UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 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)
Securities registered pursuant to Section 12(b) of the Act:
TITLE OF EACH CLASS NAME OF EACH EXCHANGE ON WHICH REGISTERED
None None
Securities registered pursuant to Section 12(g) of the Act:
CLASS A VOTING COMMON, $1.00 PAR VALUE PER SHARE
(Title of class)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes [X] No [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation Sec. (Sec. 229.405 of this chapter) is not contained herein, and
will not be contained, to the best of registrant's knowledge, in definitive
proxy or information statements incorporated by reference in Part III of this
Form 10-K or any amendment to this Form 10-K. [ ]
Aggregate market value of voting stock held by non-affiliates of the registrant,
computed by reference to the closing price of the stock, as of March 2, 2000:
$303,853,675
Number of shares outstanding of the registrant's Class A Voting Common Stock,
$1.00 par value, as of March 2, 2000: 14,525,400
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Registrant's definitive Proxy Statement for its 2000
Annual Meeting of Stockholders are incorporated into Part III; Items 10-13 of
this Form 10-K, to be filed not later than 120 days after the close of the
Registrant's fiscal year.
<PAGE>
PART I
ITEM 1. BUSINESS
GENERAL
Texas Regional Bancshares, Inc. ("Texas Regional" or the "Company") is a
Texas business corporation incorporated in 1983 and headquartered in McAllen,
Texas. The Company is a bank holding company within the meaning of the Bank
Holding Company Act of 1956 ("the BHCA") and as such is registered with the
Board of Governors of the Federal Reserve System ("Federal Reserve Board").
Texas Regional Delaware, Inc., incorporated under the laws of Delaware as a
wholly owned second tier bank holding company subsidiary, owns Texas State Bank
(the "Bank"), the Company's primary operating subsidiary. The Bank has two
wholly owned subsidiaries: (i) TSB Securities, Inc., incorporated in 1997 to
provide full service broker-dealer services and (ii) TSB Properties, Inc.,
incorporated in 1998 to receive and liquidate foreclosed assets.
Recently, the Company has grown rapidly through a series of strategic
acquisitions. The Bank acquired the Rio Grande City and Roma branches of First
National Bank of South Texas during 1995. The Company completed a secondary
public offering of 2.5 million shares of the Company's Class A Voting Common
Stock on May 14, 1996. Concurrently, the Company also completed the acquisition
of First State Bank & Trust Co., Mission, Texas and The Border Bank, Hidalgo,
Texas, through merger with the Bank. On February 19, 1998, the Company acquired
Brownsville National Bank, Brownsville, Texas, Texas Bank and Trust,
Brownsville, Texas and Bank of Texas, Raymondville, Texas through merger with
the Bank. The Company acquired The Harlingen National Bank, Harlingen, Texas on
October 1, 1999 through merger with the Bank.
The Bank operates twenty six banking locations in the Rio Grande Valley
including four banking locations in McAllen (including its main office), four
banking locations in Brownsville, four banking locations in Harlingen, three
banking locations in Mission, two banking locations in Weslaco, and one banking
location each in Edinburg, Hidalgo, La Feria, Mercedes, Palm Valley, Penitas,
Raymondville, Rio Grande City and Roma. At December 31, 1999, the Company had
consolidated total assets of $2.1 billion, loans outstanding (net of unearned
discount) of $1.4 billion, deposits of $1.9 billion, and shareholders' equity of
$188.2 million.
The Company's business strategy is to provide its customers with the
financial sophistication and breadth of products of a regional bank, while
retaining the local appeal and level of service of a community bank. The Board
of Directors and management have maintained the Bank's community orientation by
tailoring products and services to meet community and customer needs. Management
believes that the Bank is well positioned in its market due to its responsive
customer service, the strong community involvement of management and employees,
the recent trends in the Texas banking environment and the vitality of the Rio
Grande Valley economy. Management's strategy is to provide a business culture in
which individual customers and small and medium sized businesses are accorded
the highest priority in all aspects of the Company's operations.
For its business customers, the Bank offers checking facilities,
certificates of deposit, short-term loans for working capital purposes,
construction financing, mortgage loans, term loans for fixed asset and expansion
needs and other commercial loans. The services provided for individuals by the
Bank include checking accounts, savings accounts, certificates of deposit,
individual retirement accounts and consumer loan programs, including installment
loans for home repair and for purchases of consumer goods, including
automobiles, trucks and boats, and mortgage loans. The Bank also provides
travelers checks, money orders and safe deposit facilities, and offers trust
services.
The Bank has also expanded the services that it provides to third party
correspondent banks. The Bank's data processing center, for example, presently
serves six banks in addition to providing data processing services for all of
the Bank's banking locations.
Management believes there may be opportunities to expand by acquiring
other banks or by acquiring assets and deposits that will allow the Company to
enter geographically adjacent markets or further increase market share in
existing markets. Management intends to pursue acquisition opportunities in
strategic markets in circumstances in which management believes that its
managerial, operational and capital resources will enhance the performance of
acquired institutions. There are currently no agreements or understandings
related to any acquisition.
COMPETITION
The Company's operations are located in the Rio Grande Valley, which
consists of Cameron, Hidalgo, Starr and Willacy Counties. Cameron, Hidalgo and
Starr Counties are each directly adjacent to the Rio Grande River, which forms
part of the border between the United States and Mexico.
The Bank encounters intense competition in its commercial banking
business, primarily from other banks located in its market area. The Bank also
competes with insurance, finance and mortgage companies, savings and loan
institutions, credit unions, money market funds and other financial
institutions. Competition is based upon interest rates offered on deposit
PAGE 2
<PAGE>
accounts, interest rates charged on loans and other credit and service charges,
the quality and scope of the services rendered, the convenience of banking
facilities, and, in the case of loans to commercial borrowers, relative lending
limits. A substantial number of the commercial banks in the Rio Grande Valley
are branches of much larger organizations affiliated with national, regional or
state-wide banking companies which are larger than the Bank in terms of capital,
resources and personnel. However, as a major independent community bank
headquartered in its primary market area, management believes that the Company's
community commitment and involvement in its primary market area, as well as its
commitment to quality and personalized banking services, are factors that
contribute to the Company's competitiveness.
REGULATION AND SUPERVISION
In addition to the generally applicable state and federal laws governing
businesses and employers, special federal and state laws applicable only to
financial institutions and their parent companies extensively regulate the
Company and the Bank. Virtually all aspects of the Company's operations are
subject to specific requirements or restrictions and general regulatory
oversight, from laws regulating consumer finance transactions, such as the Truth
In Lending Act, the Home Mortgage Disclosure Act and the Equal Credit
Opportunity Act, to laws regulating collections and confidentiality, such as the
Fair Debt Collections Practices Act, the Fair Credit Reporting Act and the Right
to Financial Privacy Act. With few exceptions, state and federal banking laws
have as their principal objective either the maintenance of the safety and
soundness of the federal deposit insurance system or the protection of consumers
or classes of consumers, rather than the specific protection of shareholders of
the Company. To the extent the following material describes statutory or
regulatory provisions, it is qualified in its entirety by reference to the
particular statute or regulation.
References to statutes, regulations, decisions and interpretations
contained herein are only intended to be brief summaries or portions thereof, do
not purport to be complete and are qualified in their entirety by reference to
the actual text of the relevant statutes, regulations, decisions and
interpretations.
REGULATION OF THE COMPANY
The Company is a bank holding company within the meaning of the Bank
Holding Company Act of 1956 (the "BHCA"), as amended, and therefore is subject
to regulation and supervision by the Board of Governors of the Federal Reserve
System (the "FRB"). In addition, the Company is required to file reports with
and to furnish such other information as the FRB may require pursuant to the
BHCA, and to subject itself to examination by the FRB. The FRB has the authority
to issue bank holding companies orders to cease and desist from unsound
practices and violations of conditions imposed by, or violation of agreements
with, the FRB. The FRB is also empowered to assess civil penalties against
companies or individuals who violate the BHCA or orders or regulations
thereunder in amounts up to $1.0 million per day, to order termination of
non-approved activities and to order termination of ownership and control of
non-approved subsidiaries. Certain violations may also result in criminal
penalties. The FRB and the Federal Deposit Insurance Corporation (the "FDIC"),
as appropriate, are authorized to exercise comparable authority, under the
Federal Deposit Insurance Act (the "FDI Act") and other statutes, with respect
to subsidiary banks.
The FRB takes the position that a bank holding company is required to
serve as a source of financial and managerial strength to its subsidiary banks
and may not conduct its operations in an unsafe or unsound manner. In addition,
it is the FRB's position that, in serving as a source of strength to its
subsidiary banks, a bank holding company should stand ready to use available
resources to provide adequate capital funds to its subsidiary banks during
periods of financial stress or adversity and should maintain the financial
flexibility and capital-raising capacity to obtain additional resources for
assisting its subsidiary banks. A bank holding company's failure to meet its
obligations to serve as a source of strength to its subsidiary banks will
generally be considered by the FRB to be an unsafe and unsound banking practice
or a violation of the FRB regulations or both. Changes in the FDI Act made by
the Federal Deposit Insurance Corporation Improvement Act of 1991 (the "FDICIA")
now require an undercapitalized institution to submit to the FRB a capital
restoration plan with a guaranty, by each company having control of the bank, of
the bank's compliance with the plan.
The BHCA and the Change in Bank Control Act, together with regulations
promulgated by the FRB, require that, depending on the particular circumstances,
either FRB approval must be obtained or notice must be furnished to the FRB and
not disapproved prior to any person or company acquiring "control" of a bank
holding company, such as the Company, subject to certain exemptions for certain
transactions. Control is conclusively presumed to exist if an individual or
company acquires 25% or more of any class of voting securities of the bank
holding company. Control is rebuttably presumed to exist if a person acquires
10% or more but less than 25% of any class of voting securities and either the
company has registered securities under Section 12 of the Exchange Act or no
other person will own a greater percentage of that class of voting securities
immediately after the transaction. The regulations provide a procedure for
challenge of the rebuttable control presumption.
As a bank holding company, the Company is required to obtain approval
prior to merging or consolidating with any other bank holding company, acquiring
all or substantially all of the assets of any bank or acquiring ownership or
control of shares of a bank or bank holding company if, after the acquisition,
the Company would directly or indirectly own or control 5% or more of the voting
shares of such bank or bank holding company.
PAGE 3
<PAGE>
Historically, the Company has been prohibited from acquiring a direct or
indirect interest in or control of more than 5% of the voting shares of any
company which is not a bank or bank holding company and from engaging directly
or indirectly in activities other than those of banking, managing or controlling
banks or furnishing services to its subsidiary bank, except that FRB has
permitted bank holding companies to engage in and own shares of companies
engaged in certain activities found by the FRB to be so closely related to
banking or managing and controlling banks as to be a proper incident thereto.
These activities include, among others, operating a mortgage, finance, credit
card, or factoring company; performing certain data processing operations;
providing investment and financial advice; acting as an insurance agent for
certain types of credit-related insurance; leasing personal property on a full
pay out, non-operating basis; and providing certain stock brokerage and
investment advisory services. In approving acquisitions or the addition of
activities, the FRB has considered whether the acquisition or the additional
activities can reasonably be expected to produce benefits to the public, such as
greater convenience, increased competition, or gains in efficiency, that
outweigh such possible adverse effects as undue concentration of resources,
decreased or unfair competition, conflicts of interest or unsound banking
practices. In considering any application for approval of an acquisition or
merger, the FRB is also required to consider the financial and managerial
resources of the companies and the banks concerned, as well as the applicant's
record of compliance with the Community Reinvestment Act (the "CRA"). The CRA
generally requires a financial institution to take affirmative action to
ascertain and meet the credit needs of its entire community, including low and
moderate income neighborhoods.
The Gramm-Leach-Bliley Act ("Gramm-Leach"), enacted by Congress in
November 1999, now permits bank holding companies with subsidiary banks meeting
certain capital and management requirements to elect to become "financial
holding companies". Beginning in March 2000, financial holding companies may
engage in a full range of financial activities, including not only banking,
insurance and securities activities, but also merchant banking and additional
activities determined to be "financial in nature". Gramm-Leach also provides
that the list of permissible activities will be expanded as necessary for a
financial holding company to keep abreast of competitive and technological
change.
Although it preserves the Federal Reserve as the umbrella supervisor of
financial holding companies, Gramm-Leach adopts an administrative approach to
regulation that defers to the approval and supervisory requirements of the
functional regulators of insurers and insurance agents, broker-dealers,
investment companies, and banks. Thus, the various state and federal regulators
of a financial holding company's operating subsidiaries would retain their
jurisdiction and authority over the operating entities. As the umbrella
supervisor, however, the Federal Reserve has the potential to affect the
operations and activities of financial holding companies' subsidiaries through
its power over the financial holding company parent. In addition, Gramm-Leach
contains numerous trigger points related to legal noncompliance and other
serious problems affecting bank affiliates that could lead to direct Federal
Reserve involvement and to the possible exercise of remedial authority affecting
both financial holding companies and their affiliated operating companies.
The Company has not, as of the date hereof, elected to become a financial
holding company.
The BHCA imposes certain limitations on extensions of credit and other
transactions by and between banks that are members of the Federal Reserve System
and other banks and non-bank companies in the same holding company. Under the
BHCA and the FRB's regulations, a bank holding company and its subsidiaries are
prohibited from engaging in certain tie-in arrangements in connection with any
extension of credit, lease or sale of property or furnishing of services.
The Company, as an affiliate of the Bank, is subject to certain
restrictions regarding transactions between a bank and companies with which it
is affiliated. These provisions limit extensions of credit (including guarantees
of loans) by the Bank to affiliates, investments in the stock or other
securities of the Company by the Bank, and the nature and amount of collateral
that the Bank may accept from any affiliate to secure loans extended to the
affiliate.
REGULATION OF THE BANK
The Bank is a state-chartered bank subject to regulation by the Texas
Department of Banking. The Bank, whose deposits are insured by the Bank
Insurance Fund (the "BIF") of the FDIC, is also a member of the Federal Reserve
System, and therefore the FRB is the primary federal regulator for the Bank.
The requirements and restrictions applicable to the Bank under laws of the
United States and the State of Texas include (i) the requirement that reserves
be maintained, (ii) restrictions on the nature and amount of loans which can be
made, (iii) restrictions on the business activities in which the Bank may
engage, (iv) restrictions on the payment of dividends to shareholders, and (v)
the maintenance of minimum capital requirements.
The Company is dependent upon dividends received from the Bank for
discharge of the Company's obligations and for payment of dividends to the
Company's shareholders. However, the application of minimum capital requirements
and other rules and regulations applicable to the Bank restrict the amount of
dividends that it may declare without prior regulatory approval. The Texas
Banking Department and the FRB can each further limit payment of dividends if
the regulatory authority finds that the payment of dividends would constitute an
unsafe or unsound practice. Except to absorb losses in excess of undivided
profits and uncertified surplus, such certified surplus may not be reduced
without the prior written consent of the Banking Commissioner.
PAGE 4
<PAGE>
The laws of the State of Texas primarily govern interest rate limitations
for the Bank. The maximum annual interest rate that may be charged on most loans
made by the Bank is based on doubling the average auction rate, to the nearest
0.25%, for United States Treasury Bills, as computed by the Office of Consumer
Credit Commissioner of the State of Texas. However, the maximum rate does not
decline below 18% or rise above 24% (except for loans in excess of $250,000 that
are made for business, commercial, investment or other similar purposes
(excluding agricultural loans), in which case the maximum annual rate may not
rise above 28%, rather than 24%). On fixed rate closed-end loans, the maximum
non-usurious rate is to be determined at the time the rate is contracted; while
on floating rate and open-end loans (such as credit cards), the rate varies over
the term of the indebtedness. Federal law has preempted state usury laws (but
not late charge limitations) for loans secured by a first lien on residential
real property.
Banks are affected by the credit policies of other monetary authorities,
including the FRB, which regulate the national supply of bank credit. Such
regulation influences overall growth of bank loans, investments, and deposits
and may also affect interest rates charged on loans and paid on deposits. The
monetary policies of the FRB have had a significant effect on the operating
results of commercial banks in the past and are expected to continue to do so in
the future.
FDICIA
FDICIA requires that federal bank regulatory authorities take "prompt
corrective action" with respect to any depository institution that does not meet
specified minimum capital requirements. The applicable regulations establish
five capital levels which require or permit the FRB and other regulatory
authorities to take supervisory action. The relevant classifications range from
"well capitalized" to "critically undercapitalized". Under these regulations, an
institution is considered "well capitalized" if it has a total risk-based
capital ratio of 10.0% or greater, a Tier I risk-based capital ratio of 6.0% or
greater, and a leverage ratio of 5.0% or greater, and it is not subject to an
order, written agreement, capital directive, or prompt corrective action
directive to meet and maintain a specific capital level for any capital measure.
An institution is considered "adequately capitalized" if it has a total
risk-based capital ratio of 8.0% or greater, a Tier I risk-based capital ratio
of 4.0% or greater and a leverage capital ratio of 3.0% or greater (if the
institution is rated composite 1 in its most recent report of examination,
subject to appropriate federal banking agency guidelines), and the institution
does not meet the definition of a "well capitalized" institution. An institution
is considered "undercapitalized" if it has a total risk-based capital ratio that
is less than 8.0%, a Tier I risk-based capital ratio that is less than 4.0%, or
a leverage ratio that is less than 4.0% (or a leverage ratio that is less than
3.0% if the institution is rated composite 1 in its most recent report of
examination, subject to appropriate federal banking agency guidelines). A
"significantly undercapitalized" institution is one which has a total risk-based
capital ratio that is less than 6.0%, a Tier I risk-based capital ratio that is
less than 3.0%, or a leverage ratio that is less than 3.0%. A "critically
undercapitalized" institution is one that has a ratio of tangible equity to
total assets that is equal to or less than 2.0%.
With certain exceptions, an institution will be prohibited from making
capital distributions or paying management fees if the payment of such
distributions or fees will cause the institution to become "undercapitalized".
Furthermore, "undercapitalized" institutions will be required to file capital
restoration plans with the appropriate federal regulator. Pursuant to FDICIA,
"undercapitalized" institutions also will be subject to restrictions on growth,
acquisitions, branching and engaging in new lines of business unless they have
an approved capital plan that permits otherwise. The FRB also may, among other
things, require an "undercapitalized" institution to issue shares or
obligations, which could be voting stock, to recapitalize the institution or,
under certain circumstances to divest itself of any subsidiary.
The FRB is authorized to take various enforcement actions against any
"significantly undercapitalized" institution and any "undercapitalized
institution" that fails to submit an acceptable capital restoration plan or
fails to implement a plan accepted by the appropriate agency. These powers
include, among other things, requiring the institution to be recapitalized,
prohibiting asset growth, restricting interest rates paid, requiring prior
approval of capital distributions by any bank holding company which controls the
institution, requiring divestiture by the institution of its subsidiaries or by
the holding company of the institution itself, requiring a new election of
directors, and requiring the dismissal of directors and officers. If imposed,
these restrictions, either individually or in aggregate, could have a
significant adverse impact on the operations of the Bank.
"Critically undercapitalized" institutions may be subject to more
extensive control and supervision and the FRB may prohibit any "critically
undercapitalized" institution from, among other things, entering into any
material transaction not in the ordinary course of business, amending its
charter or bylaws, or engaging in certain transactions with affiliates. In
addition, "critically undercapitalized" institutions generally will be
prohibited from making payments of principal or interest on outstanding
subordinated debt. Within 90 days of an institution becoming "critically
undercapitalized", the FRB must appoint a receiver or conservator unless certain
findings are made with respect to the prospect for the institution's continued
operation.
Management believes that the Company meets all capital adequacy
requirements to which it is subject at December 31, 1999. The Bank's capital
ratios exceeded the minimum requirements for "well capitalized" institutions
under the regulatory framework for prompt corrective action at December 31,
1999. As a result, the Company does not believe that FDICIA's prompt corrective
action regulations will have any material effect on the activities or operations
of the Bank. It should be noted, however, that a bank's capital category is
determined solely for the purpose of applying the FDIC's "prompt corrective
action" regulations and that the capital category may not constitute an accurate
representation of the Bank's overall financial condition or prospects.
PAGE 5
<PAGE>
FDICIA also requires the FDIC to establish a schedule to increase (over a
period of not more than 15 years) the reserve ratio of the BIF, which insures
deposits of Texas State Bank, to 1.25% of insured deposits, and impose higher
deposit insurance premiums on BIF members, if necessary, to achieve that ratio.
FDICIA also requires a risk-based assessment system for deposit insurance
premiums commencing January 1, 1994. Since BIF reached its designated reserve
ratio in mid-1995, the FDIC adjusted the BIF assessments, so that the assessment
rate now in effect ranges from a minimum of zero to a maximum of $0.27 per $100
of deposits.
FDICIA contains numerous other provisions, including accounting, auditing
and reporting requirements, the termination of the "too big to fail" doctrine
except in special cases, regulatory standards in areas such as asset quality,
earnings and compensation, and revised regulatory standards for the powers of
state chartered banks, real estate lending, bank closures and capital adequacy.
DEPOSIT INSURANCE
The Deposit Insurance Funds Act of 1996 (the "Funds Act") was enacted on
September 30, 1996. Among its provisions, the Funds Act authorizes the Financing
Corporation (the "FICO") to impose periodic assessments on depository
institutions that are members of BIF in addition to institutions that are
members of the Savings Association Insurance Fund (the "SAIF") in order to
spread the cost of the interest payments on the outstanding FICO bonds over a
larger number of institutions. Until this change in the law, only SAIF-member
institutions bore the cost of funding these interest payments. Thus, BIF-member
institutions will share in the cost of financing outstanding FICO bonds. An
institution's FICO assessments will fluctuate based on a defined rate applied to
deposits held in periods after the date the legislation was enacted. Currently,
the FICO BIF annual rate is 2.12 cents for each $100 of qualified deposits.
ACQUISITIONS
Absent an election to become a financial holding company, the BHCA limits
acquisitions by the Company to commercial banks and companies engaged in
activities that the Federal Reserve Board has determined to be so closely
related to banking as to be a proper incident thereto. The Company's direct
activities are generally limited to furnishing to its subsidiaries services that
qualify under the prescribed regulatory tests. Prior Federal Reserve Board
approval is required under the BHCA for new activities and acquisitions of most
nonbanking companies.
The BHCA, the Federal Bank Merger Act and the Texas Banking Code regulate
the acquisition of commercial banks. The BHCA requires the prior approval of the
Federal Reserve Board for the direct or indirect acquisition of more than five
percent of the voting shares of a commercial bank or bank holding company. With
respect to the Company's subsidiary bank, the approval of the Texas Department
of Banking is required for branching, purchasing the assets of other banks and
for bank mergers.
In reviewing bank acquisition and merger applications, the bank regulatory
authorities will consider, among other things, the competitive effect and public
benefits of the transactions, the capital position of the combined organization,
and the applicant's record under the Community Reinvestment Act and fair housing
laws.
The Corporation regularly evaluates acquisition opportunities and
regularly conducts due diligence activities in connection with possible
acquisitions. As a result, acquisition discussions and, in some cases
negotiations, regularly take place and future acquisitions could occur.
INTERSTATE BANKING AND BRANCHING LEGISLATION
The Riegle-Neal Interstate Branching Efficiency Act of 1994 ("IBBEA")
authorizes interstate acquisitions of banks and bank holding companies without
geographic limitation beginning one year after enactment. In addition, beginning
June 1, 1997 IBBEA authorizes a bank to merge with a bank in another state as
long as neither of the states has opted out of interstate branching between the
date of enactment of IBBEA and May 31, 1997. IBBEA further provides that states
may enact laws permitting interstate bank merger transactions prior to June 1,
1997. A bank may establish a de novo branch in a state in which the bank does
not maintain a branch if the state expressly permits de novo branching. Once a
bank has established branches in a state through an interstate merger
transaction, the bank may establish and acquire additional branches at any
location in the state where any bank involved in the merger transaction could
have established or acquired branches under applicable federal or state law. A
bank that has established a branch in a state through de novo branching may
establish and acquire additional branches in such state in the same manner and
to the same extent as a bank having a branch in such state as a result of an
interstate merger. If a state opts out of interstate branching within the
specified time period, no bank in any other state may establish a branch in the
opting out state, whether through an acquisition or de novo.
PAGE 6
<PAGE>
Texas enacted legislation opting out of interstate branching in 1995.
However, the decision to opt out was rendered ineffective with the 1998 decision
of the United States District Court for the Northern District of Texas affirming
the Comptroller of the Currency's decision to permit an interstate merger
involving a Texas national bank. The Texas Legislature responded in 1999 by
passing The Interstate Banking and Branching Bill, which became effective
September 1, 1999. This legislation provides a framework for interstate
branching in Texas, providing for de novo branching by banks headquartered in
states offering reciprocity to Texas institutions or institutions authorized to
branch in Texas. For banks in other, non-reciprocal states, a five-year minimum
age requirement is retained. The legislation also clarifies other provisions of
Texas law related to interstate banks operating in Texas, and includes a "super
parity" provision which provides a framework for a bank chartered in Texas, upon
application, to conduct any of the activities allowed any other state or federal
financial institution in the nation.
BROKER-DEALER LICENSING REQUIREMENTS
Texas State Bank's subsidiary, TSB Securities, Inc. a broker-dealer
registered with and licensed by the National Association of Securities Dealers,
Inc. ("NASD") and the Texas State Securities Board, is subject to reporting
requirements and regulatory controls imposed by the NASD and the State
Securities Board.
ECONOMIC ENVIRONMENT
The earnings of the Bank are affected not only by general economic
conditions but also by the policies of various governmental regulatory
authorities. The FRB regulates the supply of credit in order to influence
general economic conditions, primarily through open market operations in United
States government obligations, varying the discount rate of financial
institution borrowings and varying reserve requirements against financial
institutions and their subsidiaries. The deregulation of interest rates has had
and is expected to continue to have an impact on the competitive environment in
which the Bank operates.
Governmental policies have had a significant effect on the operating
results of commercial banks in the past and are expected to continue to do so in
the future. However, the Company cannot accurately predict the nature or extent
of any effect that such policies may have on its future business and earnings.
PERSONNEL
The Company employed 888 full-time equivalent employees at December 31,
1999. Employees enjoy a variety of employee benefit programs, including an
employee stock ownership plan with 401(k) provisions, medical, accident, group
life and long-term disability plans, and paid vacations. The Company's employees
are not unionized, and management believes employee relations to be favorable.
ITEM 2. PROPERTIES
The executive offices of the Company, as well as the principal banking
quarters of Texas State Bank, are housed in an eleven-story office tower located
in McAllen, Texas. This building, completed during 1998, also includes space for
lease to third party tenants and for future growth. The Company also owns the
Kerria Plaza building, adjacent to the new headquarters building, and leases
space to third party tenants.
All of the Company's banking locations are owned, except for the branch in
Roma, Texas and the branch at 2302 South 77 Sunshine Strip in Harlingen, Texas.
The Brownsville, Edinburg, Harlingen, Hidalgo, McAllen, Mission, Penitas and
Weslaco, Texas banking locations include extensive drive-through facilities.
Management believes that it will be desirable in the future to consider
the establishment of additional banking locations.
ITEM 3. LEGAL PROCEEDINGS
The Company is involved in routine litigation in the normal course of its
business which, in the opinion of management, will not have a material adverse
effect on the financial condition or results of operations of the Company.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None
PAGE 7
<PAGE>
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS.
Since March 1994, the Corporation's Class A Voting Common Stock has traded
on The Nasdaq Stock Market(R) under the symbol TRBS. The following table shows
(i) high and low prices of the Common Stock as provided to the Company by The
Nasdaq Stock Market(R) for transactions occurring on The Nasdaq Stock Market(R)
during the past two years, and (ii) the total number of shares involved in such
transactions.
PRICE PER SHARE CASH
---------------------- DIVIDENDS VOLUME
QUARTER ENDED HIGH LOW DECLARED TRADED
- --------------------------------------------------------------------------------
March 31, 1998 $35.63 $27.00 $0.110 1,897,668
June 30, 1998 35.13 29.25 0.110 1,421,623
September 30, 1998 34.00 21.00 0.125 1,824,207
December 31, 1998 27.38 17.00 0.125 2,416,388
March 31, 1999 27.94 22.75 0.125 1,832,459
June 30, 1999 29.50 26.00 0.125 1,832,235
September 30, 1999 28.31 23.56 0.125 1,707,584
December 31, 1999 29.50 24.63 0.140 1,822,008
- --------------------------------------------------------------------------------
On December 31, 1999, there were 919 holders of record of the Company's
Class A Common Stock.
During the two years ended December 31, 1999, an aggregate of 64,617
shares purchased by the Texas Regional Bancshares, Inc. Employee Stock Ownership
Plan (with 401(k) provisions) are included in the foregoing table.
The final determination of the timing, amount and payment of dividends on
the Common Stock is at the discretion of the Company's Board of Directors. There
can be no assurance as to future dividends because they are dependent on future
earnings, capital requirements and financial conditions. The Company's principal
source of the funds to pay dividends on the Common Stock is dividends from Texas
State Bank. The payment of dividends by the Bank is subject to certain
restrictions imposed by federal and state banking laws, regulations and
authorities. At December 31, 1999, an aggregate of $21.3 million was available
for payment of dividends by the Bank to the Company under the applicable
limitations and without regulatory approval.
ITEM 6. SELECTED FINANCIAL DATA
The following table sets forth selected consolidated financial data for
the Company and its subsidiaries for, and as of, each of the years in the
five-year period ended December 31, 1999. This selected financial data has been
derived from the consolidated financial statements and accounting records of the
Company. The data presented below should be read in conjunction with the
consolidated financial statements, related notes and other financial information
included herein:
PAGE 8
<PAGE>
<TABLE>
<CAPTION>
AT / FOR YEARS ENDED DECEMBER 31,
----------------------------------------------------------------------------
SELECTED FINANCIAL DATA 1999 1998 1997 1996 1995
- ------------------------------------------------------------------------------------------------------------------------------
(Amounts in Thousands, Except Per Share Data)
<S> <C> <C> <C> <C> <C>
Income Statement Data
Interest Income $ 143,841 $ 125,649 $ 112,745 $ 88,075 $ 55,193
Interest Expense 62,221 58,384 50,618 37,494 22,071
- -------------------------------------------------------------------------------------------------------------------------------
Net Interest Income 81,620 67,265 62,127 50,581 33,122
- -------------------------------------------------------------------------------------------------------------------------------
Provision for Loan Losses 5,432 9,729 2,947 2,173 1,705
Noninterest Income 17,399 17,663 12,972 10,656 7,683
Noninterest Expense 45,888 41,102 37,170 32,096 23,065
- -------------------------------------------------------------------------------------------------------------------------------
Income Before Income Tax Expense 47,699 34,097 34,982 26,968 16,035
Income Tax Expense 16,849 11,623 11,860 8,794 5,515
- -------------------------------------------------------------------------------------------------------------------------------
Net Income $ 30,850 $ 22,474 $ 23,122 $ 18,174 $ 10,520
===============================================================================================================================
Per Common Share Data
Basic Earnings Per Share $ 2.14 $ 1.56 $ 1.61 $ 1.40 $ 0.99
Diluted Earnings Per Share 2.11 1.54 1.58 1.39 0.99
Book Value at End of Period 12.96 12.31 11.21 9.97 7.26
Cash Dividends Declared 0.52 0.47 0.40 0.29 0.29
Dividend Payout Ratio 24.64% 30.52% 25.32% 20.86% 29.29%
Weighted Average Shares Outstanding
Basic Earnings Per Share 14,410 14,402 14,371 12,936 10,577
Diluted Earnings Per Share 14,626 14,628 14,603 13,117 10,614
Shares Outstanding at End of Period 14,525 14,405 14,396 14,361 10,581
===============================================================================================================================
Balance Sheet Data
Total Assets $2,120,690 $1,762,332 $1,538,769 $1,370,809 $ 778,359
Loans 1,374,759 1,089,505 951,316 818,598 511,414
Securities 533,948 470,267 416,921 371,002 182,761
Interest-Earning Assets 1,913,784 1,592,325 1,387,322 1,214,875 706,985
Deposits 1,885,346 1,562,942 1,362,783 1,215,636 685,810
Shareholders' Equity 188,188 177,274 161,358 143,116 76,793
===============================================================================================================================
Average Balance Sheet Data
Total Assets $1,896,880 $1,654,135 $1,439,956 $1,144,162 $ 708,162
Loans 1,209,609 1,023,527 875,839 680,530 430,049
Securities 488,506 432,767 386,221 313,088 184,854
Interest-Earning Assets 1,720,083 1,491,211 1,301,959 1,032,100 640,737
Deposits 1,684,730 1,462,215 1,274,442 1,017,280 629,178
Shareholders' Equity 183,390 171,427 152,635 116,310 72,675
===============================================================================================================================
Performance Ratios
Return on Average Assets 1.63% 1.36% 1.61% 1.59% 1.49%
Return on Average Equity 16.82 13.11 15.15 15.63 14.48
Net Interest Margin(1) 4.84 4.61 4.89 5.06 5.21
Efficiency Ratio 45.29 48.86 48.82 51.49 55.77
===============================================================================================================================
Asset Quality Ratios
Nonperforming Assets to Total Loans and
Repossessed Assets 1.04% 1.44% 1.22% 0.97% 0.82%
Net Loan Charge-Offs to Average Total
Loans 0.29 0.79 0.28 0.20 0.23
Allowance for Loan Losses to Total
Loans 1.22 1.21 1.19 1.32 1.05
Allowance for Loans Losses to
Nonperforming Loans 200.35 127.10 135.14 158.87 220.24
===============================================================================================================================
Capital Ratios
Total Risk-Based Capital Ratio 11.94% 14.04% 14.73% 15.11% 14.24%
Tier 1 Risk-Based Capital Ratio 10.79 12.90 13.60 13.83 13.24
Leverage Capital Ratio 7.58 8.84 9.21 8.78 9.29
Equity to Assets Ratio 8.87 10.06 10.49 10.44 9.87
===============================================================================================================================
</TABLE>
(1) Taxable-equivalent basis assuming a 35% federal income tax rate.
PAGE 9
<PAGE>
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
Certain statements in this Annual Report on Form 10-K include
forward-looking information within the meaning of Section 27A of the Securities
Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934,
as amended, and are subject to the "safe harbor" created by those sections.
These forward-looking statements involve certain risks and uncertainties that
could cause actual results to differ materially from those in the
forward-looking statements. Such risks and uncertainties include, but are not
limited to, the following factors: competitive pressure in the banking industry
significantly increasing; changes in the interest rate environment reducing
margins; general economic conditions, either nationally or regionally, are less
favorable than expected, resulting in, among other things, a deterioration in
credit quality and an increase in the provision for possible loan losses;
changes in the regulatory environment; changes in business conditions;
volatility of rate sensitive deposits; operational risks including data
processing system failures or fraud; asset/liability matching risks and
liquidity risks; and changes in the securities markets.
The following discussion addresses information pertaining to the financial
condition and results of operations of Texas Regional Bancshares, Inc. and
subsidiaries (the "Company") that may not be otherwise apparent from a review of
the consolidated financial statements and related footnotes. It should be read
in conjunction with those statements, as well as with the other information
presented throughout the report. In addition to historical information, this
discussion and other sections contained in this Annual Report include certain
forward-looking statements regarding events and trends which may affect the
Company's future results. Such statements are subject to risks and uncertainties
that could cause the Company's actual results to differ materially. Such factors
include, but are not limited to, those described in this discussion and
analysis.
ACQUISITIONS
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, loans of $42.6 million,
deposits of $87.2 million and equity of $12.1 million. The Company achieved this
acquisition by the exchange of 984,806 shares of Company stock for all of the
outstanding shares of Brownsville Bancshares, Inc. and cancellation of
outstanding stock options. Brownsville National Bank merged with and into 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, loans of $21.9 million,
deposits of $40.3 million and equity of $4.1 million. This acquisition was
achieved by exchange of 301,483 shares of Company stock for all of the
outstanding shares of TB&T Bancshares, Inc. Texas Bank and Trust of Brownsville
merged with and into the Bank.
The third acquisition was Raymondville Bancorp, Inc. and its subsidiary,
Bank of Texas. Bank of Texas was headquartered in Raymondville, Willacy County,
Texas, with one additional banking facility in Brownsville, Texas. The
shareholder of Raymondville Bancorp, Inc. received cash consideration of $9.6
million in this acquisition, and the Company paid $100,000 in consideration for
a covenant not to compete. The Company discharged approximately $330,000 of
existing Raymondville Bancorp, Inc. indebtedness. Bank of Texas had assets of
approximately $63.9 million, loans of $25.5 million, deposits of $56.5 million
and equity of $5.1 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 year
ended December 31, 1998. These expenses, primarily professional fees and
computer conversion costs, related to business combinations accounted for by the
pooling-of-interests method. The Company accounted for its acquisition of
Raymondville Bancorp, Inc. under the purchase method of accounting; therefore,
the results of operations are included in the consolidated financial statements
from the date of acquisition, February 19, 1998.
On October 1, 1999, the Company completed the acquisition of Harlingen
Bancshares, Inc. and its subsidiary, The Harlingen National Bank. The
acquisition included its main office and two banking locations in Harlingen,
Cameron County, Texas; one banking location in La Feria, Cameron County, Texas;
one banking location in Palm Valley, Cameron County, Texas, and one banking
location in Mercedes, Hidalgo County, Texas. The shareholders of Harlingen
Bancshares, Inc. received aggregate consideration of $34.0 million, including
$1.0 million deposited into escrow pending the outcome of certain contingencies.
Simultaneously, the shareholders of Harlingen Bancshares, Inc. or their
affiliates purchased certain assets of Harlingen Bancshares, Inc. for book value
totaling $2.4 million. The Company also agreed to pay $1.0 million over a term
of ten years in consideration of a covenant not to compete from certain
principals of Harlingen Bancshares, Inc. The Harlingen National Bank had assets
of approximately $204.2 million, loans of $110.7 million, deposits of $183.6
million and equity of $19.9 million. The Company accounted for the acquisition
under the purchase method of accounting; therefore, the results of operations
are included in the consolidated financial statements from the date of
acquisition, October 1, 1999.
PAGE 10
<PAGE>
OVERVIEW
Total assets at December 31, 1999, 1998 and 1997 were $2.1 billion, $1.8
billion and $1.5 billion, respectively. Total deposits at December 31, 1999,
1998 and 1997 were $1.9 billion, $1.6 billion, and $1.4 billion, respectively,
with deposit growth in each period resulting from internal growth and
acquisitions, principally in 1999. Loans were $1.4 billion at December 31, 1999,
an increase of $285.3 million or 26.2% from $1.1 billion at the end of 1998.
Loans were $951.3 million at year end 1997. Shareholders' equity was $188.2
million, $177.3 million, and $161.4 million at December 31, 1999, 1998 and 1997,
respectively.
Net income was $30.9 million, $22.5 million and $23.1 million for the
years ended December 31, 1999, 1998 and 1997, respectively, and diluted earnings
per share were $2.11, $1.54, and $1.58 for these same periods. An increase in
provision for loan losses, primarily associated with loans to agricultural
businesses suffering the effects of severe drought throughout the entire region,
adversely affected profits during 1998. Earnings growth from 1998 to 1999
resulted principally from loan growth. The Company posted returns on average
assets of 1.63%, 1.36% and 1.61% and returns on average equity of 16.82%, 13.11%
and 15.15% for the years ended 1999, 1998 and 1997, respectively. The Company's
efficiency ratio was 45.29% in 1999, 48.86% in 1998 and 48.82% in 1997.
ANALYSIS OF FINANCIAL CONDITION
CASH AND CASH EQUIVALENTS
The Company 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 $71.9 million at
December 31, 1999. Comparatively, the Company had $90.8 million in cash and cash
equivalents at December 31, 1998, a decrease of $18.9 million or 20.8%.
SECURITIES
Securities consist of U.S. Treasury, federal agency, mortgage-backed and
state, county and municipal securities. The Company classifies debt and equity
securities into one of three categories: held to maturity, trading or available
for sale. At each reporting date, management reassesses the appropriateness of
the classification. Investments in debt securities are classified as held to
maturity and measured at amortized cost in the consolidated balance sheet only
if management has the positive intent and ability to hold those securities to
maturity. Securities that are bought and held principally for the purpose of
selling them in the near term are classified as trading and measured at fair
value in the consolidated balance sheet with unrealized holding gains and losses
included in earnings. Securities not classified as either held to maturity or
trading are classified as available for sale and measured at fair value in the
consolidated balance sheet with unrealized holding gains and losses reported in
a separate component of shareholders' equity, net of applicable income taxes
until realized.
At December 31, 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 displays the carrying amount (fair value) of
securities available for sale:
DECEMBER 31,
----------------------------------
SECURITIES AVAILABLE FOR SALE 1999 1998 1997
- -----------------------------------------------------------------------------
(Dollars in Thousands)
U.S. Treasury $ 3,004 $ -- $ 7,002
U.S. Government Agency 344,601 313,970 277,764
Mortgage-Backed 127,631 101,365 15,561
States and Political Subdivisions 46,370 36,988 20,898
Other 4,332 3,613 2,952
- -----------------------------------------------------------------------------
Total $525,938 $455,936 $324,177
=============================================================================
PAGE 11
<PAGE>
The following table presents the maturities, amortized cost, estimated
market value and weighted average yields of securities available for sale at
December 31, 1999:
<TABLE>
<CAPTION>
AMORTIZED COST MATURING
---------------------------------------------------------
AFTER ONE AFTER FIVE ESTIMATED
ONE YEAR THROUGH THROUGH AFTER AMORTIZED MARKET
SECURITIES AVAILABLE FOR SALE OR LESS FIVE YEARS TEN YEARS TEN YEARS COST VALUE
- ----------------------------------------------------------------------------------------------------------------------------------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C>
U.S. Treasury $ 2,999 $ -- $ -- $ -- $ 2,999 $ 3,004
U.S. Government Agency 4,600 188,805 166,153 -- 359,558 344,601
Mortgage-Backed -- 7,908 31,471 92,320 131,699 127,631
States and Political Subdivisions 568 9,229 13,877 24,524 48,198 46,370
Other 25 100 250 3,957 4,332 4,332
- ----------------------------------------------------------------------------------------------------------------------------------
Total $ 8,192 $ 206,042 $ 211,751 $ 120,801 $ 546,786 $525,938
==================================================================================================================================
Weighted Average Yields
(Taxable-Equivalent Basis)
- ----------------------------------------------------------------------------------------------------------------------------------
U.S. Treasury 5.97% --% --% --% 5.97%
U.S. Government Agency 5.68 5.90 6.10 -- 5.99
Mortgage-Backed -- 6.24 5.77 6.04 5.98
States and Political Subdivisions 6.48 6.99 6.85 6.63 6.76
Other 7.50 7.62 7.05 5.68 5.82
- ----------------------------------------------------------------------------------------------------------------------------------
Total 5.85% 5.96% 6.10% 6.15% 6.06%
==================================================================================================================================
</TABLE>
Net unrealized holding gains (losses), net of related tax effect, of
$(13.4) million and $609,000 at December 31, 1999 and December 31, 1998,
respectively, on securities available for sale are reported as a separate
component of shareholders' equity as accumulated other comprehensive income.
The following table displays the carrying amount (amortized cost) of
securities held to maturity:
DECEMBER 31,
------------------------------------
SECURITIES HELD TO MATURITY 1999 1998 1997
- ------------------------------------------------------------------------------
(Dollars in Thousands)
U.S. Treasury $ 5,001 $10,013 $20,249
U.S. Government Agency -- -- 64,171
Mortgage-Backed -- -- 750
States and Political Subdivisions 3,009 4,318 7,474
Other -- -- 100
- ------------------------------------------------------------------------------
Total $ 8,010 $14,331 $92,744
==============================================================================
PAGE 12
<PAGE>
The following table presents the maturities, amortized cost, estimated
market value and weighted average yields of securities held to maturity at
December 31, 1999:
<TABLE>
<CAPTION>
AMORTIZED COST MATURING
----------------------------------------------
AFTER ONE AFTER FIVE ESTIMATED
ONE YEAR THROUGH THROUGH AFTER AMORTIZED MARKET
SECURITIES HELD TO MATURITY OR LESS FIVE YEARS TEN YEARS TEN YEARS COST VALUE
- --------------------------------------------------------------------------------------------------------------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C>
U.S. Treasury $5,001 $ -- $ -- $ -- $5,001 $5,018
States and Political Subdivisions 532 1,737 740 -- 3,009 3,053
- --------------------------------------------------------------------------------------------------------------
Total $5,533 $1,737 $ 740 $ -- $8,010 $8,071
==============================================================================================================
Weighted Average Yields
(Taxable-Equivalent Basis)
- --------------------------------------------------------------------------------------------------------------
U.S. Treasury 6.69% --% --% --% 6.69% --
States and Political Subdivisions 8.29 8.32 10.13 -- 8.76 --
- --------------------------------------------------------------------------------------------------------------
Total 6.84% 8.32% 10.13% --% 7.47% --
==============================================================================================================
</TABLE>
All investments in states and political subdivisions, with the exception
of two obtained with the Harlingen Bancshares, Inc. acquisition, are investments
in entities within the State of Texas. No single issuer accounted for as much as
10.0% of total shareholders' equity at December 31, 1999. Of the obligations of
states and political subdivisions held by the Company at December 31, 1999,
76.5% were rated A or better by Moody's Investor Services, Inc. and 51.1% of the
non-rated issues or $5.6 million are local issues purchased in private placement
transactions.
LOANS
The Company manages its credit risk by establishing and implementing
strategies and guidelines appropriate to the characteristics of borrowers,
industries, geographic locations and risk products. Diversification of risk
within each of these areas is a primary objective. Policies and procedures are
developed to ensure that loan commitments conform to current strategies and
guidelines. Management continually refines the Company's credit policies and
procedures to address the risks in the current and prospective environment and
to reflect management's current strategic focus. The credit process is
controlled with continuous credit review and analysis, and review by internal
and external auditors and regulatory authorities. The Company's loans are widely
diversified by borrower and industry group.
The Company has collateral management policies in place so that collateral
lending of all types is approached on a basis consistent with safe and sound
standards. Valuation analysis is utilized to take into consideration the
potentially adverse economic conditions under which liquidation could occur.
Collateral accepted against the commercial loan portfolio includes accounts
receivable and inventory, marketable securities, equipment and agricultural
products. Autos, deeds of trust, life insurance and marketable securities are
accepted as collateral for the installment loan portfolio.
Management of the Company believes that the Company has benefited from
increased loan demand due to passage of the North American Free Trade Agreement
("NAFTA") and the strong population growth in the Rio Grande Valley. More
recently, the continued devaluation of the Mexican peso relative to the U.S.
dollar has reduced retail sales to residents of Mexico. However, the effects of
NAFTA and the devaluation have also increased cross-border trade and industrial
development including activity at twin manufacturing plants located on each side
of the border (referred to as maquiladoras) which benefit the Rio Grande Valley
economy. Management believes the on-going Mexican financial problems will not
have a material adverse effect on the Company's growth and earnings prospects,
in part because the Company presently has a low percentage of loans secured by
Mexican assets or that otherwise rely on collateral located in Mexico.
The extension of credits denominated in a currency other than that of the
country in which a borrower is located are called "cross-border" credits. The
Company has some dollar-denominated cross-border credits to individuals or
companies that are residents of, or domiciled in Mexico. The Company's total
cross-border credits at December 31, 1999 of $8.9 million represented 0.6% of
total loans. See "Nonperforming Assets" for additional information on
cross-border credits.
Total loans of $1.4 billion for the year ended December 31, 1999 increased
$285.3 million or 26.2% compared to the year ended December 31, 1998 levels of
$1.1 billion. The loan growth during 1999, which increased $138.2 million or
14.5% for the year ended December 31, 1998 compared to levels of $951.3 million
at December 31, 1997. The increase in total loans for the year ended December
31, 1999 is primarily attributable to an increased volume of business conducted
by the Company including bank acquisitions. The increase in total loans for the
year ended December 31, 1999 reflects growth in all loan categories and is
representative in part to the vitality of the Rio Grande Valley economy. A
substantial portion of the increase in loans classified as Real
Estate-Commercial Mortgage loans consists of loans secured by real estate and
other assets to commercial customers. The following table presents the
composition of the loan portfolio at the end of each of the last five years:
PAGE 13
<PAGE>
<TABLE>
<CAPTION>
DECEMBER 31,
----------------------------------------------------------------------
LOAN PORTFOLIO COMPOSITION 1999 1998 1997 1996 1995
- -------------------------------------------------------------------------------------------------------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C>
Commercial $ 391,855 $ 311,966 $ 249,819 $ 219,346 $ 131,006
Commercial Tax-Exempt 22,160 22,155 29,024 34,777 34,419
- -------------------------------------------------------------------------------------------------------
Total Commercial Loans 414,015 334,121 278,843 254,123 165,425
- -------------------------------------------------------------------------------------------------------
Agricultural 59,437 52,302 51,346 32,756 25,284
- -------------------------------------------------------------------------------------------------------
Real Estate
Construction 101,376 66,018 69,477 49,103 31,620
Commercial Mortgage 456,507 354,134 304,215 259,041 146,584
Agricultural Mortgage 38,256 34,440 31,949 29,654 18,047
1-4 Family Mortgage 160,786 128,945 122,043 116,485 75,911
- -------------------------------------------------------------------------------------------------------
Total Real Estate 756,925 583,537 527,684 454,283 272,162
- -------------------------------------------------------------------------------------------------------
Consumer 144,382 119,545 93,443 77,436 48,543
- -------------------------------------------------------------------------------------------------------
Total Loans $1,374,759 $1,089,505 $ 951,316 $ 818,598 $ 511,414
=======================================================================================================
</TABLE>
The contractual maturity schedule of the loan portfolio at December 31,
1999 follows:
<TABLE>
<CAPTION>
ONE AFTER ONE YEAR AFTER
YEAR THROUGH FIVE
LOAN MATURITIES OR LESS FIVE YEARS YEARS TOTAL
- ----------------------------------------------------------------------------------------
(Dollars in Thousands)
<S> <C> <C> <C> <C>
Commercial $ 203,059 $ 151,054 $ 37,742 $ 391,855
Commercial Tax-Exempt 997 16,229 4,934 22,160
- ----------------------------------------------------------------------------------------
Total Commercial Loans 204,056 167,283 42,676 414,015
- ----------------------------------------------------------------------------------------
Agricultural 46,310 12,020 1,107 59,437
- ----------------------------------------------------------------------------------------
Real Estate
Construction 84,609 15,342 1,425 101,376
Commercial Mortgage 75,017 301,471 80,019 456,507
Agricultural Mortgage 9,380 25,348 3,528 38,256
1-4 Family Mortgage 19,911 117,374 23,501 160,786
- ----------------------------------------------------------------------------------------
Total Real Estate 188,917 459,535 108,473 756,925
- ----------------------------------------------------------------------------------------
Consumer 48,204 95,698 480 144,382
- ----------------------------------------------------------------------------------------
Total Loans $ 487,487 $ 734,536 $ 152,736 $1,374,759
========================================================================================
Variable-Rate Loans $ 188,275 $ 250,711 $ 107,423 $ 546,409
Fixed-Rate Loans 299,212 483,825 45,313 828,350
- ----------------------------------------------------------------------------------------
Total Loans $ 487,487 $ 734,536 $ 152,736 $1,374,759
========================================================================================
</TABLE>
The Company's policy on maturity extensions and rollovers is based on
management's assessment of individual loans. Approvals for the extension or
renewal of loans without reduction of principal for more than one twelve-month
period are generally avoided, unless the loans are fully secured and properly
margined by cash or marketable securities, or are revolving lines subject to
annual analysis and renewal.
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.
PAGE 14
<PAGE>
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 $14.3 million at December 31, 1999 decreased $1.5
million, 9.4% compared to December 31, 1998 levels of $15.8 million, which
increased $4.1 million or 35.1% compared with December 31, 1997 levels of $11.7
million. Nonaccrual loans of $8.3 million at December 31, 1999 decreased $2.1
million or 19.9% compared to $10.4 million at December 31, 1998. Nonaccrual
loans at December 31, 1998 increased $2.1 million or 24.6% compared with
December 31, 1997 levels of $8.4 million. The decrease in nonaccrual loans
during 1999 was due to the Bank charging off or foreclosing on a larger amount
of nonaccrual loans outstanding as of December 31, 1998 as compared to the
amount of nonaccrual loans added and outstanding as of December 31, 1999.
Cross-border nonaccrual loans at December 31, 1999 of $4.3 million increased by
$1.7 million or 65.2% compared to $2.6 million at December 31, 1998. The
increase in foreclosed assets during 1999 was primarily attributable to a higher
amount of foreclosure loans with real estate collateral, net of write downs and
liquidations. Management actively seeks buyers for all Foreclosed Assets. 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 December 31, 1999, 1998 and 1997 that
are not classified as nonaccrual totaled $2.7 million, $3.1 million and $3.3
million, respectively. The decrease in accruing loans past due 90 days or more
at December 31, 1999 as compared to the year ended December 31, 1998 is partly
attributable to several large credits that were paid off during 1999. The ratio
of Nonperforming Assets Plus Accruing Loans 90 Days or More Past Due as a
percent of Total Loans and Foreclosed Assets at December 31, 1999 decreased to
1.23% from 1.72% at December 31, 1998 due primarily to the decrease in
nonaccrual loans.
An analysis of the components of nonperforming assets for each of the last
five years follows:
<TABLE>
<CAPTION>
DECEMBER 31,
-----------------------------------------------------------
NONPERFORMING ASSETS 1999 1998 1997 1996 1995
- --------------------------------------------------------------------------------------------------------------------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C>
Nonaccrual Loans $ 8,341 $10,414 $ 8,355 $ 6,801 $ 2,435
Renegotiated Loans -- -- -- 1 6
- --------------------------------------------------------------------------------------------------------------------
Nonperforming Loans 8,341 10,414 8,355 6,802 2,441
Foreclosed Assets 5,958 5,368 3,331 1,121 1,749
- --------------------------------------------------------------------------------------------------------------------
Total Nonperforming Assets 14,299 15,782 11,686 7,923 4,190
Accruing Loans 90 Days or More Past Due 2,697 3,099 3,287 5,328 781
- --------------------------------------------------------------------------------------------------------------------
Total Nonperforming Assets and Accruing Loans
90 Days or More Past Due $16,996 $18,881 $14,973 $13,251 $ 4,971
====================================================================================================================
Nonperforming Loans as a % of Total Loans 0.61% 0.96% 0.88% 0.83% 0.48%
Nonperforming Assets as a % of Total Loans and
Foreclosed Assets 1.04 1.44 1.22 0.97 0.82
Nonperforming Assets as a % of Total Assets 0.67 0.90 0.76 0.58 0.54
Nonperforming Assets Plus Accruing Loans 90 Days
or More Past Due as a % of Total Loans and
Foreclosed Assets 1.23 1.72 1.57 1.62 0.97
====================================================================================================================
</TABLE>
PAGE 15
<PAGE>
Management regularly reviews and monitors the loan portfolio to identify
borrowers experiencing financial difficulties. Management believes that, at
December 31, 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 December 31, 1999 totaled $16.7 million,
representing a net increase of $3.5 million or 26.3% compared to $13.2 million
at December 31, 1998. The increase in the allowance is primarily due to an
increase in the loan portfolio by 26.2% in 1999 compared to 1998. Management
believes that the allowance for loan losses at December 31, 1999 adequately
reflects the risks in the loan portfolio. Various regulatory agencies, as an
integral part of their examination process, periodically review the Bank's
allowance for loan losses. Such agencies may require the Bank to recognize
additions to the allowance based on their judgments of information available to
them at the time of their examination.
The following table summarizes the activity in the allowance for loan
losses:
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
----------------------------------------------------------
ALLOWANCE FOR LOAN LOSS ACTIVITY 1999 1998 1997 1996 1995
- ------------------------------------------------------------------------------------------------------------------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C>
Balance at Beginning of Period $13,236 $11,291 $10,806 $ 5,376 $ 4,274
Balance from Acquisitions 1,576 308 -- 4,647 450
Provision for Loan Losses 5,432 9,729 2,947 2,173 1,705
Charge-Offs
Commercial 2,279 1,600 1,778 968 869
Agricultural 106 5,453 477 158 416
Real Estate 192 875 59 82 138
Consumer 1,561 1,230 907 732 346
- ------------------------------------------------------------------------------------------------------------------
Total Charge-Offs 4,138 9,158 3,221 1,940 1,769
- ------------------------------------------------------------------------------------------------------------------
Recoveries
Commercial 268 370 136 193 509
Agricultural 5 72 48 -- 66
Real Estate 48 376 350 165 60
Consumer 284 248 225 192 81
- ------------------------------------------------------------------------------------------------------------------
Total Recoveries 605 1,066 759 550 716
- ------------------------------------------------------------------------------------------------------------------
Net Charge-Offs 3,533 8,092 2,462 1,390 1,053
- ------------------------------------------------------------------------------------------------------------------
Balance at End of Period $16,711 $13,236 $11,291 $10,806 $ 5,376
==================================================================================================================
Ratio of Allowance for Loan Losses to
Loans Outstanding, Net of Unearned Discount 1.22% 1.21% 1.19% 1.32% 1.05%
Ratio of Allowance for Loan Losses to
Nonperforming Loans 200.35 127.10 135.14 158.87 220.24
Ratio of Net Charge-Offs to Average Total
Loans Outstanding, Net of Unearned Discount 0.29 0.79 0.28 0.20 0.23
==================================================================================================================
</TABLE>
PAGE 16
<PAGE>
The allocation of the allowance for loan losses by loan category and the
percentage of loans in each category to total loans at the end of each of the
last five years follows:
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
-------------------------------------------------------------------------------------------------------------------
1999 1998 1997 1996 1995
-------------------------------------------------------------------------------------------------------------------
LOANS AS LOANS AS LOANS AS LOANS AS LOANS AS
ALLOCATION OF THE PERCENT PERCENT PERCENT PERCENT PERCENT
ALLOWANCE FOR OF TOTAL OF TOTAL OF TOTAL OF TOTAL OF TOTAL
LOAN LOSSES AMOUNT LOANS AMOUNT LOANS AMOUNT LOANS AMOUNT LOANS AMOUNT LOANS
- ------------------------------------------------------------------------------------------------------------------------------------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Commercial $ 6,493 30.1% $ 4,301 30.7% $ 2,672 29.3% $ 2,264 31.0% $ 1,142 32.3%
Agricultural 648 4.3 589 4.8 1,427 5.4 421 4.0 360 4.9
Real Estate 7,238 55.1 5,247 53.5 5,627 55.5 6,101 55.5 2,842 53.3
Consumer 950 10.5 738 11.0 527 9.8 465 9.5 350 9.5
Unallocated 1,382 -- 2,361 -- 1,038 -- 1,555 -- 682 --
- ------------------------------------------------------------------------------------------------------------------------------------
Total $16,711 100.0% $13,236 100.0% $11,291 100.0% $10,806 100.0% $ 5,376 100.0%
- ------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
PREMISES AND EQUIPMENT, NET
Premises and equipment of $75.6 million at December 31, 1999 increased
$5.8 million or 8.2% compared to $69.8 million at December 31, 1998 and
increased $17.4 million or 33.1% for December 31, 1998 compared to $52.4 million
at December 31, 1997. The increase for the year ended December 31, 1999 resulted
primarily from $5.6 million in premises and equipment obtained through the
Harlingen Bancshares, Inc. acquisition. The increase for the year ended December
31, 1998 resulted primarily from completion costs of the Company's new
headquarters in McAllen of $10.2 million, net of construction in progress of
$9.4 million as of December 31, 1997.
GOODWILL AND IDENTIFIABLE INTANGIBLES
Intangibles of $44.8 million at December 31, 1999 increased $17.9 million
or 66.6% compared to $26.9 million at December 31, 1998 and increased $2.8
million or 11.8% compared to $24.1 million at December 31, 1997. The net
increase in 1999 is primarily due to $21.0 million in intangibles added for the
Harlingen Bancshares, Inc. acquisition partially offset by the $3.2 million in
amortization. The net increase in 1998 is due to amortization of intangibles and
the acquisition of Raymondville Bancorp, Inc.
DEPOSITS
Total deposits of $1.9 billion at December 31, 1999 increased $322.4
million or 20.6% compared to December 31, 1998 levels of $1.6 billion which
increased $200.2 million or 14.7% compared to December 31, 1997 levels of $1.4
billion. The increase in total deposits for the year ended December 31, 1999 is
primarily attributable to $183.6 million recorded with the Harlingen Bancshares,
Inc. acquisition and the growth in the volume of business conducted by the
Company. The increase in total deposits for the year ended December 31, 1998 is
attributable in part to the vitality of the Rio Grande Valley economy. Total
non-interest bearing deposits of $285.9 million for the year ended December 31,
1999 represented an increase of $51.2 million or 21.8% compared to the year
ended December 31, 1998 and increased $26.2 million or 12.6% compared to the
year ended December 31, 1997. Total public funds deposits (consisting of Public
Funds Demand Deposits, Savings, Money Market Checking and Savings and Time
Deposits) of $389.5 million for the year ended December 31, 1999 increased
$123.0 million or 46.1% compared to $266.5 million for the year ended December
31, 1998. The Bank actively seeks consumer and commercial deposits, including
deposits from correspondent banks and public funds deposits.
PAGE 17
<PAGE>
The following table presents the composition of total deposits at the end
of the last three years:
<TABLE>
<CAPTION>
DECEMBER 31,
------------------------------------------
DEPOSIT COMPOSITION 1999 1998 1997
- ---------------------------------------------------------------------------------------
(Dollars in Thousands)
<S> <C> <C> <C>
Demand Deposits
Commercial and Individual $ 277,729 $ 226,605 $ 203,325
Public Funds 8,137 8,050 5,098
- ---------------------------------------------------------------------------------------
Total Demand Deposits 285,866 234,655 208,423
- ---------------------------------------------------------------------------------------
Interest-Bearing Deposits
Savings
Commercial and Individual 118,512 106,446 100,917
Public Funds 246 1,265 771
Money Market Checking and Savings
Commercial and Individual 298,668 236,157 203,292
Public Funds 78,791 65,081 39,547
Time Deposits
Commercial and Individual 800,934 727,205 647,959
Public Funds 302,329 192,133 161,874
- ---------------------------------------------------------------------------------------
Total Interest-Bearing Deposits 1,599,480 1,328,287 1,154,360
- ---------------------------------------------------------------------------------------
Total Deposits $1,885,346 $1,562,942 $1,362,783
=======================================================================================
Weighted Average Rate on
Interest-Bearing Deposits 4.41% 4.67% 4.67%
=======================================================================================
</TABLE>
Time deposits of $100,000 or more are solicited from markets served by the
Bank and are not sought through brokered sources. Time deposits continue to be a
significant source of funds. The following table presents the maturities of time
deposits of $100,000 or more as of December 31, 1999 (dollars in thousands):
MATURITIES OF TIME DEPOSITS
OF $100,000 OR MORE
- --------------------------------------------------------------------------
Three Months or Less $366,625
After Three through Six Months 137,629
After Six through Twelve Months 108,283
After Twelve Months 74,892
- --------------------------------------------------------------------------
Total $687,429
==========================================================================
Weighted Average Rate on Time Deposits of $100,000 or More 5.33%
==========================================================================
Mexico is a part of the trade territory of the Company and foreign
deposits from Mexican sources have traditionally been a source of funding. In
December 1995, the Mexican government announced a 20% devaluation of the Mexican
peso relative to the United States dollar, and the Mexican peso has since
continued to decline relative to the dollar. The Company does not anticipate any
negative impact on foreign deposits due to these recent devaluations of the
peso. The increase in foreign deposits is primarily attributable to Mexican
deposits obtained from acquisitions. The following table presents foreign
deposits, primarily from Mexican sources:
PAGE 18
<PAGE>
DECEMBER 31,
---------------------
FOREIGN DEPOSITS 1999 1998
- -----------------------------------------------------------------------
(Dollars in Thousands)
Demand Deposits $ 10,318 $ 10,667
- -----------------------------------------------------------------------
Interest-Bearing Deposits
Savings 20,882 21,638
Money Market Checking and Savings 32,243 32,324
Time Deposits Under $100,000 71,319 66,104
Time Deposits of $100,000 or more 147,711 133,641
- -----------------------------------------------------------------------
Total Interest-Bearing Deposits 272,155 253,707
- -----------------------------------------------------------------------
Total Foreign Deposits $282,473 $264,374
=======================================================================
Percent of Total Deposits 14.98% 16.92%
=======================================================================
Weighted Average Rate on Foreign Deposits 4.31% 4.60%
=======================================================================
SHAREHOLDERS' EQUITY AND CAPITAL RESOURCES
Shareholders' equity increased by $10.9 million or 6.2%, during the year
ended December 31, 1999 due to comprehensive income of $16.8 million less cash
dividends of $7.4 million. Comprehensive income for the period included net
income of $30.9 million and unrealized loss on securities available for sale,
net of tax, of $14.1 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:
<TABLE>
<CAPTION>
DECEMBER 31, 1999 DECEMBER 31, 1998
-------------------------------------------------------
RISK-BASED CAPITAL AMOUNT RATIO AMOUNT RATIO
- ----------------------------------------------------------------------------------------------------------------
(Dollars in Thousands)
<S> <C> <C> <C> <C>
Total Shareholders' Equity before unrealized
gains or losses on Securities Available for Sale $ 201,636 $176,665
Less Goodwill and Other Deductions (44,796) (26,894)
- ----------------------------------------------------------------------------------------------------------------
Total Tier I Capital 156,840 149,771
Total Tier II Capital 16,711 13,236
- ----------------------------------------------------------------------------------------------------------------
Total Qualifying Capital $ 173,551 $163,007
================================================================================================================
Total Risk-Based Capital $ 173,551 11.94% $163,007 14.04%
Total Risk-Based Capital Minimum 116,313 8.00 92,884 8.00
- ----------------------------------------------------------------------------------------------------------------
Tier I Risk-Based Capital 156,840 10.79 149,771 12.90
Tier I Risk-Based Capital Minimum 58,157 4.00 46,442 4.00
- ----------------------------------------------------------------------------------------------------------------
Tier I Leverage Capital 156,840 7.58 149,771 8.84
Tier I Leverage Capital Minimum 82,777 4.00 67,772 4.00
================================================================================================================
</TABLE>
At December 31, 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.
ANALYSIS OF RESULTS OF OPERATIONS
NET INCOME
Net income available for common shareholders was $30.9 million in 1999,
compared to $22.5 million in 1998 and $23.1 million in 1997. The increase in net
income in 1999 from 1998 by $8.4 million or 37.3% was primarily due to an
increase in interest-earning assets and a decrease in the provision for loan
losses. The provision for loan losses was $5.4 million in 1999 compared to $9.7
million in 1998. The $9.7 million provision in 1998 was recorded to bring the
allowance for loan losses back up to a level deemed appropriate by management
after considering loans charged off and written down during third quarter 1998.
Total loans charged off or written down in the third quarter of 1998 amounted to
$6.8 million, of which $4.8 million or 71.1% related to agricultural loans.
Total interest income in the amount of $1.2 million was also charged off of
which $863,000 or
PAGE 19
<PAGE>
72.9% related to agricultural loans. These charge-offs and write-downs were
primarily the result of a severe drought and its impact on agricultural growers,
shippers, suppliers and consumers throughout the Rio Grande Valley region.
Earnings per diluted common share were $2.11, $1.54 and $1.58 for the years
ended December 31, 1999, 1998, and 1997, respectively. Return on assets averaged
1.63%, 1.36% and 1.61%, respectively, while return on shareholders' equity
averaged 16.82%, 13.11%, and 15.15%, respectively, for the years ended December
31, 1999, 1998, and 1997, respectively.
NET INTEREST INCOME
The following table presents for the 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, 1998, and 1997 (dollars in thousands):
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
----------------------------------------------------------------------------------------
1999 1998
------------------------------------------- ---------------------------------------
AVERAGE YIELD/ AVERAGE YIELD/
TAXABLE-EQUIVALENT BASIS (1) BALANCE INTEREST RATE BALANCE INTEREST RATE
- --------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Assets
Interest-Earning Assets
Loans
Commercial $ 427,828 $ 38,560 9.01% $ 355,014 $ 32,085 9.04%
Real Estate 650,168 61,578 9.47 556,800 54,158 9.73
Consumer 131,613 13,745 10.44 111,713 11,474 10.27
- --------------------------------------------------------------------------------------------------------------------------
Total Loans 1,209,609 113,883 9.41 1,023,527 97,717 9.55
- --------------------------------------------------------------------------------------------------------------------------
Securities
Taxable 444,021 27,244 6.14 402,457 25,138 6.25
Tax-Exempt 44,485 3,170 7.13 30,310 2,357 7.78
- --------------------------------------------------------------------------------------------------------------------------
Total Securities 488,506 30,414 6.23 432,767 27,495 6.35
- --------------------------------------------------------------------------------------------------------------------------
Time Deposits 1,621 114 7.03 1,300 76 5.85
Federal Funds Sold 20,347 1,000 4.91 33,617 1,829 5.44
- --------------------------------------------------------------------------------------------------------------------------
Total Interest-Earning
Assets 1,720,083 $ 145,411 8.45% 1,491,211 $127,117 8.52%
- --------------------------------------------------------------------------------------------------------------------------
Cash and Due from Banks 56,414 54,531
Premises and Equipment, Net 71,001 64,937
Other Assets 64,310 55,866
Allowance for Loan Losses (14,928) (12,410)
- --------------------------------------------------------------------------------------------------------------------------
Total Assets $1,896,880 $1,654,135
==========================================================================================================================
Liabilities
Interest-Bearing Liabilities
Savings $ 112,948 $ 2,517 2.23% $ 105,243 $ 2,986 2.84%
Money Market Checking
and Savings 316,929 9,018 2.85 258,885 7,521 2.91
Time Deposits 1,001,399 49,960 4.99 879,379 47,590 5.41
- --------------------------------------------------------------------------------------------------------------------------
Total Savings and
Time Deposits 1,431,276 61,495 4.30 1,243,507 58,097 4.67
- --------------------------------------------------------------------------------------------------------------------------
Federal Funds Purchased
and Securities Sold
Under Repurchase
Agreements 15,377 726 4.72 5,772 287 4.97
- --------------------------------------------------------------------------------------------------------------------------
Total Interest-Bearing
Liabilities 1,446,653 $ 62,221 4.30% 1,249,279 $ 58,384 4.67%
- --------------------------------------------------------------------------------------------------------------------------
Demand Deposits 253,454 218,708
Other Liabilities 13,383 14,721
- --------------------------------------------------------------------------------------------------------------------------
Total Liabilities 1,713,490 1,482,708
- --------------------------------------------------------------------------------------------------------------------------
Shareholders' Equity 183,390 171,427
- --------------------------------------------------------------------------------------------------------------------------
Total Liabilities and
Shareholders' Equity $1,896,880 $1,654,135
==========================================================================================================================
Net Interest Income $ 83,190 $ 68,733
==========================================================================================================================
Net Yield on Total Interest-
Earning Assets 4.84% 4.61%
==========================================================================================================================
YEARS ENDED DECEMBER 31,
-------------------------------------------
1997
-------------------------------------------
AVERAGE YIELD/
TAXABLE-EQUIVALENT BASIS (1) BALANCE INTEREST RATE
- -----------------------------------------------------------------------------
Assets
Interest-Earning Assets
Loans
Commercial $ 303,683 $ 29,398 9.68%
Real Estate 489,611 48,650 9.94
Consumer 82,545 8,615 10.44
- -----------------------------------------------------------------------------
Total Loans 875,839 86,663 9.89
- -----------------------------------------------------------------------------
Securities
Taxable 359,898 23,124 6.43
Tax-Exempt 26,323 2,303 8.75
- -----------------------------------------------------------------------------
Total Securities 386,221 25,427 6.58
- -----------------------------------------------------------------------------
Time Deposits 242 14 5.79
Federal Funds Sold 39,657 2,195 5.53
- -----------------------------------------------------------------------------
Total Interest-Earning
Assets 1,031,959 $ 114,299 8.78%
- -----------------------------------------------------------------------------
Cash and Due from Banks 55,515
Premises and Equipment, Net 43,728
Other Assets 49,840
Allowance for Loan Losses (11,086)
- -----------------------------------------------------------------------------
Total Assets $1,439,956
=============================================================================
Liabilities
Interest-Bearing Liabilities
Savings $ 101,903 $ 3,235 3.17%
Money Market Checking
and Savings 241,765 7,142 2.95
Time Deposits 738,643 40,189 5.44
- -----------------------------------------------------------------------------
Total Savings and
Time Deposits 1,082,311 50,566 4.67
- -----------------------------------------------------------------------------
Federal Funds Purchased
and Securities Sold
Under Repurchase
Agreements 988 52 5.26
- -----------------------------------------------------------------------------
Total Interest-Bearing
Liabilities 1,083,299 $ 50,618 4.67%
- -----------------------------------------------------------------------------
Demand Deposits 192,131
Other Liabilities 11,891
- -----------------------------------------------------------------------------
Total Liabilities 1,287,321
- -----------------------------------------------------------------------------
Shareholders' Equity 152,635
- -----------------------------------------------------------------------------
Total Liabilities and
Shareholders' Equity $1,439,956
=============================================================================
Net Interest Income $ 63,681
=============================================================================
Net Yield on Total Interest-
Earning Assets 4.89%
=============================================================================
</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% tax rate).
PAGE 20
<PAGE>
Net interest income, reported on a tax equivalent basis, increased $14.5
million or 21.0% to $83.2 million in 1999, compared to $68.7 million in 1998.
The increase in net interest income was largely due to growth of 15.3% in
average interest-earning assets, which rose to $1.7 billion in 1999 compared to
$1.5 billion in 1998. The increase was partially offset by lower yields on
interest-earning assets. Loan yield for 1999 decreased as a result of a decrease
in the average prime rate from 8.36% in 1998 to 7.99% in 1999. In addition, the
decrease in securities yield in 1999 compared to 1998 resulted from higher
yielding securities maturing and the reinvesting of the proceeds into lower
yielding securities. The net interest margin increased to 4.84% in 1999,
compared to 4.61% in 1998.
Tax-equivalent net interest income was $68.7 million for 1998, an increase
of $5.1 million or 7.9% compared to 1997. The decrease in the interest margin
for 1998 reflected decreases in the rates earned on interest-earning assets. The
decrease in loan yield for 1998 reflected a lower market rate in response to
Federal Reserve Bank actions and continued strong competition from local
financial institutions and, to a lesser extent, the charge-off of $900,000 in
interest income on agricultural loans during third quarter 1998. The rate paid
on interest-bearing liabilities during 1998 did not change due to competition
from local financial institutions and time deposit maturities, which prevent the
Company from rapidly lowering deposit rates. The net interest margin for 1998
was 4.61% compared to 4.89% in 1997.
The net interest income and the yield on earning assets were reduced by
interest foregone on nonaccrual loans. If interest on those loans had been
accrued at the original contractual rates, additional interest income would have
approximated $1.9 million, $2.2 million and $1.6 million for the years ended
December 31, 1999, 1998 and 1997, respectively. The amount of interest income on
nonaccrual loans included in net income for cash payments received was $156,000
in 1999, $232,000 in 1998, and $238,000 in 1997.
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>
INCREASE (DECREASE)
------------------------------------------------------------------------------------------------
YEAR ENDED DECEMBER 31, YEAR ENDED DECEMBER 31,
1999 COMPARED TO 1998 1998 COMPARED TO 1997
------------------------------------------------------------------------------------------------
DUE TO CHANGE IN DUE TO CHANGE IN
NET ------------------ RATE/ NET ------------------ RATE/
TAXABLE-EQUIVALENT BASIS (1) CHANGE VOLUME RATE VOLUME CHANGE VOLUME RATE VOLUME
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Interest Income
Loans $16,166 $17,765 $(1,353) $ (246) $11,054 $14,606 $(2,978) $(574)
Securities
Taxable 2,106 2,596 (444) (46) 2,014 2,737 (648) (75)
Tax-Exempt 813 1,102 (197) (92) 54 349 (255) (40)
Time Deposits in Bank 38 19 15 4 62 61 -- 1
Federal Funds Sold (829) (722) (177) 70 (366) (334) (36) 4
- ------------------------------------------------------------------------------------------------------------------------------------
Total Interest Income 18,294 20,760 (2,156) (310) 12,818 17,419 (3,917) (684)
- ------------------------------------------------------------------------------------------------------------------------------------
Interest Expense
Deposits 3,398 8,773 (4,670) (705) 7,531 7,528 -- 3
Federal Funds Purchased and
Securities Sold Under
Repurchase Agreements 439 477 (14) (24) 235 252 (3) (14)
- ------------------------------------------------------------------------------------------------------------------------------------
Total Interest Expense 3,837 9,250 (4,684) (729) 7,766 7,780 (3) (11)
- ------------------------------------------------------------------------------------------------------------------------------------
Net Interest Income Before
Allocation of
Rate/Volume 14,457 11,510 2,528 419 5,052 9,639 (3,914) (673)
Allocation of Rate/Volume -- (765) 1,184 (419) -- (545) (128) 673
- ------------------------------------------------------------------------------------------------------------------------------------
Changes in Net Interest Income $14,457 $10,745 $ 3,712 $ - $ 5,052 $ 9,094 $ (4,042) $ -
====================================================================================================================================
</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).
PAGE 21
<PAGE>
PROVISION FOR LOAN LOSSES
The Company recorded a provision for loan losses of $5.4 million for 1999,
compared to $9.7 million for 1998 and $2.9 million for 1997. Net charge-offs
totaled $3.5 million and $8.1 million for 1999 and 1998, respectively, and
decreased to 0.29% of average loans in 1999 compared to 0.79% of average loans
in 1998. Charge-offs of $5.5 million on agricultural loans during 1998, as
previously discussed, factored heavily in the decrease in the provision for loan
losses by $4.3 million or 44.2% in 1999 compared to 1998. Net charge-offs were
$2.5 million or 0.28% of average loans in 1997. The provision for loan losses
reflected an increase of $6.8 million or 230.1% in 1998 compared to 1997,
primarily due to the $5.5 million in charge-offs on agricultural loans during
1998 and, to a lesser extent, loan growth of $138.2 million.
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.
For additional information on charge-offs and recoveries and the aggregate
provision for loan losses, see the "Allowance for Loan Losses" section of this
Report.
NONINTEREST INCOME
Noninterest Income totaled $17.4 million for 1999 compared to $17.7
million for 1998 and $13.0 million for 1997. Excluding Net Realized Gains
(Losses) on Sales of Securities Available for Sale, Noninterest Income increased
$2.6 million or 17.9% in 1999 compared to 1998 and $2.5 million or 20.6% in 1998
compared to 1997. The Noninterest Income growth in 1999 and 1998 resulted
primarily from the increased volume of business conducted by the Company and, in
part, because of the Harlingen Bancshares, Inc. acquisition in 1999 and the
Raymondville merger in 1998.
Total Service Charges were $12.1 million for 1999 compared to $10.1
million for 1998 and $8.6 million for 1997. The increase in Total Service
Charges during 1999 by $1.9 million or 19.1% is attributable to increased
account transaction fees generated by deposit growth, an increase in amount
charged for overdrafts, and a decrease in the percentage of overdraft charges
waived. The increase in Total Service Charges in 1998 by $1.5 million or 17.8%
compared to 1997 is primarily due to increased fees resulting from deposit
growth experienced by the Company and as a result of the Raymondville merger.
Trust Service Fees were $2.0 million for 1999 compared to $1.8 million for
1998 and $1.7 million for 1997. The increase in Trust Service Fees during 1999
by $195,000 or 11.0% is attributable to an increase in the market value of trust
accounts managed. The fair market value of assets managed was $357.6 million at
December 31, 1999 compared to $328.7 million at December 31, 1998, representing
an increase of 8.8%. Trust Service Fees increased by $79,000 or 4.7% in 1998
compared to 1997 primarily due to an increase in the number of trust accounts.
The fair market value of assets managed at December 31, 1997 was $250.8 million.
Assets held by the trust department of the Bank in fiduciary or agency
capacities are not assets of the Company and are not included in the
consolidated balance sheets.
Net Realized Gains on Sales of Securities Available for Sale were $1,000
for 1999 compared to $2.9 million for 1998 and $734,000 for 1997. Market
opportunities to realize bond profits were limited as bond prices generally fell
during 1999. During the latter half of 1998, long-term interest rates reached or
neared 30 year lows. This coupled with management's belief in the fundamental
underlying strength of the U.S., Texas and Rio Grande Valley economies,
presented an opportunity to realize some of the gains in the Securities
Available for Sale portfolio. During 1997, the gains were a result of the
Company's decision to reduce asset sensitivity of callable bonds and improve
bond quality.
Data Processing Service Fees of $2.1 million for 1999 increased $589,000
or 38.9% compared to $1.5 million for 1998. This increase primarily arose from
the acquisition of an additional banking client during 1999, the recognition of
a full year's income on the two banking clients obtained during 1998 and
increased utilization of services offered to existing clients. Data Processing
Service Fees of $1.5 million in 1998 increased by $435,000 or 40.3% compared to
$1.1 million in 1997 as a result of the acquisition of two banking clients
during 1998 and increased utilization of services by existing clients. The
number of data processing clients as of December 31, 1999, 1998 and 1997 was 7,
6, and 4, respectively.
Other Operating Income of $1.2 million for 1999 was comparable to $1.3
million reported for 1998. Other Operating Income increased by $469,000 or 55.0%
in 1998 compared to $852,000 for 1997. The increase in Other Operating Income
for 1998 was primarily attributable to the increased volume of deposit accounts
and other business conducted by the Company.
NONINTEREST EXPENSE
Noninterest Expense of $45.9 million for 1999 increased $4.8 million or
11.6% compared to $41.1 million for 1998. Noninterest Expense of $41.1 million
for 1998 increased $3.9 million or 10.6% compared to $37.2 million for 1997. The
efficiency ratio of expense to total revenue improved to 45.29% compared to
48.86% for 1998 and 48.82% for 1997. 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
PAGE 22
<PAGE>
One Time Charge - Acquisitions of $728,000 in 1998, Noninterest Expense
increased $5.5 million or 13.7% in 1999 over 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, were $22.4 million in 1999, $18.5 million in 1998 and $17.7 million in
1997. The increase in 1999 over 1998 by $3.9 million or 20.8% reflects increases
in base salaries and higher levels of staff, including the staff acquired as a
result of the Harlingen Bancshares, Inc. acquisition. In addition, during 1999
the Company paid bonuses to its officers totaling $908,000. The increase in 1998
over 1997 by $834,000 or 4.7% was primarily due to staffing increases, including
the staff acquired as a result of the Raymondville merger. At the end of 1999,
the Company had approximately 888 full-time equivalent employees, compared to
727 at year end 1998 and 564 at year end 1997. Salaries and Employee Benefits
averaged 1.18% of average assets in 1999 compared to 1.12% in 1998 and 1.23% in
1997.
Net Occupancy Expense of $3.8 million for 1999 was comparable to $3.6
million for 1998, decreasing by only $136,000 or 3.7%. Although expenses
associated with the new corporate headquarters building in McAllen, Texas, which
opened mid-1998, increased in 1999, the increase was offset by an increase in
rental income generated from leasing space in the new building. Net Occupancy
Expense of $3.6 million for 1998 increased $944,000 or 35.1% compared to $2.7
million for 1997. Expenses associated with the new corporate headquarters
contributed to the increase in Net Occupancy Expense during 1998.
Equipment Expense of $5.1 million for 1999 increased $528,000 or 11.5%
compared to $4.6 million for 1998. During 1998, Equipment Expense increased
$821,000 or 21.7% compared to $3.8 million for 1997. Expenses associated with
the new corporate headquarters building contributed to the increase in Equipment
Expense during 1998.
Other Real Estate Expense, Net, includes rental income from foreclosed
properties, gain or loss on sale of other real estate properties and direct
expenses of foreclosed real estate including property taxes, maintenance costs
and write-downs. Write-downs of other real estate are required if the fair value
of an asset acquired in a loan foreclosure subsequently declines below its
carrying value. Other Real Estate Expense, Net of $332,000 for 1999 was
comparable to $307,000 reported for 1998, increasing by only $25,000 or 8.1%.
Other Real Estate Expense, Net increased $202,000 or 192.4% in 1998 compared to
$105,000 for 1997. The net increase in 1998 was primarily attributable to higher
volumes in Other Real Estate Owned offsetting increased operating income and
gain on sale of foreclosed properties. Management is actively seeking buyers for
all Other Real Estate.
Amortization of Goodwill and Identifiable Intangibles of $3.2 million for
1999 increased $520,000 or 19.5% compared to $2.7 million for 1998. The increase
in Amortization of Goodwill and Identifiable Intangibles during 1999 compared to
1998 was attributable to the amortization of $21.0 million of goodwill and other
intangibles added in 1999 with the Harlingen Bancshares, Inc. acquisition.
Amortization of Goodwill and Identifiable Intangibles increased to $2.7 million
in 1998 compared to $2.3 million in 1997, an increase of $408,000 or 18.1%. The
increase was due to the amortization of goodwill and core deposit premiums
associated with the 1998 acquisitions.
An impairment loss of $630,000 was recorded during the three months ended
June 30, 1997 to reflect the impairment of an existing bank building. The
building was razed to provide additional parking upon completion of the new
headquarters building in McAllen, Texas. The new bank building completed in 1998
serves as the headquarters for Texas State Bank and Texas Regional Bancshares,
Inc. The amount of the impairment loss represented the book value of the
building at June 30, 1997.
One Time Charge - Acquisitions of $728,000 in 1998 related primarily to
professional fees and computer conversion costs resulting from the Company's
1998 acquisitions.
Other Noninterest Expense of $11.1 million for 1999 is comparable to $10.7
million reported for 1998, increasing by only $453,000 or 4.3%. Other
Noninterest Expense of $10.7 million for 1998 increased by $625,000 or 6.2%
compared to $10.0 million for 1997. The increases for 1999 and 1998 were
primarily attributable to an increased volume of business, primarily due to the
1999 and 1998 acquisitions.
PAGE 23
<PAGE>
A detailed summary of Noninterest Expense during the last three years
follows (dollars in thousands):
<TABLE>
<CAPTION>
1999 1998 1997
- ----------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Salaries and Wages $ 17,841 $ 15,108 $ 14,442
Employee Benefits 4,537 3,418 3,250
- ----------------------------------------------------------------------------------------------
Total Salaries and Employee Benefits 22,378 18,526 17,692
- ----------------------------------------------------------------------------------------------
Net Occupancy Expense 3,767 3,631 2,687
- ----------------------------------------------------------------------------------------------
Equipment Expense 5,127 4,599 3,778
- ----------------------------------------------------------------------------------------------
Other Real Estate Expense, Net
Rental Income (389) (154) (71)
Gain on Sale (171) (257) (115)
Expenses 875 674 267
Write-Downs 17 44 24
- ----------------------------------------------------------------------------------------------
Total Other Real Estate Expense, Net 332 307 105
- ----------------------------------------------------------------------------------------------
Amortization of Goodwill and Identifiable Intangibles 3,180 2,660 2,252
- ----------------------------------------------------------------------------------------------
Impairment Loss -- -- 630
- ----------------------------------------------------------------------------------------------
One Time Charge - Acquisitions -- 728 --
- ----------------------------------------------------------------------------------------------
Other Noninterest Expense
Advertising and Public Relations 1,495 1,536 1,372
Data Processing and Check Clearing 1,480 1,183 1,120
Director Fees 344 333 515
Franchise Tax 334 600 533
Insurance 400 430 327
FDIC Insurance 191 166 150
Legal 663 1,255 1,050
Professional Fees 1,136 638 775
Postage, Delivery and Freight 916 816 689
Printing, Stationery and Supplies 1,447 1,325 1,056
Telephone 628 534 433
Other Losses 759 68 837
Miscellaneous Expense 1,311 1,767 1,169
- ----------------------------------------------------------------------------------------------
Total Other Noninterest Expense 11,104 10,651 10,026
- ----------------------------------------------------------------------------------------------
Total Noninterest Expense $ 45,888 $ 41,102 $ 37,170
==============================================================================================
</TABLE>
INCOME TAX EXPENSE
The Company recorded income tax expense of $16.8 million for 1999 compared
to $11.6 million for 1998 and $11.9 million for 1997. The changes in income tax
expense are due primarily to changes in the 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 December 31,
1999, the Company exceeded all applicable capital requirements, having a total
risk-based capital ratio of 11.94%, a Tier I risk-based capital ratio of 10.79%,
and a leverage ratio of 7.58%.
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, time deposits, U.S. Treasury, U.S. Government Agency
and mortgage-backed securities. At December 31, 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 30.3% compared to 33.0% at December 31, 1998 and 34.3% at December 31, 1997.
PAGE 24
<PAGE>
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 1999, funds for $188.6 million of securities purchases and $179.0
million of net loan growth came from various sources, including a net increase
in deposits of $138.8 million, $125.9 million in proceeds from maturing
securities and $30.9 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.
PAGE 25
<PAGE>
ITEM 7A. 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 December 31, 1999 and December 31, 1998:
INCREASE (DECREASE) IN
NET INTEREST INCOME
CHANGES IN INTEREST ESTIMATED NET ----------------------
RATES (BASIS POINTS) INTEREST INCOME AMOUNT PERCENT
- ---------------------------------------------------------------------
(Dollars in Thousands)
December 31, 1999
+100 $99,136 $ 1,189 1.2%
- 97,947 - -
-100 95,954 (1,993) (2.0)
December 31, 1998
+100 77,223 2,317 3.1
- 74,906 - -
-100 69,940 (4,966) (6.6)
- ---------------------------------------------------------------------
All the measurements of risk described above are made based upon the
Company's business mix and interest rate exposures at the particular point in
time. An immediate 100 basis point decline in interest rates is a hypothetical
rate scenario, used to calibrate risk, and does not necessarily represent
management's current view of future market developments. Because of
uncertainties as to the extent of customer behavior, refinance activity,
absolute and relative loan and deposit pricing levels, competitor pricing and
market behavior, product volumes and mix, and other unexpected changes in
economic events impacting movements and volatility in market rates, there can be
no assurance that simulation results are reliable indicators of net interest
income under such conditions.
The interest rate sensitivity gap represents the dollar amount of
difference between rate sensitive assets and rate sensitive liabilities within a
given time period ("GAP"). A GAP ratio is determined by dividing rate sensitive
assets by rate sensitive liabilities. A ratio of 1.0 indicates a perfectly
matched position, in which case the effect on net interest income due to
interest rate movements would be zero. The following table summarizes interest
rate sensitive assets and liabilities by their repricing dates at December 31,
1999:
PAGE 26
<PAGE>
<TABLE>
<CAPTION>
0-3 4-6 7-12 1-5 OVER
INTEREST RATE SENSITIVITY ANALYSIS MONTHS MONTHS MONTHS YEARS 5 YEARS TOTAL
- ------------------------------------------------------------------------------------------------------------------------------------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C>
Loans $ 657,392 $ 70,301 $ 117,928 $483,825 $ 45,313 $1,374,759
Securities
Available for Sale 961 1,001 6,225 202,374 315,377 525,938
Held to Maturity 5,424 3 106 1,737 740 8,010
Time Deposits 1,218 -- 1,683 2,176 -- 5,077
- ------------------------------------------------------------------------------------------------------------------------------------
Total Interest-Bearing Assets 664,995 71,305 125,942 690,112 361,430 1,913,784
- ------------------------------------------------------------------------------------------------------------------------------------
Savings 118,758 -- -- -- -- 118,758
Money Market Checking and Savings Accounts 377,458 -- -- -- -- 377,458
Time Deposits 516,633 235,532 204,569 146,445 85 1,103,264
Federal Funds Purchased and Securities Sold
under Repurchase Agreements 34,608 -- -- -- -- 34,608
- ------------------------------------------------------------------------------------------------------------------------------------
Total Interest-Bearing Liabilities 1,047,457 235,532 204,569 146,445 85 1,634,088
- ------------------------------------------------------------------------------------------------------------------------------------
Rate Sensitivity GAP (1) $ (382,462) $(164,227) $ (78,627) $543,667 $361,345 $ 279,696
- ------------------------------------------------------------------------------------------------------------------------------------
Cumulative Rate Sensitivity GAP $ (382,462) $(546,689) $(625,316) $(81,649) $279,696
- ------------------------------------------------------------------------------------------------------------------------------------
Ratio of Cumulative Rate Sensitivity GAP to
Total Assets (18.03)% (25.78)% (29.49)%
Ratio of Cumulative Rate Sensitive
Interest-Earning Assets to Cumulative Rate
Sensitive Interest-Bearing Liabilities 0.63:1 0.57:1 0.58:1
- ------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
(1) Rate sensitive interest-earning assets less rate sensitive interest-bearing
liabilities.
YEAR 2000
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.
Over the past two years, the Company formalized and implemented a
comprehensive plan to address the Year 2000 problem which encompassed its
in-house and third party computer systems, vendors, customers, and business
partners. In the process, the Company expended approximately $472,000, including
$188,000 expended during 1999.
As of the date of this filing, the Company has not experienced any Year
2000 problems that have affected its operations, the realization of financial
assets, or its results of operations. The Company believes that there is no
remaining significant risk or exposure to the Company as a result of the Year
2000 issue.
CURRENT ACCOUNTING ISSUES
The Financial Accounting Standards Board's Statement No. 133 ("Statement
133"), "Accounting for Derivative Instruments and for Hedging Activities,"
requires companies to recognize all derivatives as either assets or liabilities
in the statement of financial position 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. Upon implementation of Statement 133, hedging relationships may be
redesignated and securities held to maturity may be transferred to available for
sale or trading. The Financial Accounting Standards Board's Statement No. 137,
"Accounting for Derivative Instruments and Hedging Activities-Deferral of the
Effective Date of Statement No. 133", deferred the effective date of Statement
133 to fiscal years beginning after June 15, 2000. The Company will adopt
Statement 133 on January 1, 2001 and is evaluating the impact, if any, this
statement may have on its future consolidated financial statements.
FOURTH QUARTER RESULTS
The fourth quarter net income for 1999 of $8.3 million or $0.57 per
diluted common share reflected an increase of $1.2 million or 17.6% compared to
$7.1 million or $0.48 per share for fourth quarter 1998. Results for fourth
quarter 1999 reflected increases in net interest income, noninterest income and
noninterest expense compared to fourth quarter 1998.
Net interest income, on a tax-equivalent basis, of $23.4 million for
fourth quarter 1999 increased $5.6 million or 31.5% compared to $17.8 million
for fourth quarter 1998. The increase resulted from an increased volume of
earning assets due to the 1999 acquisition of Harlingen Bancshares, Inc. and in
part to the vitality of the Rio Grande Valley economy. Average earning
PAGE 28
<PAGE>
assets of $1.9 billion for fourth quarter 1999 increased by $338.1 million or
21.7% compared to $1.6 billion for fourth quarter 1998. Net interest margin for
fourth quarter 1999 was 4.88% compared to 4.52% for fourth quarter 1998.
The provision for loan losses charged against earnings in fourth quarter
1999 totaled $1.0 million compared to $650,000 for fourth quarter 1998,
reflecting an increase of $360,000 or 55.4%. Net charge-offs (recoveries) of
$954,000 for fourth quarter 1999 increased $985,000 or 3,177.4% compared to
$(31,000) for fourth quarter 1998.
Noninterest income of $4.8 million for fourth quarter 1999 increased
$537,000 or 12.7% compared to $4.2 million for fourth quarter 1998. The increase
is primarily due to an increase in service charges on deposit accounts and data
processing fees and is partially offset by a decrease in realized gains on
securities available for sale.
Noninterest expense of $13.8 million for fourth quarter 1999 increased
$3.4 million or 33.1% compared to $10.4 million for fourth quarter 1998,
primarily due to an increase in salaries and employee benefits and other
noninterest expense. The efficiency ratio of expense to total revenue averaged
48.81% for fourth quarter 1999 compared to 46.66% for fourth quarter 1998.
The fourth quarter net income for 1999 was $8.3 million or $0.57 per
diluted common share reflected an increase of $305,000 or 3.8% compared to $8.0
million or $0.55 per diluted common share for third quarter 1999. Operating
results for fourth quarter 1999 reflected an increase in net interest income,
provision for loan losses, noninterest income and noninterest expense from third
quarter 1999.
Net interest income, on a tax-equivalent basis, of $23.4 million for
fourth quarter 1999 increased $2.7 million or 12.8% compared to $20.7 million
for third quarter 1999, reflecting a continued increase in volume of earning
assets. Average earning assets of $1.9 billion for fourth quarter 1999 increased
$201,000 or 11.8% compared to $1.7 billion for third quarter 1999. The fourth
quarter 1999 net interest margin of 4.88% compared to 4.84% in third quarter
1999.
The provision for loan losses charged against earnings in fourth quarter
1999 of $1.0 million compared to $1.6 million for third quarter 1999, reflecting
a decrease of $590,000 or 36.9%. Net charge-offs of $954,000 for fourth quarter
1999 increased $172,000 or 22.0% compared to net charge-offs of $782,000 for
third quarter 1999.
Noninterest income of $4.8 million for fourth quarter 1999 increased
$476,000 or 11.1% compared to $4.3 million for third quarter 1999. The increase
was primarily due to an increase in service charges due to deposit growth
resulting from the Harlingen Bancshares, Inc. acquisition.
Noninterest expense of $13.8 million for fourth quarter 1999 increased
$3.1 million or 29.4% compared to $10.6 million for third quarter 1999. The
increase was largely attributable to an increase in salaries and employee
benefits resulting from the Harlingen Bancshares, Inc. acquisition during fourth
quarter 1999, as well as officer bonuses paid during the fourth quarter. In
addition, increases in other noninterest expense were attributable to increased
business resulting from the Harlingen Bancshares, Inc. acquisition. The
efficiency ratio of expense to total revenue averaged 48.81% for fourth quarter
1999 compared to 42.26% for third quarter 1999.
The nonaccrual and renegotiated loans at December 31, 1999 of $8.3 million
increased $717,000 or 9.4% compared to $7.6 million at September 30, 1999
primarily due to higher nonaccrual loan volumes.
PAGE 28
<PAGE>
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
MANAGEMENT'S REPORT ON RESPONSIBILITY FOR FINANCIAL REPORTING
To Our Shareholders
The management of Texas Regional Bancshares, Inc. and its subsidiaries has
the responsibility for preparing the accompanying consolidated financial
statements and for their integrity and objectivity. The statements were prepared
in accordance with generally accepted accounting principles. The consolidated
financial statements include amounts that are based on management's best
estimates and judgments. Management also prepared the other information in the
annual report and is responsible for its accuracy and consistency with the
consolidated financial statements.
Management maintains a comprehensive system of internal control to assure
the proper authorization of transactions, the safeguarding of assets, and the
reliability of the financial records. The system of internal control provides
for appropriate division of responsibility and is documented by written policies
and procedures that are communicated to employees. The Company maintains a
strong internal auditing program that independently assesses the effectiveness
of the internal controls and recommends possible improvements thereto.
Management believes that as of December 31, 1999, the Company maintains an
effective system of internal control.
The Audit Committee of the Board of Directors reviews the systems of
internal control and financial reporting. The Committee meets and consults
regularly with management, the internal auditors and the independent accountants
to review the scope and results of their work.
The accounting firm of KPMG LLP has performed an independent audit of the
Company's consolidated financial statements. Management has made available to
KPMG LLP all of the Company's financial records and related data, as well as the
minutes of shareholders' and directors' meetings. Furthermore, management
believes that all representations made to KPMG LLP during its audit were valid
and appropriate. The firm's report appears below.
Glen E. Roney R. T. Pigott, Jr.
Chairman of the Board, President Executive Vice President
& Chief Executive Officer & Chief Financial Officer
January 28, 2000
INDEPENDENT AUDITORS' REPORT
Board of Directors
Texas Regional Bancshares, Inc.
We have audited the accompanying consolidated balance sheets of Texas
Regional Bancshares, Inc. and subsidiaries (the "Company") as of December 31,
1999 and 1998, the related consolidated statements of income and comprehensive
income, changes in shareholders' equity and cash flows for each of the years in
the three-year period ended December 31, 1999. These consolidated financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these consolidated financial
statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of Texas
Regional Bancshares, Inc. and subsidiaries at December 31, 1999 and 1998, and
the results of their operations and their cash flows for each of the years in
the three-year period ended December 31, 1999 in conformity with generally
accepted accounting principles.
KPMG LLP
Houston, Texas
January 28, 2000
PAGE 29
<PAGE>
CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
TEXAS REGIONAL BANCSHARES, INC. AND SUBSIDIARIES DECEMBER 31,
CONSOLIDATED BALANCE SHEETS ---------------------------
(DOLLARS IN THOUSANDS, EXCEPT SHARE DATA) 1999 1998
- -----------------------------------------------------------------------------------------------------------
Assets
<S> <C> <C>
Cash and Due From Banks (Note 2) $ 66,819 $ 58,274
Time Deposits 5,077 553
Federal Funds Sold - 32,000
- -----------------------------------------------------------------------------------------------------------
Total Cash and Cash Equivalents 71,896 90,827
Securities Available for Sale, at Fair Value (Note 3) 525,938 455,936
Securities Held to Maturity, at Amortized Cost (Fair Value of
$8,071 in 1999 and $14,650 in 1998) (Note 3) 8,010 14,331
Loans, Net of Unearned Discount of $5,154 in 1999 and $4,886 in 1998 1,374,759 1,089,505
Less: Allowance for Loan Losses (16,711) (13,236)
- -----------------------------------------------------------------------------------------------------------
Net Loans (Note 4) 1,358,048 1,076,269
Premises and Equipment, Net (Note 5) 75,583 69,827
Accrued Interest Receivable 19,869 16,416
Other Real Estate 5,268 4,178
Goodwill and Identifiable Intangibles 44,796 26,894
Other Assets 11,282 7,654
- -----------------------------------------------------------------------------------------------------------
Total Assets $2,120,690 $1,762,332
===========================================================================================================
Liabilities
Deposits
Demand 285,866 $ 234,655
Savings 118,758 107,711
Money Market Checking and Savings 377,458 301,238
Time Deposits (Note 6) 1,103,264 919,338
- -----------------------------------------------------------------------------------------------------------
Total Deposits 1,885,346 1,562,942
Federal Funds Purchased and Securities Sold Under Repurchase
Agreements (Note 7) 34,608 7,407
Accounts Payable and Accrued Liabilities 12,548 14,709
- -----------------------------------------------------------------------------------------------------------
Total Liabilities 1,932,502 1,585,058
- -----------------------------------------------------------------------------------------------------------
Commitments and Contingencies (Notes 11, 12, 18 and 19)
Shareholders' Equity
Preferred Stock; $1.00 Par Value, 10,000,000 Shares Authorized;
None Issued and Outstanding (Note 9) - -
Common Stock - Class A; $1.00 Par Value, 50,000,000 Shares Authorized;
Issued and Outstanding 14,524,739 Shares in 1999 and 14,405,027 Shares
in 1998 (Note 10) 14,525 14,405
Paid-In Capital 88,834 87,396
Retained Earnings (Note 16) 98,277 74,864
Accumulated Other Comprehensive Income (Loss) (Note 3) (13,448) 609
- -----------------------------------------------------------------------------------------------------------
Total Shareholders' Equity 188,188 177,274
- -----------------------------------------------------------------------------------------------------------
Total Liabilities and Shareholders' Equity $2,120,690 $1,762,332
===========================================================================================================
The accompanying notes are an integral part of the consolidated financial
statements.
</TABLE>
PAGE 30
<PAGE>
<TABLE>
<CAPTION>
TEXAS REGIONAL BANCSHARES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME AND COMPREHENSIVE YEARS ENDED DECEMBER 31,
INCOME -------------------------------------
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA) 1999 1998 1997
- -----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Interest Income
Loans, Including Fees $113,382 $97,064 $85,905
Securities
Taxable 27,244 25,138 23,124
Tax-Exempt 2,101 1,542 1,507
Time Deposits 114 76 14
Federal Funds Sold 1,000 1,829 2,195
- -----------------------------------------------------------------------------------------------------------
Total Interest Income 143,841 125,649 112,745
- -----------------------------------------------------------------------------------------------------------
Interest Expense
Deposits 61,495 58,097 50,566
Federal Funds Purchased and Securities
Sold Under Repurchase Agreements 726 287 52
- -----------------------------------------------------------------------------------------------------------
Total Interest Expense 62,221 58,384 50,618
- -----------------------------------------------------------------------------------------------------------
Net Interest Income Before Provision for Loan Losses 81,620 67,265 62,127
Provision for Loan Losses (Note 4) 5,432 9,729 2,947
- -----------------------------------------------------------------------------------------------------------
Net Interest Income After Provision for Loan Losses 76,188 57,536 59,180
- -----------------------------------------------------------------------------------------------------------
Noninterest Income
Service Charges on Deposit Accounts 9,799 8,025 7,009
Other Service Charges 2,286 2,122 1,606
Trust Service Fees 1,965 1,770 1,691
Net Realized Gains on Sales of Securities
Available for Sale (Note 3) 1 2,910 734
Data Processing Service Fees 2,104 1,515 1,080
Other Noninterest Income 1,244 1,321 852
- -----------------------------------------------------------------------------------------------------------
Total Noninterest Income 17,399 17,663 12,972
- -----------------------------------------------------------------------------------------------------------
Noninterest Expense
Salaries and Employee Benefits (Note 11) 22,378 18,526 17,692
Net Occupancy Expense 3,767 3,631 2,687
Equipment Expense 5,127 4,599 3,778
Other Real Estate Expense, Net 332 307 105
Amortization of Goodwill and Identifiable Intangibles 3,180 2,660 2,252
Impairment Loss (Note 5) - - 630
One Time Charge - Acquisitions - 728 -
Other Noninterest Expense (Note 13) 11,104 10,651 10,026
- -----------------------------------------------------------------------------------------------------------
Total Noninterest Expense 45,888 41,102 37,170
- -----------------------------------------------------------------------------------------------------------
Income Before Income Tax Expense 47,699 34,097 34,982
Income Tax Expense (Note 8) 16,849 11,623 11,860
- -----------------------------------------------------------------------------------------------------------
Net Income 30,850 22,474 23,122
Other Comprehensive Income (Loss), Net of Tax
Net Unrealized Gains (Losses) on Securities Available for Sale
Net Unrealized Holding Gains (Losses) Arising During Period (14,056) 1,594 916
Less: Reclassification Adjustment for Net Realized Gains
Included in Net Income 1 1,892 477
- -----------------------------------------------------------------------------------------------------------
Total Other Comprehensive Income (Loss) (14,057) (298) 439
- -----------------------------------------------------------------------------------------------------------
Comprehensive Income $16,793 $22,176 $23,561
===========================================================================================================
Net Income Per Common Share (Note 14)
Basic $ 2.14 $ 1.56 $ 1.61
Diluted 2.11 1.54 1.58
===========================================================================================================
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
PAGE 31
<PAGE>
<TABLE>
<CAPTION>
ACCUMULATED
TEXAS REGIONAL BANCSHARES, INC. AND 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
- --------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Balance, December 31, 1996 $ 9,993 $86,430 $46,225 $ 468 $143,116
Net Income - - 23,122 - 23,122
Net Change in Unrealized Gains (Losses) on
Securities Available for Sale, Net of Tax
And Reclassification Adjustment - - - 439 439
- --------------------------------------------------------------------------------------------------------------------------
Total Comprehensive Income - - 23,122 439 23,561
- --------------------------------------------------------------------------------------------------------------------------
Exercise of Stock Options, 35,814 Shares of
Class A Common Stock 36 458 - - 494
Class A Common Stock Cash Dividends - $0.40 per
share - - (5,809) - (5,809)
Class A Common Stock 3 for 2 Split 4,367 - (4,371) - (4)
- --------------------------------------------------------------------------------------------------------------------------
Balance, December 31, 1997 14,396 86,888 59,167 907 161,358
Net Income - - 22,474 - 22,474
Net Change in Unrealized Gains (Losses) on
Securities Available for Sale, Net of Tax
And Reclassification Adjustment - - - (298) (298)
- --------------------------------------------------------------------------------------------------------------------------
Total Comprehensive Income - - 22,474 (298) 22,176
- --------------------------------------------------------------------------------------------------------------------------
Exercise of Stock Options, 8,099 Shares of
Class A Common Stock 9 64 - - 73
Tax Effect of Nonqualified Stock Options
Exercised - 444 - - 444
Class A Common Stock Cash Dividends - $0.47 per
share - - (6,769) - (6,769)
Cash Dividends Paid on Fractional Shares - - (8) - (8)
- --------------------------------------------------------------------------------------------------------------------------
Balance, December 31, 1998 14,405 87,396 74,864 609 177,274
Net Income - - 30,850 - 30,850
Net Change in Unrealized Gains (Losses) on
Securities Available for Sale, Net of Tax
And Reclassification Adjustment - - - (14,057) (14,057)
- --------------------------------------------------------------------------------------------------------------------------
Total Comprehensive Income - - 30,850 (14,057) 16,793
- --------------------------------------------------------------------------------------------------------------------------
Exercise of Stock Options, 119,743 Shares of
Class A Common Stock 120 846 - - 966
Tax Effect of Nonqualified Stock Options
Exercised - 592 - - 592
Class A Common Stock Cash Dividends - $0.515
per share - - (7,437) - (7,437)
- --------------------------------------------------------------------------------------------------------------------------
Balance, December 31, 1999 $14,525 $88,834 $98,277 $(13,448) $188,188
==========================================================================================================================
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
PAGE 32
<PAGE>
<TABLE>
<CAPTION>
TEXAS REGIONAL BANCSHARES, INC. AND SUBSIDIARIES YEAR ENDED DECEMBER 31,
CONSOLIDATED STATEMENTS OF CASH FLOWS -------------------------------------
(DOLLARS IN THOUSANDS) 1999 1998 1997
- ---------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Cash Flows from Operating Activities
Net Income $ 30,850 $ 22,474 $ 23,122
Adjustments to Reconcile Net Income to
Net Cash Provided by Operating Activities
Depreciation, Amortization and Accretion, Net 8,917 3,149 3,360
Provision for Loan Losses 5,432 9,729 2,947
Provision for Estimated Losses on Other Real Estate and Other Assets 549 49 70
Gain on Sale of Securities Available for Sale (1) (2,910) (734)
(Gain) Loss on Sale of Other Assets 76 57 (13)
Gain on Sale of Other Real Estate (171) (257) (113)
Gain on Sale of Premises and Equipment (41) (218) (2)
Impairment Loss -- -- 630
Change in Assets and Liabilities, Net of Effects from Merger
Decrease in Deferred Income Tax Asset 2,366 -- --
Decrease in Deferred Income Tax Liability (4,487) (571) (1,001)
(Increase) Decrease in Accrued Interest Receivable and Other Assets (3,300) 1,554 17,339
Increase (Decrease) in Accounts Payable and Accrued Liabilities 1,596 175 1,587
- ---------------------------------------------------------------------------------------------------------------------
Net Cash Provided by Operating Activities 41,786 33,231 47,192
- ---------------------------------------------------------------------------------------------------------------------
Cash Flows from Investing Activities
Proceeds from Sales of Securities Available for Sale 27,040 378,411 105,989
Proceeds from Maturing Securities Available for Sale 119,638 274,617 47,450
Purchases of Securities Available for Sale (188,575) (719,971) (269,458)
Proceeds from Maturing Securities Held to Maturity 6,300 37,306 91,003
Purchases of Securities Held to Maturity -- -- (19,453)
Proceeds from Sale of Loans 1,431 2,104 46
Purchases of Loans (4,020) (176) (1,051)
Loan Originations and Advances, Net (178,951) (127,627) (138,400)
Recoveries of Charged-Off Loans 605 1,066 759
Proceeds from Sale of Premises and Equipment 221 554 2
Purchases of Premises and Equipment (5,875) (19,410) (16,304)
Proceeds from Sale of Other Real Estate 1,212 1,355 1,019
Proceeds from Sale of Other Assets 675 716 277
Net Cash Provided By (Used in) Mergers (133) 5,160 --
- ---------------------------------------------------------------------------------------------------------------------
Net Cash Used in Investing Activities (220,432) (165,895) (198,121)
- ---------------------------------------------------------------------------------------------------------------------
Cash Flows from Financing Activities
Net Increase in Demand Deposits, Savings, Money Market
Checking and Savings Accounts 16,479 62,728 2,606
Net Increase in Time Deposits 122,274 80,973 144,542
Net Increase in Federal Funds Purchased
And Securities Sold Under Repurchase Agreements 27,201 4,782 1,169
Cash Dividends Paid on Class A Common Stock (7,205) (6,410) (5,242)
Cash Dividends Paid on Fractional Shares -- (8) --
Proceeds from the Exercise of Stock Options 966 73 494
- ---------------------------------------------------------------------------------------------------------------------
Net Cash Provided by Financing Activities 159,715 142,138 143,569
- ---------------------------------------------------------------------------------------------------------------------
Increase (Decrease) in Cash and Cash Equivalents (18,931) 9,474 (7,360)
Cash and Cash Equivalents at Beginning of Period 90,827 81,353 88,713
- ---------------------------------------------------------------------------------------------------------------------
Cash and Cash Equivalents at End of Period $ 71,896 $ 90,827 $ 81,353
=====================================================================================================================
</TABLE>
(Continued)
PAGE 33
<PAGE>
<TABLE>
<CAPTION>
TEXAS REGIONAL BANCSHARES, INC. AND SUBSIDIARIES YEAR ENDED DECEMBER 31,
CONSOLIDATED STATEMENTS OF CASH FLOWS --------------------------------
(DOLLARS IN THOUSANDS) 1999 1998 1997
- ---------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Supplemental Disclosures of Cash Flow Information
Interest Paid $ 61,321 $ 58,385 $ 49,747
Income Taxes Paid 18,270 12,003 12,660
Supplemental Schedule of Noncash Investing and Financing Activities
Foreclosure and Repossession in Partial Satisfaction of Loans Receivable 5,354 7,915 3,538
Financing Provided For Sales of Other Real Estate 2,577 4,088 --
Net Increase in Dividends Payable 232 359 567
The Company acquired Harlingen Bancshares, Inc. and its subsidiary, Harlingen
National Bank, on October 1, 1999. Assets acquired and liabilities assumed are
as follows:
Fair Value of Assets Acquired 204,627 -- --
Cash Paid 32,248 -- --
Liabilities Assumed 185,076 -- --
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 34
<PAGE>
TEXAS REGIONAL BANCSHARES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1999, 1998 AND 1997
NOTE 1: SUMMARY OF SIGNIFICANT ACCOUNTING PRINCIPLES
Texas Regional Bancshares, Inc. (the "Parent" or "Corporation") and
subsidiaries (collectively, the "Company") is headquartered in McAllen, Texas.
The Company provides a broad array of customary banking services and operates
twenty-six banking offices throughout the Rio Grande Valley at December 31,
1999. The accounting and reporting policies followed by the Company conform to
generally accepted accounting principles and to general practices within the
banking industry.
PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the accounts of Texas
Regional Bancshares, Inc. and its wholly owned subsidiaries, Texas Regional
Delaware, Inc. and Texas State Bank (the "Bank"). The Company eliminates all
significant intercompany transactions and balances in consolidation. The
Corporation accounts for investments in the subsidiaries on the equity method in
the Parent's financial statements.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosures of contingent assets and liabilities at the date of the consolidated
financial statements and the reported amounts of revenues and expenses during
the reporting period. Actual results could differ from these estimates.
TRUST ASSETS
Assets held by the trust department of the Bank in fiduciary or agency
capacities are not assets of the Company and are not included in the
consolidated balance sheets.
CASH AND CASH EQUIVALENTS
For purposes of the consolidated statements of cash flows, cash and cash
equivalents include cash on hand, amounts due from banks and investments with
original maturities of three months or less.
SECURITIES
Securities that management has both the positive intent and ability to
hold to maturity are classified as securities held to maturity and are carried
at cost, adjusted for amortization of premium or accretion of discount using the
interest method. Securities that may be sold prior to maturity for
asset/liability management purposes, or that may be sold in response to changes
in interest rates, to changes in prepayment risk, to increase regulatory capital
or other similar factors, are classified as securities available for sale and
carried at fair value with any adjustments to fair value reported in
shareholders' equity as a component of accumulated other comprehensive income
(loss), net of tax. Declines in the fair value of individual held to maturity
and available for sale securities below their cost that are other than temporary
result in write-downs of the individual securities to their fair value. The
related write-downs are included in earnings as realized losses. Securities
purchased for trading purchases are held on the trading portfolio at fair value,
with changes in fair value included in noninterest income.
Interest and dividends on securities, including the amortization of
premiums and the accretion of discounts, are reported in interest and dividends
on securities using the interest method. Gains and losses on the sale of
securities are recorded on the trade date and are calculated using the specific
identification method.
LOANS
Loans that management has the intent and ability to hold for the
foreseeable future or until maturity or pay-off generally are reported at their
outstanding unpaid principal balances adjusted for charge-offs, the allowance
for loan losses, and any deferred fees or costs on originated loans or
unamortized premiums or discounts on purchased loans. The Company recognizes
interest income on discounted loans on the sum-of-the-months-digits method,
which approximates the interest method. Interest income accrues on the unpaid
principal balance of other loans. Interest income includes discounts and
premiums amortized using the interest method. Loan origination fees, net of
certain direct origination costs, are deferred and recognized as an adjustment
of the yield (interest method).
PAGE 35
<PAGE>
NONACCRUAL LOANS
The Company discontinues the accrual of interest on loans at the time the
loan is 90 days delinquent unless the credit is well secured and in process of
collection. In all cases, loans must be placed on nonaccrual or charged-off at
an earlier date if collection of principal or interest is considered doubtful.
All interest accrued but not collected for loans that are placed on
nonaccrual or charged off is reversed against interest income. The interest on
these loans is accounted for on the cash basis or cost-recovery method, until
qualifying for a return to accrual status. Loans are returned to accrual status
when all the principal and interest amounts contractually due are reasonably
assured of repayment within a reasonable period and when the borrower has
demonstrated payment performance history.
ALLOWANCE FOR LOAN LOSSES
The Company has established the allowance for loan losses through
provisions for loan losses charged against income. The Company charges off
portions of loans deemed uncollectible against the allowance for loan losses,
and credits subsequent recoveries, if any, to the allowance.
The allowance for loan losses related to impaired loans that are
identified for evaluation is based on discounted cash flows using the loan's
initial effective interest rate, or for collateral-dependent loans, the fair
value, less selling costs, of the collateral. By the time a loan becomes
probable of foreclosure, the Company charges it down to fair value, less
estimated cost to sell.
Management's periodic evaluation of the adequacy of the allowance is based
on the Company's past loan loss experience, known and inherent risks in the
portfolio, adverse situations that may affect the borrower's ability to repay
(including the timing of future payments), the estimated value of any underlying
collateral, composition of the loan portfolio, and current economic conditions.
This evaluation is inherently subjective, as it requires material estimates that
are susceptible to significant change including the amounts and timing of future
cash flows expected to be received on impaired loans.
Management believes that the allowance for loan losses at December 31,
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 judgements of information
available to them at the time of their examination.
FORECLOSED ASSETS
Foreclosed assets, which includes other foreclosed assets included in
other assets, include properties acquired through foreclosure in full or partial
satisfaction of the related loan.
The Company records foreclosed assets initially at the lower of fair
value, net of estimated selling costs, or cost, at the date of foreclosure.
After foreclosure, the Company carries the assets at the lower of (1) cost or
(2) fair value, less estimated costs to sell, based on valuations periodically
performed by management. Revenue and expenses from operations and changes in the
valuation allowance are included in noninterest expense.
INCOME TAXES
Deferred income tax assets and liabilities are determined using the asset
and liability (or balance sheet) method. Under this method, the net deferred tax
asset or liability is determined based on the tax effects of the differences
between the book and tax basis of the various balance sheet assets and
liabilities and gives current recognition to changes in tax rates and laws. The
Company files a consolidated federal income tax return with its subsidiaries.
PREMISES AND EQUIPMENT
Premises and equipment are stated at cost, net of accumulated depreciation
and amortization. Depreciable assets are depreciated over their estimated useful
lives. For financial reporting, depreciation is computed using the straight-line
method; in computing federal income tax, both the straight-line and accelerated
methods are used. Maintenance and repairs which do not extend the life of
premises and equipment are charged to noninterest expense.
GOODWILL AND IDENTIFIABLE INTANGIBLES
Goodwill represents the excess of the purchase price over the estimated
fair value of identifiable net assets associated with acquisition transactions.
The Company amortizes goodwill on a straight-line basis over 15 years and
identifiable intangibles on a straight-line basis over their estimated periods
of benefit.
The Company reviews its intangible assets periodically for
other-than-temporary impairment. If such impairment is indicated, recoverability
of the asset is assessed based on expected undiscounted net cash flows.
PAGE 36
<PAGE>
STOCK OPTION PLAN
Prior to January 1, 1996, the Company accounted for its stock compensation
programs in accordance with the provisions of Accounting Principles Board
("APB") Opinion No. 25, "Accounting for Stock Issued to Employees," and related
interpretations. As such, compensation expense would be recorded on the date of
grant only if the current market price of the underlying stock exceeded the
exercise price. On January 1, 1996, the Company adopted the Financial Accounting
Standards Board issued Statement of Financial Accounting Standards No. 123,
("Statement 123") "Accounting for Stock-Based Compensation," which permits
entities to recognize as expense over the vesting period the fair value of all
stock-based awards on the date of grant. Alternatively, Statement 123 also
allows entities to continue to apply the provisions of APB Opinion No. 25 and
provide pro forma net income and pro forma earnings per share disclosures for
employee stock option grants made in 1995 and future years as if the
fair-value-based method defined in Statement 123 had been applied. The Company
has elected to continue to apply the provisions of APB Opinion No. 25 and
provide the pro forma disclosure provisions of Statement 123.
EARNINGS PER COMMON SHARE COMPUTATIONS
In February 1997, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards No. 128, ("Statement 128") "Earnings
per Share." Statement 128 specifies the computation, presentation, and
disclosure requirements for earnings per share (EPS) for entities with publicly
held common stock or potential common stock. Statement 128 replaces primary EPS
and fully diluted EPS on the face of the income statement for all entities with
complex capital structures and requires a reconciliation of the basic EPS
computation to the diluted EPS. Basic EPS is calculated by dividing net income
available to common shareholders, by the weighted average number of common
shares outstanding. The computation of diluted EPS assumes the issuance of
common shares for all dilutive potential common shares outstanding during the
reporting period. The dilutive effect of stock options are considered in
earnings per share calculations if dilutive, using the treasury stock method.
Statement 128 is effective for financial statements issued for periods ending
after December 15, 1997, including interim periods. The Company adopted
Statement 128 in 1997.
IMPAIRMENT OF LONG-LIVED ASSETS
Long-lived assets and certain identifiable intangibles are reviewed by the
Company for impairment whenever events or changes indicate that the carrying
amount of an asset may not be recoverable.
DISCLOSURES ABOUT SEGMENTS OF AN ENTERPRISE AND RELATED INFORMATION
In June 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 131, ("Statement 131") "Disclosures about
Segments of an Enterprise and Related Information." Statement 131 establishes
standards for the way that public business enterprises report information about
operation segments in annual financial statements and requires that those
enterprises report selected information about operation segments in interim
financial reports issued to shareholders. Statement 131 also establishes
standards for related disclosures about products and services, geographic areas,
and major customers. Statement 131 is effective for financial statements for
periods beginning after December 15, 1997. The Company did not identify any
reportable operating segments based on the requirements of Statement 131.
ACCOUNTING FOR DERIVATIVE INSTRUMENTS AND FOR HEDGING ACTIVITIES
The Financial Accounting Standards Board's Statement No. 133 ("Statement
133"), "Accounting for Derivative Instruments and for Hedging Activities," was
issued in June 1998. Statement 133 requires companies to recognize all
derivatives as either assets or liabilities in the statement of financial
condition and measure those instruments at fair value. Statement 133 requires
that changes in fair value of a derivative be recognized currently in earnings
unless specific hedge accounting criteria are met. The Financial Accounting
Standards Board's Statement No. 137 ("Statement 137"), "Accounting for
Derivative Instruments and Hedging Activities-Deferral of the Effective Date of
FASB Statement No. 133", deferred the effective date of Statement 133 to fiscal
years beginning after June 15, 2000. The Company will adopt Statement 133 on
January 1, 2001 and is evaluating the impact, if any, this statement may have on
its future consolidated financial statements.
RECLASSIFICATION
Certain amounts in the prior year's presentation have been reclassified to
conform to the current presentation. These reclassifications have no effect on
previously reported net income.
NOTE 2: CASH AND DUE FROM BANKS
The Federal Reserve Bank requires the Bank to maintain average reserve
balances for certain deposit balances. There were no required reserves as of
December 31, 1999 and 1998.
PAGE 37
<PAGE>
NOTE 3: SECURITIES
An analysis of securities available for sale as of December 31, 1999
follows:
<TABLE>
<CAPTION>
GROSS GROSS ESTIMATED
AMORTIZED UNREALIZED UNREALIZED FAIR
(DOLLARS IN THOUSANDS) COST GAINS LOSSES VALUE
- --------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
U.S. Treasury $ 2,999 $ 5 $ -- $ 3,004
U.S. Government Agency 359,558 18 (14,975) 344,601
Mortgage-Backed 131,699 5 (4,073) 127,631
States and Political Subdivisions 48,198 164 (1,992) 46,370
Other 4,332 -- -- 4,332
- --------------------------------------------------------------------------------------------------
Total $546,786 $ 192 $(21,040) $525,938
==================================================================================================
</TABLE>
The carrying amount and estimated fair value of securities held to
maturity as of December 31, 1999 follow:
<TABLE>
<CAPTION>
GROSS GROSS ESTIMATED
AMORTIZED UNREALIZED UNREALIZED FAIR
(DOLLARS IN THOUSANDS) COST GAINS LOSSES VALUE
- --------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
U.S. Treasury $5,001 $ 17 -- $5,018
States and Political Subdivisions 3,009 50 (6) 3,053
- --------------------------------------------------------------------------------------------------
Total $8,010 $ 67 $ (6) $8,071
==================================================================================================
</TABLE>
An analysis of securities available for sale as of December 31, 1998
follows:
<TABLE>
<CAPTION>
GROSS GROSS ESTIMATED
AMORTIZED UNREALIZED UNREALIZED FAIR
(DOLLARS IN THOUSANDS) COST GAINS LOSSES VALUE
- --------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
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
==================================================================================================
</TABLE>
The carrying amount and estimated fair value of securities held to
maturity as of December 31, 1998 follow:
<TABLE>
<CAPTION>
GROSS GROSS ESTIMATED
AMORTIZED UNREALIZED UNREALIZED FAIR
(DOLLARS IN THOUSANDS) COST GAINS LOSSES VALUE
- --------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
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
$(13.4) million and $609,000 at December 31, 1999 and 1998, respectively, on
securities available for sale are reported as a separate component of
shareholders' equity as accumulated other comprehensive income.
Proceeds from the sale of securities available for sale portfolio totaled
$27.0 million, $378.4 million and $106.0 million in 1999, 1998, and 1997. Gross
realized gains and gross realized losses on sales of securities available for
sale were $3,000 and $2,000, respectively, in 1999, $3.0 million and $93,000,
respectively, in 1998 and $781,000 and $47,000 respectively, in 1997. There were
no sales of securities held to maturity in 1999, 1998 or 1997.
The scheduled maturities of securities available for sale and securities
held to maturity at December 31, 1999 follow. The remaining contractual
maturities for mortgage-backed securities were allocated assuming no
prepayments. Actual maturities will differ from contractual maturities because
borrowers may have the right to call or prepay obligations with or without call
or prepayment penalties.
PAGE 38
<PAGE>
<TABLE>
<CAPTION>
SECURITIES AVAILABLE SECURITIES HELD
FOR SALE TO MATURITY
------------------------------------------------------------
ESTIMATED ESTIMATED
MATURITY IN YEARS AMORTIZED MARKET AMORTIZED MARKET
(DOLLARS IN THOUSANDS) COST VALUE COST VALUE
- --------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
1 Year or Less $ 8,192 $ 8,187 $5,533 $5,538
1 to 5 Years 206,042 202,374 1,737 1,771
5 to 10 Years 211,751 199,121 740 762
Over 10 Years 120,801 116,256 - -
- -------------------------------------------------------------------------------------------
Total $546,786 $525,938 $8,010 $8,071
===========================================================================================
</TABLE>
Securities with carrying values of $516.8 million at December 31, 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.
NOTE 4: LOANS AND ALLOWANCE FOR LOAN LOSSES
Loans consisted of the following:
DECEMBER 31,
-------------------------
(DOLLARS IN THOUSANDS) 1999 1998
- -------------------------------------------------------------------------
Commercial $ 391,855 $ 311,966
Commercial Tax-Exempt 22,160 22,155
- -------------------------------------------------------------------------
Total Commercial Loans 414,015 334,121
Agricultural 59,437 52,302
- -------------------------------------------------------------------------
Real Estate
Construction 101,376 66,018
Commercial Mortgage 456,507 354,134
Agricultural Mortgage 38,256 34,440
1-4 Family Mortgage 160,786 128,945
- -------------------------------------------------------------------------
Total Real Estate 756,925 583,537
Consumer 144,382 119,545
- -------------------------------------------------------------------------
Total Loans $1,374,759 $1,089,505
=========================================================================
In the ordinary course of business, the Company's subsidiary bank makes
loans to its officers and directors, including entities related to those
individuals. These loans are made on substantially the same terms and conditions
as those prevailing at the time for comparable transactions with other persons
and do not involve more than the normal risk of collectibility or present other
unfavorable features. As of December 31, 1999 and 1998, loans outstanding to
directors, officers and their affiliates were approximately $6.4 million and
$5.8 million, respectively.
The activity in the allowance for loan losses follows:
<TABLE>
<CAPTION>
DECEMBER 31,
------------------------------------------
(DOLLARS IN THOUSANDS) 1999 1998 1997
- --------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Balance at Beginning of Year $ 13,236 $ 11,291 $ 10,806
Balance from Acquisitions 1,576 308 --
Provision for Loan Losses 5,432 9,729 2,947
Loans Charged Off (4,138) (9,158) (3,221)
Recoveries of Loans Previously Charged Off 605 1,066 759
- --------------------------------------------------------------------------------------------
Balance at End of Year $ 16,711 $ 13,236 $ 11,291
============================================================================================
</TABLE>
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 $8.3 million
at December 31, 1999 and $10.4 million at December 31, 1998. The total allowance
for loan losses related to these loans was $1.6 million and $1.4 million on
December 31, 1999 and 1998, respectively. At December 31, 1999 and 1998, the
Company had $112,000 and $35,000, respectively, in impaired loans for which
there was no related allowance for loan losses. The average recorded investment
in impaired loans during 1999 and 1998 was $7.6 million and $11.2 million,
respectively. Interest income on impaired loans of $156,000, $232,000 and
$238,000 was recognized for cash payments received during 1999, 1998 and 1997,
respectively. If interest on these impaired loans had been
PAGE 39
<PAGE>
accrued at the original contractual rates, interest income would have been
increased by approximately $1.9 million, $2.2 million and $1.6 million for the
years ended December 31, 1999, 1998 and 1997, respectively.
NOTE 5: PREMISES AND EQUIPMENT
A summary of premises and equipment and related accumulated depreciation
and amortization follows:
<TABLE>
<CAPTION>
DECEMBER 31,
ESTIMATED --------------------
(DOLLARS IN THOUSANDS) USEFUL LIVES 1999 1998
- ----------------------------------------------------------------------------------------------
<S> <C> <C>
Land $11,567 $10,373
Buildings and Leasehold Improvements 2-40 Years 61,559 56,569
Construction in Progress 1,327 168
Furniture and Equipment 3-10 Years 25,142 22,896
- ----------------------------------------------------------------------------------------------
Subtotal 99,595 90,006
Less: Accumulated Depreciation and Amortization (24,012) (20,179)
- ----------------------------------------------------------------------------------------------
Total $75,583 $69,827
==============================================================================================
</TABLE>
Depreciation and amortization expense for the years ended December 31,
1999, 1998 and 1997 was approximately $5.3 million, $4.4 million and $3.4
million, respectively.
The Company recorded an impairment loss of $630,000 during the three
months ended June 30, 1997 to reflect the impairment of an existing bank
building. During 1998, construction of a new corporate headquarters building in
McAllen, Texas was completed adjacent to this site and the existing building was
razed to provide additional parking. The amount of the impairment loss was the
book value of the building at June 30, 1997.
NOTE 6: TIME DEPOSITS
Time deposits of $100,000 or more totaled $687.4 million and $545.7
million at December 31, 1999 and 1998, respectively. Interest expense for the
years ended December 31, 1999, 1998 and 1997 on time deposits of $100,000 or
more was approximately $32.4 million, $28.7 million and $23.3 million,
respectively.
The maturities of time deposits as of December 31, 1999 follows:
(DOLLARS IN THOUSANDS)
- ------------------------------------------------------
1 Year or Less $ 956,734
1 to 2 Years 117,828
2 to 3 Years 15,976
3 to 4 Years 7,779
4 to 5 Years 4,862
After 5 Years 85
- ------------------------------------------------------
Total $1,103,264
======================================================
PAGE 40
<PAGE>
NOTE 7: FEDERAL FUNDS PURCHASED AND SECURITIES SOLD UNDER REPURCHASE AGREEMENTS
The following table summarizes selected information regarding federal
funds purchased and securities sold under repurchase agreements:
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------------------------
(DOLLARS IN THOUSANDS) 1999 1998 1997
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
Balance at End of Year $34,608 $7,407 $1,801
Rate on Balance at End of Year 5.45% 4.52% 5.98%
Average Daily Balance $15,377 $5,772 $980
Average Interest Rate 4.72% 4.97% 5.27%
Maximum Month-End Balance $46,162 $14,835 $11,100
================================================================================
</TABLE>
Securities sold under agreements to repurchase are comprised of customer
deposit agreements with maturities ranging from overnight to six months. These
obligations are not federally insured but are collateralized by a security
interest in various securities. These pledged securities are segregated and
maintained by a third party bank.
NOTE 8: INCOME TAX
The components of income tax expense consisted of the following:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
------------------------------------------
(DOLLARS IN THOUSANDS) 1999 1998 1997
- ----------------------------------------------------------------------------------------
Current Income Tax Expense
<S> <C> <C> <C>
Federal $ 18,314 $ 12,091 $ 12,559
State 656 107 320
- ----------------------------------------------------------------------------------------
Total Current Income Tax Expense 18,970 12,198 12,879
- ----------------------------------------------------------------------------------------
Deferred Income Tax Benefit
Federal (2,047) (572) (999)
State (74) (3) (20)
- ----------------------------------------------------------------------------------------
Total Deferred Income Tax Benefit (2,121) (575) (1,019)
- ----------------------------------------------------------------------------------------
Total Income Tax Expense $ 16,849 $ 11,623 $ 11,860
========================================================================================
</TABLE>
Following is a reconciliation between the amount of reported income tax
expense and the amount computed by multiplying the income before tax by the
federal statutory tax rate:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
------------------------------------------------------------
1999 1998 1997
----------------- ----------------- -------------------
(DOLLARS IN THOUSANDS) AMOUNT RATE AMOUNT RATE AMOUNT RATE
- ------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Tax at Statutory Rate $16,695 35% $11,934 35% $12,244 35%
Additions (Reductions)
Tax-Exempt Interest (898) (2) (828) (2) (860) (3)
State Earned Surplus Tax, Net of
Federal Income Tax Effect 378 1 67 - 221 1
Goodwill Amoritzation 486 1 404 1 344 1
Change in Anticipated State Income
Tax Rate 135 - - - - -
Other, Net 53 - 46 - (89) -
- ------------------------------------------------------------------------------------------------------
Total Income Tax Expense $16,849 35% $11,623 34% $11,860 34%
======================================================================================================
</TABLE>
PAGE 41
<PAGE>
The net deferred tax asset (liability) included in the accompanying
consolidated balance sheets is comprised of the following deferred tax assets
and liabilities.
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------------
(DOLLARS IN THOUSANDS) 1999 1998
- -----------------------------------------------------------------------------------------
<S> <C> <C>
Deferred Tax Liability
Premises and Equipment $ 5,627 $ 5,039
Identifiable Intangibles 5,473 3,170
Loan Origination Costs 626 571
Other Real Estate 252 --
Unrealized Gain on Securities Available for Sale -- 335
Other 180 208
- -----------------------------------------------------------------------------------------
Total Deferred Tax Liability 12,158 9,323
- -----------------------------------------------------------------------------------------
Deferred Tax Asset
Unrealized Loss on Securities Available for Sale 7,402 --
Allowance for Loan Losses 5,491 3,868
Deferred Compensation 504 462
State Income Taxes 241 38
Other Foreclosed Assets 194 1
Loans 425 61
Other Real Estate -- 28
Other 148 78
- -----------------------------------------------------------------------------------------
Total Deferred Tax Asset Before Valuation Allowance 14,405 4,536
Valuation Allowance (36) (35)
- -----------------------------------------------------------------------------------------
Net Deferred Tax Asset (Liability) $ 2,211 $ (4,822)
=========================================================================================
</TABLE>
For the years ended December 31, 1999 and December 31, 1998, the deferred
tax liability results primarily from the use of accelerated methods of
depreciation of equipment for tax purposes and the amortization of core deposits
for financial statement purposes. The deferred tax asset results from
differences in the bad debts written-off for financial statement purposes and
the amount allowed under tax law for both years ended December 31, 1999 and
1998. For 1999, the deferred tax asset also includes the net unrealized gain
(loss) on securities available for sale.
Based upon the level of historical taxable income and projections for
future taxable income over the periods which the deferred tax assets are
deductible, management believes it is more likely than not the Company will
realize the benefits of these deductible differences, net of the existing
valuation allowances at December 31, 1999. The Company's conclusion that it is
"more likely than not" that the deferred tax assets will be realized is based on
federal taxable income of $67.4 million in the carry back period, as well as a
history of growth in earnings and the prospects for continued growth. The amount
of the deferred tax asset considered realizable, however, could be reduced in
the near term if estimates of future taxable income during the carryforward
period are reduced.
NOTE 9: PREFERRED STOCK
The Corporation has 10.0 million authorized shares of $1 par value
preferred stock. The articles of incorporation of the Corporation grant
discretion to the Board of Directors to establish series of preferred stock with
such rights, preferences and limitations as may be determined by resolution of
the Board. No shares of preferred stock are currently outstanding.
NOTE 10: COMMON STOCK
The Corporation has 50.0 million authorized shares of $1 par value common
stock. At December 31, 1999, 1998 and 1997, the number of common shares
outstanding are 14,524,739, 14,405,027 and 14,396,928, respectively.
NOTE 11: EMPLOYEE BENEFITS
The Company has an Employee Stock Ownership Plan (with section 401(k)
provisions) (the "KSOP") covering substantially all of their employees. Employer
contributions to the KSOP are discretionary, and as such, determined at the sole
discretion of the Board of Directors. The KSOP covers employees who have
completed twelve consecutive months of credited service, as defined in the plan,
and attained age 21. A participant's account balance will be fully vested after
six years of credited service. Contribution expense, which includes employer
matching for the years ended December 31, 1999, 1998 and 1997 was $962,000,
$469,000 and $652,000, respectively.
The Company acquired existing 401(k) plans in connection with its
acquisitions of the Bank of Texas and Harlingen Bancshares, Inc. The plans are
restricted to pre-acquisition participation by qualified employees.
PAGE 42
<PAGE>
The Company has granted stock options providing for the purchase of Class
A Common shares by certain key employees under five separate option plans
approved by the shareholders. The following discussion concerning stock option
plans has been restated to retroactively give effect for the three-for-two stock
split declared and distributed by the Corporation during the third quarter of
1997.
The 1985 Nonstatutory Stock Option Plan ("the 1985 NSO Plan") authorized
the award of stock options for 190,076 shares to the chief executive officer at
a price determined by a committee of directors on the grant date. Options to
acquire 90,076 shares at a weighted average exercise price of $8.00 per share
were outstanding and exercisable under 1985 NSO Plan expiring on May 10, 2000 at
December 31, 1999.
The 1985 Incentive Stock Option Plan ("the 1985 ISO Plan") provided for
the grant of options for 190,076 shares at an exercise price of fair market
value on the grant date to certain key employees of the Company. Options to
acquire 3,822 shares at a weighted average exercise price of $8.00 per share
were outstanding and exercisable under 1985 ISO Plan expiring on May 10, 2000 at
December 31, 1999.
The 1995 Nonstatutory Stock Option Plan ("the 1995 NSO Plan") authorized
the award of options up to an aggregate maximum of 135,000 shares at an exercise
price of fair market value on the grant date. The Company granted options in
1996 with contractual terms of seven years and a vesting period of four years.
Options to acquire 120,875 shares at a weighted average exercise price of $11.50
per share were outstanding and exercisable, under 1995 NSO Plan expiring on July
1, 2002 at December 31, 1999.
The 1997 Nonstatutory Stock Option Plan ("the 1997 NSO Plan") authorized
the award of options up to an aggregate maximum of 125,000 shares at an exercise
price of fair market value on the grant date. The Company granted options in
1998 with contractual terms of approximately five years and a vesting period of
approximately three years. Options to acquire 125,000 shares at a weighted
average exercise price of $33.56 per share were outstanding, with 60,988
exercisable, under the 1997 NSO Plan expiring on July 1, 2003 at December 31,
1999.
The 1997 Incentive Stock Option Plan ("the 1997 ISO Plan") authorized the
award of options up to an aggregate maximum of 100,000 shares at an exercise
price of fair market value on the grant date. The Company granted options in
1998 with contractual terms of approximately five years and a vesting period of
approximately three years. Options to acquire 92,864 shares at a weighted
average exercise price of $33.68 per share were outstanding, with 45,694
exercisable, under the 1997 ISO Plan expiring on July 1, 2003 at December 31,
1999.
The Company applies APB Opinion 25 and related interpretations in
accounting for its plans. Accordingly, no compensation cost has been recognized
for its fixed stock option plans. Had compensation cost for the Company's
stock-based compensation plans been determined based on the fair value at the
grant dates for awards under those plans consistent with the method of FASB
Statement 123 adopted in 1995, the Company's net income and earnings per share
would have been reduced to the pro forma amounts indicated below:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
------------------------------------
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA) 1999 1998 1997
- ---------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Net Income As Reported $ 30,850 $ 22,474 23,122
Pro Forma 30,490 21,917 23,036
- ---------------------------------------------------------------------------------------
Basic Earnings Per Share As Reported 2.14 1.56 1.61
Pro Forma 2.12 1.52 1.60
- ---------------------------------------------------------------------------------------
Diluted Earnings Per Share As Reported 2.11 1.54 1.58
Pro Forma 2.08 1.50 1.58
=======================================================================================
</TABLE>
The fair value of options at date of grant was estimated using the
Black-Scholes option pricing model with the following weighted-average
assumptions:
DECEMBER 31,
---------------------------
1999 1998 1997
- -------------------------------------------------------------
Expected Life in Years - 3.46 -
Interest Rate - 5.52% -
Volatility - 30.00 -
Dividend Yield - 1.49 -
- -------------------------------------------------------------
No options were granted during the years ended December 31, 1999 and 1997.
Pro forma net income reflects options granted in 1998 and 1995.
PAGE 43
<PAGE>
A summary of the status of the Company's five fixed option plans as of
December 31, 1999, 1998 and 1997, and changes during the years ending on those
dates is presented below:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
---------------------------------------------------------------------------------
1999 1998 1997
---------------------------------------------------------------------------------
WEIGHTED WEIGHTED WEIGHTED
SHARES AVERAGE SHARES AVERAGE SHARES AVERAGE
UNDERLYING EXERCISE UNDERLYING EXERCISE UNDERLYING EXERCISE
FIXED OPTIONS OPTIONS PRICE OPTIONS PRICE OPTIONS PRICE
- ---------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Outstanding at Beginning of Year 557,516 $19.07 343,927 $ 9.29 391,324 $9.21
Granted -- -- 234,000 33.63 -- --
Exercised (119,743) 8.07 (8,099) 9.05 (47,397) 8.58
Forfeited (5,136) 33.88 (12,312) 31.49 -- --
- ---------------------------------------------------------------------------------------------------------------------------------
Outstanding at End of Year 432,637 $21.88 557,516 $19.07 343,927 $9.29
- ---------------------------------------------------------------------------------------------------------------------------------
Options Exercisable at End of Year 321,455 $17.86 356,079 $12.82 276,428 $8.75
Options Available for Grant at End of Year 8,448 3,312 --
Weighted Average Fair Value of Options
Granted During the Year -- $ 8.71 --
- ---------------------------------------------------------------------------------------------------------------------------------
</TABLE>
The following table summarizes information about fixed stock options outstanding
at December 31, 1999.
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
----------------------------------------- ---------------------------
WEIGHTED WEIGHTED EXERCISABLE WEIGHTED
SHARES AVERAGE AVERAGE SHARES AVERAGE
UNDERLYING REMAINING EXERCISE UNDERLYING EXERCISE
RANGE OF EXERCISE PRICES OPTIONS LIFE (YEARS) PRICE OPTIONS PRICE
- -----------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
$ 8.00 93,898 0.4 $8.00 93,898 $8.00
11.50 120,875 2.5 11.50 120,875 11.50
27.38 9,000 3.5 27.38 2,250 27.38
33.88 208,864 3.5 33.88 104,432 33.88
- -----------------------------------------------------------------------------------------------------
$8.00 to $33.88 432,637 2.5 $21.88 321,455 $17.86
=====================================================================================================
</TABLE>
Effective as of December 14, 1993, the Company adopted a Deferred
Compensation Plan for the benefit of Glen E. Roney, Chief Executive Officer of
the Company. The Deferred Compensation Plan provides for a retirement benefit
payable to Mr. Roney (or his designated beneficiary or his estate if Mr. Roney
dies prior to payment of the full amount of deferred compensation) of $100,000
per year commencing October 29, 2002, and continuing annually thereafter for
fourteen years. In the event payments are to commence after October 30, 2002,
the Company shall pay to Employee on the Late Retirement Date a lump sum equal
to the amount of money that would have been paid to Employee had payments
commenced on October 30, 2002 (the "Catch-Up Amount"), and in addition, the
Company shall pay to Employee $100,000 per year commencing on October 30 of the
year next following the Late Retirement Date and continuing regularly on the
same calendar day of each year thereafter, (including the Catch-Up Amount and
all other payments) the aggregate sum of $1,500,000; and on the Late Retirement
Date, the Company shall pay Employee an amount intended to compensate for
Employee's lost earnings potential on the Catch-Up Amount. If Mr. Roney dies
prior to commencement of the retirement benefit, payments would commence
immediately and be paid to his designated beneficiary or his estate. The Company
also adopted the Trust Under Glen E. Roney Deferred Compensation Plan, in the
form prescribed by applicable regulations adopted by the Internal Revenue
Service for nonqualified deferred compensation plans. Among other things, the
Plan and Trust provide for an initial deposit into the Trust by the Company and
subsequent deposits at the discretion of the Board of Directors, and further
provide for full funding of the amount necessary to discharge the retirement
benefit in the event of a change of control, as that term is defined in the
Trust.
With the consummation of the Mergers the Company acquired four existing
separate deferred compensation plans for the benefit of certain Texas State Bank
employees. The plans provide for retirement benefits to be paid to the specific
employee (or a designated beneficiary or estate if death occurs prior to payment
of the full amount of deferred compensation) on reaching age 65. One plan
entered into on December 10, 1963, commenced payments of approximately $13,000
each year on January 4, 1988, continuing annually thereafter through June 2003.
A second plan, entered into on September 1, 1979, provides for payments of
approximately $13,000 each year which was scheduled to commence on April 1,
1990, continuing annually thereafter through June 2005; however, the employee
elected to receive an amount less than that provided for in the plan over a
longer period of time. The third plan provides for a retirement benefit payable
of $50,000 per year commencing in March 1999 and continuing annually thereafter
for 20 years. The fourth plan provides for a retirement benefit payable of
$13,350 each year beginning March 15, 1995 and continuing annually thereafter
for fourteen years.
The Company has incurred deferred compensation expense of $152,000,
$152,000 and $130,000 for the years ended December 31, 1999, 1998 and 1997,
respectively, related to the five deferred compensation plans previously
discussed.
PAGE 44
<PAGE>
The Bank owns and is the beneficiary of five life insurance policies on
the former employees covered by the deferred compensation plans. The life
insurance policies' face values are amounts equal to the total benefits paid
under the plans.
NOTE 12: COMMITMENTS AND CONTINGENCIES
In the normal course of business, the Company enters into various
transactions which, in accordance with generally accepted accounting principles,
are not included on the consolidated balance sheets. These transactions are
referred to as "off-balance sheet commitments." The Company enters into these
transactions to meet the financing needs of its customers. These transactions
include commitments to extend credit and letters of credit which involve
elements of credit risk in excess of the amounts recognized in the consolidated
balance sheets. The Company's exposure to credit loss in the event of
nonperformance by the other party to these financial instruments is represented
by the contractual notional amount of those instruments. The Company attempts to
minimize its exposure to loss under these commitments by subjecting them to the
same credit approval and monitoring procedures as its other credit facilities.
The Company enters into contractual commitments to extend credit, normally
with fixed expiration dates or termination clauses, at specified rates and for
specific purposes. Customers use credit commitments to ensure that funds will be
available for working capital purposes, for capital expenditures and to ensure
access to funds at specified terms and conditions. Substantially all of the
Company's commitments to extend credit are contingent on customers maintaining
specific credit standards at the time of loan funding. Management assesses the
credit risk associated with certain commitments to extend credit in determining
the level of the allowance for possible loan losses.
Letters of credit are written for conditional commitments issued by the
Company to guarantee the performance of a customer to a third party. The
Company's policies generally require that letters of credit arrangements contain
security and debt covenants similar to those contained in loan agreements.
At December 31, 1999, the Company had outstanding commitments to extend
credit of approximately $193.4 million and standby letters of credit of
approximately $17.2 million.
The Company was obligated under noncancelable leases for premises and
equipment with terms, including renewal options, ranging from one to twenty
years. Minimum future lease payments on operating leases, with terms of one year
or more, as of December 31, 1999 are as follows:
OFFICE
(DOLLARS IN THOUSANDS) SPACE EQUIPMENT TOTAL
- ------------------------------------------------------------------------
2000 $36 $ 56 $ 92
2001 36 12 48
2002 27 9 36
2003 - 7 7
2004 - 4 4
Thereafter - 18 18
- ------------------------------------------------------------------------
Total Minimum Lease Payments $99 $106 $205
========================================================================
In the normal course of business, the Company also leases space in
buildings it owns. Minimum future rentals from buildings owned as of December
31, 1999 are as follows:
(DOLLARS IN THOUSANDS) TOTAL
- -----------------------------------------------------------
2000 $1,005
2001 934
2002 698
2003 553
2004 297
Thereafter 73
- -----------------------------------------------------------
Total Minimum Future Rentals $3,560
===========================================================
The Company is a defendant in various legal proceedings arising in
connection with its ordinary course of business. In the opinion of management,
the financial position of the Company will not be materially affected by the
final outcome of these legal proceedings.
PAGE 45
<PAGE>
NOTE 13: OTHER NONINTEREST EXPENSE
Other noninterest expense consisted of the following:
YEAR ENDED DECEMBER 31,
----------------------------------
(DOLLARS IN THOUSANDS) 1999 1998 1997
- -----------------------------------------------------------------------------
Advertising and Public Relations $1,495 $1,536 $1,372
Data Processing and Check Clearing 1,480 1,183 1,120
Directors Fees 344 333 515
Franchise Tax 334 600 533
Insurance 400 430 327
FDIC Insurance 191 166 150
Legal 663 1,255 1,050
Professional 1,136 638 775
Postage, Delivery and Freight 916 816 689
Printing, Stationery and Supplies 1,447 1,325 1,056
Telephone 628 534 433
Other Losses 759 68 837
Miscellaneous Expense 1,311 1,767 1,169
- -----------------------------------------------------------------------------
Total $11,104 $10,651 $10,026
- -----------------------------------------------------------------------------
NOTE 14: EARNINGS PER COMMON SHARE COMPUTATIONS
Basic earnings per share was computed by dividing net income available to
common shareholders by the weighted average number of common stock outstanding
during the year, retroactively adjusted for stock splits effected as a stock
dividend.
Diluted earnings per share was computed by dividing net income by the
weighted average number of common stock and common stock equivalents outstanding
during the year, retroactively adjusted for stock splits effected as a stock
dividend. The diluted earnings per share computations include the effects of
common stock equivalents applicable to stock option contracts.
The number of shares outstanding and related earnings per share amounts
have been restated to retroactively give effect for the three-for-two stock
split declared and distributed by the Corporation during the third quarter of
1997.
The table below presents a reconciliation of basic and diluted earnings
per share computations.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
--------------------------------------------
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA) 1999 1998 1997
- -----------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Net Income Available to Common Shareholders $ 30,850 $ 22,474 $ 23,122
- -----------------------------------------------------------------------------------------------------
Weighted Average Number of Common Shares Outstanding
Used in Basic EPS Calculation 14,410,164 14,401,977 14,371,438
Add Assumed Exercise of Outstanding Stock Options as
Adjustments for Dilutive Securities 215,637 225,679 231,566
- -----------------------------------------------------------------------------------------------------
Weighted Average Number of Common Shares
Outstanding Used in Diluted EPS Calculations 14,625,801 14,627,656 14,603,004
- -----------------------------------------------------------------------------------------------------
Basic EPS $2.14 $1.56 $1.61
Diluted EPS 2.11 1.54 1.58
- -----------------------------------------------------------------------------------------------------
</TABLE>
PAGE 46
<PAGE>
NOTE 15: TEXAS REGIONAL BANCSHARES, INC. (PARENT ONLY) CONDENSED FINANCIAL
STATEMENTS
DECEMBER 31,
CONDENSED BALANCE SHEETS ------------------------
(DOLLARS IN THOUSANDS) 1999 1998
- ------------------------------------------------------------------------------
Assets
Cash in Subsidiary Bank $ 9,085 $ 5,473
- ------------------------------------------------------------------------------
Total Cash and Cash Equivalents 9,085 5,473
Investments in Consolidated Subsidiaries 180,621 173,766
Furniture and Equipment 90 45
Other Assets 491 33
- ------------------------------------------------------------------------------
Total Assets $190,287 $179,317
- ------------------------------------------------------------------------------
Liabilities
Accounts Payable and Accrued Liabilities $ 65 $ 242
Dividends Payable 2,034 1,801
- ------------------------------------------------------------------------------
Total Liabilities 2,099 2,043
Shareholders' Equity 188,188 177,274
- ------------------------------------------------------------------------------
Total Liabilities and Shareholders' Equity $190,287 $179,317
==============================================================================
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
CONDENSED STATEMENTS OF INCOME ----------------------------------------
(DOLLARS IN THOUSANDS) 1999 1998 1997
- ----------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Income
Interest Income $ - $ - $ 451
Dividends Received 10,206 10,439 17
- ----------------------------------------------------------------------------------------------
Total Income 10,206 10,439 468
- ----------------------------------------------------------------------------------------------
Expense
Occupancy Expense 12 5 6
Equipment Expense 17 17 17
Directors Fees 118 103 113
Franchise Tax - 189 198
Legal and Professional 106 97 55
Printing, Stationery and Supplies 133 109 96
Organizational Expense - 65 3
Other 29 76 48
- ----------------------------------------------------------------------------------------------
Total Expense 415 661 536
- ----------------------------------------------------------------------------------------------
Income (Loss) Before Income Tax Expense and Equity
In Undistributed Net Income of Subsidiaries 9,791 9,778 (68)
Income Tax Benefit (147) (239) (49)
- ----------------------------------------------------------------------------------------------
Income (Loss) Before Equity in Undistributed Net
Income of Subsidiaries 9,938 10,017 (19)
Equity in Undistributed Net Income of Subsidiaries 20,912 12,457 23,141
- ----------------------------------------------------------------------------------------------
Net Income $30,850 $22,474 $23,122
- ----------------------------------------------------------------------------------------------
</TABLE>
PAGE 47
<PAGE>
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
CONDENSED STATEMENTS OF CASH FLOWS -----------------------------------------------
(DOLLARS IN THOUSANDS) 1999 1998 1997
- ------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Cash Flows from Operating Activities
Net Income $ 30,850 $ 22,474 $ 23,122
Adjustment to Reconcile Net Income to Net Cash
Provided by (Used in) Operating Activities
Depreciation and Amortization 14 11 14
Undistributed Net Income of Subsidiaries (20,912) (12,457) (23,141)
Decrease in Other Assets 21 65 16
Increase (Decrease) in Income Taxes Payable 592 (12) 6
(Increase) Decrease in Deferred Income Taxes (479) 34 2
Increase (Decrease) in Accounts Payable and Accrued Liabilities (177) 12 3
- -----------------------------------------------------------------------------------------------------------------------
Net Cash Provided by Operating Activities 9,909 10,127 22
- -----------------------------------------------------------------------------------------------------------------------
Cash Flows from Investing Activities
Investment in Subsidiaries -- (8,000) (250)
Purchase of Fixed Assets (59) -- --
- -----------------------------------------------------------------------------------------------------------------------
Net Cash Used in Investing Activities (59) (8,000) (250)
- -----------------------------------------------------------------------------------------------------------------------
Cash Flows from Financing Activities
Cash Dividends Paid on Common Stock (7,204) (6,421) (4,236)
Proceeds from Exercise of Stock Options 966 73 494
- -----------------------------------------------------------------------------------------------------------------------
Net Cash Used in Financing Activities (6,238) (6,348) (3,742)
- -----------------------------------------------------------------------------------------------------------------------
Net Increase (Decrease) in Cash and Cash Equivalents 3,612 (4,221) (3,970)
Cash and Cash Equivalents at Beginning of Year 5,473 9,694 13,664
- -----------------------------------------------------------------------------------------------------------------------
Cash and Cash Equivalents at End of Year $ 9,085 $ 5,473 $ 9,694
=======================================================================================================================
Supplemental Disclosures of Cash Flow Information
Income Taxes Paid $ 18,271 $ 12,003 $ 12,660
=======================================================================================================================
</TABLE>
NOTE 16: RESTRICTIONS ON RETAINED EARNINGS
The Bank is subject to certain restrictions on the amount of dividends
that it may declare without prior regulatory approval. The amount of retained
earnings in the Bank at December 31, 1999 was $36.5 million. On December 31,
1999, the aggregate amount of dividends, which legally could be paid to the
Corporation without prior approval of various regulatory agencies, totaled $21.3
million.
NOTE 17: REGULATORY MATTERS
The Company is subject to various regulatory capital requirements
administered by the federal banking agencies. Failure to meet minimum capital
requirements can initiate certain mandatory, and possibly additional
discretionary, actions by regulators that, if undertaken, could have a direct
material effect on the Company's financial statements. Under capital adequacy
guidelines and the regulatory framework for prompt corrective action, the
Company must meet specific capital guidelines that involve quantitative measures
of the Company's assets, liabilities, and certain off-balance-sheet items as
calculated under regulatory accounting practices. The Company's capital amounts
and classification are also subject to qualitative judgments by the regulators
about components, risk weightings, and other factors.
Quantitative measures established by regulation to ensure capital adequacy
require the Company to maintain minimum amounts and ratios (set forth in the
table below) of Total and Tier I capital (as defined in the regulations) to
risk-weighted assets (as defined), and of Tier I capital (as defined) to average
assets (as defined). Management believes that the Company meets all capital
adequacy requirements to which it is subject at December 31, 1999.
At December 31, 1999, the most recent notification from the Federal
Reserve Board categorized the Company as well capitalized under the regulatory
framework for prompt corrective action. To be categorized as well capitalized,
the Company must maintain minimum total risk-based, Tier I risk-based, and Tier
I leverage ratios as set forth in the table. There are no conditions or events
since that notification that management believes have changed the institution's
category. The Company's actual capital amounts and ratios are also presented in
the table.
PAGE 48
<PAGE>
<TABLE>
<CAPTION>
TO BE WELL CAPITALIZED
FOR CAPITAL UNDER PROMPT
ACTUAL ADEQUACY PURPOSES ACTION PROVISIONS
------------------------- ------------------------- ---------------------------
(DOLLARS IN THOUSANDS) AMOUNT RATIO AMOUNT RATIO AMOUNT RATIO
- ----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
December 31, 1999
Total Capital (to risk weighted assets) $173,551 11.94% $116,313 8.00% $145,392 10.00%
Tier 1 Capital (to risk weighted assets) 156,840 10.79 58,157 4.00 87,235 6.00
Tier 1 Capital (to average assets) 156,840 7.58 82,777 4.00 103,471 5.00
December 31, 1998
Total Capital (to risk weighted assets) $163,007 14.04% $ 92,884 8.00% $116,105 10.00%
Tier 1 Capital (to risk weighted assets) 149,771 12.90 46,442 4.00 69,663 6.00
Tier 1 Capital (to average assets) 149,771 8.84 67,772 4.00 84,715 5.00
==================================================================================================================================
</TABLE>
NOTE 18: FAIR VALUE OF FINANCIAL INSTRUMENTS
DISCLOSURES ABOUT FAIR VALUE OF FINANCIAL INSTRUMENTS
Statement of Financial Accounting Standards No. 107 ("Statement 107"),
"Disclosures about Fair Value of Financial Instruments", requires that the
Company disclose estimated fair values for its financial instruments. Fair value
estimates, methods and assumptions are set forth below for the Company's
financial instruments.
SECURITIES
For securities held, estimated fair value equals quoted market price, if
available. If a quoted market price is not available, fair value is estimated
using quoted market prices for a similar security. Securities not classified as
held to maturity or trading are classified as available for sale and measured at
fair value in the consolidated balance sheets with unrealized holding gains and
losses reported as a separate component of shareholders' equity until realized.
The following table presents the amortized cost and estimated fair value of
securities classified as available for sale:
<TABLE>
<CAPTION>
DECEMBER 31,
------------------------------------------------------------
1999 1998
------------------------------- ----------------------------
AMORTIZED ESTIMATED AMORTIZED ESTIMATED
(DOLLARS IN THOUSANDS) COST FAIR VALUE COST FAIR VALUE
- ----------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
U.S. Treasury $ 2,999 $ 3,004 $ -- $ --
U.S. Government Agency 359,558 344,601 313,647 313,970
Mortgage-Backed 131,699 127,631 101,670 101,365
States and Political Subdivisions 48,198 46,370 36,112 36,988
Other 4,332 4,332 3,562 3,613
- ----------------------------------------------------------------------------------------------------
Total $546,786 $525,938 $454,991 $455,936
====================================================================================================
</TABLE>
The following table presents the carrying value and estimated fair
value of securities classified as held to maturity:
<TABLE>
<CAPTION>
DECEMBER 31,
-----------------------------------------------------------
1999 1998
------------------------------ ----------------------------
AMORTIZED ESTIMATED AMORTIZED ESTIMATED
(DOLLARS IN THOUSANDS) COST FAIR VALUE COST FAIR VALUE
- ---------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
U.S. Treasury $5,001 $5,018 $10,013 $10,186
States and Political Subdivisions 3,009 3,053 4,318 4,464
- ---------------------------------------------------------------------------------------------------
Total $8,010 $8,071 $ 14,331 $14,650
===================================================================================================
</TABLE>
PAGE 49
<PAGE>
LOANS
The Company does not consider its loan portfolio to have the homogeneous
categories of loans for which the fair value could be estimated by using quoted
market prices for securities backed by similar loans. Therefore, the fair value
of all loans is estimated by discounting future cash flows using the current
rates at which similar loans would be made to borrowers with similar credit
ratings for the same remaining maturities. Assumptions regarding credit risk,
cash flows and discount rates are judgmentally determined using available market
information and specific borrower information. The following table presents
information for loans:
<TABLE>
<CAPTION>
DECEMBER 31,
------------------------------------------------------------------------------
1999 1998
------------------------------------ -------------------------------------
CARRYING AVERAGE ESTIMATED CARRYING AVERAGE ESTIMATED
(DOLLARS IN THOUSANDS) AMOUNT YIELD FAIR VALUE AMOUNT YIELD FAIR VALUE
- --------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Commercial and Agricultural
Adjustable $ 258,776 9.43% $ 257,555 $ 237,920 8.85% $ 236,818
Fixed 214,676 9.61 213,762 148,503 9.64 150,643
Real Estate
Adjustable 285,398 9.50 282,540 232,857 9.15 231,413
Fixed 471,527 9.61 470,450 350,680 9.89 357,376
Consumer 144,382 11.33 143,331 119,545 11.49 120,081
- --------------------------------------------------------------------------------------------------------------
Total Loans, Net of
Unearned Discount $1,374,759 9.73% $1,367,638 $1,089,505 9.65% $1,096,331
==============================================================================================================
</TABLE>
DEPOSIT LIABILITIES
The fair value of demand deposits, savings accounts and certain money
market deposits is the amount payable on demand at the reporting date. The fair
value of certificates of deposit is based on the discounted value of contractual
cash flows. The discount rate is estimated using the rates currently offered for
deposits of similar remaining maturities. The following table presents the
carrying value and estimated fair value of deposit liabilities at December 31,
1999 and December 31, 1998:
<TABLE>
<CAPTION>
DECEMBER 31,
----------------------------------------------------------
1999 1998
----------------------------- ----------------------------
CARRYING ESTIMATED CARRYING ESTIMATED
(DOLLARS IN THOUSANDS) AMOUNT FAIR VALUE AMOUNT FAIR VALUE
- --------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Demand $ 285,866 $ 285,866 $ 234,655 $ 234,655
Savings 118,758 118,758 107,711 107,711
Money Market Checking and Savings 377,459 377,459 301,238 301,238
Time Deposits 1,103,263 1,105,414 919,338 926,256
- --------------------------------------------------------------------------------------------------------
Total Deposits $1,885,346 $1,887,497 $1,562,942 $1,569,860
========================================================================================================
</TABLE>
The fair value estimates above do not include the benefit that results
from the low-cost funding provided by the deposit liabilities compared to the
cost of borrowing funds in the market. The Company has not attempted to
determine the amount of increase in net assets that would result from the
benefit of considering the low-cost funding provided by deposit liabilities.
COMMITMENTS TO EXTEND CREDIT, STANDBY LETTERS OF CREDIT AND FINANCIAL GUARANTEES
WRITTEN
These financial instruments are not sold or traded, and estimated fair
values are not readily available. The carrying amount of commitments to extend
credit and standby letters of credit is the net unamortized deferred cost or
income arising from these unrecognized financial instruments. The estimated fair
value of these commitments is considered to be the carrying value. Financial
guarantees written consist of obligations for credit cards issued to certain
customers. Substantially all of the liability for financial guarantees written
is collateralized by deposits pledged to the Company.
The following table presents the contract amount, carrying amount and
estimated fair value for commitments to extend credit, standby letters of credit
and financial guarantees written at December 31, 1999 and 1998:
PAGE 50
<PAGE>
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------------------------------------------------------------------------
1999 1998
------------------------------------------ ---------------------------------------
CONTRACT CARRYING ESTIMATED CONTRACT CARRYING ESTIMATED
(DOLLARS IN THOUSANDS) AMOUNT AMOUNT FAIR VALUE AMOUNT AMOUNT FAIR VALUE
- -----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Commitments to Extend Credit $191,591 $(2,482) $(2,482) $154,155 $(2,209) $(2,209)
Standby Letters of Credit 17,223 2 2 11,722 5 5
Financial Guarantees Written 1,822 - - 1,846 - -
- -----------------------------------------------------------------------------------------------------------------------------
</TABLE>
LIMITATIONS
Fair value estimates are made at a specific point in time, based on
relevant market information and information about the financial instrument.
These estimates do not reflect any premium or discount that could result from
offering for sale at one time the Company's entire holdings of a particular
financial instrument. Because no market exists for a significant portion of the
Company's financial instruments, fair value estimates are based on judgments
regarding future expected loss experience, current economic conditions, risk
characteristics of various financial instruments and other factors. These
estimates are subjective in nature and involve uncertainties and matters of
significant judgment and therefore cannot be determined with precision. Changes
in assumptions could significantly affect the estimates.
Fair value estimates are based on existing on-and off-balance sheet
financial instruments without attempting to estimate the value of anticipated
future business and the value of assets and liabilities that are not considered
financial instruments. For example, the Company has a substantial trust
department that contributes net fee income annually. The trust department is not
considered a financial instrument, and its value has not been incorporated into
the fair value estimates. Other significant assets and liabilities that are not
considered financial assets or liabilities include the deferred tax liabilities,
premises, equipment and goodwill. In addition, the tax ramifications related to
the realization of the unrealized gains and losses can have a significant effect
on fair value estimates and have not been considered in many of the estimates.
NOTE 19: ACQUISITION ACTIVITY
On February 19, 1998, the Company completed the acquisition of three bank
holding companies and their three subsidiary banks. The acquisition of
Brownsville Bancshares, Inc. and its subsidiary, Brownsville National Bank,
includes two banking locations in Brownsville, Cameron County, Texas, with
assets of approximately $100.1 million, equity of $12.1 million, loans of $42.6
million, and deposits of $87.2 million. This acquisition was achieved by the
exchange of 984,806 shares of Company stock for all of the outstanding shares of
Brownsville Bancshares, Inc. and cancellation of outstanding stock options.
Brownsville National Bank merged with and into Texas State Bank.
The second acquisition was TB&T Bancshares, Inc. and its subsidiary, Texas
Bank and Trust of Brownsville, Cameron County, Texas. Texas Bank and Trust of
Brownsville had assets of approximately $44.9 million, equity of $4.1 million,
loans of $21.9 million, and deposits of $40.3 million. This acquisition was
achieved by exchange of 301,483 shares of Company stock for all of the
outstanding shares of TB&T Bancshares, Inc. Texas Bank and Trust of Brownsville
merged with and into Texas State Bank.
The third acquisition was Raymondville Bancorp, Inc. and its subsidiary,
Bank of Texas. Bank of Texas is headquartered in Raymondville, Willacy County,
Texas, with one additional banking facility in Brownsville, Texas. The
shareholder of Raymondville Bancorp, Inc. received cash consideration of $9.6
million in this acquisition, and the Company paid $100,000 in consideration for
a covenant not to compete. The Company discharged approximately $330,000 of
existing Raymondville Bancorp, Inc. indebtedness. Bank of Texas had assets of
approximately $63.7 million, equity of $5.1 million, loans of $25.5 million, and
deposits of $56.5 million. Bank of Texas merged with and into Texas State Bank.
The acquisition of Brownsville Bancshares, Inc. and TB&T Bancshares, Inc.
are accounted for under the pooling-of-interests method of accounting, and as
such, the enclosed financial information has been restated for all periods
presented to include the results of operations and financial position of these
acquired entities. The acquisition of Raymondville Bancorp, Inc. was accounted
for under the purchase method of accounting; therefore, the results of
operations are included in the consolidated financial statements from the date
of acquisition, February 19, 1998. The One Time Charge - Acquisitions of
$728,000 primarily included professional fees and computer conversion costs
related to effecting business combinations accounted for by the
pooling-of-interests method.
On October 1, 1999, the Company completed the acquisition of Harlingen
Bancshares, Inc. and its subsidiary, Harlingen National Bank. The acquisition
included its main office and two banking locations in Harlingen, Cameron County,
Texas; one banking location in La Feria, Cameron County, Texas; one banking
location in Palm Valley, Cameron County, Texas, and one banking location in
Mercedes, Hidalgo County, Texas. The shareholders of Harlingen Bancshares, Inc.
received aggregate consideration of $34.0 million, including $1.0 million
deposited into escrow pending the outcome of certain contingencies.
Simultaneously, the shareholders of Harlingen Bancshares, Inc. and their
affiliates purchased certain assets of
PAGE 51
<PAGE>
Harlingen Bancshares, Inc. with a book value totaling $2.4 million. The Company
also agreed to pay $1.0 million over a term of ten years in consideration of a
covenant not to compete from certain principals of Harlingen Bancshares, Inc.
Harlingen National Bank had assets of approximately $204.2 million, loans of
$110.7 million, deposits of $183.6 million and equity of $19.9 million. The
Company accounted for the acquisition under the purchase method of accounting;
therefore, the results of operations are included in the consolidated financial
statements from the date of acquisition, October 1, 1999.
PAGE 52
<PAGE>
<TABLE>
<CAPTION>
SELECTED FINANCIAL DATA
TEXAS REGIONAL BANCSHARES, INC. AND SUBSIDIARIES
CONDENSED QUARTERLY INCOME STATEMENTS
TAXABLE-EQUIVALENT BASIS FOURTH THIRD SECOND FIRST
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA) QUARTER QUARTER QUARTER QUARTER
- ---------------------------------------------------------------------------------------------------------
1999
- ---------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Interest Income $40,945 $36,138 $34,965 $33,362
Interest Expense 17,577 15,420 14,862 14,362
- ---------------------------------------------------------------------------------------------------------
Net Interest Income 23,368 20,718 20,103 19,000
Provision for Loan Losses 1,010 1,600 1,499 1,323
Noninterest Income 4,761 4,285 4,197 4,156
Noninterest Expense 13,782 10,648 10,919 10,539
- ---------------------------------------------------------------------------------------------------------
Income Before Taxable-Equivalent
Adjustment and Income Tax Expense 13,337 12,755 11,882 11,294
Tax-Equivalent Adjustment 450 376 374 369
Applicable Income Tax Expense 4,568 4,365 4,043 3,873
- ---------------------------------------------------------------------------------------------------------
Net Income $ 8,319 $ 8,014 $7,465 $7,052
=========================================================================================================
Net Income Per Common Share
Basic $ 0.58 $ 0.56 $ 0.52 $ 0.49
Diluted 0.57 0.55 0.51 0.48
=========================================================================================================
1998
- ---------------------------------------------------------------------------------------------------------
Interest Income $32,911 $31,499 $31,792 $30,915
Interest Expense 15,141 15,238 14,038 13,967
- ---------------------------------------------------------------------------------------------------------
Net Interest Income 17,770 16,261 17,754 16,948
Provision for Loan Losses 650 7,157 981 941
Noninterest Income 4,224 5,854 3,623 3,962
Noninterest Expense 10,355 10,582 9,638 10,527
- ---------------------------------------------------------------------------------------------------------
Income Before Taxable-Equivalent
Adjustment and Income Tax Expense 10,989 4,376 10,758 9,442
Tax-Equivalent Adjustment 369 372 374 353
Applicable Income Tax Expense 3,546 1,207 3,624 3,246
- ---------------------------------------------------------------------------------------------------------
Net Income $7,074 $2,797 $6,760 $5,843
=========================================================================================================
Net Income Per Common Share
Basic $ 0.49 $ 0.19 $ 0.47 $ 0.41
Diluted 0.48 0.19 0.46 0.40
=========================================================================================================
</TABLE>
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
None.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The information regarding directors and executive officers called for by
Item 10 is incorporated herein by reference to the sections entitled "Election
of Directors" and "Executive Officers" in the Company's Proxy Statement for its
Annual Meeting of Shareholders to be held April 24, 2000. The Proxy Statement
will be filed with the Securities and Exchange Commission within 120 days
following the end of the Company's fiscal year.
ITEM 11. EXECUTIVE COMPENSATION
The information regarding executive compensation called for by Item 11 is
incorporated herein by reference to the section entitled "Executive Officers" in
the Company's Proxy Statement for its Annual Meeting of Shareholders to be held
April 24, 2000. The Proxy Statement will be filed with the Securities and
Exchange Commission within 120 days following the end of the Company's fiscal
year.
PAGE 53
<PAGE>
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information regarding ownership of the Company's common stock by
certain beneficial owners and by management called for by Item 12 is
incorporated herein by reference to the section entitled "Stock Ownership of
Management and Others" in the Company's Proxy Statement for its Annual Meeting
of Shareholders to be held April 24, 2000. The Proxy Statement will be filed
with the Securities and Exchange Commission within 120 days following the end of
the Company's fiscal year.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information regarding transactions between management and others and
the Company called for by Item 13 is incorporated herein by reference to the
sections entitled "Transactions with Management and Others" in the Company's
Proxy Statement for its Annual Meeting of Shareholders to be held April 24,
2000. The Proxy Statement will be filed with the Securities and Exchange
Commission within 120 days following the end of the Company's fiscal year.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a) The following documents are filed as part of this Annual Report on Form
10-K:
(1) The following consolidated financial statements of the registrant
and its subsidiaries, are included herein:
(i) Independent Auditors' Report
(ii) Consolidated Balance Sheets - December 31, 1999 and 1998
(iii) Consolidated Statements of Income and Comprehensive Income -
Years Ended December 31, 1999, 1998 and 1997
(iv) Consolidated Statements of Changes in Shareholders' Equity -
Years Ended December 31, 1999, 1998 and 1997
(v) Consolidated Statements of Cash Flows - Years Ended December
31, 1999, 1998 and 1997
(vi) Notes to Consolidated Financial Statements - Years Ended
December 31, 1999, 1998 and 1997
(2) Financial Statement Schedules are omitted because the required
information is not applicable.
(3) Exhibits - The following exhibits are filed as a part of this Annual
Report on Form 10-K:
2.1 Agreement and Plan of Reorganization dated as of October 15,
1997, by and between Texas Regional Bancshares, Inc. and
Raymondville Bancorp, Inc. (incorporated by reference from
1998 Form 10-K, Commission File No. 000-14517).
2.2 Agreement and Plan of Reorganization dated as of October 20,
1997, by and between Texas Regional Bancshares, Inc. and
Brownsville Bancshares, Inc. (incorporated by reference from
Form S-4, Commission File No. 333-41959).
2.3 Agreement and Plan of Reorganization dated as of October 15,
1997, by and between Texas Regional Bancshares, Inc. and TB&T
Bancshares, Inc. (incorporated by reference from Form S-4,
Commission File No. 333-41945).
2.4 Agreement and Plan of Reorganization by and between Texas
State Bank, McAllen, Texas, First State Bank & Trust Co.,
Mission, Texas ("First State Bank"), Texas Regional
Bancshares, Inc., and certain shareholders of First State
Bank, dated as of January 9, 1996 (incorporated by reference
from Form 8-K, Commission File No. 000-14517).
2.5 Agreement and Plan of Reorganization by and between Texas
State Bank, McAllen, Texas, The Border Bank, Hidalgo, Texas
("Border Bank"), Texas Regional Bancshares, Inc., and certain
shareholders of Border Bank, dated as of January 9, 1996
(incorporated by reference from Form 8-K, Commission File No.
000-14517).
3.1 Articles of Incorporation of Texas Regional Bancshares, Inc.
(incorporated by reference from Form 10, Commission File No.
000-14517).
3.2 Amendment to Articles of Incorporation of Texas Regional
Bancshares, Inc., filed December 28, 1983 (incorporated by
reference from Form 10, Commission File No. 000-14517).
PAGE 54
<PAGE>
3.3 Amendment to Articles of Incorporation of Texas Regional
Bancshares, Inc., filed June 25, 1986 (incorporated by
reference from Form S-1, Commission File No. 33-28340).
3.4 Amendment to Articles of Incorporation of Texas Regional
Bancshares, Inc., filed April 4, 1988 (incorporated by
reference from Form S-1, Commission File No. 33-28340).
3.5 Amendment to Articles of Incorporation of Texas Regional
Bancshares, Inc., filed April 12, 1991 (incorporated by
reference from Form 10-K, Commission File No. 000-14517).
3.6 Amendment to Articles of Incorporation of Texas Regional
Bancshares, Inc., filed March 2, 1992 (incorporated by
reference from Form 10-K, Commission File No. 000-14517).
3.7 Resolution Eliminating from the Articles of Incorporation
certain preferred series of shares of Texas Regional
Bancshares, Inc., filed February 21, 1995 (incorporated by
reference from 1994 Form 10-K, Commission File No. 000-14517).
3.8 Bylaws of Texas Regional Bancshares, Inc., as amended
(incorporated by reference from Form S-1, Commission File No.
33-74992).
4 Relevant portions of Texas Regional Bancshares, Inc. Articles
of Incorporation and Bylaws (incorporated by reference from
Form S-1, Commission File No. 333-1467).
10.1 Incentive Stock Option Plan (incorporated by reference from
Form 10, Commission File No. 000-14517).
10.2 1985 Non-Statutory Stock Option Plan (incorporated by
reference from Form 10, Commission File No. 000-14517).
10.3 1995 Non-Statutory Stock Option Plan (incorporated by
reference from Form S-1, Commission File No. 333-1467).
10.4 Texas Regional Bancshares, Inc., 1997 Incentive Stock Option
Plan (incorporated by reference from Form S-4, Commission File
No. 000-14517).
10.5 Texas Regional Bancshares, Inc., 1997 Nonstatutory Stock
Option Plan (incorporated by reference from Form S-4,
Commission File No. 000-14517).
10.6 Texas Regional Bancshares, Inc. Employees Stock Ownership Plan
(with 401(k) provisions) (incorporated by reference from Form
S-8, Commission File No. 33-39386).
10.7 Amendment No. 1 to Texas Regional Bancshares, Inc. Employees
Stock Ownership Plan, adopted July 9, 1991 (incorporated by
reference from 1991 Form 10-K, Commission File No. 000-14517).
10.8 Amendment No. 2 to Texas Regional Bancshares, Inc. Employees
Stock Ownership Plan, adopted May 12, 1992 (incorporated by
reference from 1992 Form 10-K, Commission File No. 000-14517).
10.9 Amendment No. 3 to Texas Regional Bancshares, Inc. Employees
Stock Ownership Plan, adopted September 8, 1992, effective
January 1, 1992 (incorporated by reference from Form S-1,
Commission File No. 33-74992).
10.10 Amendment No. 4 to Texas Regional Bancshares, Inc. Employees
Stock Ownership Plan (with 401(k) provisions), adopted August
10, 1993 (incorporated by reference from Form S-1, Commission
File No. 33-74992).
10.11 Amendment No. 5 to Texas Regional Bancshares, Inc. Employees
Stock Ownership Plan (with 401(k) provisions), adopted August
10, 1993 (incorporated by reference from 1994 Form 10-K,
Commission File No. 000-14517).
10.12 Amendment No. 6 to Texas Regional Bancshares, Inc. Employee
Stock Ownership Plan (with 401(k) provisions), adopted as of
August 8, 1995 (incorporated by reference from Form S-1,
Commission File No. 333-1467).
10.13 Amendment No. 7 to Texas Regional Bancshares, Inc. Employees
Stock Ownership Plan (with 401(k) provisions), adopted May 21,
1996 (incorporated by reference from 1996 Form 10-K,
Commission File No. 000-14517).
10.14 Amendment No. 8 to Texas Regional Bancshares, Inc. Employee
Stock Ownership Plan (with 401(k) provisions), adopted March
10, 1998 (incorporated by reference from 1998 Form 10-K,
Commission File No. 000-14517).
PAGE 55
<PAGE>
10.15 Glen E. Roney Amended and Restated Deferred Compensation Plan
dated as of March 11, 1997 (incorporated by reference from
Form S-4, Commission File No. 333-41959).
10.16 Amendment No. 9 to Texas Regional Bancshares, Inc. Employee
Stock Ownership Plan (with 401(k) provisions), adopted June 9,
1998 (incorporated by reference from Form 10-Q for quarter
ended June 30, 1998, Commission File No. 000-14517).
10.17 Amendment No. 3 to Texas Regional Bancshares, Inc. Employee
Stock Ownership Trust Agreement, adopted July 13, 1999
(incorporated by reference from Form 10-Q for quarter ended
September 30, 1999, Commission File No. 000-14517).
10.18 Amendment No. 10 to Texas Regional Bancshares, Inc. Employee
Stock Ownership Plan (with 401(k) provisions), adopted July
13, 1999 (incorporated by reference from Form 10-Q for quarter
ended September 30, 1999, Commission File No. 000-14517).
10.19 Second Amendment to Bank of Texas Profit Sharing Plan, adopted
August 27, 1999 (incorporated by reference from Form 10-Q for
quarter ended September 30, 1999, Commission File No.
000-14517).
10.20 Amendment No. 11 to the Texas Regional Bancshares, Inc.
Employee Stock Ownership Plan (with 401(k) provisions),
adopted October 1, 1999 (filed herewith).
21 Subsidiaries of the Registrant (filed herewith)
27 Financial Data Schedule (filed herewith)
(b) Reports of Form 8-K
No report on Form 8-K was filed by Texas Regional Bancshares, Inc. during the
three months ended December 31, 1999.
PAGE 56
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
TEXAS REGIONAL BANCSHARES, INC.
(Registrant)
March 14, 2000 /s/ G. E. Roney
- -------------------- ----------------------------------
Glen E. Roney
Chairman of the Board, President
& Chief Executive Officer
Pursuant to the requirement of the Securities Exchange Act of 1934, this
report has signed below by the following persons on behalf of the Registrant and
in the capacities and on the date indicated.
Signature Title Date
- --------------------------------------------------------------------------------
/s/ G. E. Roney Chairman of the Board, President March 14, 2000
- ---------------------------- and Chief Executive Officer -----------------
Glen E. Roney (principal executve officer)
/s/ Morris Atlas Director March 14, 2000
- ---------------------------- -----------------
Morris Atlas
/s/ Frank N. Boggus Director March 14, 2000
- ---------------------------- -----------------
Frank N. Boggus
/s/ Robert G. Farris Director March 14, 2000
- ---------------------------- -----------------
Robert G. Farris
/s/ C. Kenneth Landrum, M.D. Director March 14, 2000
- ---------------------------- -----------------
C. Kenneth Landrum, M.D.
/s/ Julie G. Uhlhorn Director March 14, 2000
- ---------------------------- -----------------
Julie G. Uhlhorn
/s/ Jack Whetsel Director March 14, 2000
- ---------------------------- -----------------
Jack Whetsel
/s/ Paul S. Moxley Senior Executive Vice President March 14, 2000
- ---------------------------- -----------------
Paul S. Moxley
/s/ R. T. Pigott, Jr. Executive Vice President March 14, 2000
- ---------------------------- and Chief Financial Officer -----------------
R. T. Pigott, Jr. (principal financial officer)
/s/ Ann M. Sefcik Controller/Assistant Secretary March 14, 2000
- ---------------------------- (principal accounting officer) -----------------
Ann M. Sefcik
INDEX TO EXHIBITS FILED HEREWITH
EXHIBIT
NUMBER SEQUENTIALLY NUMBERED EXHIBIT
- --------
10.20 Amendment Number 11 to the Texas Regional Bancshares, Inc.
Employee Stock Ownership Plan (with 401(k) provisions) adopted
October 1, 1999
21 Subsidiaries of the Registrant
27 Financial Data Schedule
PAGE 57
EXHIBIT 10.20
AMENDMENT NUMBER 11 TO THE
TEXAS REGIONAL BANCSHARES, INC.
EMPLOYEE STOCK OWNERSHIP PLAN (WITH 401(K) PROVISIONS)
Texas Regional Bancshares, Inc., a corporation organized and operating
under the laws of the State of Texas, and registered as a bank holding company
under the Bank Holding Company Act of 1956, as amended (the "Corporation"),
hereby adopts the following amendments to the Texas Regional Bancshares, Inc.
Employee Stock Ownership Plan (with 401(k) provisions) (the "Plan"), effective
as of October 1, 1999:
WHEREAS, Texas Regional Delaware, Inc. is a wholly-owned subsidiary of the
Corporation and, in turn, Texas Regional HBI Acquisition Corp. and Texas State
Bank are wholly owned subsidiaries of Texas Regional Delaware, Inc.; and
WHEREAS, the Corporation and Harlingen Bancshares, Inc. entered into an
Agreement and Plan of Reorganization, pursuant to which, effective as of October
1, 1999, Harlingen Bancshares, Inc. and its wholly owned subsidiary, HN
Bancshares of Delaware, Inc., will merge with and into Texas Regional HBI
Acquisition Corp. and Harlingen National Bank will merge with and into Texas
State Bank; and
WHEREAS, as a part of those mergers, the Corporation will become the
employer of the employees of former Harlingen Bancshares, Inc. and HN Bancshares
of Delaware, Inc., and Texas State Bank will become the employer of the
employees of the former Harlingen National Bank; and
WHEREAS, it is the desire of the Corporation and its wholly owned
subsidiary, Texas State Bank, that eligible former employees of Harlingen
Bancshares, Inc., HN Bancshares of Delaware, Inc. and Harlingen National Bank,
as a result of becoming employees of the Corporation and Texas State Bank
pursuant to the mergers, be entitled to participate in the Texas Regional
Bancshares, Inc. Employee Stock Ownership Plan (with 401(k) provisions); and
WHEREAS, the Board of Directors desires to coordinate and consolidate the
employee benefit programs available to all employees of the Corporation and its
subsidiaries;
NOW THEREFORE, IT IS HEREBY AGREED THAT the Texas Regional Bancshares,
Inc. Employee Stock Ownership Plan (with 401(k) provisions) (the "ESOP"), is
hereby amended effective as of October 1, 1999, as follows:
1. AMENDMENT RELATED TO DEFINITION OF "SERVICE". The definition of
"Service" in Section 2 of the Plan (as originally stated in the Plan and as the
same may have been previously amended) is hereby deleted and substituted
therefor is the following language:
"SERVICE.
Employment with (i) the Company, (ii) an Affiliated Company, (iii) Mid
Valley Bank, as predecessor to the Company's subsidiary, Texas State
Bank (with respect to those Employee participants that were formerly
participants in the Mid Valley Bank Employees' Pension Plan), (iv)
First National Bank of South Texas (with respect to those Employees who
were employed by First National Bank of South Texas as employees of the
Rio Grande City and Roma branch bank facilities of First National Bank
of South Texas as of the time of acquisition of such branch bank
facilities by Texas State Bank), (v) First State Bank & Trust Co. and
The Border Bank (with respect to those Employees who were employed by
First State Bank & Trust Co. or The Border Bank as employees of such
banks as of the time of the merger of such banks with and into Texas
State Bank), (vi) Brownsville National Bank, Texas Bank & Trust and
Bank of Texas (with respect to those Employees who were employed by
Brownsville National Bank, Texas Bank & Trust or Bank of Texas as of
the time of the merger of such banks with and into Texas State Bank),
and/or (vii) Harlingen Bancshares, Inc., HN Bancshares of Delaware,
Inc. and/or Harlingen National Bank (with respect to those individuals
who are Employees as of October 1, 1999 and who were employed by
Harlingen Bancshares, Inc., HN Bancshares of Delaware, Inc. and/or
Harlingen National Bank as of August 15th, 1999)."
2. AMENDMENT RELATED TO CREDIT SERVICE. Section 13(a) of the Plan (as
originally stated in the Plan and as the same may have been previously amended)
is hereby amended in its entirety to read as follows:
"(a) GENERAL RULE. For purposes of vesting, an Employee's Credited
Service includes the number of Plan Years after January 1, 1984 in
which he is credited with at least 1,000 Hours of Service. Credited
Service shall include such Service with (i) the Company, (ii) any other
Employer, (iii) an Affiliated Company, (iv) Mid Valley Bank (with
respect to those Employee participants that were formerly participants
in the Mid Valley Bank Employees' Pension Plan), (v) First National
Bank of South Texas (with respect to those Employees who were employed
by First National Bank of South Texas as
PAGE 58
<PAGE>
employees of the Rio Grande City and Roma branch bank facilities of
First National Bank of South Texas as of the time of acquisition of
such branch facilities by Texas State Bank), (vi) First State Bank &
Trust Co. and The Border Bank (with respect to those Employees who were
employed by First State Bank & Trust Co. or The Border Bank as of the
time of the merger of First State Bank & Trust Co. and The Border Bank
with and into Texas State Bank), (vii) Brownsville National Bank, Texas
Bank & Trust and Bank of Texas (with respect to those employees who
were employed by Brownsville National Bank, Texas Bank & Trust or Bank
of Texas as of the time of the merger of Brownsville National Bank,
Texas Bank & Trust and Bank of Texas with and into Texas State Bank)
and (viii) Harlingen Bancshares, Inc., HN Bancshares of Delaware, Inc.
and Harlingen National Bank (with respect to those individuals who are
Employees as of October 1, 1999 and who were employed by Harlingen
Bancshares, Inc., HN Bancshares of Delaware, Inc. or Harlingen National
Bank as of August 15th, 1999)."
3. PARTICIPANTS. As a result of the amendments of the Plan pursuant to
sections 1 and 2 of this Amendment Number 11, persons who were
employees of Harlingen Bancshares, Inc., HN Bancshares of Delaware,
Inc. or Harlingen National Bank as of August 15th, 1999 will become
Participants (as that term is defined in the Plan) as of the date that
such persons become employees of the Corporation and/or Texas State
Bank, without regard to the requirement of entry on January 1st or July
1st subsequent to their initial dates of service, provided that they
are otherwise qualified to be Participants as set forth in section 3 of
the Plan. The Plan is hereby further amended to provide that such
persons thus become Participants immediately upon commencement of
employment by the Corporation and/or Texas State Bank, without regard
to the requirement of entry on January 1st or July 1st subsequent to
their initial dates of service, provided that they are otherwise
qualified under section 3 of the Plan. Notwithstanding the foregoing,
each such employee shall only be credited (pursuant to and in
accordance with the rules set forth in the Plan) with the amount of
compensation paid by the Corporation and/or Texas State Bank, and shall
not be credited with any part of such employee's compensation paid by
Harlingen Bancshares, Inc., HN Bancshares of Delaware, Inc. and/or
Harlingen National Bank for purposes of determining allocations of
Employer Contributions and Forfeitures and for all other purposes.
4. DEFINITIONS. Defined terms used herein and not otherwise defined herein
shall have the meanings assigned to them in the Plan.
IN WITNESS WHEREOF, the undersigned a duly authorized officer of Texas
Regional Bancshares, Inc., hereby certifies the adoption of this Amendment
Number 11 of the Texas Regional Bancshares, Inc. Employee Stock Ownership Plan
(with 401(k) provisions) effective as of October 1, 1999.
Texas Regional Bancshares, Inc.
By: /s/ G.E. RONEY
-----------------------------
Glen E. Roney,
Chairman of the Board and
Chief Executive Officer
PAGE 59
EXHIBIT 21
TEXAS REGIONAL BANCSHARES, INC.
LIST OF SUBSIDIARIES
DECEMBER 31, 1999
PERCENTAGE OF
DECEMBER 31, 1999 JURISDICTION OF VOTING SECURITIES
NAME DOMICILE ORGANIZATION OWNED
- --------------------------------------------------------------------------------
Texas Regional Delaware, Inc. Wilmington, DE Delaware 100%
Texas State Bank McAllen, TX Texas 100%
TSB Securities, Inc. McAllen, TX Texas 100%
TSB Properties, Inc. McAllen, TX Texas 100%
- --------------------------------------------------------------------------------
PAGE 60
<TABLE> <S> <C>
<ARTICLE> 9
<LEGEND>
This schedule contains summary financial information extracted from the
Consolidated Balance Sheets, Consolidated Statements of Income, included herein
and is qualified in its entirety by reference to such financial statements.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C> <C> <C>
<PERIOD-TYPE> YEAR YEAR YEAR
<FISCAL-YEAR-END> DEC-31-1999 DEC-31-1998 DEC-31-1997
<PERIOD-END> DEC-31-1999 DEC-31-1998 DEC-31-1997
<CASH> 66,819 58,274 62,268
<INT-BEARING-DEPOSITS> 5,077 553 100
<FED-FUNDS-SOLD> 0 32,000 18,985
<TRADING-ASSETS> 0 0 0
<INVESTMENTS-HELD-FOR-SALE> 525,938 445,936 324,177
<INVESTMENTS-CARRYING> 8,010 14,331 92,744
<INVESTMENTS-MARKET> 8,071 14,650 93,281
<LOANS> 1,374,759 1,089,505 951,316
<ALLOWANCE> 16,711 13,236 11,291
<TOTAL-ASSETS> 2,120,690 1,762,332 1,538,769
<DEPOSITS> 1,885,346 1,562,942 1,362,783
<SHORT-TERM> 34,608 7,407 1,801
<LIABILITIES-OTHER> 12,548 14,709 12,827
<LONG-TERM> 0 0 0
0 0 0
0 0 0
<COMMON> 14,525 14,405 14,396
<OTHER-SE> 173,663 162,869 146,962
<TOTAL-LIABILITIES-AND-EQUITY> 2,120,690 1,762,332 1,538,769
<INTEREST-LOAN> 113,382 97,064 85,905
<INTEREST-INVEST> 29,345 26,680 24,631
<INTEREST-OTHER> 1,114 1,905 2,209
<INTEREST-TOTAL> 143,841 125,649 112,745
<INTEREST-DEPOSIT> 61,495 58,097 50,566
<INTEREST-EXPENSE> 62,221 58,384 50,618
<INTEREST-INCOME-NET> 81,620 67,265 62,127
<LOAN-LOSSES> 5,432 9,729 2,947
<SECURITIES-GAINS> 1 2,910 734
<EXPENSE-OTHER> 45,888 41,102 37,170
<INCOME-PRETAX> 47,699 34,097 34,982
<INCOME-PRE-EXTRAORDINARY> 30,850 22,474 23,122
<EXTRAORDINARY> 0 0 0
<CHANGES> 0 0 0
<NET-INCOME> 30,850 22,474 23,122
<EPS-BASIC> 2.14 1.56 1.61
<EPS-DILUTED> 2.11 1.54 1.58
<YIELD-ACTUAL> 4.84 4.61 4.89
<LOANS-NON> 8,341 10,414 8,355
<LOANS-PAST> 2,697 3,099 3,287
<LOANS-TROUBLED> 0 0 0
<LOANS-PROBLEM> 0 0 0
<ALLOWANCE-OPEN> 13,236 11,291 10,806
<CHARGE-OFFS> 4,138 9,158 3,221
<RECOVERIES> 605 1,066 759
<ALLOWANCE-CLOSE> 16,711 13,236 11,291
<ALLOWANCE-DOMESTIC> 15,329 10,875 10,253
<ALLOWANCE-FOREIGN> 0 0 0
<ALLOWANCE-UNALLOCATED> 1,382 2,361 1,038
</TABLE>
