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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.
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
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
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
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
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
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
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
AT / FOR YEARS ENDED DECEMBER 31,
----------------------------------------------------------------------------
SELECTED FINANCIAL DATA 1999 1998 1997 1996 1995
- ------------------------------------------------------------------------------------------------------------------------------
(Amounts in Thousands, Except Per Share Data)
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
===============================================================================================================================
(1) Taxable-equivalent basis assuming a 35% federal income tax rate.
PAGE 9
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
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
The following table presents the maturities, amortized cost, estimated
market value and weighted average yields of securities available for sale at
December 31, 1999:
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)
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%
==================================================================================================================================
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
The following table presents the maturities, amortized cost, estimated
market value and weighted average yields of securities held to maturity at
December 31, 1999:
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)
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% --
==============================================================================================================
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
DECEMBER 31,
----------------------------------------------------------------------
LOAN PORTFOLIO COMPOSITION 1999 1998 1997 1996 1995
- -------------------------------------------------------------------------------------------------------
(Dollars in Thousands)
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
=======================================================================================================
The contractual maturity schedule of the loan portfolio at December 31,
1999 follows:
ONE AFTER ONE YEAR AFTER
YEAR THROUGH FIVE
LOAN MATURITIES OR LESS FIVE YEARS YEARS TOTAL
- ----------------------------------------------------------------------------------------
(Dollars in Thousands)
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
========================================================================================
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
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:
DECEMBER 31,
-----------------------------------------------------------
NONPERFORMING ASSETS 1999 1998 1997 1996 1995
- --------------------------------------------------------------------------------------------------------------------
(Dollars in Thousands)
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
====================================================================================================================
PAGE 15
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:
YEARS ENDED DECEMBER 31,
----------------------------------------------------------
ALLOWANCE FOR LOAN LOSS ACTIVITY 1999 1998 1997 1996 1995
- ------------------------------------------------------------------------------------------------------------------
(Dollars in Thousands)
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
==================================================================================================================
PAGE 16
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:
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)
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%
- ------------------------------------------------------------------------------------------------------------------------------------
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
The following table presents the composition of total deposits at the end
of the last three years:
DECEMBER 31,
------------------------------------------
DEPOSIT COMPOSITION 1999 1998 1997
- ---------------------------------------------------------------------------------------
(Dollars in Thousands)
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%
=======================================================================================
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
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:
DECEMBER 31, 1999 DECEMBER 31, 1998
-------------------------------------------------------
RISK-BASED CAPITAL AMOUNT RATIO AMOUNT RATIO
- ----------------------------------------------------------------------------------------------------------------
(Dollars in Thousands)
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
================================================================================================================
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
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):
YEARS ENDED DECEMBER 31,
----------------------------------------------------------------------------------------
1999 1998
------------------------------------------- ---------------------------------------
AVERAGE YIELD/ AVERAGE YIELD/
TAXABLE-EQUIVALENT BASIS (1) BALANCE INTEREST RATE BALANCE INTEREST RATE
- --------------------------------------------------------------------------------------------------------------------------
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%
=============================================================================
(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
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):
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
- ------------------------------------------------------------------------------------------------------------------------------------
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
- ---------------------------------------------