Back to GetFilings.com
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 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, 1997
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 No. 0-14517
TEXAS REGIONAL BANCSHARES, INC.
(Exact name of registrant as specified in its charter)
Texas 74-2294235
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
3700 North 10th Suite 301, McAllen, Texas 78501
(Address of principal executive office) (Zip Code)
Registrant's telephone number, including area code: 956-631-5400
Securities registered pursuant to Section 12(b) of the Act:
Name of Exchange
Title of Class on Which Registered
-------------- -------------------
None None
Securities registered pursuant to Section 12(g) of the Act:
Class A Voting Common, $1.00 Per Value Per Share
(Title of Class)
Indicate by check mark whether the registrant (1) has filed all
reports required to be filed by Section 13 or 15(d) of the Securities
Exchange Act of 1934 during the preceding 12 months (or for such shorter
period that the registrant was required to file such reports), and (2) has
been subject to such filing requirements for the past 90 days.
Yes X No
---- ----
Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K (Sec. 229.405 of this chapter) is not contained
herein, and will not be contained, to the best of registrant's knowledge,
in definitive proxy or information statements incorporated by reference in
Part III of this Form 10-K or any amendment to this form 10-K. [ ]
The aggregate market value of the voting stock held by non-affiliates
of the registrant as of February 27, 1998 was $426,240,813.00.
The number of shares outstanding of each of the registrant's classes
of common stock, as of February 27, 1998 are as follows:
Class A Voting Common - 14,403,484 shares
DOCUMENTS INCORPORATED BY REFERENCE
Proxy Statement for Annual Meeting on April 27, 1998 Part III
PART I
ITEM 1. BUSINESS
GENERAL
Texas Regional Bancshares, Inc. ("Texas Regional" or the "Corporation"), a
Texas business corporation registered as a bank holding company under the Bank
Holding Company Act of 1956, was incorporated in 1983 and is headquartered in
McAllen, Texas. Texas Regional Delaware, Inc., incorporated under the laws of
the state of Delaware, is wholly owned by Texas Regional. Texas Regional
Delaware, Inc., owns all banking and nonbanking subsidiaries of the Corporation,
including the Corporation's principal operating subsidiary, Texas State Bank
(the "Bank") (collectively, the "Company"). As of December 31, 1997, the
Bank operated sixteen banking locations in the Rio Grande Valley: five banking
locations in McAllen (including its main office), three banking locations in
Mission, two banking locations in Weslaco, and one banking location each in
Edinburg, Harlingen, Hidalgo, Penitas, Rio Grande City and Roma. At December 31,
1997, Texas Regional had consolidated total assets of $1.4 billion, loans
outstanding (net of unearned discount) of $886.9 million, total deposits of $1.2
billion, and shareholders' equity of $145.7 million.
On February 19, 1998, Texas Regional completed the acquisitions of TB&T
Bancshares, Inc. of Brownsville, Texas ("TB&T"), Brownsville Bancshares, Inc. of
Brownsville, Texas ("BBI") and Raymondville Bancorp, Inc. of Raymondville, Texas
("Raymondville"). As of February 19, 1998 these bank holding companies had an
aggregate of approximately $208.7 million in assets and five banking locations.
An aggregate of 1,292,845 shares of Texas Regional's Class A Voting Common Stock
were issued in connection with the acquisitions of TB&T and BBI, and $9.6
million of cash was paid to the shareholder of Raymondville in connection with
the acquisition of Raymondville. The subsidiary banks of TB&T, BBI and
Raymondville were merged with and into Texas State Bank immediatly following the
acquisitions.
TSB Securities, Inc. was formed by the Company in 1997, to provide full
service broker-dealer services and perform other transactions or operations
related to the sale and purchase of securities. TSB Securities, Inc. is a wholly
owned subsidiary of Texas Regional Delaware, Inc. TSB Properties, Inc., a wholly
owned subsidiary of Texas State Bank was created in 1998 to receive and
liquidate foreclosed assets.
The business strategy of Texas Regional is for the Bank to provide its
customers with the financial sophistication and breadth of products of a
regional bank, while retaining the local appeal and level of service of a
community bank. The Board of Directors and senior management of the Company have
maintained the Company's community orientation by tailoring products and
services to meet community and customer needs. Management believes that the
Company is well positioned in its market due to its responsive customer service,
the strong community involvement of Texas State Bank management and employees,
recent trends in the Texas banking environment in general and the economy of the
Rio Grande Valley in particular. Management's strategy is to provide a business
culture in which individual customers and small and medium sized businesses are
accorded the highest priority in all aspects of the Company's operations.
Management believes that individualized customer service will allow the Company
to increase its market share in lending volume and deposits. As part of its
operating and growth strategies, the Company is working to continue to attract
business from, and provide service to, small and medium sized businesses, and
expand operations in the Rio Grande Valley.
For its business customers, 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 provides services to third-party correspondent banks. The Bank's
data processing center, for example, presently serves three banks in addition to
providing data processing services for all of the Bank's banking locations.
Management believes there may be opportunities to expand by acquiring
financial institutions or by acquiring assets and deposits that will allow the
Company to enter adjacent markets or further increase market share in existing
markets. Management intends to pursue acquisition opportunities in strategic
markets in circumstances in which management believes that its managerial,
operational and capital resources will enhance the performance of acquired
institutions.
COMPETITION
Texas Regional's operations are located in the Rio Grande Valley, which
consists of Cameron, Hidalgo, Willacy and Starr Counties. Cameron, Hidalgo and
Starr Counties are each directly adjacent to the Rio Grande River, which forms
part of the border between the United States and Mexico. Texas State Bank's
banking locations are currently located in Hidalgo County (McAllen, Hidalgo,
Mission, Penitas and Weslaco), Cameron County (Brownsville and Harlingen), Starr
County (Rio Grande City and Roma), and Willacy County (Raymondville).
The banking industry in the market area served by the Bank is highly
competitive. Competition among financial institutions is based upon interest
rates offered on deposit accounts, interest rates charged on loans and other
credit, service charges assessed, 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, and as a result of those affiliations have greater resources than
Texas Regional or Texas State Bank. However, as an independent community bank
headquartered in Texas State Bank's primary market area, management of the
Company believes that Texas State Bank'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, the Company and Texas State Bank are further
extensively regulated by special federal and state laws applicable only to
financial institutions and their parent companies. Virtually all aspects of the
Company's operations are subject to specific requirements or restrictions and
general regulatory oversight, from laws regulating consumer finance
transactions, such as the Truth In Lending Act, the Home Mortgage Disclosure Act
and the Equal Credit Opportunity Act, to laws regulating collections and
confidentiality, such as the Fair Debt Collections Practices Act, the Fair
Credit Reporting Act and the Right to Financial Privacy Act. With few
exceptions, state and federal banking laws have as their principal objective
either the maintenance of the safety and soundness of the federal deposit
insurance system or the protection of consumers or classes of consumers, rather
than the specific protection of shareholders of the Company. To the extent the
following material describes statutory or regulatory provisions, it is qualified
in its entirety by reference to the particular statute or regulation.
REGULATION OF THE COMPANY
Texas Regional is a bank holding company within the meaning of the Bank
Holding Company Act of 1956 (the "BHCA"), as amended, and therefore is subject
to regulation and supervision by the Federal Reserve Board (the "FRB"). In
addition, the Company is required to file reports with and to furnish such other
information as the FRB may require pursuant to the BHCA, and to subject itself
to examination by the FRB. The FRB has the authority to issue bank holding
companies orders to cease and desist from unsound practices and violations of
conditions imposed by, or violation of agreements with, the FRB. The FRB is also
empowered to assess civil penalties against companies or individuals who violate
the BHCA or orders or regulations thereunder in amounts up to $1.0 million per
day, to order termination of non-banking activities of non-banking subsidiaries
of bank holding companies, and to order termination of ownership and control of
a non-banking subsidiary by a bank holding company. Certain violations may also
result in criminal penalties. The FRB and the Federal Deposit Insurance
Corporation (the "FDIC"), as appropriate, are authorized to exercise comparable
authority, under the Federal Deposit Insurance Act (the "FDI Act") and other
statutes, with respect to subsidiary banks.
The FRB takes the position that a bank holding company is required to serve
as a source of financial and managerial strength to its subsidiary banks and may
not conduct its operations in an unsafe or unsound manner. In addition, it is
the FRB's position that, in serving as a source of strength to its subsidiary
banks, a bank holding company should stand ready to use available resources to
provide adequate capital funds to its subsidiary banks during periods of
financial stress or adversity and should maintain the financial flexibility and
capital-raising capacity to obtain additional resources for assisting its
subsidiary banks. A bank holding company's failure to meet its obligations to
serve as a source of strength to its subsidiary banks will generally be
considered by the FRB to be an unsafe and unsound banking practice or a
violation of the FRB regulations or both. Changes in the FDI Act made by the
Federal Deposit Insurance Corporation Improvement Act of 1991 (the "FDICIA") now
require an undercapitalized institution to submit to the FRB a capital
restoration plan with a guaranty by each company having control of the bank of
the bank's compliance with the plan.
The BHCA and the Change in Bank Control Act, together with regulations
promulgated by the FRB, require that, depending on the particular circumstances,
either FRB approval must be obtained or notice must be furnished to the FRB and
not disapproved prior to any person or company acquiring "control" of a bank
holding company, such as the Company, subject to certain exemptions for certain
transactions. Control is conclusively presumed to exist if an individual or
company acquires 25% or more of any class of voting securities of the bank
holding company. Control is rebuttably presumed to exist if a person acquires
10% or more but less than 25% of any class of voting securities and either the
company has registered securities under Section 12 of the Exchange Act or no
other person will own a greater percentage of that class of voting securities
immediately after the transaction. The regulations provide a procedure for
challenge of the rebuttable control presumption.
As a bank holding company, the Company is required to obtain approval prior
to merging or consolidating with any other bank holding company, acquiring all
or substantially all of the assets of any bank or acquiring ownership or control
of shares of a bank or bank holding company if, after the acquisition, the
Company would directly or indirectly own or control 5% or more of the voting
shares of such bank or bank holding company.
The Company is also prohibited from acquiring a direct or indirect interest
in or control of more than 5% of the voting shares of any company which is not a
bank or bank holding company and from engaging directly or indirectly in
activities other than those of banking, managing or controlling banks or
furnishing services to its subsidiary bank, except that it may engage in and may
own shares of companies engaged in certain activities found by the FRB to be so
closely related to banking or managing and controlling banks as to be a proper
incident thereto. These activities include, among others, operating a mortgage,
finance, credit card, or factoring company; performing certain data processing
operations; providing investment and financial advice; acting as an insurance
agent for certain types of credit-related insurance; leasing personal property
on a full-payout, non-operating basis; and providing certain stock brokerage and
investment advisory services. In approving acquisitions or the addition of
activities, the FRB considers whether the acquisition or the additional
activities can reasonably be expected to produce benefits to the public, such as
greater convenience, increased competition, or gains in efficiency, that
outweigh such possible adverse affects as undue concentration of resources,
decreased or unfair competition, conflicts of interest or unsound banking
practices. In considering any application for approval of an acquisition or
merger, the FRB is also required to consider the financial and managerial
resources of the companies and the banks concerned, as well as the applicant's
record of compliance with the Community Reinvestment Act (the "CRA"). The CRA
generally requires a financial institution to take affirmative action to
ascertain and meet the credit needs of its entire community, including low and
moderate income neighborhoods.
The BHCA generally imposes certain limitations on extensions of credit and
other transactions by and between banks that are 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
Texas State Bank is a Texas state-chartered bank subject to regulation by
the Banking Department. Texas State Bank, the deposits of which 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 Texas
State Bank.
The requirements and restrictions applicable to Texas State 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.
Texas Regional is dependent upon dividends received from Texas State Bank
for discharge of Texas Regional'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 Texas State Bank
restrict dividend payments by Texas State Bank. The 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.
Interest rate limitations for Texas State Bank are primarily governed by the
laws of the State of Texas. The maximum annual interest rate that may be charged
on most loans made by Texas State 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. State usury laws (but not
late charge limitations) have been preempted by federal law 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 which 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 which has a ratio of tangible equity to
total assets that is equal to or less than 2.0%.
The FRB is authorized by the legislation to take various enforcement actions
against any significantly undercapitalized institution and any undercapitalized
institution that fails to submit an acceptable capital restoration plan or fails
to implement a plan accepted by the appropriate agency. These powers include,
among other things, requiring the institution to be recapitalized, prohibiting
asset growth, restricting interest rates paid, requiring prior approval of
capital distributions by any bank holding company which controls the
institution, requiring divestiture by the institution of its subsidiaries or by
the holding company of the institution itself, requiring a new election of
directors, and requiring the dismissal of directors and officers. If imposed
these restrictions, either individually or in aggregate, could have a
significantly adverse impact on the operations of the Bank.
With certain exceptions, an institution will be prohibited from making
capital distributions or paying management fees if the payment of such
distributions or fees will cause the institution to become undercapitalized.
Furthermore, undercapitalized institutions will be required to file capital
restoration plans with the appropriate federal regulator. Pursuant to FDICIA,
undercapitalized institutions also will be subject to restrictions on growth,
acquisitions, branching and engaging in new lines of business unless they have
an approved capital plan that permits otherwise. The FRB also may, among other
things, require an undercapitalized institution to issue shares or obligations,
which could be voting stock, to recapitalize the institution or, under certain
circumstances to divest itself of any subsidiary.
Critically undercapitalized institutions may be subject to more extensive
control and supervision and the FRB may prohibit any critically undercapitalized
institution from, among other things, entering into any material transaction not
in the ordinary course of business, amending its charter or bylaws, or engaging
in certain transactions with affiliates. In addition, critically
undercapitalized institutions generally will be prohibited from making payments
of principal or interest on outstanding subordinated debt. Within 90 days of an
institution becoming critically undercapitalized, the FRB must appoint a
receiver or conservator unless certain findings are made with respect to the
prospect for the institution's continued operation.
Based on Texas State Bank's capital ratios at December 31, 1997, Texas State
Bank was classified as "well capitalized" under the applicable regulations. 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
Texas State Bank.
FDICIA also requires the FDIC to establish a schedule to increase (over a
period of not more than 15 years) the reserve ratio of the BIF, which insures
deposits of Texas State Bank, to 1.25% of insured deposits, and impose higher
deposit insurance premiums on BIF members, if necessary, to achieve that ratio.
FDICIA also requires a risk-based assessment system for deposit insurance
premiums commencing January 1, 1994. Since BIF reached its designated reserve
ratio in mid-1995, the FDIC adjusted the BIF assessments, so that the assessment
rate now in effect ranges from a minimum of zero to a maximum of $0.27 per $100
of deposits.
FDICIA contains numerous other provisions, including accounting, auditing
and reporting requirements, the termination of the "too big to fail" doctrine
except in special cases, regulatory standards in areas such as asset quality,
earnings and compensation, and revised regulatory standards for the powers of
state chartered banks, real estate lending, bank closures and capital adequacy.
The Deposit Insurance Funds Act of 1996 (the "Funds Act") was enacted on
September 30, 1996. Among its provisions, the Funds Act authorizes the Financing
Corporation (the "FICO") to impose periodic assessments on depository
institutions that are members of BIF in addition to institutions that are
members of the Savings Association Insurance Fund (the "SAIF") in order to
spread the cost of the interest payments on the outstanding FICO bonds over a
larger number of institutions. Until this change in the law, only SAIF-member
institutions bore the cost of funding these interest payments. Thus, BIF-member
institutions will share in the cost of financing outstanding FICO bonds. An
institution's FICO assessments will fluctuate based on a defined rate applied to
deposits held in periods after the date the legislation was enacted. Currently,
the FICO BIF annual rate is 1.3 cents for each $100 of qualified deposits.
ACQUISITIONS
The BHC Act generally limits acquisitions by the Company to commercial banks
and companies engaged in activities that the Federal Reserve Board has
determined to be so closely related to banking as to be a proper incident
thereto. The Company's direct activities are generally limited to furnishing to
its subsidiaries services that qualify under the prescribed regulatory tests.
Prior Federal Reserve Board approval is required under the BHC Act for new
activities and acquisitions of most nonbanking companies.
The BHC Act, the Federal Bank Merger Act, and the Texas Banking Code
regulate the acquisition of commercial banks. The BHC Act requires the prior
approval of the Federal Reserve Board for the direct or indirect acquisition of
more than five percent of the voting shares of a commercial bank or bank holding
company. With respect to the Company's subsidiary bank, the approval of the
Texas Department of Banking is required for branching, purchasing the assets of
other banks and for bank mergers.
In reviewing bank acquisition and merger applications, the bank regulatory
authorities will consider, among other things, the competitive effect and public
benefits of the transactions, the capital position of the combined organization,
and the applicant's record under the Community Reinvestment Act and fair housing
laws.
The Corporation regularly evaluates acquisition opportunities and regularly
conducts due diligence activities in connection with possible acquisitions. As a
result, acquisition discussions and, in some cases negotiations, regularly take
place and future acquisitions could occur.
INTERSTATE BANKING AND BRANCHING LEGISLATION
The Riegle-Neal Interstate Branching Efficiency Act of 1994 ("IBBEA"),
authorizes interstate acquisitions of banks and bank holding companies without
geographic limitation beginning one year after enactment. In addition, beginning
June 1, 1997 IBBEA authorizes a bank to merge with a bank in another state as
long as neither of the states has opted out of interstate branching between the
date of enactment of IBBEA and May 31, 1997. IBBEA further provides that states
may enact laws permitting interstate bank merger transactions prior to June 1,
1997. A bank may establish a de novo branch in a state in which the bank does
not maintain a branch if the state expressly permits de novo branching. Once a
bank has established branches in a state through an interstate merger
transaction, the bank may establish and acquire additional branches at any
location in the state where any bank involved in the merger transaction could
have established or acquired branches under applicable federal or state law. A
bank that has established a branch in a state through de novo branching may
establish and acquire additional branches in such state in the same manner and
to the same extent as a bank having a branch in such state as a result of an
interstate merger. If a state opts out of interstate branching within the
specified time period, no bank in any other state may establish a branch in the
opting out state, whether through an acquisition or de novo. On August 28, 1995,
Texas enacted legislation opting out of interstate branching.
ECONOMIC ENVIRONMENT
The earnings of the Bank are affected not only by general economic
conditions but also by the policies of various governmental regulatory
authorities. The FRB regulates the supply of credit in order to influence
general economic conditions, primarily through open market operations in United
States government obligations, varying the discount rate of financial
institution borrowings, varying reserve requirements against financial
institutions and their subsidiaries. The deregulation of interest rates has had
and is expected to continue to have an impact on the competitive environment in
which the Bank operates.
Governmental policies have had a significant effect on the operating results
of commercial banks in the past and are expected to continue to do so in the
future. However, the Company cannot accurately predict the nature or extent of
any effect which such policies may have on its future business and earnings.
PERSONNEL
At December 31, 1997, Texas Regional employed 564 full-time equivalent
employees. Employees of Texas Regional 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
All of Texas Regional's banking locations are owned by Texas Regional,
except for the Company's Roma, Texas banking location. The Edinburg, Harlingen,
Hidalgo, McAllen, Mission, Penitas, and Weslaco, Texas banking locations include
extensive drive-through facilities. The Kerria Plaza banking location and the
main office of Texas Regional are located within the Kerria Plaza Building.
Management believes that it will be desirable in the future to consider the
establishment of additional banking locations.
As indicated above, on February 19, 1998, the Company completed the
acquisitions of TB&T Bancshares, Inc. of Brownsville, Texas, and Brownsville
Bancshares, Inc. of Brownsville, Texas, and Raymondville Bancorp, Inc. of
Raymondville, Texas, The bank subsidiaries of these companies had a total of
four banking locations in Brownsville, Texas and one banking location in
Raymondville, Texas.
Construction of a new headquarters building for the Company in McAllen,
Texas is in progress. The new building will include the main offices of the Bank
and Texas Regional, and will include space for lease to third party tenants and
for future growth. The new building is projected for completion mid-1998.
ITEM 3. LEGAL PROCEEDINGS
Texas State Bank is involved in routine litigation in the normal course of
its business, which in the opinion of management of Texas Regional will not have
a material adverse effect on the financial condition or results of operations of
Texas Regional.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
None
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS.
Since March 1994, the Common Stock has traded on the Nasdaq National Market
tier of The Nasdaq Stock Market under the Symbol: "TRBS." The following table
shows (i) high and low prices of the Common Stock as reported in the Summary of
Activity provided to the Company by The Nasdaq Stock Market for transactions
occurring on The Nasdaq Stock Market during the past two years, and (ii) the
total number of shares involved in such transactions.
The following information has been restated to retroactively give effect to
the three-for-two stock split declared and distributed by the Corporation during
the third quarter of 1997.
PRICE PER SHARE CASH
-------------------- DIVIDENDS NUMBER OF
HIGH LOW DECLARED SHARES
--------- --------- ----------- -----------
1997
Fourth Quarter................... $ 31.50 $26.00 $ 0.11 1,049,074
Third Quarter.................... 31.50 24.50 0.11 1,691,818
Second Quarter................... 30.25 19.00 0.07 1,371,797
First Quarter.................... 24.50 21.17 0.07 926,227
1996
Fourth Quarter................... 23.00 18.83 0.07 1,242,633
Third Quarter.................... 19.50 15.67 0.07 934,507
Second Quarter................... 17.33 13.33 0.07 2,484,147
First Quarter.................... 15.67 11.33 0.06 396,700
During the two years ended December 31, 1997, an aggregate of 34,500 shares
purchased by the Texas Regional Bancshares, Inc. Employee Stock Ownership Plan
(with 401 (k) provisions) are included in the foregoing table.
The final determination of the timing, amount and payment of dividends on
the Common Stock is at the discretion of the Company's Board of Directors and
will depend on conditions then existing, including Texas Regional's
profitability, liquidity, financial condition, capital requirements and other
relevant factors, including regulatory restrictions applicable to the Company.
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 Texas State Bank
is subject to certain restrictions imposed by federal and state banking laws,
regulations and authorities. At December 31, 1997, an aggregate of $30.2 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 selected consolidated financial information below for, and as of, each
of the years in the five-year period ended December 31, 1997 has been derived
from the consolidated financial statements of the Company, which financial
statements have been audited by KPMG Peat Marwick LLP, independent auditors.
1997 1996 1995 1994 1993
- ------------------------------------------------------------------------------------------
Summary of Operations
Interest Income $ 102,344 $ 78,226 $ 45,592 $ 34,631 $ 29,691
Interest Expense 46,092 33,248 18,052 11,690 10,494
- ------------------------------------------------------------------------------------------
Net Interest Income 56,252 44,978 27,540 22,941 19,197
Provision for Loan Losses 2,817 2,120 1,685 1,085 392
Noninterest Income 11,614 9,395 6,518 5,772 5,032
Noninterest Expense 32,603 27,962 18,977 16,507 14,513
- ------------------------------------------------------------------------------------------
Income Before Income Tax Expense 32,446 24,291 13,396 11,121 9,324
Income Tax Expense 11,029 7,912 4,671 3,936 3,345
Cumulative Effect of Change in
Accounting Principle - - - - 32
- ------------------------------------------------------------------------------------------
Net Income $ 21,417 $ 16,379 $ 8,725 $ 7,185 $ 6,011
==========================================================================================
Per Share Data
Net Income - Basic $ 1.64 $ 1.41 $ 0.94 $ 0.80 $ 0.87
Net Income - Diluted 1.61 1.38 0.94 0.79 0.78
Book Value at Year-End 11.11 9.81 6.75 6.00 5.18
Cash Dividends Declared Per
Common Share 0.36 0.27 0.27 0.16 -
Average Shares Outstanding (in Thousands)
Basic 13,085 11,650 9,291 8,669 6,279
Diluted 13,317 11,831 9,327 9,049 7,755
Year-End Balance Sheet Data
Total Assets $1,395,863 $1,230,577 $646,769 $531,834 $473,263
Loans 886,854 757,656 450,854 339,939 290,500
Investments Securities 367,259 318,136 131,641 126,828 127,540
Interest-Earning Assets 1,256,813 1,086,307 586,095 468,067 422,965
Deposits 1,236,997 1,091,735 579,731 472,108 429,521
Shareholders' Equity 145,654 128,148 62,720 55,731 39,983
Performance Ratios
Return on Average Assets 1.65% 1.62% 1.51% 1.43% 1.34%
Return on Average Shareholders'
Equity 15.62 16.11 14.69 14.11 16.15
Net Interest Margin 4.93 5.14 5.33 5.12 4.84
Loan to Deposit Ratio 71.69 69.40 77.77 72.00 67.63
Demand Deposit to Total
Deposit Ratio 14.92 15.46 20.77 21.11 20.81
Asset Quality Ratios
Nonperforming Assets as a % of Total
Loans and Foreclosed Assets 1.23% 0.97% 0.79% 1.41% 1.69%
Net Charge-Offs (Recoveries) to Average
Total Loans Outstanding,
Net of Unearned Discount 0.29 0.21 0.30 0.33 (0.04)
Allowance for Loan Losses as a Percentage of:
Loans 1.19 1.32 1.01 1.03 1.18
Nonperforming Loans 134.81 155.62 216.49 143.42 146.05
Nonperforming Assets 95.87 135.72 126.62 72.96 69.39
Capital Ratios
Equity to Assets Ratio 10.43% 10.41% 9.70% 10.48% 8.45%
Tier I Capital Ratio 13.01 13.17 11.70 14.71 12.05
Total Capital Ratio 14.14 14.44 12.64 15.67 13.21
Leverage Capital Ratio 9.01 8.45 8.96 10.37 7.88
==========================================================================================
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
SELECTED CONSOLIDATED FINANCIAL INFORMATION
Net income for the year ended December 31, 1997 was $21.4 million, reflecting a
net increase of $5.0 million or a 30.8% increase compared to net income of $16.4
million for the year ended December 31, 1996. The earnings per share of $1.64
for the year ended December 31, 1997 increased $0.23 or 16.3% compared to the
earnings per share of $1.41 for the year ended December 31, 1996. Earnings
performance for the year ended December 31, 1997 reflected gains in net interest
income and an increase in noninterest income. These positive factors were
partially offset by an increase in provision for loan losses and noninterest
expenses. A more detailed description of the results of operations is included
in the material that follows. The number of shares outstanding, dividends per
share declared and paid, and related earnings per share amounts have been
restated to retroactively give effect for the three-for-two stock split declared
and distributed by Texas Regional Bancshares, Inc. during the third quarter of
1997.
On May 14, 1996, Texas Regional Bancshares, Inc. (the "Corporation") completed
its secondary public offering of 2.5 million shares of the Corporation's Class A
Voting Common Stock (priced at $22.25 per share). On May 14, 1996, Texas
Regional also completed the acquisition of First State Bank & Trust Co.,
Mission, Texas and The Border Bank, Hidalgo, Texas (which transactions are
called the "Mergers" in this Management's Discussion and Analysis of Financial
Condition and Results of Operations), through merger with Texas State Bank (the
"Bank"), the principal operating subsidiary of Texas Regional Bancshares, Inc.
(collectively, the "Company"). The purchase price of the Mergers was financed
with a combination of proceeds from the 2.5 million share common equity offering
and cash on the balance sheet of the Company. The Mergers included the
assumption of $241.8 million in loans and the assumption of $450.4 million in
deposit liabilities.
The Mergers were accounted for as a purchase; therefore, the results of
operations of the two acquired banks are included in the consolidated financial
statements from the date of each respective acquisition. Accordingly, certain
income statement and balance sheet comparisons may not be appropriate.
The Company paid cash and used the purchase method of accounting for the Mergers
which has resulted in the creation of intangible assets. These
intangible assets are deducted from capital in the determination of regulatory
capital. Thus, "cash" earnings represent the regulatory capital generated during
the year and can be viewed as net income excluding intangible amortization, net
of tax. While the definition of "cash" earnings may vary by company, management
of Texas Regional believe this definition is appropriate as it measures the per
share growth of regulatory capital, which impacts the amount available for
dividends and acquisitions.
The following table reconciles reported net income to net income excluding
intangible assets amortization ("cash" earnings):
Cash Earnings
Taxable-Equivalent basis *
(Dollars in Thousands,
Except Per Share Data) 1997 1996 1995
- -------------------------------------------------------------------------------
Reported Net Income $ 21,417 $ 16,379 $ 8,725
Intangible Amortization 2,252 1,590 320
Income Tax Adjustment (444) (333) (91)
- -------------------------------------------------------------------------------
Cash Earnings $ 23,225 $ 17,636 $ 8,954
===============================================================================
Cash Earnings Per Common Share
Basic $ 1.77 $ 1.51 $ 0.96
Diluted 1.74 1.49 0.96
Cash Earnings Return on
Average Assets 1.79% 1.75% 1.55%
Cash Earnings Return on
Average Shareholders' Equity 16.94 17.34 15.07
===============================================================================
* Taxable-Equivalent basis assuming a 35% federal income tax rate.
ANALYSIS OF RESULTS OF OPERATIONS
NET INTEREST INCOME
Net interest income is the difference between interest earned on assets and
interest expense incurred for the funds supporting those assets. Earning assets
consists of loans, investment securities and federal funds sold. For analytical
purposes, income from tax-exempt assets, primarily securities issued by state
and local governments or authorities, is adjusted by an increment which equates
tax-exempt income to interest from taxable assets.
Earning assets are financed by consumer and commercial deposits and short-term
borrowings. In addition to these interest-bearing funds, assets also are
supported by interest-free funds, primarily demand deposits and shareholders'
equity. Variations in the volume and mix of assets and liabilities, and their
relative sensitivity to interest rate movements, determine changes in net
interest income.
Taxable-equivalent net interest income was $57.8 million for the year ended
December 31, 1997, an increase of $11.2 million or 23.9% compared to the year
ended December 31, 1996, and taxable-equivalent net interest income of $46.6
million for the year ended December 31, 1996, increased $18.9 million or 67.9%
compared to the year ended December 31, 1995. Both net interest income and the
yield on earning assets were reduced by interest foregone on nonaccrual and
renegotiated loans. If interest on those loans had been accrued at the original
contractual rates, additional interest income would have approximated $1.2
million, $765,000, and $247,000 for the years ended December 31, 1997, 1996 and
1995, respectively.
The net yield on total interest-earning assets, also referred to as net interest
margin, represents net interest income divided by average interest-earning
assets. Since a significant portion of the Company's funding is derived from
interest-free sources, primarily demand deposits and shareholders' equity, the
effective rate paid for all funds is lower than the rate paid on
interest-bearing liabilities alone. As the following table illustrates, the net
interest margin of 4.93% for the year ended December 31, 1997 decreased 21 basis
points compared to 5.14% for the year ended December 31, 1996 while the net
interest margin of 5.14% for the year ended December 31, 1996 decreased 19 basis
points compared to 5.33% for the year ended December 31, 1995.
The decrease in the interest margin for the year ended December 31, 1997 is
reflective of the increase in the rate paid on interest-bearing liabilities. The
rate paid on interest-bearing liabilities of 4.70% for the year ended December
31, 1997 increased 25 basis points compared to 4.45% for the year ended December
31, 1996 and the interest paid on interest-bearing liabilities of 4.45% for the
year ended December 31, 1996 increased 6 basis points compared to 4.39% for the
year ended December 31, 1995. The increase in the rate paid on interest-bearing
liabilities during 1997 was primarily attributable to the general increase in
average short-term interest rates and increased competition from local financial
institutions.
The yield on interest-earning assets of 8.87% for the year ended December 31,
1997 increased 6 basis points compared to 8.81% for the year ended December 31,
1996 and the yield on interest-earning assets of 8.81% for the year ended
December 31, 1996 increased 2 basis points compared to 8.79% for the year ended
December 31, 1995. The mix of average interest-earning assets for the year ended
December 31, 1997 compared to year ended December 31, 1996 was changed by total
average loans of $812.3 million increasing $192.7 million or 31.1%, total
average investment securities of $333.3 million increasing $75.0 million or
29.0% and average federal funds sold of $25.6 million decreasing $3.2 million or
11.1%. The decrease in loan yield for 1997 reflects the increase in competition
from local financial institutions. The decrease in loan yield for 1996 reflects
the general decrease in average interest rates in 1996 compared to 1995. The
increase in investment securities yield for the years ended December 31, 1997
and 1996 resulted from lower yielding investment securities maturing and the
reinvesting of the proceeds into higher yields.
The following table presents for the last three calendar years the total dollar
amount of interest income from average interest-earning assets and the resultant
yields, reported on a tax-equivalent basis, as well as the 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 1997 and 1996, and a 34% effective income tax rate for
1995.
Three-Year Financial Summary
Years Ended December 31,
-------------------------------------------------------------------------
1997 1996 1995
---------------------- ---------------------- ------------------------
Taxable-Equivalent Basis(1) Average Yield/ Average Yield/ Average Yield/
(Dollars in Thousands) Balance Interest Rate Balance Interest Rate Balance Interest Rate
- -----------------------------------------------------------------------------------------------------
Assets
Interest-Earning Assets
Loans
Commercial $ 281,682 $ 27,328 9.70% $ 219,923 $21,324 9.70% $125,321 $12,355 9.86%
Real Estate 453,417 45,170 9.96 339,834 34,247 10.08 208,035 21,197 10.19
Consumer 77,177 7,711 9.99 59,824 6,064 10.14 36,918 3,647 9.88
- -----------------------------------------------------------------------------------------------------
Total Loans 812,276 80,209 9.87 619,581 61,635 9.95 370,274 37,199 10.05
- -----------------------------------------------------------------------------------------------------
Investment Securities
Taxable 308,787 20,044 6.49 231,844 14,240 6.14 126,086 7,004 5.55
Tax-Exempt 24,524 2,164 8.82 26,451 2,427 9.18 4,907 431 8.78
- -----------------------------------------------------------------------------------------------------
Total Investment
Securities 333,311 22,208 6.66 258,295 16,667 6.45 130,993 7,435 5.68
- -----------------------------------------------------------------------------------------------------
Federal Funds Sold 25,584 1,433 5.60 28,793 1,554 5.40 19,807 1,172 5.92
- -----------------------------------------------------------------------------------------------------
Total Interest-
Earning Assets 1,171,171 103,850 8.87 906,669 79,856 8.81 521,074 45,806 8.79
- -----------------------------------------------------------------------------------------------------
Cash and Due from Banks 48,726 43,785 31,151
Premises and Equipment,
Net 40,552 29,866 16,365
Other Assets 48,048 35,943 13,507
Allowance for
Loan Losses (10,351) (8,138) (4,158)
- -----------------------------------------------------------------------------------------------------
Total Assets $1,298,146 $1,008,125 $577,939
=====================================================================================================
Liabilities
Interest-Bearing Liabilities
Savings $ 89,729 2,876 3.21 $ 75,360 2,374 3.15 $ 31,360 840 2.68
Money Market Checking
and Savings 224,176 6,632 2.96 205,707 5,763 2.80 129,012 3,484 2.70
Time Deposits 665,781 36,532 5.49 465,262 25,091 5.39 249,167 13,666 5.48
- -----------------------------------------------------------------------------------------------------
Total Savings and
Time Deposits 979,686 46,040 4.70 746,329 33,228 4.45 409,539 17,990 4.39
- -----------------------------------------------------------------------------------------------------
Federal Funds Purchased
and Securities Sold
Under Repurchase
Agreements 980 52 5.31 507 20 3.94 1,093 46 4.21
Short-Term Borrowings - - - - - - 232 16 6.90
- -----------------------------------------------------------------------------------------------------
Total Interest-Bearing
Liabilities 980,666 46,092 4.70 746,836 33,248 4.45 410,864 18,052 4.39
- -----------------------------------------------------------------------------------------------------
Demand Deposits 169,799 150,779 103,842
Other Liabilities 10,575 8,831 3,835
- -----------------------------------------------------------------------------------------------------
Total Liabilities 1,161,040 906,446 518,541
- -----------------------------------------------------------------------------------------------------
Shareholders' Equity 137,106 101,679 59,398
- -----------------------------------------------------------------------------------------------------
Total Liabilities and
Shareholders'
Equity $1,298,146 $1,008,125 $577,939
=====================================================================================================
Net Interest Income $57,758 $46,608 $27,754
=====================================================================================================
Net Yield on Total Interest-
Earning Assets 4.93% 5.14% 5.33%
=====================================================================================================
(1) For analytical purposes, income from tax-exempt assets, primarily securities
issued by state and local governments or authorities, is adjusted by an
increment which equates tax-exempt income to interest from taxable assets
(assuming a 35% effective federal income tax rate for 1997 and 1996, and a 34%
effective federal income tax rate for 1995).
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.
Analysis of Changes in Net Interest Income
Taxable-Equivalent Basis(1)
Year Ended December 31, Due to Change in
1997 Compared to 1996 Net ------------------------------
(Dollars in Thousands) Change Volume Rate Rate/Volume
- ---------------------------------------------------------------------------------------
Interest Income
Loans, Including Fees $18,574 $19,173 $ (496) $ (103)
Investment Securities
Taxable 5,804 4,724 811 269
Tax-Exempt (263) (177) (95) 9
Federal Funds Sold (121) (173) 58 (6)
- ---------------------------------------------------------------------------------------
Total Interest Income 23,994 23,547 278 169
- ---------------------------------------------------------------------------------------
Interest Expense
Deposits 12,812 10,384 1,866 562
Federal Funds Purchased and
Securities Sold Under
Repurchase Agreements 32 19 7 6
- ---------------------------------------------------------------------------------------
Total Interest Expense 12,844 10,403 1,873 568
- ---------------------------------------------------------------------------------------
Net Interest Income Before Allocation of
Rate/Volume 11,150 13,144 (1,595) (399)
- ---------------------------------------------------------------------------------------
Allocation of Rate/Volume - (350) (49) 399
- ---------------------------------------------------------------------------------------
Changes in Net Interest Income $11,150 $12,794 $(1,644) $ -
=======================================================================================
Analysis of Changes in Net Interest Income
Taxable-Equivalent Basis(1)
Year Ended December 31, Due to Change in
1996 Compared to 1995 Net ------------------------------
(Dollars in Thousands) Change Volume Rate Rate/Volume
- ---------------------------------------------------------------------------------------
Interest Income
Loans, Including Fees $24,436 $25,055 $ (370) $ (249)
Investment Securities
Taxable 7,236 5,870 744 622
Tax-Exempt 1,996 1,892 20 84
Federal Funds Sold 382 532 (103) (47)
- ---------------------------------------------------------------------------------------
Total Interest Income 34,050 33,349 291 410
- ---------------------------------------------------------------------------------------
Interest Expense
Deposits 15,238 14,785 246 207
Federal Funds Purchased and
Securities Sold Under
Repurchase Agreements (26) (25) (3) 2
Short-Term Borrowings (16) (16) - -
- ---------------------------------------------------------------------------------------
Total Interest Expense 15,196 14,744 243 209
- ---------------------------------------------------------------------------------------
Net Interest Income Before Allocation of
Rate/Volume 18,854 18,605 48 201
- ---------------------------------------------------------------------------------------
Allocation of Rate/Volume - 145 56 (201)
- ---------------------------------------------------------------------------------------
Changes in Net Interest Income $18,854 $18,750 $ 104 $ -
=======================================================================================
(1) For analytical purposes, income from tax-exempt assets, primarily securities
issued by state and local governments or authorities, is adjusted by an
increment which equates tax-exempt income to interest from taxable assets
(assuming a 35% effective federal income tax rate for 1997 and 1996, and a 34%
effective federal income tax rate for 1995).
NET YIELD ON EARNING ASSETS
The following table presents net interest income, average earning assets and the
net yield by quarter for the past three years. Income and yield on earning
assets include amounts to convert tax-exempt income to a taxable-equivalent
basis, assuming a 35% effective federal income tax rate for 1997 and 1996, and a
34% effective federal income tax rate for 1995.
Net Yield on
Earning Assets Quarter
Taxable-Equivalent Basis % Change ---------------------------------------------
(Dollars in Thousands) Prior Year Year Fourth Third Second First
- ---------------------------------------------------------------------------------------------
1997
Net Interest Income 23.9% $ 57,758 $ 14,691 $ 14,284 $ 14,742 $ 14,041
Average Earning Assets 29.2 1,171,171 1,234,357 1,191,855 1,134,898 1,123,574
Net Yield 4.93% 4.72% 4.75% 5.21% 5.07%
1996
Net Interest Income 67.9% $ 46,608 $ 13,713 $ 14,019 $ 10,981 $ 7,895
Average Earning Assets 74.0 906,669 1,098,972 1,090,068 847,169 590,467
Net Yield 5.14% 4.96% 5.12% 5.21% 5.38%
1995
Net Interest Income 20.3% $ 27,754 $ 7,633 $ 7,047 $ 6,585 $ 6,489
Average Earning Asset 15.7 521,074 574,033 542,783 492,880 474,600
Net Yield 5.33% 5.28% 5.15% 5.36% 5.54%
=============================================================================================
PROVISION FOR LOAN LOSSES
The provision for loan losses for the year ended December 31, 1997 was $2.8
million, an increase of $697,000 or 32.9% from the $2.1 million for the year
ended December 31, 1996. The provision for loan losses for the year ended
December 31, 1996 of $2.1 million reflects an increase of $435,000 or 25.8% from
the $1.7 million provision for loan losses for the year ended December 31, 1995.
Provisions for loan losses are charged to earnings to bring the total allowance
for loan losses to a level deemed appropriate by management based on such
factors as historical experience, the volume and type of lending conducted by
the Company, the amount of nonperforming assets, regulatory policies, generally
accepted accounting principles, general economic conditions, particularly as
they relate to the Company's lending area, and other factors related to the
collectibility of the Company's loan portfolio. The increase in the provision
for the year ended December 31, 1997, compared to the provision for the year
ended December 31, 1996, was primarily attributable to loan growth of $129.2
million and net charge-offs of $2.3 million. See "Allowance for Loan Losses."
NONINTEREST INCOME
Noninterest income of $11.6 million for the year ended December 31, 1997
increased $2.2 million or 23.6% compared to $9.4 million for the year ended
December 31, 1996, and noninterest income of $9.4 million for the year ended
December 31, 1996 increased $2.9 million or 44.1% compared to $6.5 million for
the year ended December 31, 1995. All categories of noninterest income for the
year ended December 31, 1997 increased when compared to the year ended December
31, 1996, and the increase was primarily attributable to the increased volume of
business conducted by the Company, in part as a result of the Mergers. All
categories of noninterest income, except Other Operating Income for the year
ended December 31, 1996, increased when compared to the year ended December 31,
1995.
Total Service Charges of $7.3 million for the year ended December 31, 1997,
increased $1.3 million or 22.4% compared to $6.0 million for the year ended
December 31, 1996. Total Service Charges of $6.0 million for the year ended
December 31, 1996 increased $1.7 million or 38.2% compared to $4.3 million for
the year ended December 31, 1995. The increase in Total Service Charges for the
years ended December 31, 1997, 1996 and 1995 is attributable to increased
account transaction fees as a result of the deposit growth experienced by the
Company and as a result of the Mergers.
Trust Service Fees of $1.7 million for the year ended December 31, 1997
increased $186,000 or 12.4% compared to $1.5 million for the year ended December
31, 1996, and Trust Service Fees of $1.5 million for the year ended December 31,
1996 increased $249,000 or 19.8% compared to $1.3 million for the year ended
December 31, 1995. The increase in Trust Service Fees in each of the years 1997
and 1996 is attributable to an increase in the number of trust accounts managed.
The book value of assets managed at December 31, 1997 of $221.8 million
decreased $45.5 million or 17.0% compared to $267.3 million at December 31,
1996, and was primarily attributable to two public entities, one of which
represents a bond issue for a high school construction project which is close to
completion. Assets held by the trust department of the Bank in fiduciary or
agency capacities are not assets of the Company and are not included in the
consolidated balance sheets.
Net Investment Securities Gains (Losses) was a $731,000 gain for the year ended
December 31, 1997, compared to an $401,000 gain for the year ended December 31,
1996. The sale of securities in 1997 and 1996 was designed to reduce asset
sensitivity of callable bonds and improve bond quality.
Other Operating Income of $789,000 for the year ended December 31, 1997
increased $195,000 or 32.8% compared to $594,000 for the year ended December 31,
1996 and Other Operating Income of $594,000 for the year ended December 31, 1996
decreased $7,000 or 1.2% compared to $601,000 for the year ended December 31,
1995. The increase in Other Operating Income for 1997 was primarily attributable
to the increased volume of business conducted by the Company.
A detailed summary of noninterest income during the last three years is
presented in the following table:
Noninterest Income % %
Years Ended December 31, Change From Change From
(Dollars in Thousands) 1997 Prior Year 1996 Prior Year 1995
- ---------------------------------------------------------------------------------------------
Service Charges on Deposit Accounts $ 5,961 19.7% $ 4,982 43.5% $ 3,472
Other Service Charges 1,362 35.8 1,003 16.8 859
- ---------------------------------------------------------------------------------------------
Total Service Charges 7,323 22.4 5,985 38.2 4,331
Trust Service Fees 1,691 12.4 1,505 19.8 1,256
Net Investment Securities Gains (Losses) 731 82.3 401 461.3 (111)
Data Processing Service Fees 1,080 18.7 910 106.3 441
Other Operating Income 789 32.8 594 (1.2) 601
- ---------------------------------------------------------------------------------------------
Total $11,614 23.6% $ 9,395 44.1% $ 6,518
=============================================================================================
NONINTEREST EXPENSE
Noninterest expense of $32.6 million for the year ended December 31, 1997
increased $4.6 million or 16.6% compared to $28.0 million for the year ended
December 31, 1996, and noninterest expense of $28.0 million for the year ended
December 31, 1996 increased $9.0 million or 47.3% compared with $19.0 million
for the year ended December 31, 1995. These increases for the years ended
December 31, 1997 and 1996 were primarily attributable to an increased volume of
business conducted by the Company, the impairment loss and the Mergers.
The largest category of noninterest expense, Salaries and Employee Benefits
("Personnel"), of $15.4 million for the year ended December 31, 1997 increased
$1.4 million or 10.3% compared to year ended December 31, 1996 levels of $13.9
million. Personnel expenses of $13.9 million for the year ended December 31,
1995 increased $4.4 million or 45.5% compared to year ended December 31, 1995
levels of $9.6 million. Personnel expenses increased for the year ended December
31, 1997 primarily due to staffing increases, including the staff acquired as a
result of the Mergers.
Net Occupancy Expense of $2.3 million for the year ended December 31, 1997
increased $391,000 or 20.0% compared to $2.0 million for the year ended December
31, 1996, and Net Occupancy Expense of $2.0 million for the year ended December
31, 1996 increased $882,000 or 82.5% when compared to Net Occupancy Expense of
$1.1 million for the year ended December 31, 1995. The increase for the year
ended December 31, 1997 and 1996 is primarily attributable to the occupancy
expenses associated with the Mergers.
Equipment Expense of $3.5 million for the year ended December 31, 1997 increased
$341,000 or 10.8% compared to $3.2 million for the year ended December 31, 1996
and Equipment Expense of $3.2 million for the year ended December 31, 1996
increased $1.1 million or 56.1% when compared with $2.0 million for the year
ended December 31, 1995. The Equipment Expense increase noted during the year
ended December 31, 1997 is primarily attributable to equipment obtained in the
Mergers and equipment acquired to service the Company's increasing customer
base.
Other Real Estate (Income) Expense, Net includes rent income from foreclosed
properties, gain or loss on sale of other real estate properties and direct
expenses of foreclosed real estate including property taxes, maintenance costs
and write-downs. Write-downs of Other Real Estate are required if the fair value
of an asset acquired in a loan foreclosure subsequently declines below its
carrying value. The category Other Real Estate (Income) Expense, Net reflects
net loss of $112,000 for the year ended December 31, 1997 which compares
unfavorably to $67,000 net income for the year ended December 31, 1996. Other
Real Estate (Income) Expense, Net of $67,000 net income for the year ended
December 31, 1996 increased $174,000 or 162.6% compared to $107,000 net expense
for the year ended December 31, 1995. The net improvement for year ended
December 31, 1996 is primarily attributable to net reduction in Other Real
Estate owned and a net gain on the sale of foreclosed properties. Management is
actively seeking buyers for all Other Real Estate.
The Intangible Asset Amortization expense of $2.3 million for the year ended
December 31, 1997 increased $659,000 or 41.4% compared to $1.6 million for the
year ended December 31, 1996 and increased $1.3 million or 393.2% compared to
$323,000 for the year ended December 31, 1995. The increase in Intangible Asset
Amortization expense was due to the amortization of goodwill and core deposit
premium associated with the Mergers.
An impairment loss of $630,000 was recorded during the three months ended June
30, 1997 to reflect the impairment of an existing bank building. Construction of
a new bank building in McAllen, Texas is in progress. The new bank building will
be the headquarters for Texas State Bank and Texas Regional Bancshares, Inc. and
is being constructed next to Texas State Bank main banking facility. Upon
completion of the new bank building, the existing building will be razed to make
room for parking. The amount of the impairment loss was the book value of the
building at June 30, 1997.
Other Noninterest Expense $8.4 million for the year ended December 31, 1997
increased $1.0 million or 13.6% compared to $7.4 for the year ended December 31,
1996 and Other Noninterest Expense of $7.4 million for the year ended December
31, 1996 increased $1.5 million or 25.8% compared to $5.9 million for the year
ended December 31, 1995. The increase in Other Noninterest Expense for 1997 and
1996 was primarily attributable to an increased volume of business, primarily
due to the Mergers.
All Other Noninterest Expense categories, not previously discussed, reflect a
net increase for year ended December 31, 1997 compared to the year ended
December 31, 1996 and was attributable to an increased volume of business,
primarily due to the Mergers.
A detailed summary of noninterest expense during the last three years is
presented in the following table:
Noninterest Expense % %
Years Ended December 31, Change From Change From
(Dollars in Thousands) 1997 Prior Year 1996 Prior Year 1995
- ---------------------------------------------------------------------------------------------
Salaries and Wages $12,459 12.9% $ 11,033 45.1% $ 7,605
Employee Benefits 2,892 0.4 2,881 47.1 1,958
- ---------------------------------------------------------------------------------------------
Total Salaries and Employee Benefits 15,351 10.3 13,914 45.5 9,563
- ---------------------------------------------------------------------------------------------
Net Occupancy Expense 2,342 20.0 1,951 82.5 1,069
- ---------------------------------------------------------------------------------------------
Equipment Expense 3,506 10.8 3,165 56.1 2,028
- ---------------------------------------------------------------------------------------------
Other Real Estate (Income) Expense, Net
Rent Income (61) (43.0) (107) (36.4) (146)
(Gain) Loss on Sale (113) (44.3) (203) (686.7) 3
Expenses 262 31.0 200 52.7 131
Write-Downs 24 (44.2) 43 (63.9) 119
- ---------------------------------------------------------------------------------------------
Total Other Real Estate (Income)
Expense, Net 112 (267.2) (67) (162.6) 107
- ---------------------------------------------------------------------------------------------
Intangible Asset Amortization 2,252 41.4 1,593 393.2 323
- ---------------------------------------------------------------------------------------------
Impairment Loss 630 * - * -
- ---------------------------------------------------------------------------------------------
Other Noninterest Expense
Advertising and Public Relations 1,277 6.7 1,197 55.1 772
Data Processing and Check Clearing 845 (10.3) 942 91.9 491
Director Fees 333 (2.9) 343 20.8 284
Franchise Tax 496 102.5 245 23.7 198
Insurance 288 47.7 195 (14.5) 228
FDIC Insurance 138 * 3 (99.4) 540
Legal 958 39.0 689 55.2 444
Professional Fees 637 8.0 590 38.5 426
Postage, Delivery and Freight 594 28.3 463 43.3 323
Stationery and Supplies 951 4.9 907 37.8 658
Telephone 381 10.1 346 38.4 250
Other Losses 521 (16.9) 627 0.5 624
Miscellaneous Expense 991 15.4 859 32.3 649
- ---------------------------------------------------------------------------------------------
Total Other Noninterest Expense 8,410 13.6 7,406 25.8 5,887
- ---------------------------------------------------------------------------------------------
Total $32,603 16.6% $27,962 47.3% $18,977
=============================================================================================
* Not meaningful.
POSTRETIREMENT BENEFITS OTHER THAN PENSIONS
The Company provides the following postretirement benefits: (i) the benefits
provided under the Texas Regional Bancshares, Inc. Employee Stock Ownership Plan
(with 401 (K) provisions), (ii) a nonqualified deferred compensation plan for
the benefit of Glen E. Roney, Chairman of the Board, President and Chief
Executive Officer, (iii) as a result of the consummation of the Mergers, the
Company acquired four existing separate nonqualified deferred compensation plans
for the benefit of certain employees of the Mission and Hidalgo banks and (iv)
medical insurance is also provided on a selected basis.
INCOME TAX
The Company recorded income tax expense of $11.0 million for the year ended
December 31, 1997 compared to $7.9 million for the year ended December 31, 1996.
The increase in income tax expense for the year ended December 31, 1997 is due
primarily to an increased level of pretax income during the year ended December
31, 1997.
NET INCOME
Net income was $21.4 million, $16.4 million and $8.7 million for the years ended
December 31, 1997, 1996 and 1995, respectively.
ANALYSIS OF FINANCIAL CONDITION
BALANCE SHEET COMPOSITION
The Company continues to experience growth in total assets, deposits and loans
attributable in the opinion of management, to the Mergers and in part to the
vitality of the Rio Grande Valley economy. The effects of NAFTA and the
continued devaluation of the Mexican peso relative to the U.S. dollar have
increased cross-border trade and industrial development including activity at
twin manufacturing plants located on each side of the border (referred to as
maquiladoras) which benefit the Rio Grande Valley economy. Management does not
believe that the on-going Mexican financial problems will materially affect the
Company's growth and earnings prospects.
Average interest-earning assets of $1.2 billion increased $264.5 million or
29.2% for the year ended December 31, 1997 compared to $906.7 million for the
year ended December 31, 1996 and increased $385.6 million or 74.0% compared to
$521.1 million for the year ended December 31, 1995. Average loans increased
$192.7 million or 31.1% to $812.3 million for the year ended December 31, 1997
compared to December 31, 1996 levels of $619.6 million, while average investment
securities of $333.3 million increased $75.0 million or 29.0% for the year ended
December 31, 1997 compared to December 31, 1996 levels of $258.3 million. Total
average assets increased $281.0 million or 27.9% to $1.3 billion for the year
ended December 31, 1997 compared to December 31, 1996 levels and $430.2 million
or 74.4% to $1.0 billion for the year ended December 31, 1996 compared to
December 31, 1995 levels of $577.9 million.
Average interest-bearing deposits increased $233.4 million or 31.3% to $979.7
million for the year ended December 31, 1997 compared to the year ended December
31, 1996 levels of $746.3 million. Demand deposits also increased $19.0 million
or 12.6% for the year ended December 31, 1997 to $169.8 million compared to the
year ended December 31, 1996 levels of $150.8 million.
The following table presents the Company's average balance sheets during the
last three years:
Average Balance Sheets
Years Ended December 31,
(Dollars in Thousands) 1997 1996 1995
- -------------------------------------------------------------------------------
Assets
Loans $ 812,276 $ 619,581 $370,274
Investment Securities
Taxable 308,787 231,844 126,086
Tax-Exempt 24,524 26,451 4,907
Federal Funds Sold 25,584 28,793 19,807
- -------------------------------------------------------------------------------
Total Interest-Earning Assets 1,171,171 906,669 521,074
Cash and Due From Banks 48,726 43,785 31,151
Bank Premises and Equipment, Net 40,552 29,866 16,365
Other Assets 48,048 35,943 13,507
Allowance for Loan Losses (10,351) (8,138) (4,158)
- -------------------------------------------------------------------------------
Total $1,289,146 $1,008,125 $577,939
===============================================================================
Liabilities
Demand Deposits
Commercial and Individual $ 163,792 $ 144,777 $ 96,773
Public Funds 6,007 6,002 7,069
- -------------------------------------------------------------------------------
Total Demand Deposits 169,799 150,779 103,842
- -------------------------------------------------------------------------------
Savings
Commercial and Individual 89,061 74,788 30,748
Public Funds 668 572 612
Money Market Checking and Savings
Commercial and Individual 182,935 157,624 101,881
Public Funds 41,241 48,083 27,131
Time Deposits
Commercial and Individual 537,488 406,645 232,966
Public Funds 128,293 58,617 16,201
- -------------------------------------------------------------------------------
Total Interest-Bearing Deposits 979,686 746,329 409,539
- -------------------------------------------------------------------------------
Total Deposits 1,149,485 897,108 513,381
Federal Funds Purchased and
Securities Sold Under Repurchase Agreements 980 507 1,093
Short-Term Borrowings - - 232
Other Liabilities 10,575 8,831 3,835
Shareholders' Equity 137,106 101,679 59,398
- -------------------------------------------------------------------------------
Total $1,298,146 $1,008,125 $577,939
===============================================================================
CASH AND DUE FROM BANKS
Texas State Bank, through its main office and branches, offers a broad range of
commercial banking services to individuals and businesses in its service area.
Texas State Bank also acts as a correspondent to a number of banks in its
service area, providing check clearing, wire transfer, federal funds
transactions, loan participations and other correspondent services. The amount
of cash and due from banks held on any one day is significantly influenced by
temporary changes in cash items in process of collection. At December 31, 1997,
cash and due from banks was $54.0 million.
INVESTMENT SECURITIES
Investment securities consist of U. S. Treasury, federal agency, state, county
and municipal securities, mortgage-backed, corporate debt and equity securities.
The Bank classifies debt and equity securities into one of three categories:
Held to Maturity, Trading or Available for Sale. At each reporting date, the
appropriateness of the classification is reassessed. 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. Investments 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, 1997, 1996 and 1995, no securities were classified as Trading.
The Company does not currently engage in trading activities or use derivative
instruments to control rate risk. Even though such activities may be permitted
with the approval of the Board of Directors, the Company does not intend to
engage in such activities in the immediate future.
The following table presents estimated market value of Securities Available for
Sale at December 31, 1997, 1996 and 1995:
Securities Available for Sale % Change From % Change From
(Dollars in Thousands) 1997 Prior Year 1996 Prior Year 1995
- ---------------------------------------------------------------------------------------------
U.S. Treasury $ 7,002 (22.0)% $ 8,973 49.3% $ 6,012
U.S. Government Agency 269,562 70.9 157,705 183.3 55,668
Mortgage-Backed 15,561 * 92 * -
States and Political Subdivisions 20,898 (8.4) 22,811 * -
Other 2,701 (0.7) 2,720 85.0 1,470
- ---------------------------------------------------------------------------------------------
Total $315,724 64.2% $192,301 204.5% $63,150
=============================================================================================
* Not meaningful.
The following table presents the maturities, amortized cost, estimated market
value and weighted average yields of the Securities Available for Sale at
December 31, 1997:
Amortized Cost(1) Maturing
------------------------------------------
After One After Five Estimated
Securities Available for Sale One Year Through Through After Amortized Market
(Dollars in Thousands) Or Less Five Years Ten Years Ten Years Cost(1) Value
- ---------------------------------------------------------------------------------------------
U.S. Treasury $ - $ 6,976 $ - $ - $ 6,976 $ 7,002
U.S. Government Agency 30,592 156,201 82,358 - 269,151 269,562
Mortgage-Backed 66 - - 15,483 15,549 15,561
States and Political Subdivisions 581 1,381 14,371 3,594 19,927 20,898
Other - 25 75 2,592 2,692 2,701
- ---------------------------------------------------------------------------------------------
Total $31,239 $164,583 $96,804 $21,669 $314,295 $315,724
=============================================================================================
Weighted Average Yields
(Taxable-Equivalent Basis)
- ---------------------------------------------------------------------------------------------
U.S. Treasury -% 5.94% -% -% 5.94%
U.S. Government Agency 5.67 6.47 6.84 - 6.49
Mortgage-Backed 8.50 8.50 - 6.60 8.50
States and Political Subdivisions 8.12 8.39 7.67 8.36 7.86
Other - 7.50 7.67 5.97 6.03
Total 5.97 6.59 7.01 6.83 6.57
=============================================================================================
(1) Amortized cost for Securities Available for Sale is stated at par plus any
remaining unamortized premium paid or less any remaining unamortized
discounts received.
The following table presents amortized cost of Securities Held to Maturity at
December 31, 1997, 1996 and 1995:
Securities Held to Maturity % Change From % Change From
(Dollars in Thousands) 1997 Prior Year 1996 Prior Year 1995
- ---------------------------------------------------------------------------------------------
U.S. Treasury $15,953 (58.2)% $ 38,160 32.6% $28,787
U.S. Government Agency 29,941 (63.0) 81,003 136.6 34,230
States and Political Subdivisions 5,641 (15.5) 6,672 21.9 5,474
- ---------------------------------------------------------------------------------------------
Total $51,535 (59.0)% $125,835 83.7% $68,491
=============================================================================================
All investments in states and political subdivisions are investments in entities
within the State of Texas. No single issuer accounted for as much as 10.0% of
total shareholders' equity at December 31, 1997. Of the obligations of states
and political subdivisions held by the Company at December 31, 1997, 68.7% were
rated A or better by Moody's Investor Services, Inc. and 94.1% of the non-rated
issues or $5.1 million are local issues purchased in private placement
transactions.
The following table presents the maturities, amortized cost, estimated market
value and weighted average yields of Securities Held to Maturity at December 31,
1997:
Amortized Cost (1) Maturing
------------------------------------------
After One After Five Estimated
Securities Held to Maturity One Year Through Through After Amortized Market
(Dollars in Thousands) Or Less Five Years Ten Years en Years Cost(1) Value
- ---------------------------------------------------------------------------------------------
U.S. Treasury $ 5,924 $10,029 $ - $ - $15,953 $ 16,182
U.S. Government Agency 9,988 19,953 - - 29,941 30,062
States and Political Subdivisions 1,142 2,657 1,742 100 5,641 5,792
- ---------------------------------------------------------------------------------------------
Total $17,054 $32,639 $ 1,742 $ 100 $51,535 $ 52,036
=============================================================================================
Weighted Average Yields
(Taxable-Equivalent Basis)
- ---------------------------------------------------------------------------------------------
U.S. Treasury 6.56% 6.63% -% -% 6.60%
U.S. Government Agency 6.24 7.45 - - 7.05
States and Political Subdivisions 7.58 7.75 9.52 10.29 8.31
Total 6.44 7.22 9.52 10.29 7.05
=============================================================================================
(1) Amortized cost for Securities Held to Maturity is stated at par plus any
remaining unamortized premium paid or less any remaining unamortized discount
received.
LOANS
The Company manages its credit risk by establishing and implementing strategies
and guidelines appropriate to the characteristics of borrowers, industries,
geographic locations and risk products. Diversification of risk within each of
these areas is a primary objective. Policies and procedures are developed to
ensure that loan commitments conform to current strategies and guidelines.
Management continues to refine the Company's credit policies and procedures to
address the risks in the current and prospective environment and to reflect
management's current strategic focus. The credit process is controlled with
continuous credit review and analysis, and by review by internal and external
auditors and regulatory authorities. The Company's loans are widely diversified
by borrower and industry group.
The Company has collateral management policies in place so that collateral
lending of all types is approached on a basis consistent with safe and sound
standards. Valuation analysis is utilized to take into consideration the
potentially adverse economic conditions under which liquidation could occur.
Collateral accepted against the commercial loan portfolio includes accounts
receivable and inventory, marketable securities, equipment and agricultural
products. Autos, deeds of trust, life insurance and marketable securities are
accepted as collateral for the installment loan portfolio.
Management of the Company believes that the Company has benefited from increased
loan demand due to passage of the North American Free Trade Agreement ("NAFTA")
and the strong population growth in the Rio Grande Valley. The effects of NAFTA
and the continued devaluation of the Mexican peso relative to the U.S. dollar
have 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. With
the completion of the Mergers, the Company has acquired some dollar-denominated
cross-border credits to individuals or companies that are residents of, or
domiciled in Mexico. The Company's total cross-border credits at December 31,
1997 of $7.7 million were less than 0.9% of total loans. See "Nonperforming
Assets" for additional information on cross-border credits.
Total loans of $886.9 million for the year ended December 31, 1997 increased
$129.2 million or 17.1% compared to the year ended December 31, 1996 levels of
$757.7 million and increased $306.8 million or 68.0% for the year ended December
31, 1996 compared to levels of $450.9 million at December 31, 1995. The increase
in total loans for the year ended December 31, 1997 reflects growth in all loan
categories except Commercial Tax-Exempt loans and is representative in part to
the vitality of the Rio Grande Valley economy. The increase in total loans for
the year ended December 31, 1996 is primarily attributable to the Mergers. 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:
Loan Portfolio Composition
December 31,
(Dollars in Thousands) 1997 1996 1995 1994 1993
- --------------------------------------------------------------------------------
Commercial $230,024 $198,752 $112,042 $101,866 $ 91,697
Commercial Tax-Exempt 29,024 34,777 34,419 - -
- --------------------------------------------------------------------------------
Total Commercial Loans 259,048 233,529 146,461 101,866 91,697
- --------------------------------------------------------------------------------
Agricultural 51,214 32,639 25,097 17,199 13,829
- --------------------------------------------------------------------------------
Real Estate
Construction 67,872 47,400 29,967 18,809 11,846
Commercial Mortgage 287,204 243,198 129,953 113,677 98,635
Agricultural Mortgage 31,001 28,803 17,057 10,263 5,153
1-4 Family Mortgage 105,852 100,301 59,052 47,425 42,647
- --------------------------------------------------------------------------------
Total Real Estate 491,929 419,702 236,029 190,174 158,281
- --------------------------------------------------------------------------------
Consumer 84,663 71,786 43,267 30,700 26,693
- --------------------------------------------------------------------------------
Total Loans $886,854 $757,656 $450,854 $339,939 $290,500
================================================================================
The contractual maturity schedule of the loan portfolio at December 31, 1997 is
presented in the following table:
Loan Maturities One After One Year After
December 31, 1997 Year Through Five
(Dollars in Thousands) Or Less Five Years Years Total
- -------------------------------------------------------------------------------
Commercial $114,832 $ 94,080 $ 21,112 $230,024
Commercial Tax-Exempt 4,061 24,246 717 29,024
Agricultural 44,067 6,810 337 51,214
Real Estate
Construction 55,143 10,646 2,083 67,872
Commercial Mortgage 47,021 182,489 57,694 287,204
Agricultural Mortgage 2,662 21,057 7,282 31,001
1-4 Family Mortgage 19,263 83,165 3,424 105,852
Consumer 32,892 51,436 335 84,663
- -------------------------------------------------------------------------------
Total $319,941 $473,929 $ 92,984 $886,854
===============================================================================
Variable-Rate Loans $142,224 $209,189 $ 70,262 $421,675
Fixed-Rate Loans 177,717 264,740 22,722 465,179
- -------------------------------------------------------------------------------
Total $319,941 $473,929 $ 92,984 $886,854
===============================================================================
As shown in the preceding table, loans maturing within one year totaled $319.9
million at year-end 1997. 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 Bank has several procedures in place to assist in maintaining the overall
quality of its loan portfolio. The Bank has established underwriting guidelines
to be followed by its officers and monitors its delinquency levels for any
negative or adverse trends.
Nonperforming assets consist of nonaccrual loans, loans for which the interest
rate has been renegotiated below originally contracted rates and real estate or
other assets that have been acquired in partial or full satisfaction of loan
obligations. The Company's policy generally is to place a loan on nonaccrual
status when payment of principal or interest is contractually past due 90 days,
or earlier when concern exists as to the ultimate collection of principal and
interest. At the time a loan is placed on nonaccrual status, interest previously
accrued but uncollected is reversed and charged against current income.
Nonaccrual loans of $7.8 at December 31, 1997 increased $1.4 million or 21.1%
compared to $6.4 million at December 31, 1996 and nonaccrual loans at December
31, 1996 of $6.4 million increased $4.4 million or 208.1% compared to $2.1
million at December 31, 1995. The increase in nonaccrual loans during 1997 are
due to several diverse credits secured primarily by real estate. The increase in
nonaccrual loans during 1996 were primarily attributable to three cross-border
credits totaling $3.4 million. The cross-border nonaccrual credits at December
31, 1997 of $2.9 million reflect a decrease of $500,000 when compared to the
$3.4 million at December 31, 1996. The decrease in cross-border nonaccrual
credits is a result of loan collections.
Loans which are contractually past due 90 days or more, which are both well
secured or guaranteed by financially responsible third parties and in the
process of collection, generally are not placed on nonaccrual status. The amount
of such loans past due 90 days or more for the years ended December 31, 1997,
1996 and 1995 that are not classified as nonaccrual totaled $3.0 million, $4.1
million and $642,000, respectively. The decrease in accruing loans past due 90
days or more at December 31, 1997 as compared to the year ended December 31,
1996 is partly attributable to loan collections.
Nonperforming Assets of $11.0 million at December 31, 1997 increased $3.6
million or 48.4% compared to December 31, 1996 levels of $7.4 million and
increased $3.8 million or 106.0% compared to December 31, 1995 levels of $3.6
million. The increase in Foreclosed Assets during 1997 was primarily
attributable to a higher foreclosure rate of loans with real estate collateral,
net of write-downs and liquidations. Management actively seeks buyers for all
Other Real Estate. See "Noninterest Expense" above. The ratio of Nonperforming
Assets Plus Accruing Loans 90 Days or More Past Due as a percent of Total Loans
and Foreclosed Assets at December 31, 1997 increased to 1.57% from 1.51% at
December 31, 1996 due primarily to the increase in foreclosed assets.
The Company's classification of nonperforming loans includes those loans for
which management believes collection is doubtful. Management is not aware of any
specific borrower relationships that are not reported as nonperforming where
management has serious doubts as to the ability of such borrowers to comply with
the present loan repayment terms which would cause nonperforming assets to
increase materially.
The Company identifies loans to be reported as impaired when such loans are in
nonaccrual status or are considered troubled debt restructurings due to the
granting of a below-market rate of interest or a partial forgiveness of
indebtedness on an existing loan. Impairment of loans having recorded
investments of $7.8 million at December 31, 1997 and $6.4 million at December
31, 1996 has been recognized in conformity with Statement 114, as amended by
Statement 118. The average recorded investment in impaired loans during 1997 and
1996 was $8.1 million and $4.8 million, respectively. The total allowance for
loan losses related to these loans was $786,000 and $506,000 on December 31,
1997 and 1996, respectively. Interest income on impaired loans of $178,000 and
$532,000 was recognized for cash payments received in 1997 and 1996,
respectively.
An analysis of the components of nonperforming assets for the last five years is
presented in the following table:
Nonperforming Assets
December 31,
(Dollars in Thousands) 1997 1996 1995 1994 1993
- ---------------------------------------------------------------------------------------------
Nonaccrual Loans $ 7,802 $ 6,445 $2,092 $2,435 $2,305
Renegotiated Loans - 1 6 13 47
- ---------------------------------------------------------------------------------------------
Nonperforming Loans 7,802 6,446 2,098 2,448 2,352
Foreclosed Assets 3,169 945 1,489 2,364 2,598
- ---------------------------------------------------------------------------------------------
Total Nonperforming Assets 10,971 7,391 3,587 4,812 4,950
Accruing Loans 90 Days or More Past Due 3,041 4,089 642 226 439
- ---------------------------------------------------------------------------------------------
Total Nonperforming Assets and
Accruing Loans 90 Days or More Past Due $14,012 $11,480 $4,229 $5,038 $5,389
=============================================================================================
Nonperforming Loans as a % of Total Loans 0.88% 0.85% 0.47% 0.72% 0.81%
Nonperforming Assets as a % of Total Loans
and Foreclosed Assets 1.23 0.97 0.79 1.41 1.69
Nonperforming Assets as a % of Total Assets 0.79 0.60 0.55 0.90 1.05
Nonperforming Assets Plus Accruing Loans
90 Days or More Past Due as a % of Total
Loans and Foreclosed Assets 1.57 1.51 0.94 1.47 1.84
=============================================================================================
Interest income that would have been recorded for the year ended December 31,
1997 on nonaccrual and renegotiated loans had such loans performed in accordance
with their original contractual terms and been outstanding throughout the year
ended December 31, 1997, or since origination, if held for only part of that
year, was approximately $1.2 million. For the year ended December 31, 1997, the
amount of interest income actually recorded on nonaccrual and renegotiated loans
was approximately $552,000.
Management regularly reviews and monitors the loan portfolio to identify
borrowers experiencing financial difficulties. Management believes that, at
December 31, 1997, all such loans had been identified and included in the
nonaccrual, renegotiated or 90 days past due loan totals reflected in the table
above. Management continues to emphasize maintaining a low level of
nonperforming assets and returning nonperforming assets to an earning status.
ALLOWANCE FOR LOAN LOSSES
Management analyzes the loan portfolio to determine the adequacy of the
allowance for loan losses and the appropriate provision required to maintain an
adequate allowance. In assessing the adequacy of the allowance, management
reviews the size, quality and risks of loans in the portfolio and considers
factors such as specific known risks, past experience, the status and amount of
nonperforming assets and economic conditions. A specific percentage is allocated
to total loans in good standing and additional amounts are added for individual
loans considered to have specific loss potential. Loans identified as losses are
charged-off. In addition, the loan review committee of the Bank reviews the
assessments of management in determining the adequacy of the Bank's allowance
for loan losses. Based on total allocations, the provision is recorded to
maintain the allowance at a level deemed appropriate by management. While
management uses available information to recognize losses on loans, there can be
no assurance that future additions to the allowance will not be necessary.
The allowance for loan losses at year ended December 31, 1997 was $10.5 million,
which represents a net increase of $487,000 or 4.9% as compared to $10.0 million
at December 31, 1996. Management believes that the allowance for loan losses at
December 31, 1997 adequately reflects the risks in the loan portfolio. Various
regulatory agencies, as an integral part of their examination process,
periodically review the Company's allowance for loan losses. Such agencies may
require the Company to recognize additions to the allowance based on their
judgments of information available to them at the time of their examination.
The following table summarizes the activity in the allowance for loan losses for
the last five years:
Allowance for Loan Loss Activity
Years Ended December 31,
(Dollars in Thousands) 1997 1996 1995 1994 1993
- ---------------------------------------------------------------------------------------------
Balance at Beginning of Year $10,031 $4,542 $3,511 $3,435 $2,929
Balance from Acquisitions - 4,647 450 - -
Provision for Loan Losses 2,817 2,120 1,685 1,085 392
Charge-Offs
Commercial 1,731 883 813 169 64
Agricultural 477 158 416 781 -
Real Estate 59 82 111 153 89
Consumer 797 659 300 132 93
- ---------------------------------------------------------------------------------------------
Total Charge-Offs 3,064 1,782 1,640 1,235 246
- ---------------------------------------------------------------------------------------------
Recoveries
Commercial 124 160 401 163 113
Agricultural 48 - 66 4 13
Real Estate 350 161 4 10 128
Consumer 212 183 65 49 106
- ---------------------------------------------------------------------------------------------
Total Recoveries 734 504 536 226 360
- ---------------------------------------------------------------------------------------------
Net Charge-Offs (Recoveries) 2,330 1,278 1,104 1,009 (114)
- ---------------------------------------------------------------------------------------------
Balance at End of Year $10,518 $10,031 $4,542 $3,511 $3,435
=============================================================================================
Ratio of Allowance for Loan
Losses to Loans Outstanding,
Net of Unearned Discount 1.19% 1.32% 1.01% 1.03% 1.18%
Ratio of Allowance for Loan
Losses to Nonperforming Assets 95.87 135.72 126.62 72.96 69.39
Ratio of Net Charge-Offs (Recoveries)
to Average Total Loans Outstanding,
Net of Unearned Discount 0.29 0.21 0.30 0.33 (0.04)
=============================================================================================
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 is presented in the table below:
1997 1996 1995 1994 1993
Allocation of the -------------- --------------- --------------- -------------- -------------
Allowance for % of Loans % of Loans % of Loans % of Loans % of Loans
Loan Losses in Each in Each in Each in Each in Each
December 31, Category Category Category Category Category
(Dollars in of Total of Total of Total of Total of Total
Thousands) Amount Loans Amount Loans Amount Loans Amount Loans Amount Loans
- ---------------------------------------------------------------------------------------------
Commercial $ 2,489 29.2% $ 2,102 30.8% $ 965 32.5% $1,057 30.0% $1,348 31.6%
Agricultural 1,329 5.8 391 4.3 304 5.6 478 5.1 138 4.7
Real Estate 5,242 55.5 5,663 55.4 2,401 52.3 1,644 55.9 1,705 54.5
Consumer 491 9.5 432 9.5 296 9.6 257 9.0 215 9.2
Unallocated 967 - 1,443 - 576 - 75 - 29 -
- ---------------------------------------------------------------------------------------------
Total $10,518 100.0% $10,031 100.0% $4,542 100.0% $3,511 100.0% $3,435 100.0%
=============================================================================================
PREMISES AND EQUIPMENT
Premises and equipment of $49.3 million at December 31, 1997 increased $12.2
million or 33.0% compared to $37.1 million at December 31, 1996 in addition to a
net increase of $18.7 million or 107.7% for December 31, 1996 compared to $18.4
million at December 31, 1995. The net increase for the year ended December 31,
1997 was primarily attributable to $9.2 million for construction in progress of
the Company's new headquarters in McAllen. As previously reported the Company's
new headquarters is approximately 187,000 square feet at a cost of approximately
$18.5 million. The Bank will occupy approximately 110,000 square feet, leaving
approximately 77,000 square feet available for prospective tenants. Completion
of the building is expected by mid-1998. The net increase for the year ended
December 31, 1996 was primarily attributable to the Mergers.
INTANGIBLES
Intangibles of $24.1 million at December 31, 1997 decreased $2.3 million or 8.6%
compared to $26.3 million at December 31, 1996 and increased $20.6 million or
360.8% for December 31, 1996 compared to $3.7 million at December 31, 1995. The
decrease in 1997 was due to amortization of existing intangibles. The net
increase for the year ended December 31, 1996 is attributable to the intangibles
recorded as a result of the Mergers.
DEPOSITS
Total deposits of $1.2 billion at December 31, 1997 increased $145.3 million or
13.3% compared to December 31, 1996 levels of $1.1 billion and total deposits of
$1.1 billion for the year ended December 31, 1996 increased $512.0 million or
88.3% compared to December 31, 1995 levels of $579.7 million. The increase in
total deposits for the year ended December 31, 1997 is attributable in part to
the vitality of the Rio Grande Valley economy. The increase in total deposits at
December 31, 1996 compared to December 31, 1995 is primarily attributable to the
Mergers. Total noninterest-bearing deposits of $184.5 million for the year ended
December 31, 1997 represented an increase of $15.8 million or 9.4% compared to
the year ended December 31, 1996 and increased $48.3 million or 40.1% for the
year ended December 31, 1996 compared to the year ended December 31, 1995. Total
public funds deposits (consisting of Public Funds Demand Deposits, Savings,
Money Market Checking and Savings and Time Deposits) of $205.4 million for the
year ended December 31, 1997 increased $42.2 million or 25.9% compared to
December 31, 1996 levels of $163.2 million. The Bank actively seeks consumer and
commercial deposits, including deposits from correspondent banks and public
funds deposits. The following table presents the composition of total deposits
at the end of the last three years:
Total Deposits
December 31, % Change From % Change From
(Dollars in Thousands) 1997 Prior Year 1996 Prior Year 1995
- ---------------------------------------------------------------------------------------------
Demand Deposits
Commercial and Individual $ 180,467 11.0% $ 162,650 43.5% $113,345
Public Funds 4,054 (33.3) 6,078 (14.0) 7,069
- ---------------------------------------------------------------------------------------------
Total Demand Deposits 184,521 9.4 168,728 40.1 120,414
- ---------------------------------------------------------------------------------------------
Interest-Bearing Deposits
Savings
Commercial and Individual 89,231 (5.2) 94,114 165.0 35,521
Public Funds 771 4.5 738 20.6 612
Money Market Checking and Savings
Commercial and Individual 186,576 2.8 181,495 72.2 105,409
Public Funds 39,523 (26.0) 53,432 139.8 22,278
Time Deposits
Commercial and Individual 575,299 17.3 490,294 71.7 285,545
Public Funds 161,076 56.5 102,934 * 9,952
- ---------------------------------------------------------------------------------------------
Total Interest-Bearing Deposits 1,052,476 14.0 923,007 101.0 459,317
- ---------------------------------------------------------------------------------------------
Total Deposits $1,236,997 13.3% $1,091,735 88.3% $579,731
=================================================================================