------- --------------------------------
Glen E. Roney
Chairman of the Board, President
& Chief Executive Officer
July 27, 1999 /s/ R. T. Pigott, Jr.
- -------------------- --------------------------------
R. T. Pigott, Jr.
Executive Vice President
& Chief Financial Officer
PAGE 27
<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> 6-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-END> JUN-30-1999
<CASH> 51,505
<INT-BEARING-DEPOSITS> 237
<FED-FUNDS-SOLD> 15,280
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 474,407
<INVESTMENTS-CARRYING> 8,314
<INVESTMENTS-MARKET> 0
<LOANS> 1,179,339
<ALLOWANCE> 14,261
<TOTAL-ASSETS> 1,844,568
<DEPOSITS> 1,632,389
<SHORT-TERM> 13,831
<LIABILITIES-OTHER> 18,113
<LONG-TERM> 0
0
0
<COMMON> 14,412
<OTHER-SE> 165,823
<TOTAL-LIABILITIES-AND-EQUITY> 1,844,568
<INTEREST-LOAN> 52,840
<INTEREST-INVEST> 14,072
<INTEREST-OTHER> 672
<INTEREST-TOTAL> 67,584
<INTEREST-DEPOSIT> 29,023
<INTEREST-EXPENSE> 29,224
<INTEREST-INCOME-NET> 38,360
<LOAN-LOSSES> 2,822
<SECURITIES-GAINS> (1)
<EXPENSE-OTHER> 21,458
<INCOME-PRETAX> 22,433
<INCOME-PRE-EXTRAORDINARY> 14,517
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 14,517
<EPS-BASIC> 1.01
<EPS-DILUTED> 0.99
<YIELD-ACTUAL> 4.81
<LOANS-NON> 6,510
<LOANS-PAST> 4,161
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 13,236
<CHARGE-OFFS> 1,979
<RECOVERIES> 182
<ALLOWANCE-CLOSE> 14,261
<ALLOWANCE-DOMESTIC> 11,128
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 3,133
</TABLE>
