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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-K
(Mark One)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 1998
or
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM ___________ TO _________
COMMISSION FILE NUMBER 000-14517
TEXAS REGIONAL BANCSHARES, INC.
(Exact name of registrant as specified in its charter)
TEXAS 74-2294235
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
POST OFFICE BOX 5910
3900 NORTH 10TH STREET, 11TH FLOOR
MCALLEN, TEXAS 78502-5910
(Address of principal executive offices) (Zip Code)
(956) 631-5400
Registrant's telephone number, including area code
Securities registered pursuant to Section 12(b) of the Act:
TITLE OF EACH CLASS NAME OF EACH EXCHANGE ON WHICH REGISTERED
--------------------- -------------------------------------------
None None
Securities registered pursuant to Section 12(g) of the Act:
CLASS A VOTING COMMON, $1.00 PAR VALUE PER SHARE
--------------------------------------------------
(Title of class)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes [X] No [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K (Sec. 229.405 of this chapter) is not contained herein, and
will not be contained, to the best of registrant's knowledge, in definitive
proxy or information statements incorporated by reference in Part III of this
Form 10-K or any amendment to this Form 10-K. [ ]
The aggregate market value of the voting stock held by non-affiliates of the
registrant as of March 8, 1999 (based on the closing price on such date as
reported on The Nasdaq Stock Market(R) was $325,696,957.
There were 14,411,583 shares of the registrant's Class A Voting Common Stock,
$1.00 par value, outstanding as of March 8, 1999.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Registrant's definitive Proxy Statement for its 1999 Annual
Meeting of Stockholders are incorporated into Part III, Items 10-13 of this
Form 10-K.
PART I
ITEM 1. BUSINESS
GENERAL
Texas Regional Bancshares, Inc. ("Texas Regional" or the "Company"), a
Texas business corporation incorporated in 1983 and headquartered in McAllen,
Texas, is a bank holding company within the meaning of the Bank Holding Company
Act of 1956 ("the BHCA") and as such is registered with the Board of Governors
of the Federal Reserve System ("Federal Reserve Board"). Texas Regional
Delaware, Inc., incorporated under the laws of Delaware as a wholly owned second
tier bank holding company subsidiary, owns Texas State Bank (the "Bank"), the
Company's primary operating subsidiary. The Bank has two wholly owned
subsidiaries: (i) TSB Securities, Inc., incorporated in 1997 to provide full
service broker-dealer services and (ii) TSB Properties, Inc., incorporated in
1998 to receive and liquidate foreclosed assets.
Texas State Bank acquired the Rio Grande City and Roma branches of First
National Bank of South Texas during 1995. The Company completed a secondary
public offering of 2.5 million shares of the Company's Class A Voting Common
Stock on May 14, 1996. Concurrently, Texas Regional also completed the
acquisition of First State Bank & Trust Co., Mission, Texas and The Border Bank,
Hidalgo, Texas, through merger with the Bank. On February 19, 1998, the Company
acquired Brownsville National Bank, Brownsville, Texas, Texas Bank and Trust,
Brownsville, Texas and Bank of Texas, Raymondville, Texas through merger with
the Bank.
Texas State Bank operates twenty banking locations in the Rio Grande
Valley including four banking locations in McAllen (including its main office),
four banking locations in Brownsville, three banking locations in Mission, two
banking locations in Weslaco, and one banking location each in Edinburg,
Harlingen, Hidalgo, Penitas, Raymondville, Rio Grande City and Roma. At December
31, 1998, Texas Regional had consolidated total assets of $1.8 billion, loans
outstanding (net of unearned discount) of $1.1 billion, total deposits of $1.6
billion, and shareholders' equity of $177.5 million.
The business strategy of Texas Regional is for the Bank to provide its
customers with the financial sophistication and breadth of products of a
regional bank, while retaining the local appeal and level of service of a
community bank. The Board of Directors and management of the Company have
maintained the Company's community orientation by tailoring products and
services to meet community and customer needs. Management believes that the
Company is well positioned in its market due to its responsive customer service,
the strong community involvement of management and employees, the recent trends
in the Texas banking environment and the vitality of the Rio Grande Valley
economy. Management's strategy is to provide a business culture in which
individual customers and small and medium sized businesses are accorded the
highest priority in all aspects of the Company's operations. Management believes
that individualized customer service will allow the Company to increase its
market share in loan and deposit volumes. As part of its operating and growth
strategies, the Company is working to continue to attract business from, and
provide service to, small and medium sized businesses, and expand operations in
the Rio Grande Valley.
For its business customers, Texas State Bank offers checking facilities,
certificates of deposit, short-term loans for working capital purposes,
construction financing, mortgage loans, term loans for fixed asset and expansion
needs, and other commercial loans. The services provided for individuals by the
Bank include checking accounts, savings accounts, certificates of deposit,
individual retirement accounts and consumer loan programs, including installment
loans for home repair and for purchases of consumer goods, including
automobiles, trucks and boats, and mortgage loans. The Bank also provides
travelers checks, money orders and safe deposit facilities, and offers trust
services.
The Bank has also expanded the services that it provides to third party
correspondent banks. The Bank's data processing center, for example, presently
serves five banks in addition to providing data processing services for all of
the Bank's banking locations.
Management believes there may be opportunities to expand by acquiring
financial institutions or by acquiring assets and deposits that will allow the
Company to enter adjacent markets or further increase market share in existing
markets. Management intends to pursue acquisition opportunities in strategic
markets in circumstances in which management believes that its managerial,
operational and capital resources will enhance the performance of acquired
institutions. There are currently no agreements or understandings related to any
acquisition.
COMPETITION
The Company's operations are located in the Rio Grande Valley, which
consists of Cameron, Hidalgo, Willacy and Starr Counties. Cameron, Hidalgo and
Starr Counties are each directly adjacent to the Rio Grande River, which forms
part of the border between the United States and Mexico. The Company's twenty
banking locations are currently located in Cameron County (Brownsville and
Harlingen), Hidalgo County (Edinburg, Hidalgo, McAllen, Mission, Penitas and
Weslaco), Starr County (Rio Grande City and Roma) and Willacy County
(Raymondville).
The Bank encounters intense competition in its commercial banking
business, primarily from other banks located in its market area. The Bank also
competes with insurance, finance and mortgage companies, savings and loan
institutions, credit unions, money market funds and other financial
institutions. Competition is based upon interest rates offered on deposit
accounts, interest rates charged on loans and other credit and service charges,
the quality and scope of the services rendered, the convenience of banking
facilities, and, in the case of loans to commercial borrowers, relative lending
limits. A substantial number of the commercial banks in the Rio Grande Valley
are branches of much larger organizations affiliated with national, regional or
state-wide banking companies which are larger than the Bank in terms of capital,
resources and personnel. However, as a major independent community bank
headquartered in its primary market area, management believes that the Company's
community commitment and involvement in its primary market area, as well as its
commitment to quality and personalized banking services, are factors that
contribute to the Company's competitiveness.
REGULATION AND SUPERVISION
In addition to the generally applicable state and federal laws governing
businesses and employers, special federal and state laws applicable only to
financial institutions and their parent companies further extensively regulate
the Company and the Bank. Virtually all aspects of the Company's operations are
subject to specific requirements or restrictions and general regulatory
oversight, from laws regulating consumer finance transactions, such as the Truth
In Lending Act, the Home Mortgage Disclosure Act and the Equal Credit
Opportunity Act, to laws regulating collections and confidentiality, such as the
Fair Debt Collections Practices Act, the Fair Credit Reporting Act and the Right
to Financial Privacy Act. With few exceptions, state and federal banking laws
have as their principal objective either the maintenance of the safety and
soundness of the federal deposit insurance system or the protection of consumers
or classes of consumers, rather than the specific protection of shareholders of
the Company. To the extent the following material describes statutory or
regulatory provisions, it is qualified in its entirety by reference to the
particular statute or regulation.
REGULATION OF THE COMPANY
Texas Regional is a bank holding company within the meaning of the Bank
Holding Company Act of 1956 (the "BHCA"), as amended, and therefore is subject
to regulation and supervision by the Federal Reserve Board (the "FRB"). In
addition, the Company is required to file reports with and to furnish such other
information as the FRB may require pursuant to the BHCA, and to subject itself
to examination by the FRB. The FRB has the authority to issue bank holding
companies orders to cease and desist from unsound practices and violations of
conditions imposed by, or violation of agreements with, the FRB. The FRB is also
empowered to assess civil penalties against companies or individuals who violate
the BHCA or orders or regulations thereunder in amounts up to $1.0 million per
day, to order termination of non-banking activities of non-banking subsidiaries
of bank holding companies, and to order termination of ownership and control of
a non-banking subsidiary by a bank holding company. Certain violations may also
result in criminal penalties. The FRB and the Federal Deposit Insurance
Corporation (the "FDIC"), as appropriate, are authorized to exercise comparable
authority, under the Federal Deposit Insurance Act (the "FDI Act") and other
statutes, with respect to subsidiary banks.
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 effects as undue concentration of resources,
decreased or unfair competition, conflicts of interest or unsound banking
practices. In considering any application for approval of an acquisition or
merger, the FRB is also required to consider the financial and managerial
resources of the companies and the banks concerned, as well as the applicant's
record of compliance with the Community Reinvestment Act (the "CRA"). The CRA
generally requires a financial institution to take affirmative action to
ascertain and meet the credit needs of its entire community, including low and
moderate income neighborhoods.
The BHCA generally imposes certain limitations on extensions of credit and
other transactions by and between banks that are a member of the Federal Reserve
System and other banks and non-bank companies in the same holding company. Under
the BHCA and the FRB's regulations, a bank holding company and its subsidiaries
are prohibited from engaging in certain tie-in arrangements in connection with
any extension of credit, lease or sale of property or furnishing of services.
The Company, as an affiliate of the Bank, is subject to certain
restrictions regarding transactions between a bank and companies with which it
is affiliated. These provisions limit extensions of credit (including guarantees
of loans) by the Bank to affiliates, investments in the stock or other
securities of the Company by the Bank, and the nature and amount of collateral
that the Bank may accept from any affiliate to secure loans extended to the
affiliate.
REGULATION OF THE BANK
Texas State Bank is a state-chartered bank subject to regulation by the
Texas Department of Banking. The Bank, whose deposits are insured by the Bank
Insurance Fund (the "BIF") of the FDIC, is also a member of the Federal Reserve
System, and therefore the FRB is the primary federal regulator for the Bank.
The requirements and restrictions applicable to the Bank under laws of the
United States and the State of Texas include (i) the requirement that reserves
be maintained, (ii) restrictions on the nature and amount of loans which can be
made, (iii) restrictions on the business activities in which the Bank may
engage, (iv) restrictions on the payment of dividends to shareholders, and (v)
the maintenance of minimum capital requirements.
The Company is dependent upon dividends received from the Bank for
discharge of the Company's obligations and for payment of dividends to the
Company's shareholders. However, the application of minimum capital requirements
and other rules and regulations applicable to the Bank restrict the amount of
dividends that it may declare without prior regulatory approval. The Texas
Banking Department and the FRB can each further limit payment of dividends if
the regulatory authority finds that the payment of dividends would constitute an
unsafe or unsound practice. Except to absorb losses in excess of undivided
profits and uncertified surplus, such certified surplus may not be reduced
without the prior written consent of the Banking Commissioner.
The laws of the State of Texas primarily govern interest rate limitations
for the Bank. The maximum annual interest rate that may be charged on most loans
made by the Bank is based on doubling the average auction rate, to the nearest
0.25%, for United States Treasury Bills, as computed by the Office of Consumer
Credit Commissioner of the State of Texas. However, the maximum rate does not
decline below 18% or rise above 24% (except for loans in excess of $250,000 that
are made for business, commercial, investment or other similar purposes
(excluding agricultural loans), in which case the maximum annual rate may not
rise above 28%, rather than 24%). On fixed rate closed-end loans, the maximum
non-usurious rate is to be determined at the time the rate is contracted; while
on floating rate and open-end loans (such as credit cards), the rate varies over
the term of the indebtedness. Federal law has preempted state usury laws (but
not late charge limitations) for loans secured by a first lien on residential
real property.
Banks are affected by the credit policies of other monetary authorities,
including the FRB, which regulate the national supply of bank credit. Such
regulation influences overall growth of bank loans, investments, and deposits
and may also affect interest rates charged on loans and paid on deposits. The
monetary policies of the FRB have had a significant effect on the operating
results of commercial banks in the past and are expected to continue to do so in
the future.
FDICIA
FDICIA requires that federal bank regulatory authorities take "prompt
corrective action" with respect to any depository institution that does not meet
specified minimum capital requirements. The applicable regulations establish
five capital levels which require or permit the FRB and other regulatory
authorities to take supervisory action. The relevant classifications range from
"well capitalized" to "critically undercapitalized". Under these regulations, an
institution is considered well capitalized if it has a total risk-based capital
ratio of 10.0% or greater, a Tier I risk-based capital ratio of 6.0% or greater,
and a leverage ratio of 5.0% or greater, and it is not subject to an order,
written agreement, capital directive, or prompt corrective action directive to
meet and maintain a specific capital level for any capital measure. An
institution is considered adequately capitalized if it has a total risk-based
capital ratio of 8.0% or greater, a Tier I risk-based capital ratio of 4.0% or
greater and a leverage capital ratio of 3.0% or greater (if the institution is
rated composite 1 in its most recent report of examination, subject to
appropriate federal banking agency guidelines), and the institution does not
meet the definition of a well capitalized institution. An institution is
considered undercapitalized if it has a total risk-based capital ratio that is
less than 8.0%, a Tier I risk-based capital ratio that is less than 4.0%, or a
leverage ratio that is less than 4.0% (or a leverage ratio that is less than
3.0% if the institution is rated composite 1 in its most recent report of
examination, subject to appropriate federal banking agency guidelines). A
significantly undercapitalized institution is one which has a total risk-based
capital ratio that is less than 6.0%, a Tier I risk-based capital ratio that is
less than 3.0%, or a leverage ratio that is less than 3.0%. A critically
undercapitalized institution is one that has a ratio of tangible equity to total
assets that is equal to or less than 2.0%.
The FRB is authorized by the legislation to take various enforcement
actions against any significantly undercapitalized institution and any
undercapitalized institution that fails to submit an acceptable capital
restoration plan or fails to implement a plan accepted by the appropriate
agency. These powers include, among other things, requiring the institution to
be recapitalized, prohibiting asset growth, restricting interest rates paid,
requiring prior approval of capital distributions by any bank holding company
which controls the institution, requiring divestiture by the institution of its
subsidiaries or by the holding company of the institution itself, requiring a
new election of directors, and requiring the dismissal of directors and
officers. If imposed these restrictions, either individually or in aggregate,
could have a significantly adverse impact on the operations of the Bank.
With certain exceptions, an institution will be prohibited from making
capital distributions or paying management fees if the payment of such
distributions or fees will cause the institution to become undercapitalized.
Furthermore, undercapitalized institutions will be required to file capital
restoration plans with the appropriate federal regulator. Pursuant to FDICIA,
undercapitalized institutions also will be subject to restrictions on growth,
acquisitions, branching and engaging in new lines of business unless they have
an approved capital plan that permits otherwise. The FRB also may, among other
things, require an undercapitalized institution to issue shares or obligations,
which could be voting stock, to recapitalize the institution or, under certain
circumstances to divest itself of any subsidiary.
Critically undercapitalized institutions may be subject to more extensive
control and supervision and the FRB may prohibit any critically undercapitalized
institution from, among other things, entering into any material transaction not
in the ordinary course of business, amending its charter or bylaws, or engaging
in certain transactions with affiliates. In addition, critically
undercapitalized institutions generally will be prohibited from making payments
of principal or interest on outstanding subordinated debt. Within 90 days of an
institution becoming critically undercapitalized, the FRB must appoint a
receiver or
conservator unless certain findings are made with respect to the prospect for
the institution's continued operation.
Management believes that the Company meets all capital adequacy
requirements to which it is subject at December 31, 1998. The Bank's capital
ratios exceeded the minimum requirements for "well capitalized" institutions
under the regulatory framework for prompt corrective action at December 31,
1998. As a result, the Company does not believe that FDICIA's prompt corrective
action regulations will have any material effect on the activities or operations
of the Bank.
FDICIA also requires the FDIC to establish a schedule to increase (over a
period of not more than 15 years) the reserve ratio of the BIF, which insures
deposits of Texas State Bank, to 1.25% of insured deposits, and impose higher
deposit insurance premiums on BIF members, if necessary, to achieve that ratio.
FDICIA also requires a risk-based assessment system for deposit insurance
premiums commencing January 1, 1994. Since BIF reached its designated reserve
ratio in mid-1995, the FDIC adjusted the BIF assessments, so that the assessment
rate now in effect ranges from a minimum of zero to a maximum of $0.27 per $100
of deposits.
FDICIA contains numerous other provisions, including accounting, auditing
and reporting requirements, the termination of the "too big to fail" doctrine
except in special cases, regulatory standards in areas such as asset quality,
earnings and compensation, and revised regulatory standards for the powers of
state chartered banks, real estate lending, bank closures and capital adequacy.
The Deposit Insurance Funds Act of 1996 (the "Funds Act") was enacted on
September 30, 1996. Among its provisions, the Funds Act authorizes the Financing
Corporation (the "FICO") to impose periodic assessments on depository
institutions that are members of BIF in addition to institutions that are
members of the Savings Association Insurance Fund (the "SAIF") in order to
spread the cost of the interest payments on the outstanding FICO bonds over a
larger number of institutions. Until this change in the law, only SAIF-member
institutions bore the cost of funding these interest payments. Thus, BIF-member
institutions will share in the cost of financing outstanding FICO bonds. An
institution's FICO assessments will fluctuate based on a defined rate applied to
deposits held in periods after the date the legislation was enacted. Currently,
the FICO BIF annual rate is 1.2 cents for each $100 of qualified deposits.
ACQUISITIONS
The BHC Act generally limits acquisitions by the Company to commercial
banks and companies engaged in activities that the Federal Reserve Board has
determined to be so closely related to banking as to be a proper incident
thereto. The Company's direct activities are generally limited to furnishing to
its subsidiaries services that qualify under the prescribed regulatory tests.
Prior Federal Reserve Board approval is required under the BHC Act for new
activities and acquisitions of most nonbanking companies.
The BHC Act, the Federal Bank Merger Act, and the Texas Banking Code
regulate the acquisition of commercial banks. The BHC Act requires the prior
approval of the Federal Reserve Board for the direct or indirect acquisition of
more than five percent of the voting shares of a commercial bank or bank holding
company. With respect to the Company's subsidiary bank, the approval of the
Texas Department of Banking is required for branching, purchasing the assets of
other banks and for bank mergers.
In reviewing bank acquisition and merger applications, the bank regulatory
authorities will consider, among other things, the competitive effect and public
benefits of the transactions, the capital position of the combined organization,
and the applicant's record under the Community Reinvestment Act and fair housing
laws.
The Corporation regularly evaluates acquisition opportunities and
regularly conducts due diligence activities in connection with possible
acquisitions. As a result, acquisition discussions and, in some cases
negotiations, regularly take place and future acquisitions could occur.
INTERSTATE BANKING AND BRANCHING LEGISLATION
The Riegle-Neal Interstate Branching Efficiency Act of 1994 ("IBBEA"),
authorizes interstate acquisitions of banks and bank holding companies without
geographic limitation beginning one year after enactment. In addition, beginning
June 1, 1997 IBBEA authorizes a bank to merge with a bank in another state as
long as neither of the states has opted out of interstate branching between the
date of enactment of IBBEA and May 31, 1997. IBBEA further provides that states
may enact laws permitting interstate bank merger transactions prior to June 1,
1997. A bank may establish a de novo branch in a state in which the bank does
not maintain a branch if the state expressly permits de novo branching. Once a
bank has established branches in a state through an interstate merger
transaction, the bank may establish and acquire additional branches at any
location in the state where any bank involved in the merger transaction could
have established or acquired branches under applicable federal or state law. A
bank that has established a branch in a state through de novo branching may
establish and acquire additional branches in such state in the same manner and
to the same extent as a bank having a branch in such state as a result of an
interstate merger. If a state opts out of interstate branching within the
specified time period, no bank in any other state may establish a branch in the
opting out state, whether through an acquisition or de novo. On August 28, 1995,
Texas enacted legislation opting out of interstate branching.
ECONOMIC ENVIRONMENT
The earnings of the Bank are affected not only by general economic
conditions but also by the policies of various governmental regulatory
authorities. The FRB regulates the supply of credit in order to influence
general economic conditions, primarily through open market operations in United
States government obligations, varying the discount rate of financial
institution borrowings, varying reserve requirements against financial
institutions and their subsidiaries. The deregulation of interest rates has had
and is expected to continue to have an impact on the competitive environment in
which the Bank operates.
Governmental policies have had a significant effect on the operating
results of commercial banks in the past and are expected to continue to do so in
the future. However, the Company cannot accurately predict the nature or extent
of any effect that such policies may have on its future business and earnings.
PERSONNEL
The Company employed 727 full-time equivalent employees at December 31,
1998. Employees enjoy a variety of employee benefit programs, including an
employee stock ownership plan with 401(k) provisions, medical, accident, group
life and long-term disability plans, and paid vacations. The Company's employees
are not unionized, and management believes employee relations to be favorable.
ITEM 2. PROPERTIES
The executive offices of the Company, as well as the principal banking
quarters of Texas State Bank, are housed in an eleven-story office tower located
in McAllen, Texas. This new building, completed during 1998, also includes space
for lease to third party tenants and for future growth. The Company also owns
the Kerria Plaza building, adjacent to the new headquarters building, and leases
space to third party tenants.
All of the Company's banking locations are owned, except for the Roma,
Texas banking location. The Brownsville, Edinburg, Harlingen, Hidalgo, McAllen,
Mission, Penitas and Weslaco, Texas banking locations include extensive
drive-through facilities.
Management believes that it will be desirable in the future to consider
the establishment of additional banking locations.
ITEM 3. LEGAL PROCEEDINGS
The Company is involved in routine litigation in the normal course of its
business, which in the opinion of management, will not have a material adverse
effect on the financial condition or results of operations of the Company.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
None
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS.
Since March 1994, the Corporation's Class A Voting Common Stock has traded
on The Nasdaq Stock Market(R) under the symbol TRBS. The following table shows
(i) high and low prices of the Common Stock as provided to the Company by The
Nasdaq Stock Market(R) for transactions occurring on The Nasdaq Stock Market
during the past two years, and (ii) the total number of shares involved in such
transactions.
The following information has been restated to retroactively give effect
to the three-for-two stock split declared and distributed by the Corporation
during the third quarter of 1997.
Price Per Share Cash
--------------------- Dividends Volume
Quarter Ended High Low Declared Traded
- ------------------------------------------------------------------------------
March 31, 1997 ...... $ 24.50 $ 21.17 $ 0.07 926,227
June 30, 1997 ....... 30.25 19.00 0.07 1,371,797
September 30, 1997... 31.50 24.50 0.11 1,691,818
December 31, 1997.... 31.50 26.00 0.11 1,049,074
March 31, 1998 ...... 35.63 27.00 0.11 1,897,668
June 30, 1998 ....... 35.13 29.25 0.11 1,421,623
September 30, 1998... 34.00 21.00 0.13 1,824,207
December 31, 1998.... 27.38 17.00 0.13 2,416,388
- ------------------------------------------------------------------------------
On December 31, 1998, there were 961 holders of record of the
Corporation's Class A Common Stock.
During the two years ended December 31, 1998, an aggregate of 57,500
shares purchased by the Texas Regional Bancshares, Inc. Employee Stock Ownership
Plan (with 401(k) provisions) are included in the foregoing table.
The final determination of the timing, amount and payment of dividends on
the Common Stock is at the discretion of the Company's Board of Directors. There
can be no assurance as to future dividends because they are dependent on future
earnings, capital requirements and financial conditions. The Company's principal
source of the funds to pay dividends on the Common Stock is dividends from Texas
State Bank. The payment of dividends by the Bank is subject to certain
restrictions imposed by federal and state banking laws, regulations and
authorities. At December 31, 1998, an aggregate of $48.8 million was available
for payment of dividends by the Bank to the Company under the applicable
limitations and without regulatory approval.
ITEM 6. SELECTED FINANCIAL DATA
The following table sets for selected consolidated financial data for the
Company and its subsidiaries for, and as of, each of the years in the five-year
period ended December 31, 1998. This selected financial data has been derived
from the consolidated financial statements and accounting records of the
Company. The data presented below should be read in conjunction with the
consolidated financial statements, related notes and other financial information
included herein:
Years Ended December 31,
(Dollars in Thousands, Except Per Share Data) 1998 1997 1996 1995 1994
- -----------------------------------------------------------------------------------------------------------------------------
Summary of Operations
Interest Income ............................. $ 125,649 $ 112,745 $ 88,075 $ 55,193 $ 43,472
Interest Expense ............................ 58,384 50,618 37,494 22,071 14,994
- -----------------------------------------------------------------------------------------------------------------------------
Net Interest Income ......................... 67,265 62,127 50,581 33,122 28,478
Provision for Loan Losses ................... 9,729 2,947 2,173 1,705 1,105
Noninterest Income .......................... 17,663 12,972 10,656 7,683 7,105
Noninterest Expense ......................... 41,102 37,170 32,096 23,065 20,773
- -----------------------------------------------------------------------------------------------------------------------------
Income Before Income Tax Expense ............ 34,097 34,982 26,968 16,035 13,705
Income Tax Expense .......................... 11,623 11,860 8,794 5,515 4,841
- -----------------------------------------------------------------------------------------------------------------------------
Net Income .................................. $ 22,474 $ 23,122 $ 18,174 $ 10,520 $ 8,864
- -----------------------------------------------------------------------------------------------------------------------------
Per Common Share Data
Net Income - Basic .......................... $ 1.56 $ 1.61 $ 1.40 $ 0.99 $ 0.89
Net Income - Diluted ........................ 1.54 1.58 1.38 0.99 0.89
Book Value at Year-End ...................... 12.31 11.22 9.98 7.27 6.38
Cash Dividends .............................. 0.47 0.40 0.29 0.29 0.14
Average Shares Outstanding (in Thousands)
Basic ............................... 14,409 14,378 12,943 10,583 9,962
Diluted ............................. 14,634 14,610 13,124 10,620 9,979
Year-End Balance Sheet Data
Total Assets ................................ $1,762,329 $1,538,769 $1,370,809 $ 778,359 $ 663,675
Loans ....................................... 1,089,505 951,316 818,598 511,414 398,606
Securities .................................. 470,267 416,921 371,002 182,761 185,448
Interest-Earning Assets ..................... 1,592,325 1,387,322 1,214,875 706,985 589,059
Deposits .................................... 1,562,942 1,362,783 1,215,636 685,810 589,909
Shareholders' Equity ........................ 177,468 161,555 143,313 76,990 67,543
Performance Ratios
Return on Average Assets .................... 1.36% 1.61% 1.59% 1.49% 1.39%
Return on Average Shareholders' Equity ...... 13.10 15.13 15.60 14.44 14.22
Net Interest Margin ......................... 4.61 4.89 5.06 5.21 4.99
Loan to Deposit Ratio ....................... 69.71 69.81 67.34 74.57 67.57
Demand Deposit to Total Deposit Ratio ....... 15.01 15.29 15.73 20.28 20.59
Asset Quality Ratios
Nonperforming Assets as a % of Total
Loans and Foreclosed Assets ......... 1.44% 1.22% 0.97% 0.82% 1.41%
Net Charge-Offs (Recoveries) to Average
Total Loans Outstanding,
Net of Unearned Discount .... 0.79 0.28 0.20 0.23 0.29
Allowance for Loan Losses as a Percentage of:
Loans ............................... 1.21 1.19 1.32 1.05 1.07
Nonperforming Loans ................. 127.10 135.14 158.87 220.24 143.28
Nonperforming Assets ................ 83.87 96.62 136.39 128.31 75.66
Capital Ratios at Year-End
Equity to Assets Ratio ...................... 10.07% 10.50% 10.45% 9.89% 10.18%
Tier I Capital Ratio ........................ 12.92 13.60 13.83 13.24 15.86
Total Capital Ratio ......................... 14.06 14.73 15.11 14.24 16.87
Leverage Capital Ratio ...................... 8.85 9.21 8.78 9.29 10.19
=============================================================================================================================
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
The following analysis of the financial condition and results of
operations of the Company should be read in conjunction with the Company's
Consolidated Financial Statements and Notes thereto and the other financial data
included herein. The ratios and percentages set forth below are calculated using
the detailed financial information contained in the Consolidated Financial
Statements and the Notes thereto, and the financial data included elsewhere in
this Form 10-K.
SELECTED CONSOLIDATED FINANCIAL INFORMATION
Net income for the year ended December 31, 1998 was $22.5 million, reflecting a
net decrease of $648,000 or a 2.8% decrease compared to net income of $23.1
million for the year ended December 31, 1997. The earnings per diluted common
share of $1.54 for the year ended December 31, 1998 decreased $0.04 or 2.5%
compared to the earnings per diluted common share of $1.58 for the year ended
December 31, 1997. Earnings performance for the year ended December 31, 1998
reflected gains in net interest income and an increase in noninterest income.
However, an increase in provision for loan losses and noninterest expenses
offset these positive factors. A more detailed description of the results of
operations is included in the material that follows.
On February 19, 1998, Texas Regional Bancshares, Inc., (the "Company") completed
the acquisition of three bank holding companies and their three subsidiary banks
(the "Mergers"). The acquisition of Brownsville Bancshares, Inc. and its
subsidiary, Brownsville National Bank, included two banking locations in
Brownsville, Cameron County, Texas, with assets of approximately $100.1 million,
equity of $12.1 million, loans of $42.6 million, and deposits of $87.2 million.
The Company achieved this acquisition by the exchange of 984,806 shares of
Company stock for all of the outstanding shares of Brownsville Bancshares, Inc.
and cancellation of outstanding stock options. Brownsville National Bank merged
with and into Texas State Bank (the "Bank").
The second acquisition was TB&T Bancshares, Inc. and its subsidiary, Texas Bank
and Trust of Brownsville, Cameron County, Texas. Texas Bank and Trust of
Brownsville had assets of approximately $44.9 million, equity of $4.1 million,
loans of $21.9 million, and deposits of $40.3 million. This acquisition was
achieved by exchange of 308,039 shares of Company stock for all of the
outstanding shares of TB&T Bancshares, Inc., a portion of which are retained in
a holdback escrow account pending resolution of certain claims. Texas Bank and
Trust of Brownsville merged with and into Texas State Bank.
The third acquisition was Raymondville Bancorp, Inc. and its subsidiary, Bank of
Texas. Bank of Texas was headquartered in Raymondville, Willacy County, Texas,
with one additional banking facility in Brownsville, Texas. The shareholder of
Raymondville Bancorp, Inc. received cash consideration of $9.6 million in this
acquisition, and the Company paid $100,000 in consideration for a covenant not
to compete. The Company discharged approximately $330,000 of existing
Raymondville Bancorp, Inc. indebtedness. Bank of Texas had assets of
approximately $63.7 million, equity of $5.1 million, loans of $25.5 million, and
deposits of $56.5 million. Bank of Texas was merged with and into Texas State
Bank.
The Company accounted for its acquisition of Brownsville Bancshares, Inc. and
TB&T Bancshares, Inc. under the pooling-of-interests method of accounting, and
as such, the enclosed financial information has been restated for all periods
presented to include the results of operations and financial position of these
acquired entities. A One Time Charge-Acquisitions of $728,000 or $0.03 per
diluted common share, net of federal income tax, reduced net income for the year
ended December 31, 1998. These expenses, primarily professional fees and
computer conversion costs, related to business combinations accounted for by the
pooling-of-interests method. The Company accounted for its acquisition of
Raymondville Bancorp, Inc. under the purchase method of accounting; therefore,
the results of operations are included in the consolidated financial statements
from the date of acquisition, February 19, 1998.
ANALYSIS OF RESULTS OF OPERATIONS
NET INTEREST INCOME
Net interest income is the difference between interest income earned on assets
and interest expense incurred for the funds supporting those assets. The largest
category of earning assets consists of loans. The second largest category of
earning assets is securities, followed by federal funds sold. For analytical
purposes, income from tax-exempt assets, primarily securities issued by state
and local governments or authorities, is adjusted by an increment which equates
tax-exempt income to interest from taxable assets.
Earning assets are financed by consumer and commercial deposits and short-term
borrowings. In addition to these interest-bearing funds, assets also are
supported by interest-free funds, primarily demand deposits and shareholders'
equity. Variations in the volume and mix of assets and liabilities, and their
relative sensitivity to interest rate movements, determine changes in net
interest income.
Taxable-equivalent net interest income was $68.7 million for the year ended
December 31, 1998, an increase of $5.1 million or 7.9% compared to the year
ended December 31, 1997, and taxable-equivalent net interest income of $63.7
million for the year ended December 31, 1997, increased $11.4 million or 21.9%
compared to the year ended December 31, 1996. Both net interest income and the
yield on earning assets were reduced by interest foregone on nonaccrual and
renegotiated loans. If interest on those loans had been accrued at the original
contractual rates, additional interest income would have approximated $2.2
million, $1.6 million and $807,000 for the years ended December 31, 1998, 1997
and 1996, respectively.
The net yield on total interest-earning assets, also referred to as net interest
margin, represents net interest income divided by average interest-earning
assets. Since a significant portion of the Company's funding is derived from
interest-free sources, primarily demand deposits and shareholders' equity, the
effective rate paid for all funds is lower than the rate paid on
interest-bearing liabilities alone. The net interest margin of 4.61% for the
year ended December 31, 1998 decreased 28 basis points compared to 4.89% for the
year ended December 31, 1997 while the net interest margin of 4.89% for the year
ended December 31, 1997 decreased 17 basis points compared to 5.06% for the year
ended December 31, 1996.
The decrease in the interest margin for the year ended December 31, 1998
reflected decreases in the rates earned on interest-earnings assets. The yield
on interest-earning assets of 8.52% for the year ended December 31, 1998
decreased 26 basis points compared to 8.78% for the year ended December 31, 1997
and yield on interest-earning assets of 8.78% for the year ended December 31,
1997 increased 8 basis points compared to 8.70% for the year ended December 31,
1996. The mix of average interest-earning assets for the year ended December 31,
1998 compared to the year ended December 31, 1997 was changed by total average
loans of $1.0 billion increasing $147.7 million or 16.9%, total average
securities of $432.8 million increasing $46.5 million or 12.1% and average
federal funds sold of $33.6 million decreasing $6.0 million or 15.2%. The
decrease in loan yield for 1998 reflects lower market rates in response to
recent Federal Reserve Bank actions and continued strong competition from local
financial institutions and, to a lesser extent, the charge-off of $900,000 in
interest income on agricultural loans during the three months ended September
30, 1998. The decrease in loan yield for 1997 reflects the general decrease in
average interest rates in 1997 compared to 1996. The decrease in securities
yield for the year ended December 31, 1998 resulted from sales and maturities of
higher yielding securities and reinvestment at lower rates. The increase in
securities yield in 1997 compared to 1996 resulted from lower yielding
securities maturing and the reinvesting of the proceeds into higher yields.
The rate paid on interest-bearing liabilities of 4.67% for the year ended
December 31, 1998 did not change from the year ended December 31, 1997 and the
rate on interest-bearing liabilities of 4.67% for the year ended December 31,
1997 increased 24 basis points compared to 4.43% for the year ended December 31,
1996. The rate paid on interest-bearing liabilities during 1998 did not change
due to competition from local financial institutions and time deposit
maturities, which prevent the Company from rapidly lowering deposit rates. The
increase in the rate paid on interest-bearing liabilities during 1997 resulted
from the general increase in average short-term interest rates and increased
competition from local financial institutions.
The following table presents for the last three calendar years the total dollar
amount of interest income from average interest-earning assets and the resultant
yields, reported on a tax-equivalent basis, and average interest-bearing
liabilities, expressed both in dollars and rates. Average balances are derived
from average daily balances and the yields and costs are established by dividing
income or expense by the average balance of the asset or liability. Income and
yield on interest-earning assets include amounts to convert tax-exempt income to
a taxable-equivalent basis, assuming a 35% effective tax rate for 1998, 1997,
and 1996.
Three-Year Financial Summary
Years Ended December 31,
--------------------------------------------------------------------------------------
1998 1997
------------------------------------------- ----------------------------------------
Taxable-Equivalent Basis(1) Average Yield/ Average Yield/
(Dollars in Thousands) Balance Interest Rate Balance Interest Rate
- ---------------------------------------------------------------------------------------------------------------------------------
Assets
Interest-Earning Assets
Loans
Commercial ............. $ 355,014 $ 32,085 9.04% $ 303,683 $ 29,398 9.68%
Real Estate ............ 556,800 54,158 9.73 489,611 48,650 9.94
Consumer ............... 111,713 11,474 10.27 82,545 8,615 10.44
- ---------------------------------------------------------------------------------------------------------------------------------
Total Loans .... 1,023,527 97,717 9.55 875,839 86,663 9.89
- ---------------------------------------------------------------------------------------------------------------------------------
Securities
Taxable ................ 402,457 25,138 6.25 359,898 23,124 6.43
Tax-Exempt ............. 30,310 2,357 7.78 26,323 2,303 8.75
- ---------------------------------------------------------------------------------------------------------------------------------
Total Securities 432,767 27,495 6.35 386,221 25,427 6.58
- ---------------------------------------------------------------------------------------------------------------------------------
Time Deposits .................. 1,300 76 5.85 242 14 5.79
- ---------------------------------------------------------------------------------------------------------------------------------
Federal Funds Sold ............. 33,617 1,829 5.44 39,657 2,195 5.53
- ---------------------------------------------------------------------------------------------------------------------------------
Total Interest-
Earning Assets . 1,491,211 127,117 8.52 1,301,959 114,299 8.78
- ---------------------------------------------------------------------------------------------------------------------------------
Cash and Due from Banks ................ 54,531 55,515
Premises and Equipment,
Net ............................ 64,937 43,728
Other Assets ........................... 55,863 49,840
Allowance for
Loan Losses .................... (12,410) (11,086)
- ---------------------------------------------------------------------------------------------------------------------------------
Total Assets ... $ 1,654,132 $ 1,439,956
=================================================================================================================================
Liabilities
Interest-Bearing Liabilities
Savings ........................ $ 105,243 2,986 2.84 $ 101,903 3,235 3.17
Money Market Checking
and Savings ............ 258,885 7,521 2.91 241,765 7,142 2.95
Time Deposits .................. 879,379 47,590 5.41 738,643 40,189 5.44
- ---------------------------------------------------------------------------------------------------------------------------------
Total Savings and
Time Deposits .. 1,243,507 58,097 4.67 1,082,311 50,566 4.67
- ---------------------------------------------------------------------------------------------------------------------------------
Federal Funds Purchased
and Securities Sold
Under Repurchase
Agreements ............. 5,772 287 4.97 988 52 5.26
- ---------------------------------------------------------------------------------------------------------------------------------
Total Interest-Bearing
Liabilities .... 1,249,279 58,384 4.67 1,083,299 50,618 4.67
- ---------------------------------------------------------------------------------------------------------------------------------
Demand Deposits ........................ 218,708 192,131
Other Liabilities ...................... 14,524 11,694
- ---------------------------------------------------------------------------------------------------------------------------------
Total Liabilities ...... 1,482,511 1,287,124
- ---------------------------------------------------------------------------------------------------------------------------------
Shareholders' Equity ................... 171,621 152,832
- ---------------------------------------------------------------------------------------------------------------------------------
Total Liabilities and
Shareholders'
Equity ......... $ 1,654,132 $ 1,439,956
=================================================================================================================================
Net Interest Income .................... $ 68,733 $ 63,681
=================================================================================================================================
Net Yield on Total Interest-
Earning Assets ................. 4.61% 4.89%
=================================================================================================================================
Three-Year Financial Summary
Years Ended December 31,
---------------------------------------------
1996
---------------------------------------------
Taxable-Equivalent Basis(1) Average Yield/
(Dollars in Thousands) Balance Interest Rate
- ----------------------------------------------------------------------------------------
Assets
Interest-Earning Assets
Loans
Commercial ............. $ 240,056 $ 22,177 9.24%
Real Estate ............ 375,328 38,828 10.35
Consumer ............... 65,146 6,774 10.40
- ----------------------------------------------------------------------------------------
Total Loans .... 680,530 67,779 9.96
- ----------------------------------------------------------------------------------------
Securities
Taxable ................ 285,021 17,355 6.09
Tax-Exempt ............. 28,067 2,551 9.09
- ----------------------------------------------------------------------------------------
Total Securities 313,088 19,906 6.36
- ----------------------------------------------------------------------------------------
Time Deposits .................. 219 10 4.57
- ----------------------------------------------------------------------------------------
Federal Funds Sold ............. 38,263 2,054 5.37
- ----------------------------------------------------------------------------------------
Total Interest-
Earning Assets . 1,032,100 89,749 8.70
- ----------------------------------------------------------------------------------------
Cash and Due from Banks ................ 50,039
Premises and Equipment,
Net ............................ 33,256
Other Assets ........................... 37,692
Allowance for
Loan Losses .................... (8,925)
- ----------------------------------------------------------------------------------------
Total Assets ... $ 1,144,162
========================================================================================
Liabilities
Interest-Bearing Liabilities
Savings ........................ $ 88,150 2,754 3.12
Money Market Checking
and Savings ............ 223,855 6,277 2.80
Time Deposits .................. 533,774 28,441 5.33
- ----------------------------------------------------------------------------------------
Total Savings and
Time Deposits .. 845,779 37,472 4.43
- ----------------------------------------------------------------------------------------
Federal Funds Purchased
and Securities Sold
Under Repurchase
Agreements ............. 507 22 4.34
- ----------------------------------------------------------------------------------------
Total Interest-Bearing
Liabilities .... 846,286 37,494 4.43
- ----------------------------------------------------------------------------------------
Demand Deposits ........................ 171,501
Other Liabilities ...................... 9,868
- ----------------------------------------------------------------------------------------
Total Liabilities ...... 1,027,655
- ----------------------------------------------------------------------------------------
Shareholders' Equity ................... 116,507
- ----------------------------------------------------------------------------------------
Total Liabilities and
Shareholders'
Equity ......... $ 1,144,162
========================================================================================
Net Interest Income .................... $ 52,255
========================================================================================
Net Yield on Total Interest-
Earning Assets ................. 5.06%
========================================================================================
1 For analytical purposes, income from tax-exempt assets, primarily
securities issued by state and local governments or authorities, is
adjusted by an increment which equates tax-exempt income to interest from
taxable assets (assuming a 35% effective federal income tax rate for 1998,
1997, and 1996).
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.
Taxable-Equivalent Basis(1)
Year Ended December 31, Due to Change in
1998 Compared to 1997 Net ----------------------------------
(Dollars in Thousands) Change Volume Rate Rate/Volume
- -----------------------------------------------------------------------------------------
Interest Income
Loans, Including Fees .......... $ 11,054 $ 14,606 $ (2,978) $ (574)
Securities
Taxable ................ 2,014 2,737 (648) (75)
Tax-Exempt ............. 54 (349) (255) (40)
Time Deposits .................. 62 61 -- 1
Federal Funds Sold ............. (366) (334) (36) 4
- -----------------------------------------------------------------------------------------
Total Interest Income .. 12,818 17,419 (3,917) (684)
- -----------------------------------------------------------------------------------------
Interest Expense
Deposits ....................... 7,531 7,528 -- 3
Federal Funds Purchased and
Securities Sold Under
Repurchase Agreements .. 235 252 (3) (14)
- -----------------------------------------------------------------------------------------
Total Interest Expense . 7,766 7,780 (3) (11)
- -----------------------------------------------------------------------------------------
Net Interest Income Before Allocation of
Rate/Volume .................... 5,052 9,639 (3,914) (673)
- -----------------------------------------------------------------------------------------
Allocation of Rate/Volume .............. -- (545) (128) 673
- -----------------------------------------------------------------------------------------
Changes in Net Interest Income ......... $ 5,052 $ 9,094 $ (4,042) $ --
=========================================================================================
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 .......... $ 18,884 $ 19,453 $ (476) $ (93)
Securities
Taxable ................ 5,769 4,560 969 240
Tax-Exempt ............. (248) (159) (95) 6
Time Deposits .................. 4 1 3 --
Federal Funds Sold ............. 141 75 61 5
- -----------------------------------------------------------------------------------------
Total Interest Income .. 24,550 23,930 462 158
- -----------------------------------------------------------------------------------------
Interest Expense
Deposits ....................... 13,094 10,478 2,030 586
Federal Funds Purchased and
Securities Sold Under
Repurchase Agreements .. 30 21 5 4
- -----------------------------------------------------------------------------------------
Total Interest Expense . 13,124 10,499 2,035 590
- -----------------------------------------------------------------------------------------
Net Interest Income Before Allocation of
Rate/Volume .................... 11,426 13,431 (1,573) (432)
- -----------------------------------------------------------------------------------------
Allocation of Rate/Volume .............. -- (380) (52) 432
- -----------------------------------------------------------------------------------------
Changes in Net Interest Income ......... $ 11,426 $ 13,051 $ (1,625) $ --
=========================================================================================
(1) For analytical purposes, income from tax-exempt assets, primarily securities
issued by state and local governments or authorities, is adjusted by an
increment which equates tax-exempt income to interest from taxable assets
(assuming a 35% effective federal income tax rate for 1998, 1997 and 1996).
NET YIELD ON EARNING ASSETS
The following table presents net interest income, average earning assets and the
net yield by quarter for the past three years. Income and yield on earning
assets include amounts to convert tax-exempt income to a taxable-equivalent
basis, assuming a 35% effective federal income tax rate for 1998, 1997 and 1996.
Net Yield on
Earning Assets Quarter
Taxable-Equivalent Basis(1) % Change ------------------------------------------------------
(Dollars in Thousands) Prior Year Year Fourth Third Second First
- -------------------------------------------------------------------------------------------------------------
1998
Net Interest Income .. 7.9% $ 68,733 $ 17,770 $ 16,261 $ 17,754 $ 16,948
Average Earning Assets 14.5 1,491,211 1,560,523 1,519,281 1,454,067 1,429,222
Net Yield ............ 4.61% 4.52% 4.25% 4.90% 4.81%
1997
Net Interest Income .. 21.9% $ 63,681 $ 16,174 $ 15,769 $ 16,240 $ 15,498
Average Earning Assets 26.1 1,301,959 1,366,149 1,322,415 1,265,715 1,252,776
Net Yield ............ 4.89% 4.70% 4.73% 5.15% 5.02%
1996
Net Interest Income .. 56.6% $ 52,255 $ 15,145 $ 15,450 $ 12,400 $ 9,260
Average Earning Assets 61.1 1,032,100 1,226,018 1,214,296 972,269 711,683
Net Yield ............ 5.06% 4.91% 5.06% 5.13% 5.23%
=============================================================================================================
(1) For analytical purposes, income from tax-exempt assets, primarily securities
issued by state and local governments or authorities, is adjusted by an
increment which equates tax-exempt income to interest from taxable assets
(assuming a 35% effective federal income tax rate for 1998, 1997 and 1996).
PROVISION FOR LOAN LOSSES
The Company recorded a provision for loan losses of $9.7 million for the year
ended December 31, 1998, compared to $2.9 million in the year ended December 31,
1997 and $2.2 million for the year ended December 31, 1996. Net charge-offs for
the year ended December 31, 1998 totaled $8.1 million compared to $2.5 million
for 1997 and $1.4 million for 1996. Charge offs of $5.5 million on agriculture
loans and loan growth of $138.2 million, to a lesser extent, factored heavily in
the increase of $6.8 million, or 230.1%, in the provision for loan losses for
the year ended December 31, 1998. The provision for loan losses reflected an
increase of $774,000 or 35.6% for the year ended December 31, 1997 due to loan
growth of $132.7 million during the year. Management charges provisions for loan
losses to earnings to bring the total allowance for loan losses to a level
deemed appropriate. Management bases its decision on many factors which include
historical experience, the volume and type of lending conducted by the Company,
the amount of nonperforming assets, regulatory policies, generally accepted
accounting principles, and general economic conditions, particularly as they
relate to the Company's lending area. See "Allowance for Loan Losses."
NONINTEREST INCOME
Noninterest income totaled $17.7 million for the year ended December 31, 1998
compared to $13.0 million for 1997 and $10.7 million for 1996. Excluding net
realized gains on sales of securities available for sale, total noninterest
income increased $2.5 million or 20.6% from 1997 and $2.0 million or 19.3% from
1996. The noninterest income growth in 1998 and 1997 resulted primarily from the
increased volume of business conducted by the Company and, in part, because of
the Raymondville merger.
Total Service Charges of $10.1 million for the year ended December 31, 1998,
increased $1.5 million or 17.8% compared to $8.6 million for the year ended
December 31, 1997. Total Service Charges of $8.6 million for the year ended
December 31, 1997 increased $1.5 million or 20.8% compared to $7.1 million for
the year ended December 31, 1996. The increase in Total Service Charges for the
years ended December 31, 1998 and 1997 is attributable to increased account
transaction fees generated by deposit growth experienced by the Company and due
to the Raymondville merger.
Trust Service Fees of $1.8 million for the year ended December 31, 1998
increased $79,000 or 4.7% compared to $1.7 million for the year ended December
31, 1997. Trust Service Fees of $1.7 million for the year ended December 31,
1997
increased $186,000 or 12.4% compared to $1.5 million for the year ended
December 31, 1996. The increase in Trust Service Fees in each of the years 1998
and 1997 is attributable to an increase in the number of trust accounts managed.
The fair market value of assets managed at December 31, 1998 of $328.7 million
increased $78.0 million or 31.1% compared to $250.8 million at December 31,
1997. Assets held by the trust department of the Bank in fiduciary or agency
capacities are not assets of the Company and are not included in the
consolidated balance sheets.
Net Realized Gains on Sales of Securities Available for Sale of $2.9 million for
the year ended December 31, 1998 increased $2.2 million or 296.5% compared to
$734,000 for 1997. Long-term interest rates reached or neared 30 year lows
during the latter half of 1998. This coupled with management's belief in the
fundamental underlying strength of the U.S., Texas and Rio Grande Valley
economies, presented an opportunity to realize some of the gains in the
securities available for sale portfolio. Net Realized Gains on Sales of
Securities Available for Sale totaled $734,000 for 1997 compared to $401,000 for
1996 as a result of sales designed to reduce asset sensitivity of callable bonds
and improve bond quality during 1997.
Data Processing Fees of $1.5 million for the year ended December 31, 1998
increased $435,000 or 40.3% compared to $1.1 million for the year ended December
31, 1997. This increase arose from the acquisition of additional banking clients
and increased utilization of services offered to existing clients during 1998.
Data Processing Fees of $1.1 million for the year ended December 31, 1997
increased $170,000 from $910,000 in 1996. The Company obtained two additional
banking clients during 1998 and none during 1997.
Other Operating Income of $1.3 million for the year ended December 31, 1998
increased $469,000 or 55.0% compared to $852,000 for the year ended December 31,
1997. Other Operating Income of $852,000 for the year ended December 31, 1997
increased $146,000 or 20.7% compared to $706,000 for 1996. The increase in Other
Operating Income for 1998 was primarily attributable to the increased volume of
deposit accounts and other business conducted by the Company.
A detailed summary of noninterest income during the last three years follows
below:
Noninterest Income
Years Ended December 31, % Change From % Change From
(Dollars in Thousands) 1998 Prior Year 1997 Prior Year 1996
- -------------------------------------------------------------------------------------------------------------------
Service Charges on Deposit Accounts ........................ $ 8,025 14.5% $ 7,009 18.6% $ 5,911
Other Service Charges ...................................... 2,122 32.1 1,606 31.3 1,223
- -------------------------------------------------------------------------------------------------------------------
Total Service Charges .............................. 10,147 17.8 8,615 20.8 7,134
Trust Service Fees ......................................... 1,770 4.7 1,691 12.4 1,505
Net Realized Gains on Sales of Securities Available for Sale 2,910 296.5 734 83.0 401
Data Processing Service Fees ............................... 1,515 40.3 1,080 18.7 910
Other Operating Income ..................................... 1,321 55.0 852 20.7 706
- -------------------------------------------------------------------------------------------------------------------
Total .............................................. $17,663 36.2% $12,972 21.7% $10,656
===================================================================================================================
NONINTEREST EXPENSE
Noninterest expense of $41.1 million for the year ended December 31, 1998
increased $3.9 million or 10.6% compared to $37.2 million for 1997. Noninterest
expense of $37.2 million for the year ended December 31, 1997 increased $5.1
million or 15.8% compared with $32.1 million for the year ended December 31,
1996. The increases for the years ended December 31, 1998 and 1997 were
primarily attributable to an increased volume of business conducted by the
Company and the Raymondville merger. Noninterest expense averaged 2.48% of total
assets for the year ended December 31, 1998 compared to 2.58% for the year ended
December 31, 1997 and 2.81% for the year ended December 31, 1996.
Salaries and Employee Benefits, the largest category of noninterest expense, of
$18.5 million for the year ended December 31, 1998 increased $834,000 or 4.7%
compared to the year ended December 31, 1997 levels of $17.7 million. Salaries
and Employee Benefits of $17.7 million for the year ended December 31, 1997
increased $1.5 million or 9.3% compared to the year ended December 31, 1996
levels of $16.2 million. Salaries and Employee Benefits increased for the year
ended December 31, 1998 primarily due to staffing increases, including the staff
acquired as a result of the Raymondville merger. Salaries and Employee Benefits
averaged 1.12% of total assets for the year ended December 31, 1998 compared to
1.23% for the year ended December 31, 1997 and 1.41% for the year ended December
31, 1996.
Net Occupancy Expense of $3.6 million for the year ended December 31, 1998
increased $944,000 or 35.1% compared to $2.7 million for 1997. Expenses
associated with the new corporate headquarters building in McAllen, Texas,
opened during 1998, contributed to the increase in Net Occupancy Expense during
the year ended December 31, 1998. Net Occupancy Expense of $2.7 million for the
year ended December 31, 1997 increased $355,000 or 15.2% when compared to Net
Occupancy Expense of $2.3 million for the year ended December 31, 1996. The
increase for the year ended December 31, 1997 is primarily attributable to the
occupancy expenses associated with mergers completed during 1996.
Equipment Expense of $4.6 million for the year ended December 31, 1998 increased
$821,000 or 21.7% compared to $3.8 million for 1997. Expenses associated with
the new corporate headquarters building contributed to the increase in Equipment
Expense during the year ended December 31, 1998. Equipment Expense of $3.8
million for the year ended December 31, 1997 increased $380,000 or 11.2% when
compared with $3.4 million for the year ended December 31, 1996. The Equipment
Expense increase incurred during the year ended December 31, 1997 is primarily
attributable to equipment obtained in mergers completed during 1996 and
equipment acquired to service the Company's increasing customer base.
Other Real Estate (Income) Expense, Net includes rent income from foreclosed
properties, gain or loss on sale of other real estate properties and direct
expenses of foreclosed real estate including property taxes, maintenance costs
and write-downs. Write-downs of Other Real Estate are required if the fair value
of an asset acquired in a loan foreclosure subsequently declines below its
carrying value. The category Other Real Estate (Income) Expense, Net reflects
net expense of $307,000 for the year ended December 31, 1998, which compares
unfavorably to net expense of $105,000 for the year ended December 31, 1997.
Other Real Estate (Income) Expense, Net of $105,000 for the year ended December
31, 1997 increased $198,000 or 212.9% compared to net income of $93,000 for the
year ended December 31, 1996. The net increase for the year ended December 31,
1998 is primarily attributable to higher volumes in Other Real Estate owned
offsetting increased operating income and gain on sale of foreclosed properties.
Management is actively seeking buyers for all Other Real Estate.
Amortization of Goodwill and Identifiable Intangibles of $2.7 million for the
year ended December 31, 1998 increased $408,000 or 18.1% compared to $2.3
million for 1997. Amortization of Goodwill and Identifiable Intangibles of $2.3
million for the year ended December 31, 1997 increased $659,000 or 41.4%
compared to $1.6 million for the year ended December 31, 1996. The increase in
Amortization of Goodwill and Identifiable Intangibles was due to the
amortization of goodwill and core deposit premiums associated with the 1998 and
1996 acquisitions.
An impairment loss of $630,000 was recorded during the three months ended June
30, 1997 to reflect the impairment of an existing bank building. The building
was razed to provide additional parking upon completion of a new building in
McAllen, Texas. The new bank building completed in 1998 serves as the
headquarters for Texas State Bank and Texas Regional Bancshares, Inc. The amount
of the impairment loss represented the book value of the building at June 30,
1997.
One Time Charge - Acquisitions of $728,000, related primarily to professional
fees and computer conversion cost resulting from the Company's 1998
acquisitions.
Other Noninterest Expense $10.7 million for the year ended December 31, 1998
increased $625,000 or 6.2% compared to $10.0 for 1997. Other Noninterest Expense
of $10.0 million for the year ended December 31, 1997 increased $1.3 million or
15.5% compared to $8.7 million for the year ended December 31, 1996. The
increase in Other Noninterest Expense for 1998 and 1997 was primarily
attributable to an increased volume of business, primarily due to the 1998 and
1996 acquisitions.
All Other Noninterest Expense categories, not previously discussed, reflect a
net increase for the year ended December 31, 1998 compared to the year ended
December 31, 1997 and was attributable to an increased volume of business.
The Efficiency Ratio of expense to total revenue averaged 48.86% for the year
ended December 31, 1998 compared to 48.82% for the year ended December 31, 1997
and 51.49% for the year ended December 31, 1996.
A detailed summary of noninterest expense during the last three years follows
below:
Noninterest Expense
Years Ended December 31, % Change From % Change From
(Dollars in Thousands) 1998 Prior Year 1997 Prior Year 1996
- ----------------------------------------------------------------------------------------------------------------
Salaries and Wages ............................. $ 15,108 4.6% $ 14,442 11.2% $ 12,988
Employee Benefits .............................. 3,418 5.2 3,250 1.7 3,195
- ----------------------------------------------------------------------------------------------------------------
Total Salaries and Employee Benefits ........... 18,526 4.7 17,692 9.3 16,183
- ----------------------------------------------------------------------------------------------------------------
Net Occupancy Expense .......................... 3,631 35.1 2,687 15.2 2,332
- ----------------------------------------------------------------------------------------------------------------
Equipment Expense .............................. 4,599 21.7 3,778 11.2 3,398
- ----------------------------------------------------------------------------------------------------------------
Other Real Estate (Income) Expense, Net
Rent Income ............................ (154) 116.9 (71) (48.6) (138)
(Gain) Loss on Sale .................... (257) 123.5 (115) (43.4) (203)
Expenses ............................... 674 152.4 267 30.2 205
Write-Downs ............................ 44 83.3 24 (44.2) 43
- ----------------------------------------------------------------------------------------------------------------
Total Other Real Estate (Income)
Expense, Net ........... 307 192.4 105 (212.9) (93)
- ----------------------------------------------------------------------------------------------------------------
Amortization of Goodwill and Identifiable
Intangibles ............................ 2,660 18.1 2,252 41.4 1,593
- ----------------------------------------------------------------------------------------------------------------
Impairment Loss ................................ -- (100.0) 630 * --
- ----------------------------------------------------------------------------------------------------------------
One Time Charge - Acquisitions ................. 728 * -- * --
- ----------------------------------------------------------------------------------------------------------------
Other Noninterest Expense
Advertising and Public Relations ....... 1,536 12.0 1,372 6.2 1,292
Data Processing and Check Clearing ..... 1,183 5.6 1,120 (6.1) 1,193
Director Fees .......................... 333 (35.3) 515 (1.2) 521
Franchise Tax .......................... 600 12.6 533 89.7 281
Insurance .............................. 430 31.5 327 35.1 242
FDIC Insurance ......................... 166 10.7 150 63.0 92
Legal .................................. 1,255 19.5 1,050 47.1 714
Professional Fees ...................... 638 (17.7) 775 10.2 703
Postage, Delivery and Freight .......... 816 18.4 689 23.5 558
Stationery and Supplies ................ 1,325 25.5 1,056 4.0 1,015
Telephone .............................. 534 23.3 433 10.2 393
Other Losses ........................... 68 (91.9) 837 26.1 664
Miscellaneous Expense .................. 1,767 51.2 1,169 15.2 1,015
- ----------------------------------------------------------------------------------------------------------------
Total Other Noninterest Expense 10,651 6.2 10,026 15.5 8,683
- ----------------------------------------------------------------------------------------------------------------
Total .......................................... $ 41,102 10.6% $ 37,170 15.8% $ 32,096
================================================================================================================
* Not meaningful.
POSTRETIREMENT BENEFITS OTHER THAN PENSIONS
The Company provides the following postretirement benefits: (1) benefits
provided under the Texas Regional Bancshares, Inc. Employee Stock Ownership Plan
(with 401(k) provisions), (2) a nonqualified deferred compensation plan for the
benefit of Glen E. Roney, Chairman of the Board, President and Chief Executive
Officer, (3) four existing separate nonqualified deferred compensation plans for
the benefit of certain employees acquired through past mergers, (4) a 401 (k)
plan for the benefit of certain employees (limited to past contributions)
acquired through the Bank of Texas acquisition and (5) medical insurance on a
selected basis.
INCOME TAX
The Company recorded income tax expense of $11.6 million for the year ended
December 31, 1998 compared to $11.9 million for the year ended December 31,
1997. The decrease in income tax expense for the year ended December 31, 1998 is
due primarily to a decreased level of pretax income during the year ended
December 31, 1998.
NET INCOME
Net income was $22.5 million, $23.1 million and $18.2 million for the years
ended December 31, 1998, 1997 and 1996, respectively.
ANALYSIS OF FINANCIAL CONDITION
BALANCE SHEET COMPOSITION
The Company continues to experience growth in total assets, deposits and loans
attributable, in the opinion of management, to the vitality of the Rio Grande
Valley economy and due to the Raymondville merger. The continued devaluation of
the Mexican peso relative to the U.S. dollar has reduced retail sales to Mexican
nationals. However, the effects of NAFTA and the continued devaluation have also
increased cross-border trade and industrial development including activity at
twin manufacturing plants located on each side of the border (referred to as
maquiladoras) which benefit the Rio Grande Valley economy. Management does not
believe that the on-going Mexican financial problems will materially affect the
Company's growth and earnings prospects.
Average interest-earning assets of $1.5 billion increased $189.3 million or
14.5% for the year ended December 31, 1998 compared to $1.3 billion for the year
ended December 31, 1997 and increased $269.9 million or 26.1% compared to $1.0
billion for the year ended December 31, 1996. Average loans increased $147.7
million or 16.9% to $1.0 billion for the year ended December 31, 1998 compared
to December 31, 1997 levels of $875.8 million, while average securities of
$432.8 million increased $46.5 million or 12.1% for the year ended December 31,
1998 compared to December 31, 1997 levels of $386.2 million. Total average
assets increased $214.2 million or 14.9% to $1.7 billion for the year ended
December 31, 1998 compared to December 31, 1997 levels and $295.8 million or
25.9% to $1.4 billion for the year ended December 31, 1997 compared to December
31, 1996 levels of $1.1 billion.
Average interest-bearing deposits increased $161.2 million or 14.9% to $1.2
billion for the year ended December 31, 1998 compared to the year ended December
31, 1997 levels of $1.1 billion. Demand deposits also increased $26.6 million or
13.8% for the year ended December 31, 1998 to $218.7 million compared to the
year ended December 31, 1997 levels of $192.1 million.
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) 1998 1997 1996
- -------------------------------------------------------------------------------------------------
Assets
Loans ............................................. $ 1,023,527 $ 875,839 $ 680,530
Securities
Taxable ................................... 402,457 359,898 285,021
Tax-Exempt ................................ 30,310 26,323 28,067
Time Deposits ..................................... 1,300 242 219
Federal Funds Sold ................................ 33,617 39,657 38,263
- -------------------------------------------------------------------------------------------------
Total Interest-Earning Assets ..... 1,491,211 1,301,959 1,032,100
Cash and Due From Banks ........................... 54,531 55,515 50,039
Bank Premises and Equipment, Net .................. 64,937 43,728 33,256
Other Assets ...................................... 55,863 49,840 37,692
Allowance for Loan Losses ......................... (12,410) (11,086) (8,925)
- -------------------------------------------------------------------------------------------------
Total ............................. $ 1,654,132 $ 1,439,956 $ 1,144,162
- -------------------------------------------------------------------------------------------------
Liabilities
Demand Deposits
Commercial and Individual ................. $ 212,488 $ 185,981 $ 165,409
Public Funds .............................. 6,220 6,150 6,092
- -------------------------------------------------------------------------------------------------
Total Demand Deposits ............. 218,708 192,131 171,501
- -------------------------------------------------------------------------------------------------
Savings
Commercial and Individual ................. 104,363 101,235 87,578
Public Funds .............................. 880 668 572
Money Market Checking and Savings
Commercial and Individual ................. 215,232 200,522 175,772
Public Funds .............................. 43,653 41,243 48,083
Time Deposits
Commercial and Individual ................. 691,913 610,211 475,059
Public Funds .............................. 187,466 128,432 58,715
- -------------------------------------------------------------------------------------------------
Total Interest-Bearing Deposits ... 1,243,507 1,082,311 845,779
- -------------------------------------------------------------------------------------------------
Total Deposits .................................... 1,462,215 1,274,442 1,017,280
Federal Funds Purchased and
Securities Sold Under Repurchase Agreements 5,772 988 507
Other Liabilities ................................. 14,524 11,694 9,868
Shareholders' Equity .............................. 171,621 152,832 116,507
- -------------------------------------------------------------------------------------------------
Total ............................. $ 1,654,132 $ 1,439,956 $ 1,144,162
=================================================================================================
CASH AND DUE FROM BANKS
Texas State Bank, through its main office and branches, offers a broad range of
commercial banking services to individuals and businesses in its service area.
Texas State Bank also acts as a correspondent to a number of banks in its
service area, providing check clearing, wire transfer, federal funds
transactions, loan participations and other correspondent services. The amount
of cash and due from banks held on any one day is significantly influenced by
temporary changes in cash items in process of collection. At December 31, 1998,
cash and due from banks was $58.3 million.
SECURITIES
Securities consist of U.S. Treasury, federal agency, mortgage-backed and state,
county and municipal securities. The Bank classifies debt and equity securities
into one of three categories: Held to Maturity, Trading or Available for Sale.
At each reporting date, management reassesses the appropriateness of the
classification. Investments in debt securities are classified as Held to
Maturity and measured at amortized cost in the consolidated balance sheet only
if management has the positive intent and ability to hold those securities to
maturity. Securities that are bought and held principally for the purpose of
selling them in the near term are classified as Trading and measured at fair
value in the consolidated balance sheet with unrealized holding gains and losses
included in earnings. Securities not classified as either Held to Maturity or
Trading are classified as Available for Sale and measured at fair value in the
consolidated balance sheet with unrealized holding gains and losses reported in
a separate component of shareholders' equity net of applicable income taxes
until realized.
At December 31, 1998, 1997 and 1996, no securities were classified as Trading.
The Company does not currently engage in trading activities or use derivative
instruments to control interest rate risk. Even though such activities may be
permitted with the approval of the Board of Directors, the Company does not
intend to engage in such activities in the immediate future.
The following table presents estimated market value of Securities Available for
Sale at December 31, 1998, 1997 and 1996:
Securities Available for Sale % Change From % Change From
(Dollars in Thousands) 1998 Prior Year 1997 Prior Year 1996
- ----------------------------------------------------------------------------------------------
U.S. Treasury ................... $ -- (100.0)% $ 7,002 (26.9)% $ 9,574
U.S. Government Agency .......... 313,970 13.0 277,764 62.1 171,345
Mortgage-Backed ................. 101,365 551.4 15,561 * 180
States and Political Subdivisions 36,988 77.0 20,898 (8.4) 22,811
Other ........................... 3,613 22.4 2,952 2.9 2,868
- ----------------------------------------------------------------------------------------------
Total ................... $455,936 40.6% $324,177 56.8% $206,778
==============================================================================================
*Not meaningful.
The following table presents the maturities, amortized cost, estimated market
value and weighted average yields of the Securities Available for Sale at
December 31, 1998:
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. Government Agency .......... $ 12,603 $ 117,342 $ 181,880 $ 1,822 $ 313,647 $ 313,970
Mortgage-Backed ................. -- -- 9,263 92,407 101,670 101,365
States and Political Subdivisions 242 1,975 11,996 21,899 36,112 36,988
Other ........................... -- 125 250 3,187 3,562 3,613
- --------------------------------------------------------------------------------------------------------------------------
Total ................... $ 12,845 $ 119,442 $ 203,389 $ 119,315 $ 454,991 $ 455,936
==========================================================================================================================
Weighted Average Yields
(Taxable-Equivalent Basis)
- --------------------------------------------------------------------------------------------------------------------------
U.S. Government Agency .......... 5.35% 6.15% 6.22% 6.03% 6.16%
Mortgage-Backed ................. -- -- 5.92 6.09 6.07
States and Political Subdivisions 7.81 7.28 6.63 6.58 6.64
Other ........................... -- 7.60 6.45 5.75 5.86
- --------------------------------------------------------------------------------------------------------------------------
Total ................... 5.79% 6.22% 6.25% 6.17% 6.18%
==========================================================================================================================
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, 1998, 1997 and 1996:
Securities Held to Maturity % Change From % Change From
(Dollars in Thousands) 1998 Prior Year 1997 Prior Year 1996
- ------------------------------------------------------------------------------------------------
U.S. Treasury ................... $ 10,013 (50.6)% $ 20,249 (54.9) $ 44,853
U.S. Government Agency .......... -- (100.0) 64,171 (41.4) 109,493
Mortgage-Backed Securities ...... -- (100.0) 750 (40.3) 1,257
States and Political Subdivisions 4,318 (42.2) 7,474 (12.3) 8,521
Other Securities ................ -- (100.0) 100 -- 100
- ------------------------------------------------------------------------------------------------
Total ................... $ 14,331 (84.5)% $ 92,744 (43.5) $164,224
================================================================================================
All investments in states and political subdivisions are investments in entities
within the State of Texas. No single issuer accounted for as much as 10.0% of
total shareholders' equity at December 31, 1998. Of the obligations of states
and political subdivisions held by the Company at December 31, 1998, 70.4% were
rated A or better by Moody's Investor Services, Inc. and 56.7% of the non-rated
issues or $6.3 million are local issues purchased in private placement
transactions.
The following table presents the maturities, amortized cost, estimated market
value and weighted average yields of Securities Held to Maturity at December 31,
1998:
Amortized Cost(1) Maturing
--------------------------------------------------
After One After Five Estimated
Securities Held to Maturity One Year Through Through After Amortized Market
(Dollars in Thousands) Or Less Five Years Ten Years Ten Years Cost(1) Value
- ----------------------------------------------------------------------------------------------------------------
U.S. Treasury ................... $ 5,003 $ 5,010 $ -- $-- $ 10,013 $10,186
States and Political Subdivisions 799 2,113 1,406 -- 4,318 4,464
- ----------------------------------------------------------------------------------------------------------------
Total ................... $ 5,802 $ 7,123 $ 1,406 $-- $ 14,331 $14,650
================================================================================================================
Weighted Average Yields
(Taxable-Equivalent Basis)
- ----------------------------------------------------------------------------------------------------------------
U.S. Treasury ................... 6.56% 6.70% --% --% 6.63%
States and Political Subdivisions 7.35 8.15 9.57 -- 8.17
- ----------------------------------------------------------------------------------------------------------------
Total ................... 6.67% 7.13% 9.57% --% 7.18%
================================================================================================================
(1) Amortized cost for Securities Held to Maturity is stated at par plus any
remaining unamortized premium paid or less any remaining unamortized
discount received.
LOANS
The Company manages its credit risk by establishing and implementing strategies
and guidelines appropriate to the characteristics of borrowers, industries,
geographic locations and risk products. Diversification of risk within each of
these areas is a primary objective. Policies and procedures are developed to
ensure that loan commitments conform to current strategies and guidelines.
Management continually refines the Company's credit policies and procedures to
address the risks in the current and prospective environment and to reflect
management's current strategic focus. The credit process is controlled with
continuous credit review and analysis, and by review by internal and external
auditors and regulatory authorities. The Company's loans are widely diversified
by borrower and industry group.
The Company has collateral management policies in place so that collateral
lending of all types is approached on a basis consistent with safe and sound
standards. Valuation analysis is utilized to take into consideration the
potentially adverse economic conditions under which liquidation could occur.
Collateral accepted against the commercial loan portfolio includes accounts
receivable and inventory, marketable securities, equipment and agricultural
products. Autos, deeds of trust, life insurance and marketable securities are
accepted as collateral for the installment loan portfolio.
Management of the Company believes that the Company has benefited from increased
loan demand due to passage of the North American Free Trade Agreement ("NAFTA")
and the strong population growth in the Rio Grande Valley. More recently, the
continued devaluation of the Mexican peso relative to the U.S. dollar has
reduced retail sales to residents of Mexico. However, the effects of NAFTA and
the devaluations have also increased cross-border trade and industrial
development including activity at twin manufacturing plants located on each side
of the border (referred to as maquiladoras) which benefit the Rio Grande Valley
economy. Management believes the on-going Mexican financial problems will not
have a material adverse effect on the Company's growth and earnings prospects,
in part because the Company presently has a low percentage of loans secured by
Mexican assets or that otherwise rely on collateral located in Mexico.
The extension of credits denominated in a currency other than that of the
country in which a borrower is located are called "cross-border" credits. With
the completion of the Mergers, the Company has acquired some dollar-denominated
cross-border credits to individuals or companies that are residents of, or
domiciled in Mexico. The Company's total cross-border credits at December 31,
1998 of $7.6 million were less than .7% of total loans. See "Nonperforming
Assets" for additional information on cross-border credits.
Total loans of $1.1 billion for the year ended December 31, 1998 increased
$138.2 million or 14.5% compared to the year ended December 31, 1997 levels of
$951.3 million and increased $132.7 million or 16.2% for the year ended December
31, 1997 compared to levels of $818.6 million at December 31, 1996. The increase
in total loans for the year ended December 31, 1998 is primarily attributable to
an increased volume of business conducted by the Company. The increase in total
loans for the year ended December 31, 1997 reflects growth in all loan
categories except Commercial Tax-Exempt loans and is representative in part to
the vitality of the Rio Grande Valley economy. A substantial portion of the
increase in loans classified as Real Estate-Commercial Mortgage loans consists
of loans secured by real estate and other assets to commercial customers. The
following table presents the composition of the loan portfolio at the end of
each of the last five years:
Loan Portfolio Composition
December 31,
(Dollars in Thousands) 1998 1997 1996 1995 1994
- -----------------------------------------------------------------------------------------------
Commercial .................. $ 311,966 $ 249,819 $ 219,346 $ 131,006 $ 120,757
Commercial Tax-Exempt ....... 22,155 29,024 34,777 34,419 --
- -----------------------------------------------------------------------------------------------
Total Commercial Loans ...... 334,121 278,843 254,123 165,425 120,757
- -----------------------------------------------------------------------------------------------
Agricultural ................ 52,302 51,346 32,756 25,284 17,199
- -----------------------------------------------------------------------------------------------
Real Estate
Construction ........ 66,018 69,477 49,103 31,620 20,013
Commercial Mortgage . 354,134 304,215 259,041 146,584 128,979
Agricultural Mortgage 34,440 31,949 29,654 18,047 10,443
1-4 Family Mortgage . 128,945 122,043 116,485 75,911 64,792
- -----------------------------------------------------------------------------------------------
Total Real Estate ........... 583,537 527,684 454,283 272,162 224,227
- -----------------------------------------------------------------------------------------------
Consumer .................... 119,545 93,443 77,436 48,543 36,423
- -----------------------------------------------------------------------------------------------
Total Loans . $1,089,505 $ 951,316 $ 818,598 $ 511,414 $ 398,606
===============================================================================================
The contractual maturity schedule of the loan portfolio at December 31, 1998
follows:
Loan Maturities One After One Year After
December 31, 1998 Year Through Five
(Dollars in Thousands) Or Less Five Years Years Total
- ----------------------------------------------------------------------------------
Commercial .................. $ 163,122 $ 124,399 $ 24,445 $ 311,966
Commercial Tax-Exempt ....... 759 17,577 3,819 22,155
Agricultural ................ 43,211 9,091 -- 52,302
Real Estate
Construction ........ 49,225 12,795 3,998 66,018
Commercial Mortgage . 47,426 242,612 64,096 354,134
Agricultural Mortgage 4,003 25,248 5,189 34,440
1-4 Family Mortgage . 18,777 94,559 15,609 128,945
Consumer .................... 40,813 78,479 253 119,545
- ----------------------------------------------------------------------------------
Total ....... $ 367,336 $ 604,760 $ 117,409 $1,089,505
- ----------------------------------------------------------------------------------
Variable-Rate Loans ......... $ 148,382 $ 238,198 $ 86,077 $ 472,657
Fixed-Rate Loans ............ 218,954 366,562 31,332 616,848
- ----------------------------------------------------------------------------------
Total ....... $ 367,336 $ 604,760 $ 117,409 $1,089,505
==================================================================================
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 $10.4 million at December 31, 1998 increased $2.1 million or
24.6% compared to $8.4 million at December 31, 1997 and nonaccrual loans at
December 31, 1997 of $8.4 million increased $1.6 million or 22.8% compared to
$6.8 million at December 31, 1996. The increases in nonaccrual loans during 1998
and 1997 are