-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, B+40cnYbWrT+kJDEuhXMG+qeFWwzzQLyOkq7YWoY1UkfALg/9iDZQTgWYfQMRJbc L+Xt+g+LKYgsF1txEpx4FQ== 0000890566-99-000575.txt : 19990503 0000890566-99-000575.hdr.sgml : 19990503 ACCESSION NUMBER: 0000890566-99-000575 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19990331 FILED AS OF DATE: 19990430 FILER: COMPANY DATA: COMPANY CONFORMED NAME: TEXAS REGIONAL BANCSHARES INC CENTRAL INDEX KEY: 0000787648 STANDARD INDUSTRIAL CLASSIFICATION: STATE COMMERCIAL BANKS [6022] IRS NUMBER: 742294235 STATE OF INCORPORATION: TX FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: SEC FILE NUMBER: 000-14517 FILM NUMBER: 99606742 BUSINESS ADDRESS: STREET 1: 3700 N TENTH STE 301 STREET 2: PO BOX 5910 CITY: MCALLEN STATE: TX ZIP: 78501 BUSINESS PHONE: 9566315400 MAIL ADDRESS: STREET 1: P O BOX 5910 STREET 2: P O BOX 5910 CITY: MCALLEN STATE: TX ZIP: 78501-5910 10-Q 1 UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, DC 20549 FORM 10-Q (Mark One) [X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED MARCH 31, 1999 or [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE TRANSITION PERIOD FROM ________ TO _________ COMMISSION FILE NUMBER 000-14517 TEXAS REGIONAL BANCSHARES, INC. (Exact name of registrant as specified in its charter) TEXAS 74-2294235 (State or other jurisdiction (I.R.S. Employer of incorporation or organization) Identification No.) POST OFFICE BOX 5910 3900 NORTH 10TH STREET, 11TH FLOOR MCALLEN, TEXAS 78502-5910 (Address of principal executive offices) (Zip Code) (956) 631-5400 Registrant's telephone number, including area code Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes [X] No [ ] There were 14,411,583 shares of the registrant's Class A Voting Common Stock, $1.00 par value, outstanding as of April 26, 1999. PART I. FINANCIAL INFORMATION ITEM 1. FINANCIAL STATEMENTS
Texas Regional Bancshares, Inc. and Subsidiaries Consolidated Balance Sheets March 31, December 31, (Dollars in Thousands, Except Share Data) 1999 1998 - --------------------------------------------------------------------------------------------------------- (Unaudited) Assets Cash and Due From Banks ................................................ $ 55,199 $ 58,274 Time Deposits .......................................................... 330 553 Federal Funds Sold ..................................................... 29,500 32,000 - --------------------------------------------------------------------------------------------------------- Total Cash and Cash Equivalents ...................................... 85,029 90,827 Securities Available for Sale, at Fair Value ........................... 466,682 455,936 Securities Held to Maturity, at Amortized Cost (Fair Value of $13,547 in 1999 and $ 14,650 in 1998) ................................ 13,322 14,331 Loans, Net of Unearned Discount of $5,270 in 1999 and $4,886 in 1998 ... 1,144,172 1,089,505 Less: Allowance for Loan Losses ........................................ (13,673) (13,236) - --------------------------------------------------------------------------------------------------------- Net Loans ............................................................ 1,130,499 1,076,269 Premises and Equipment, Net ............................................ 69,655 69,827 Accrued Interest Receivable ............................................ 17,735 16,416 Other Real Estate ...................................................... 5,926 5,060 Goodwill and Identifiable Intangibles .................................. 26,215 26,894 Other Assets ........................................................... 7,412 6,769 - --------------------------------------------------------------------------------------------------------- Total Assets ......................................................... $ 1,822,475 $ 1,762,329 ========================================================================================================= Liabilities Deposits Demand ............................................................... $ 246,176 $ 234,655 Savings .............................................................. 112,648 107,711 Money Market Checking and Savings .................................... 303,502 301,238 Time Deposits ........................................................ 952,182 919,338 - --------------------------------------------------------------------------------------------------------- Total Deposits ..................................................... 1,614,508 1,562,942 Federal Funds Purchased and Securities Sold Under Repurchase Agreements 9,008 7,407 Accounts Payable and Accrued Liabilities ............................... 17,559 14,512 - --------------------------------------------------------------------------------------------------------- Total Liabilities .................................................... 1,641,075 1,584,861 - --------------------------------------------------------------------------------------------------------- Commitments and Contingencies Shareholders' Equity Preferred Stock; $1.00 Par Value, 10,000,000 Shares Authorized; None Issued and Outstanding ........................................ -- -- Common Stock - Class A; $1.00 Par Value, 50,000,000 Shares Authorized; Issued and Outstanding 14,411,583 Shares in 1999 and 1998 .......... 14,412 14,412 Paid-In Capital ...................................................... 87,586 87,586 Retained Earnings .................................................... 80,113 74,861 Accumulated Other Comprehensive Income (Loss) ........................ (711) 609 - --------------------------------------------------------------------------------------------------------- Total Shareholders' Equity ......................................... 181,400 177,468 - --------------------------------------------------------------------------------------------------------- Total Liabilities and Shareholders' Equity ........................... $ 1,822,475 $ 1,762,329 =========================================================================================================
The accompanying notes are an integral part of the consolidated financial statements. Page 2
Three Months Texas Regional Bancshares, Inc. and Subsidiaries Ended March 31, Consolidated Statements of Income and Comprehensive Income -------------------- (Dollars in Thousands, Except Share Data) 1999 1998 - ------------------------------------------------------------------------------------------------- (Unaudited) Interest Income Loans, Including Fees ................................................. $ 25,776 $ 23,521 Securities Taxable ............................................................. 6,387 6,303 Tax-Exempt .......................................................... 486 364 Time Deposits ......................................................... 5 18 Federal Funds Sold .................................................... 339 356 - ------------------------------------------------------------------------------------------------- Total Interest Income ............................................... 32,993 30,562 - ------------------------------------------------------------------------------------------------- Interest Expense Deposits .............................................................. 14,269 13,939 Federal Funds Purchased and Securities Sold Under Repurchase Agreements 93 28 - ------------------------------------------------------------------------------------------------- Total Interest Expense .............................................. 14,362 13,967 - ------------------------------------------------------------------------------------------------- Net Interest Income Before Provision for Loan Losses ..................... 18,631 16,595 Provision for Loan Losses ................................................ 1,323 941 - ------------------------------------------------------------------------------------------------- Net Interest Income After Provision for Loan Losses ................... 17,308 15,654 - ------------------------------------------------------------------------------------------------- Noninterest Income Service Charges on Deposit Accounts ................................... 2,071 1,829 Other Service Charges ................................................. 654 586 Trust Service Fees .................................................... 481 447 Net Realized Gains on Sales of Securities Available for Sale .......... -- 222 Data Processing Service Fees .......................................... 495 341 Other Operating Income ................................................ 455 537 - ------------------------------------------------------------------------------------------------- Total Noninterest Income ............................................ 4,156 3,962 - ------------------------------------------------------------------------------------------------- Noninterest Expense Salaries and Employee Benefits ........................................ 4,967 4,667 Net Occupancy Expense ................................................. 985 778 Equipment Expense ..................................................... 1,223 1,134 Other Real Estate (Income) Expense, Net ............................... 93 55 Amortization of Goodwill and Identifiable Intangibles ................. 680 621 One Time Charge - Acquisitions ........................................ -- 682 Other Noninterest Expense ............................................. 2,591 2,590 - ------------------------------------------------------------------------------------------------- Total Noninterest Expense ........................................... 10,539 10,527 - ------------------------------------------------------------------------------------------------- Income Before Income Tax Expense ......................................... 10,925 9,089 Income Tax Expense ....................................................... 3,873 3,246 - ------------------------------------------------------------------------------------------------- Net Income ............................................................... 7,052 5,843 Other Comprehensive Income (Loss), Net of Tax - Unrealized Gains (Losses) on Securities Available for Sale: Unrealized Holding Gains (Losses) Arising During Period ............. (1,320) 282 Less: Reclassification Adjustment for Gains Included in Net Income .. -- 42 - ------------------------------------------------------------------------------------------------- Total Other Comprehensive Income (Loss) ........................... (1,320) 240 - ------------------------------------------------------------------------------------------------- Comprehensive Income ..................................................... $ 5,732 $ 6,083 ================================================================================================= Net Income Per Common Share Basic ................................................................. $ 0.49 $ 0.41 Diluted ............................................................... 0.48 0.40 =================================================================================================
The accompanying notes are an integral part of the consolidated financial statements. Page 3
Texas Regional Bancshares, Inc. and Accumulated Subsidiaries Other Consolidated Statements of Changes Common Comprehensive Total In Shareholders' Equity Stock - Paid-In Retained Income Shareholders' (Dollars in Thousands) Class A Capital Earnings (Loss) Equity - --------------------------------------------------------------------------------------------------------------------------------- (Unaudited) Three Months Ended March 31, 1999 - Balance, Beginning of Period ............... $ 14,412 $ 87,586 $ 74,861 $ 609 $ 177,468 Net Income ................................. -- -- 7,052 -- 7,052 Unrealized Losses on Securities, Net of Tax and Reclassification Adjustment . -- -- -- (1,320) (1,320) - --------------------------------------------------------------------------------------------------------------------------------- Total Comprehensive Income ............... -- -- 7,052 (1,320) 5,732 - --------------------------------------------------------------------------------------------------------------------------------- Class A Common Stock Cash Dividends ........ -- -- (1,800) -- (1,800) - --------------------------------------------------------------------------------------------------------------------------------- Balance, End of Period ..................... $ 14,412 $ 87,586 $ 80,113 $ (711) $ 181,400 ================================================================================================================================= Disclosure of Reclassification Amount Unrealized Holding Losses During Period .. $ (1,320) Less Reclassification Adjustment for Gains Included in Net Income ................. -- - --------------------------------------------------------------------------------------------------------------------------------- Net Unrealized Losses on Securities .... $ (1,320) ================================================================================================================================= Three Months Ended March 31, 1998 - Balance, Beginning of Period ............... $ 14,403 $ 87,078 $ 59,167 $ 907 $ 161,555 Net Income ................................. -- -- 5,843 -- 5,843 Unrealized Gains on Securities, Net of Tax and Reclassification Adjustment . -- -- -- 240 240 - --------------------------------------------------------------------------------------------------------------------------------- Total Comprehensive Income ............... -- -- 5,843 240 6,083 - --------------------------------------------------------------------------------------------------------------------------------- Tax Effect of Nonqualified Stock Options Exercised .................................. -- 398 -- -- 398 Class A Common Stock Cash Dividends ........ -- -- (1,590) -- (1,590) Cash Dividends Paid on Fractional Shares ... -- -- (8) -- (8) - --------------------------------------------------------------------------------------------------------------------------------- Balance, End of Period ..................... $ 14,403 $ 87,476 $ 63,412 $ 1,147 $ 166,438 ================================================================================================================================= Disclosure of Reclassification Amount Unrealized Holding Gains During Period ... $ 282 Less Reclassification Adjustment for Gains Included in Net Income ................. 42 - --------------------------------------------------------------------------------------------------------------------------------- Net Unrealized Gains on Securities ..... $ 240 =================================================================================================================================
The accompanying notes are an integral part of the consolidated financial statements. Page 4
Three Months Texas Regional Bancshares, Inc. and Subsidiaries Ended March 31, Consolidated Statements of Cash Flows ------------------------- (Dollars in Thousands) 1998 1997 - --------------------------------------------------------------------------------------------------------- (Unaudited) Cash Flows from Operating Activities Net Income ............................................................. $ 7,052 $ 5,843 Adjustments to Reconcile Net Income to Net Cash Provided by Operating Activities Depreciation, Amortization and Accretion, Net ...................... 1,348 802 Provision for Loan Losses .......................................... 1,323 941 Provision for Estimated Losses on Other Real Estate and Other Assets 16 -- Gain on Sale of Securities Available for Sale ...................... -- (222) (Gain) Loss on Sale of Other Assets ................................ 4 (4) Gain on Sale of Other Real Estate .................................. (207) (34) Gain on Sale of Premises and Equipment ............................. (36) (159) Increase in Deferred Income Tax Liability .......................... (515) -- Increase in Accrued Interest Receivable and Other Assets ........... (1,241) (1,358) Increase in Accounts Payable and Accrued Liabilities ............... 4,288 2,408 - --------------------------------------------------------------------------------------------------------- Net Cash Provided by Operating Activities ................................. 12,032 8,217 - --------------------------------------------------------------------------------------------------------- Cash Flows from Investing Activities Proceeds from Sales of Securities Available for Sale ................... -- 47,999 Proceeds from Maturing Securities Available for Sale ................... 56,292 47,704 Purchases of Securities Available for Sale ............................. (69,195) (74,124) Proceeds from Maturing Securities Held to Maturity ..................... 1,000 979 Proceeds from Sale of Loans ............................................ 53 -- Purchases of Loans ..................................................... (1,542) (294) Loan Originations and Advances, Net .................................... (57,385) (42,290) Recoveries of Charged-Off Loans ........................................ 110 169 Proceeds from Sale of Premises and Equipment ........................... 216 447 Purchases of Premises and Equipment .................................... (1,300) (7,583) Proceeds from Sale of Other Real Estate ................................ 2,341 167 Proceeds from Sale of Other Assets ..................................... 213 155 Net Cash Provided By Mergers ........................................... -- 5,160 - --------------------------------------------------------------------------------------------------------- Net Cash Used in Investing Activities ..................................... (69,197) (21,511) - --------------------------------------------------------------------------------------------------------- Cash Flows from Financing Activities Net Increase in Demand Deposits, Money Market Checking and Savings Accounts ................................. 18,722 14,106 Net Increase in Time Deposits .......................................... 32,844 12,690 Net Increase (Decrease) in Federal Funds Purchased and Securities Sold Under Repurchase Agreements ...................... 1,601 (1,085) Cash Dividends Paid on Class A Common Stock ............................ (1,800) (1,442) Cash Dividends Paid on Fractional Shares ............................... -- (8) Tax Effect of Nonqualified Stock Options Exercised ..................... -- 398 - --------------------------------------------------------------------------------------------------------- Net Cash Provided by Financing Activities ................................. 51,367 24,659 - --------------------------------------------------------------------------------------------------------- Increase (Decrease) in Cash and Cash Equivalents .......................... (5,798) 11,365 Cash and Cash Equivalents at Beginning of Period .......................... 90,827 81,353 - --------------------------------------------------------------------------------------------------------- Cash and Cash Equivalents at End of Period ................................ $ 85,029 $ 92,718 ========================================================================================================= Supplemental Disclosures of Cash Flow Information Interest Paid .......................................................... $ 14,713 $ 13,656 Income Taxes Paid ...................................................... 26 4,143 Supplemental Schedule of Noncash Investing and Financing Activities Foreclosure and Repossession in Partial Satisfaction of Loans Receivable 3,211 1,005 =========================================================================================================
The accompanying notes are an integral part of the consolidated financial statements. Page 5 TEXAS REGIONAL BANCSHARES, INC. AND SUBSIDIARIES NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS NOTE 1: BASIS OF PRESENTATION The accompanying unaudited consolidated financial statements were prepared in accordance with instructions for Form 10-Q and, therefore, do not include all information and footnotes necessary for a complete presentation of financial position, results of operations, changes in shareholders' equity, and cash flows in conformity with generally accepted accounting principles. However, the consolidated financial statements include all adjustments which, in the opinion of management, are necessary for a fair presentation. The results of operations and cash flows for the three months ended March 31, 1999 and 1998 should not be considered indicative of the results to be expected for the full year. These consolidated financial statements should be read in conjunction with the consolidated financial statements and notes thereto included in the Texas Regional Bancshares, Inc. and Subsidiaries (the "Company") Annual Report on Form 10-K for the year ended December 31, 1998. The consolidated financial statements include the accounts of Texas Regional Bancshares, Inc. and its wholly owned subsidiaries, Texas Regional Delaware, Inc. and Texas State Bank (the "Bank"). The Company eliminates all significant intercompany transactions and balances in consolidation. The Company accounts for investments in the subsidiaries on the equity method in the Parent's financial statements. The Financial Accounting Standards Board's Statement No. 133 ("Statement 133"), "Accounting for Derivative Instruments and for Hedging Activities," was issued in June 1998. Statement 133 requires companies to recognize all derivatives as either assets or liabilities in the statement of financial condition and measure those instruments at fair value. Statement 133 requires that changes in fair value of a derivative be recognized currently in earnings unless specific hedge accounting criteria are met. Statement 133 is effective for fiscal years beginning after June 15, 1999. The Company does not currently have derivative instruments as defined by Statement 133. NOTE 2: IMPAIRED LOANS The Company identifies loans to be reported as impaired when such loans are on nonaccrual status or are considered troubled debt restructurings due to the granting of a below-market rate of interest or a partial forgiveness of indebtedness on an existing loan. The balance of impaired loans was $7.1 million at March 31, 1999 and the average recorded investment in impaired loans during the three months ended March 31, 1999 was $7.8 million. The total allowance for loan losses related to these loans was $1.0 million at March 31, 1999. Interest income on impaired loans of $39,000 was recognized for cash payments received during the three months ended March 31, 1999. NOTE 3: COMMON STOCK On March 9, 1999, the Board of Directors approved a cash dividend or $0.125 per share for shareholders of record on April 1, 1999 and payable on April 15, 1999. Page 6 NOTE 4: EARNINGS PER COMMON SHARE COMPUTATIONS The table below presents a reconciliation of basic and diluted earnings per share computations.
Three Months Ended March 31, ----------------------------- (Dollars in Thousands, Except Share Data) 1999 1998 - --------------------------------------------------------------------------------------- (Unaudited) Net Income Available to Common Shareholders ........ $ 7,052 $ 5,843 - --------------------------------------------------------------------------------------- Weighted Average Number of Common Shares Outstanding Used in Basic EPS Calculation ................... 14,411,583 14,403,484 Add Assumed Exercise of Outstanding Stock Options as Adjustments for Dilutive Securities ............. 210,989 244,724 - --------------------------------------------------------------------------------------- Weighed Average Number of Common Shares Outstanding Used in Diluted EPS Calculations .... 14,622,572 14,648,208 - --------------------------------------------------------------------------------------- Basic EPS .......................................... $ 0.49 $ 0.41 Diluted EPS ........................................ 0.48 0.40 - ---------------------------------------------------------------------------------------
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS FORWARD-LOOKING STATEMENTS. This Management's Discussion and Analysis includes forward-looking statements, such as: statements of the Company's goals, intentions and expectations; estimates of risks and of future costs and benefits; and statements of the Company's ability to achieve financial and other goals. These forward looking statements are subject to significant uncertainties because they are based upon: future interest rates and other economic conditions; statements by suppliers of data processing equipment and services, government agencies, and other third parties as to year 2000 compliance and costs; future laws and regulations; and a variety of other matters. Because of these uncertainties, the actual future results may be materially different from the results indicated by these forward-looking statements. In addition, the Company's past results do not necessarily indicate its future results. The following presents Management's discussion and analysis of the Company's consolidated financial condition and results of operations at the dates and for the periods indicated. This discussion should be read in conjunction with the Company's consolidated financial statements and the accompanying notes. GENERAL Texas Regional Bancshares, Inc. ("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 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 March 31, 1999, 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 $181.4 million. On February 19, 1998, the Company completed the acquisition of three bank holding companies and their three subsidiary banks (the "Mergers"). The acquisition of Brownsville Bancshares, Inc. and its subsidiary, Brownsville National Bank, included two banking locations in Brownsville, Cameron County, Texas, with assets of approximately $100.1 million, equity of $12.1 million, loans of $42.6 million, and deposits of $87.2 million. The Company achieved this acquisition by the exchange of 984,806 shares of Company stock for all of the outstanding shares of Brownsville Bancshares, Inc. and cancellation of outstanding stock options. Brownsville National Bank merged with and into the Bank. Page 7 The second acquisition was TB&T Bancshares, Inc. and its subsidiary, Texas Bank and Trust of Brownsville, Cameron County, Texas. Texas Bank and Trust of Brownsville had assets of approximately $44.9 million, equity of $4.1 million, loans of $21.9 million, and deposits of $40.3 million. This acquisition was achieved by exchange of 308,039 shares of Company stock for all of the outstanding shares of TB&T Bancshares, Inc., a portion of which are retained in a holdback escrow account pending resolution of certain claims. Texas Bank and Trust of Brownsville merged with and into the Bank. The third acquisition was Raymondville Bancorp, Inc. and its subsidiary, Bank of Texas. Bank of Texas was headquartered in Raymondville, Willacy County, Texas, with one additional banking facility in Brownsville, Texas. The shareholder of Raymondville Bancorp, Inc. received cash consideration of $9.6 million in this acquisition, and the Company paid $100,000 in consideration for a covenant not to compete. The Company discharged approximately $330,000 of existing Raymondville Bancorp, Inc. indebtedness. Bank of Texas had assets of approximately $63.7 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 the Bank. The Company accounted for its acquisition of Brownsville Bancshares, Inc. and TB&T Bancshares, Inc. under the pooling-of-interests method of accounting, and as such, the enclosed financial information has been restated for all periods presented to include the results of operations and financial position of these acquired entities. A One Time Charge-Acquisitions of $682,000 or $0.03 per diluted common share, net of federal income tax, reduced net income for the three months ended March 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. The Company signed a letter of intent on April 21, 1999 to acquire Harlingen Bancshares, Inc. and its subsidiary, Harlingen National Bank. At March 31, 1999, Harlingen Bancshares, Inc. had assets of $225.8 million, deposits of $203.3 million, loans of $128.3 million and equity of $21.0 million. The agreement provides for a cash consideration of approximately $34.0 million for all outstanding shares of Harlingen Bancshares, Inc. The transaction is subject to completion of satisfactory due diligence by the Company, execution of a mutually acceptable definitive agreement and approval by the appropriate regulatory authorities. The purchase is expected to close during the fourth quarter 1999 and to be accounted for under the purchase method of accounting. FINANCIAL CONDITION CASH AND CASH EQUIVALENTS The Company, through its main office and branches, offers a broad range of commercial banking services to individuals and businesses in its service area. It also acts as a correspondent to a number of banks in its service area, providing check clearing, wire transfer, federal funds transactions, loan participations and other correspondent services. The amount of cash and cash equivalents held on any one day is significantly influenced by temporary changes in cash items in process of collection. The Company had cash and cash equivalents totaling $85.0 million at March 31, 1999. Comparatively, the Company had $90.8 million in cash and cash equivalents at December 31, 1998, a decrease of $5.8 million or 6.4%. 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 March 31, 1999 and December 31, 1998, no securities were classified as trading. The Company does not currently engage in trading activities or use derivative instruments to control interest rate risk. Even though such Page 8 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 carrying value of securities (dollars in thousands): March 31, December 31, 1999 1998 - ---------------------------------------------------------------------------- (Unaudited) Securities Available for Sale, at Fair Value U.S. Government Agency .................... $315,994 $313,970 Mortgage-Backed ........................... 106,740 101,365 States and Political Subdivisions ......... 40,342 36,988 Other ..................................... 3,606 3,613 - ---------------------------------------------------------------------------- Total Securities Available for Sale ..... $466,682 $455,936 ============================================================================ Securities Held to Maturity, at Amortized Cost U.S. Treasury ............................. $ 10,009 $ 10,013 States and Political Subdivisions ......... 3,313 4,318 - ---------------------------------------------------------------------------- Total Securities Held to Maturity ....... $ 13,322 $ 14,331 ============================================================================ Net unrealized holding gains (losses), net of related tax effect, of $(711,000) and $609,000 at March 31, 1999 and December 31, 1998, respectively, on securities available for sale are reported as a separate component of shareholders' equity and as other comprehensive income. Securities with carrying values of $414.6 million at March 31, 1999 and $351.7 million at December 31, 1998 were pledged to secure public funds, trust assets on deposit and for other purposes required or permitted by law. 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. Page 9 The extension of credits denominated in a currency other than that of the country in which a borrower is located are called "cross-border" credits. The Company has some dollar-denominated cross-border credits to individuals or companies that are residents of, or domiciled in Mexico. The Company's total cross-border credits at March 31, 1999 of $7.5 million were less than .7% of total loans. See "Nonperforming Assets" for additional information on cross-border credits. Total loans of $1.1 billion at March 31, 1999 increased $54.7 million or 5.0% compared to December 31, 1998 levels of $1.1 billion. The increase in total loans for the three months ended March 31, 1999 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 (dollars in thousands): March 31, December 31, 1999 1998 - ----------------------------------------------------------------------- (Unaudited) Commercial ............................. $ 333,530 $ 311,966 Commercial Tax-Exempt .................. 22,038 22,155 - ----------------------------------------------------------------------- Total Commercial Loans .............. 355,568 334,121 - ----------------------------------------------------------------------- Agricultural ........................... 59,262 52,302 - ----------------------------------------------------------------------- Real Estate Construction ........................ 75,342 66,018 Commercial Mortgage ................. 363,047 354,134 Agricultural Mortgage ............... 35,526 34,440 1-4 Family Mortgage ................. 130,291 128,945 - ----------------------------------------------------------------------- Total Real Estate ................. 604,206 583,537 - ----------------------------------------------------------------------- Consumer ............................... 125,136 119,545 - ----------------------------------------------------------------------- Total Loans ......................... $1,144,172 $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 Company has several procedures in place to assist in maintaining the overall quality of its loan portfolio. The Bank has established underwriting guidelines to be followed by its officers and monitors its delinquency levels for any negative or adverse trends. Nonperforming assets consist of nonaccrual loans, loans for which the interest rate has been renegotiated below originally contracted rates and real estate or other assets that have been acquired in partial or full satisfaction of loan obligations. The Company's policy generally is to place a loan on nonaccrual status when payment of principal or interest is contractually past due 90 days, or earlier when concern exists as to the ultimate collection of principal and interest. At the time a loan is placed on nonaccrual status, interest previously accrued but uncollected is reversed and charged against current income. The Company's classification of nonperforming loans includes those loans for which management believes collection is doubtful. Management is not aware of any specific borrower relationships that are not reported as nonperforming where management has serious doubts as to the ability of such borrowers to comply with the present loan repayment terms which would cause nonperforming assets to increase materially. Nonperforming assets of $13.3 million at March 31, 1999 decreased $2.4 million, 15.5% compared to December 31, 1998 levels of $15.8 million. Nonaccrual loans of $7.1 million at March 31, 1999 decreased $3.3 million or 31.6% compared to $10.4 million at December 31, 1998. The decrease in nonaccrual loans during 1999 resulted from foreclosure on several credits secured primarily by real estate. Cross-border nonaccrual loans at March 31, 1999 Page 10 of $2.6 million reflect no change from December 31, 1998. The increase in foreclosed assets during 1998 was primarily attributable to a higher rate of foreclosure loans with real estate collateral, net of write-downs and liquidations. Management actively seeks buyers for all Other Real Estate. See "Noninterest Expense" below. Loans which are contractually past due 90 days or more, which are both well secured or guaranteed by financially responsible third parties and in the process of collection, generally are not placed on nonaccrual status. The amount of such loans past due 90 days or more at March 31, 1999 and December 31, 1998 that are not classified as nonaccrual totaled $5.9 million and $3.1 million, respectively. The increase in accruing loans past due 90 days or more at March 31, 1999 as compared to the year ended December 31, 1998 is partly attributable to several diverse loans secured primarily by real estate. The ratio of Nonperforming Assets Plus Accruing Loans 90 Days or More Past Due as a percent of Total Loans and Foreclosed Assets at March 31, 1999 decreased to 1.67% from 1.72% at December 31, 1998 due primarily to the increase in total loans. The Company identifies loans to be reported as impaired when such loans are on nonaccrual status or are considered troubled debt restructurings due to the granting of a below-market rate of interest or a partial forgiveness of indebtedness on an existing loan. The balance of impaired loans was $7.1 million at March 31, 1999 and the average recorded investment in impaired loans during the three months ended March 31, 1999 was $7.8 million. The total allowance for loan losses related to these loans was $1.0 million at March 31, 1999. Interest income on impaired loans of $39,000 was recognized for cash payments received during the three months ended March 31, 1999. An analysis of the components of nonperforming assets follows (dollars in thousands): March 31, December 31, 1999 1998 - ----------------------------------------------------------------------------- (Unaudited) Nonaccrual Loans ................................... $ 7,124 $10,414 Renegotiated Loans ................................. -- -- - ----------------------------------------------------------------------------- Nonperforming Loans ............................. 7,124 10,414 Foreclosed Assets .................................. 6,212 5,368 - ----------------------------------------------------------------------------- Total Nonperforming Assets ...................... 13,336 15,782 Accruing Loans 90 Days or More Past Due ............ 5,863 3,099 - ----------------------------------------------------------------------------- Total Nonperforming Assets and Accruing Loans 90 Days or More Past Due ....... $19,199 $18,881 ============================================================================= Nonperforming Loans as a % of Total Loans .......... 0.62% 0.96% Nonperforming Assets as a % of Total Loans and Foreclosed Assets ........................... 1.16 1.44 Nonperforming Assets as a % of Total Assets ........ 0.73 0.90 Nonperforming Assets Plus Accruing Loans 90 Days or More Past Due as a % of Total Loans and Foreclosed Assets ..................... 1.67 1.72 ============================================================================= Management regularly reviews and monitors the loan portfolio to identify borrowers experiencing financial difficulties. Management believes that, at March 31, 1999, all such loans had been identified and included in the nonaccrual, renegotiated or 90 days past due loan totals reflected in the table above. Management continues to emphasize maintaining a low level of nonperforming assets and returning nonperforming assets to an earning status. ALLOWANCE FOR LOAN LOSSES Management analyzes the loan portfolio to determine the adequacy of the allowance for loan losses and the appropriate provision required to maintain an adequate allowance. In assessing the adequacy of the allowance, management reviews the size, quality and risks of loans in the portfolio and considers factors such as specific known risks, past experience, the status and amount of nonperforming assets and economic conditions. A specific percentage is allocated to total loans in good standing and additional amounts are added for individual loans Page 11 considered to have specific loss potential. Loans identified as losses are charged-off. In addition, the loan review committee of the Bank reviews the assessments of management in determining the adequacy of the Bank's allowance for loan losses. Based on total allocations, the provision is recorded to maintain the allowance at a level deemed appropriate by management. While management uses available information to recognize losses on loans, there can be no assurance that future additions to the allowance will not be necessary. The allowance for loan losses at March 31, 1999 totaled $13.7 million, representing a net increase of $437,000 or 3.3% compared to $13.2 million at December 31, 1998. Management believes that the allowance for loan losses at March 31, 1999 adequately reflects the risks in the loan portfolio. Various regulatory agencies, as an integral part of their examination process, periodically review the Company's allowance for loan losses. Such agencies may require the Company to recognize additions to the allowance based on their judgments of information available to them at the time of their examination. The following table summarizes the activity in the allowance for loan losses (dollars in thousands): Three Months Ended March 31, ---------------------------- 1999 1998 - ------------------------------------------------------------------------------- (Unaudited) Balance at Beginning of Period .................... $13,236 $11,291 Balance from Acquisitions ......................... -- 308 Provision for Loan Losses ......................... 1,323 941 Charge-Offs Commercial ..................................... 613 228 Agricultural ................................... 5 13 Real Estate .................................... 20 120 Consumer ....................................... 358 233 - ------------------------------------------------------------------------------- Total Charge-Offs ............................ 996 594 - ------------------------------------------------------------------------------- Recoveries Commercial ..................................... 41 124 Agricultural ................................... 3 -- Real Estate .................................... 10 2 Consumer ....................................... 56 43 - ------------------------------------------------------------------------------- Total Recoveries ............................. 110 169 - ------------------------------------------------------------------------------- Net Charge-Offs ................................... 886 425 - ------------------------------------------------------------------------------- Balance at End of Period .......................... $13,673 $12,115 =============================================================================== Ratio of Allowance for Loan Losses to Loans Outstanding, Net of Unearned Discount .... 1.20% 1.19% Ratio of Allowance for Loan Losses to Nonperforming Loans .................. 191.93 153.61 Ratio of Net Charge-Offs to Average Total Loans Outstanding, Net of Unearned Discount ....................... 0.32 0.17 =============================================================================== PREMISES AND EQUIPMENT, NET Premises and equipment of $69.7 million at March 31, 1999 decreased $172,000 or .2% compared to $69.8 million at December 31, 1998. The decrease for the three months ended March 31, 1999 resulted primarily from depreciation and amortization, net of additions. GOODWILL AND IDENTIFIABLE INTANGIBLES Intangibles of $26.2 million at March 31, 1999 decreased $679,000 or 2.5% compared to $26.9 million at December 31, 1998. The net decrease for the three months ended March 31, 1999 is attributable to amortization of existing intangibles. Page 12 DEPOSITS Total deposits of $1.6 billion at March 31, 1999 increased $51.6 million or 3.3% compared to December 31, 1998 levels of $1.6 billion. The increase in total deposits for the three months ended March 31, 1999 is primarily attributable to growth in the volume of business conducted by the Company and the vitality of the Rio Grande Valley economy. The following table presents the composition of total deposits (dollars in thousands): March 31, December 31, 1999 1998 - ------------------------------------------------------------------------------ (Unaudited) Demand Deposits Commercial and Individual ................ $ 239,109 $ 227,220 Public Funds ............................. 7,067 7,435 - ------------------------------------------------------------------------------ Total Demand Deposits .................. 246,176 234,655 - ------------------------------------------------------------------------------ Interest-Bearing Deposits Savings Commercial and Individual .............. 111,357 106,446 Public Funds ........................... 1,291 1,265 Money Market Checking and Savings Commercial and Individual .............. 247,630 236,157 Public Funds ........................... 55,872 65,081 Time Deposits Commercial and Individual .............. 704,564 727,205 Public Funds ........................... 247,618 192,133 - ------------------------------------------------------------------------------ Total Interest-Bearing Deposits ........ 1,368,332 1,328,287 - ------------------------------------------------------------------------------ Total Deposits ....................... $1,614,508 $1,562,942 ============================================================================== SHAREHOLDERS' EQUITY Shareholders' equity increased by $3.9 million, or 2.2%, during the three months ended March 31, 1999 due to comprehensive income of $5.7 million less cash dividends of $1.8 million. Comprehensive income for the period included net income of $7.1 million and unrealized loss on securities available for sale, net of tax, of $1.3 million. Bank holding companies are required to maintain capital ratios in accordance with guidelines adopted by the Federal Reserve Board ("FRB"). The guidelines are commonly known as Risk-Based Capital Guidelines. The table Page 13 below reflects various measures of regulatory capital (dollars in thousands):
March 31, 1999 December 31, 1998 ------------------------- --------------------------- Amount Ratio Amount Ratio - -------------------------------------------------------------------------------------------------------------- (Unaudited) Total Shareholders' Equity before unrealized gains or losses on Securities Available for Sale $ 182,111 $ 176,859 Less Goodwill and Other Deductions ................ (26,215) (26,894) - -------------------------------------------------------------------------------------------------------------- Total Tier I Capital .............................. 155,896 149,965 Total Tier II Capital ............................. 13,673 13,236 - -------------------------------------------------------------------------------------------------------------- Total Qualifying Capital .......................... $ 169,569 $ 163,201 ============================================================================================================== Total Capital ..................................... $ 169,569 13.73% $ 163,201 14.06% Total Capital Minimum ............................. 98,810 8.00 92,884 8.00 - -------------------------------------------------------------------------------------------------------------- Tier I Capital .................................... 155,896 12.62 149,965 12.92 Tier I Capital Minimum ............................ 49,405 4.00 46,442 4.00 - -------------------------------------------------------------------------------------------------------------- Tier I Leverage Capital ........................... 155,896 8.90 149,965 8.85 Tier I Leverage Capital Minimum ................... 70,079 4.00 67,772 4.00 ==============================================================================================================
On March 31, 1999, the Company and the Bank also met the criteria for classification as a "well-capitalized" institution under the prompt corrective action rules promulgated under the Federal Deposit Insurance Act. Designation as a well-capitalized institution under these regulations does not constitute a recommendation or endorsement of the Company or the Bank by Federal bank regulators. RESULTS OF OPERATIONS NET INCOME Net income available for common shareholders was $7.1 million and $5.8 million and earnings per diluted common share were $0.48 and $0.40 for the three months ended March 31, 1999 and 1998, respectively. During the three months ended March 31, 1998, the Company incurred a One Time Charge-Acquisitions of $682,000 or $0.03 per diluted common share, net of federal income tax. These expenses, primarily professional fees and computer conversion costs, related to business combinations accounted for by the pooling-of-interests method. Increases in net income were primarily the result of strong loan growth, maintaining strong asset quality and expense control and resulted in returns on average assets of 1.61% and 1.49% and returns on average common equity of 15.88% and 14.37% for the three months ended March 31, 1999 and 1998, respectively. INTEREST INCOME Interest income for the three months ended March 31, 1999 was $33.0 million, an increase of $2.4 million, or 8.0% from the three months ended March 31, 1998. This increase in interest income is due to a $175.5 million increase in average earning assets to $1.6 billion for the three months ended March 31, 1999, a 12.3% increase from the same period last year. Interest income on loans increased $2.3 million to $25.8 million for the three months ended March 31, 1999. This was due to a $132.9 million increase in average loans outstanding over the same period in 1998. Interest income on securities increased to $6.9 million, a $206,000 increase from the prior comparable period. This increase was attributable to a $40.4 million increase in average securities, up 9.6% when compared to the three months ended March 31, 1998. INTEREST EXPENSE Interest expense on deposits and other borrowings was $14.4 million for the three months ended March 31, 1999, compared to $14.0 million for the same period in 1998. The increase in interest expense was attributable to a $147.3 million increase in average interest-bearing liabilities from the prior comparable period. Page 14 NET INTEREST INCOME Net interest income, reported on a tax equivalent basis, was $19.0 million for the three months ended March 31, 1999, compared with $16.9 million for the same period in 1998, an increase of 12.1%. The increase in net interest income during the three months ended March 31, 1999 was largely due to growth in average interest-earning assets, primarily loans. The net interest margin was 4.80% for the three months ended March 31, 1999, compared with 4.81% in the first quarter 1998. This nominal decrease was attributable to a thirty four basis point decrease in the yield on average interest earning assets to 8.43%, down from 8.77% for the same period last year. The cost of interest-bearing liabilities also decreased 40 basis points to 4.33% for the three months ended March 31, 1999. The following table presents for the three months ended March 31, 1999 and 1998 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 Page 15 taxable-equivalent basis, assuming a 35% effective tax rate for 1999 and 1998 (dollars in thousands):
Three Months Ended ----------------------------------------------------------------------------------------- March 31, 1999 March 31, 1998 ----------------------------------------------------------------------------------------- Average Yield/ Average Yield/ Taxable-Equivalent Basis (1) Balance Interest Rate (2) Balance Interest Rate (2) - --------------------------------------------------------------------------------------------------------------------------------- (Unaudited) Assets Interest-Earning Assets Loans Commercial .................. $ 400,283 $ 8,908 9.03% $ 342,401 $ 8,010 9.49% Real Estate ................. 592,200 13,857 9.49 539,122 13,146 9.89 Consumer .................... 122,495 3,134 10.38 100,544 2,537 10.23 - --------------------------------------------------------------------------------------------------------------------------------- Total Loans ............... 1,114,978 25,899 9.42 982,067 23,693 9.78 - --------------------------------------------------------------------------------------------------------------------------------- Securities Taxable ..................... 418,107 6,387 6.20 392,570 6,303 6.51 Tax-Exempt .................. 42,548 731 6.97 27,666 545 7.99 - --------------------------------------------------------------------------------------------------------------------------------- Total Securities .......... 460,655 7,118 6.27 420,236 6,848 6.61 - --------------------------------------------------------------------------------------------------------------------------------- Time Deposits ................. 359 6 6.78 1,167 18 6.26 Federal Funds Sold ............ 28,741 339 4.78 25,752 356 5.61 - --------------------------------------------------------------------------------------------------------------------------------- Total Interest-Earning Assets 1,604,733 33,362 8.43% 1,429,222 30,915 8.77% - --------------------------------------------------------------------------------------------------------------------------------- Cash and Due from Banks ......... 58,583 58,155 Premises and Equipment, Net ..... 69,816 57,234 Other Assets .................... 57,942 52,292 Allowance for Loan Losses ....... (13,445) (11,775) - --------------------------------------------------------------------------------------------------------------------------------- Total Assets .................. $ 1,777,629 $ 1,585,128 ================================================================================================================================= Liabilities Interest-Bearing Liabilities Savings ....................... $ 109,364 $ 611 2.27% $ 104,425 $ 767 2.98% Money Market Checking and Savings ................. 300,228 2,140 2.89 252,859 1,844 2.96 Time Deposits ................. 927,095 11,518 5.04 838,400 11,328 5.48 - --------------------------------------------------------------------------------------------------------------------------------- Total Savings and Time Deposits ............. 1,336,687 14,269 4.33 1,195,684 13,939 4.73 - --------------------------------------------------------------------------------------------------------------------------------- Federal Funds Purchased and Securities Sold Under Repurchase Agreements .................. 8,336 93 4.52 2,004 28 5.67 - --------------------------------------------------------------------------------------------------------------------------------- Total Interest-Bearing Liabilities ............... 1,345,023 14,362 4.33% 1,197,688 13,967 4.73% - --------------------------------------------------------------------------------------------------------------------------------- Demand Deposits ................. 237,796 207,920 Other Liabilities ............... 14,753 14,585 - --------------------------------------------------------------------------------------------------------------------------------- Total Liabilities ............. 1,597,572 1,420,193 - --------------------------------------------------------------------------------------------------------------------------------- Shareholders' Equity ............ 180,057 164,935 - --------------------------------------------------------------------------------------------------------------------------------- Total Liabilities and Shareholders' Equity ........ $ 1,777,629 $ 1,585,128 ================================================================================================================================= Net Interest Income ................ $ 19,000 $ 16,948 ================================================================================================================================= Net Yield on Total Interest Earning Assets .................. 4.80% 4.81% =================================================================================================================================
(1) For analytical purposes, income from tax-exempt assets, primarily securities issued by state and local governments or authorities, is adjusted by an increment that equates tax-exempt income to interest from taxable assets (assuming a 35% tax rate). (2) Annualized. Page 16 The following table presents the effects of changes in volume, rate and rate/volume on interest income and interest expense for major categories of interest-earning assets and interest-bearing liabilities. Nonaccrual loans are included in assets, thereby reducing yields (see "Nonperforming Assets"). The allocation of the rate/volume variance has been made pro-rata on the percentage that volume and rate variances produce in each category. An analysis of changes in net interest income follows (dollars in thousands):
Three Months Ended March 31, 1999 Compared to 1998 --------------------------------------------- Due to Change in Net ------------------- Rate/ Taxable-Equivalent Basis (1) Change Volume Rate Volume - ----------------------------------------------------------------------------------------- (Unaudited) Interest Income Loans ............................... $ 2,206 $ 3,205 $ (872) $ (127) Securities Taxable ........................... 84 410 (300) (26) Tax-Exempt ........................ 186 293 (70) (37) Time Deposits in Bank ............... (12) (12) 1 (1) Federal Funds Sold .................. (17) 41 (53) (5) - ----------------------------------------------------------------------------------------- Total Interest Income ............. 2,447 3,937 (1,294) (196) - ----------------------------------------------------------------------------------------- Interest Expense Deposits ............................ 330 1,645 (1,179) (136) Federal Funds Purchased and Securities Sold Under Repurchase Agreements ............. 65 89 (6) (18) - ----------------------------------------------------------------------------------------- Total Interest Expense ............ 395 1,734 (1,185) (154) - ----------------------------------------------------------------------------------------- Net Interest Income Before Allocation of Rate/Volume ......................... 2,052 2,203 (109) (42) Allocation of Rate/Volume .............. -- (52) 10 42 - ----------------------------------------------------------------------------------------- Changes in Net Interest Income ......... $ 2,052 $ 2,151 $ (99) $ -- =========================================================================================
(1) For analytical purposes, income from tax-exempt assets, primarily securities issued by state and local governments or authorities, is adjusted by an increment that equates tax-exempt income to interest from taxable assets (assuming a 35% effective federal income tax rate for 1999 and 1998). PROVISION FOR LOAN LOSSES The Company recorded a provision for loan losses of $1.3 million for the three months ended March 31, 1999, compared to $941,000 in the three months ended March 31, 1998. The provision for loan losses reflected an increase of $382,000 or 40.6% for first quarter 1999 necessary to maintain the total allowance for loan losses at an adequate level consistent with the Company's methodology. Net charge-offs totaled $886,000 and $425,000, respectively, for the three months ended March 31, 1999 and 1998 and increased to .32% of average loans in 1999 compared to .17% of average loans for 1998. Management charges provisions for loan losses to earnings to bring the total allowance for loan losses to a level deemed appropriate. Management bases its decision on many factors which include historical experience, the volume and type of lending conducted by the Company, the amount of nonperforming assets, regulatory policies, generally accepted accounting principles, and general economic conditions, particularly as they relate to the Company's lending area. See "Allowance for Loan Losses." NONINTEREST INCOME Noninterest Income totaled $4.2 million for the three months ended March 31, 1999 compared to $4.0 million for 1998. Excluding Net Realized Gains on Sales of Securities Available for Sale in 1998, Noninterest Income increased $416,000 or 11.1% from 1998. Total Service Charges of $2.7 million for the three months ended March 31, 1999, increased $310,000 or 12.8% compared to $2.4 million for same period in 1998. The increase in Total Service Charges is attributable to increased account transaction fees generated by deposit growth experienced by the Company. Trust Service Fees of $481,000 for the three months ended March 31, 1999 increased $34,000 or 7.6% compared to $447,000 for comparable prior year period. The increase in Trust Service Fees is attributable to an Page 17 increase in the number of trust accounts managed. The fair market value of assets managed at March 31, 1999 of $328.9 million increased $54.4 million or 19.8% compared to $274.6 million at March 31, 1998. 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 totaled $ - for the three months ended March 31, 1999 decreased $222,000 or 100.0% compared to $222,000 for 1998. Market opportunities to realize bond profits were limited as bond prices generally fell during the first quarter 1999. Unrealized holding losses on securities available for sale totaled $1.3 million during the quarter (see "Shareholders' Equity"). Data Processing Fees of $495,000 for the three months ended March 31, 1999 increased $154,000 or 45.2% compared to $341,000 for the same period last year. This increase arose from the acquisition of additional banking clients and increased utilization of services offered to existing clients during 1998. The Company obtained two additional banking clients during the past year. Other Operating Income of $455,000 for the three months ended March 31, 1999 decreased $82,000 or 15.3% compared to $537,000 for the same 1998 period. Other Operating Income included a gain on sale of bank real estate of $158,000 in the prior year period. A detailed summary of Noninterest Income follows (dollars in thousands): Three Months Ended March 31, ----------------------- 1999 1998 - --------------------------------------------------------------------------- (Unaudited) Service Charges on Deposit Accounts ............ $2,071 $1,829 Other Service Charges .......................... 654 586 - --------------------------------------------------------------------------- Total Service Charges ....................... 2,725 2,415 - --------------------------------------------------------------------------- Trust Service Fees ............................. 481 447 Net Realized Gains on Sales of Securities Available for Sale ............ -- 222 Data Processing Service Fees ................... 495 341 Other Operating Income ......................... 455 537 - --------------------------------------------------------------------------- Total Noninterest Income .................... $4,156 $3,962 =========================================================================== NONINTEREST EXPENSE Noninterest Expense of $10.5 million for the three months ended March 31, 1999 increased $12,000 or .1% compared to $10.5 million for 1998. The efficiency ratio of expense to total revenue improved to 45.11% for the first quarter 1999 compared to 50.62% for the first quarter 1998. Excluding One Time Charge - Acquisitions of $682,000 in 1998, Noninterest Expense increased $694,000 or 7.0 percent over first quarter 1998. The increase results primarily from higher personnel costs and occupancy expenses associated with the new corporate headquarters building in McAllen, Texas opened in mid 1998. Salaries and Employee Benefits, the largest category of Noninterest Expense, of $5.0 million for the three months ended March 31, 1999 increased $300,000 or 6.4% compared to the same period last year of $4.7 million. The number of full-time equivalent employees of 753 at March 31, 1999 increased 12.9% from 667 at March 31, 1998. Salaries and Employee Benefits averaged 1.12% of total assets for the three months ended March 31, 1999 compared to 1.18% for the three months ended March 31, 1998. Net Occupancy Expense of $985,000 for the three months ended March 31, 1999 increased $207,000 or 26.6% compared to $778,000 for 1998. Expenses associated with the new corporate headquarters building in McAllen, Texas, opened mid-1998, contributed to the increase in Net Occupancy Expense during the three months ended March 31, 1999. Equipment Expense of $1.2 million for the three months ended March 31, 1999 increased $89,000 or 7.8% compared to $1.1 million for 1998. Expenses associated with the new corporate headquarters building contributed to the increase in Equipment Expense for the three months ended March 31, 1999. Page 18 Other Real Estate (Income) Expense, Net, includes rent income from foreclosed properties, gain or loss on sale of other real estate properties and direct expenses of foreclosed real estate including property taxes, maintenance costs and write-downs. Write-downs of other real estate are required if the fair value of an asset acquired in a loan foreclosure subsequently declines below its carrying value. Other Real Estate (Income) Expense, Net of $93,000 for the three months ended March 31, 1999 increased $38,000 or 69.1% compared to $55,000 for the three months ended March 31, 1998. The net increase for first quarter 1999 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 $680,000 for the three months ended March 31, 1999 increased $59,000 or 9.5% compared to $621,000 for 1998. The increase in Amortization of Goodwill and Identifiable Intangibles was due to the amortization of goodwill and core deposit premiums associated with the 1998 acquisitions. One Time Charge - Acquisitions of $682,000, related primarily to professional fees and computer conversion cost resulting from the Company's 1998 acquisitions. A detailed summary of Noninterest Expense follows (dollars in thousands): Three Months Ended March 31, --------------------- 1999 1998 - ------------------------------------------------------------------------------- (Unaudited) Salaries and Wages .................................... $ 3,873 $ 3,814 Employee Benefits ..................................... 1,094 853 - ------------------------------------------------------------------------------- Total Salaries and Employee Benefits ............... 4,967 4,667 - ------------------------------------------------------------------------------- Net Occupancy Expense ................................. 985 778 Equipment Expense ..................................... 1,223 1,134 - ------------------------------------------------------------------------------- Other Real Estate Income (Expense), Net Rent Income ........................................ (54) (14) (Gain) Loss on Sale ................................ (207) (34) Expenses ........................................... 339 103 Write-Downs ........................................ 15 -- - ------------------------------------------------------------------------------- Total Other Real Estate Income (Expense), Net .... 93 55 - ------------------------------------------------------------------------------- Amortization of Goodwill and Identifiable Intangibles . 680 621 One Time Charge - Acquisitions ........................ -- 682 Other Noninterest Expense Advertising and Public Relations ................... 381 322 Data Processing and Check Clearing ................. 358 295 Director Fees ...................................... 79 124 Franchise Tax ...................................... 122 137 Insurance .......................................... 101 92 FDIC Insurance ..................................... 46 38 Legal .............................................. 181 348 Professional Fees .................................. 219 173 Postage, Delivery and Freight ...................... 236 204 Stationery and Supplies ............................ 319 341 Telephone .......................................... 142 132 Other Losses ....................................... 27 56 Miscellaneous Expense .............................. 380 328 - ------------------------------------------------------------------------------- Total Other Noninterest Expense .................. 2,591 2,590 - ------------------------------------------------------------------------------- Total Noninterest Expense ............................. $ 10,539 $ 10,527 =============================================================================== INCOME TAX EXPENSE The Company recorded income tax expense of $3.9 million for the three months ended March 31, 1999 compared to $3.2 million for the three months ended March 31, 1998. The increase in income tax expense is due primarily to an increased level of pretax income for the first quarter 1998. Page 19 CAPITAL AND LIQUIDITY Bank holding companies are required to maintain capital ratios in accordance with guidelines adopted by the Federal Reserve Board ("FRB"). The guidelines are commonly known as Risk-Based Capital Guidelines. On March 31, 1999, the Company exceeded all applicable capital requirements, having a total risk-based capital ratio of 13.73%, a Tier I risk-based capital ratio of 12.62%, and a leverage ratio of 8.90%. Liquidity management assures that adequate funds are available to meet deposit withdrawals, loan demand and maturing liabilities. Insufficient liquidity can result in higher costs of obtaining funds, while excessive liquidity can lead to a decline in earnings due to the cost of foregoing alternative investments. The ability to renew and acquire additional deposit liabilities is a major source of liquidity. The Company's principal sources of funds are primarily within the local markets of the Bank and consist of deposits, interest and principal payments on loans and securities, sales of loans and securities and borrowings. Cash and assets which are readily marketable, or which can be pledged, or which will mature in the near future provide asset liquidity. These include cash, federal funds sold and U.S. Government Agency and mortgage-backed securities. At March 31, 1999, the Company's liquidity ratio, defined as cash, U.S. Government Agency and mortgage-backed securities and federal funds sold as a percentage of deposits, was 32.1% compared to 33.0% at December 31, 1998. Liability liquidity is provided by access to core funding sources, principally various customers' interest-bearing and noninterest-bearing deposit accounts in the Company's trade area. The Company does not have nor does it solicit brokered deposits. Federal funds purchased and short-term borrowings are additional sources of liquidity. These sources of liquidity are short-term in nature, and are used, as necessary, to fund asset growth and meet short-term liquidity needs. During the three months ended March 31, 1999, funds for $69.2 million of securities purchases and $54.7 million of net loan growth came from various sources, including a net increase in deposits of $51.6 million and $57.3 million in proceeds from maturing securities and $7.1 million of net income. The Company is dependent on dividend and interest income from the Bank and the sale of stock for its liquidity. Applicable Federal Reserve Board regulations provide that bank holding companies are permitted by regulatory authorities to pay cash dividends on their common or preferred stock if consolidated earnings and consolidated capital are within regulatory guidelines. EFFECTS OF INFLATION Financial institutions are impacted differently by inflation than are industrial companies. While industrial and manufacturing companies generally have significant investments in inventories and fixed assets, financial institutions ordinarily do not have such investments. As a result, financial institutions are generally in a better position than industrial companies to respond to inflationary trends by monitoring the spread between interest costs and interest income yields through adjustments of maturities and interest rates of assets and liabilities. In addition, inflation tends to increase demand for loans from financial institutions as industrial companies attempt to maintain a constant level of goods in inventory and assets. As consumers of goods and services, financial institutions are affected by inflation as prices increase, causing an increase in costs of salaries, employee benefits, occupancy expense and similar items. YEAR 2000 PROJECT GENERAL The Year 2000 problem affects all companies. This problem is rooted in storage constraints of systems developed in the 1960's and 1970's. Many computer codes used only two-digit year codes, e.g., 98 instead of four digits, 1998. Thus, many computer applications interpret the year "00" as 1900 and accordingly need to be modified to process in the next century. In the early 1990's, management of Texas State Bank (the "Bank") decided to process all data in-house and offer data processing services to third party banks. As part of this initiative, management decided to purchase all Page 20 critical software and support services from third party software vendors. All of the critical software purchased had already been coded to recognize a four-digit date. The Bank has no computer applications developed in-house. STATE OF READINESS In early 1997, the Bank established an ongoing corporate-wide effort to address the issues associated with the Year 2000. The Bank adopted the phased approach to Year 2000 project management as outlined by the Federal Financial Institutions Examination Council ("FFIEC"). The Bank's project goals are to meet if not exceed all Year 2000 regulatory guidelines. This approach requires the active involvement of management and the Board of Directors. This active management involvement provides the sponsorship and commitment to ensure the business issues and risks are adequately addressed and resolved. The FFIEC phases used are Awareness Phase, Assessment Phase, Renovation Phase, Validation Phase and Implementation Phase. AWARENESS PHASE: DEFINE THE PROBLEM AND GAIN MANAGEMENT SUPPORT. The Bank established a Year 2000 Committee comprised of all levels of management to address the Year 2000 project. An action plan was developed that includes strategies for dealing with in-house and third party computer systems, vendors, customers and business partners. An ongoing process to continually evaluate customers, business partners and management practices and policies will be phased in as the Year 2000 project evolves. ASSESSMENT PHASE: ASSESS THE SIZE AND COMPLEXITY OF THE PROBLEM. EVALUATE RISK IMPACT AND ESTABLISH CONTINGENCY PLANS. The Bank has essentially completed the assessment phase. Information Technology "(IT)" and Non IT systems have been identified. Systems have generally been identified as Core Mission critical, Non Mission critical and Business critical. Risk impact of material customers and other business partners are identified and due diligence procedures developed. The impact of strategic business initiatives, resources, needs and time lines have been addressed. A contingency plan for the Bank was completed on June 22, 1998 and addresses Core Mission critical and Business critical systems. Continually assessing risk is a major goal in the Year 2000 process. RENOVATION PHASE: UPGRADE OR REPLACE NON-COMPLIANT SYSTEMS. Core Mission critical software and hardware vendors of the Bank have represented their products as being Year 2000 compliant. The Bank is currently testing these products to corroborate the vendor representations. Certain Non Mission critical systems have been identified as not Year 2000 compliant. These systems will require the purchase of compliant systems from third party vendors. Renovation timelines have been established and all upgrades will be completed by June 30, 1999. VALIDATION PHASE: TESTING CURRENT AND UPGRADED SYSTEMS. The Bank has created a Year 2000 Test Lab located in the Data Center to test many of the internal and external Core Mission critical systems. The Bank completed all internal Core Mission critical testing by September 30, 1998. In addition, the Bank has requested and received vendor representations that all Core Mission critical applications are Year 2000 compliant. The Data Center and appropriate operating departments at March 31, 1999 had completed interface testing with FEDLINE. IMPLEMENTATION PHASE: SYSTEMS MUST BE YEAR 2000 READY BEFORE YEAR 2000. In this phase, all systems should be fully renovated, tested and certified as Year 2000. If systems fail to meet Year 2000 requirements, contingency plans will be implemented. The Bank anticipates that all systems will be fully renovated and tested by June 30, 1999. Page 21 ESTIMATED COSTS The Bank has estimated the total cost of the Year 2000 project at $500,000. The approximate cost expensed was $31,000 in 1997, $253,000 in 1998 and is estimated to be $216,000 in 1999. RISK Testing and planning do not ensure that any organization will be able to conduct business around and after the Year 2000. Testing does not ensure that the Bank's customers and other business partners will be able to conduct business. The Bank is performing due diligence on its customers and other business partners. Where our customers and business partners are regulated, we take comfort from knowing that this is a regulated entity and its regulator is doing its own due diligence. Where our customers and business partners are not regulated, the Bank implemented processes for evaluating readiness of customers and business partners for the Year 2000. These processes are continuously monitored. CONTINGENCY PLAN The Bank has implemented procedures and continues to refine its processes for evaluating its business readiness. Still, the possibility exists that something can go wrong. The Bank has prepared contingency plans to ensure a smooth flow of funds in the event of unforeseen problems. The effect of many business disruptions at the same time may impact the Bank. These contingency plans are reviewed continually to reasonably address these incidents. ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISKS The funds management policy of the Company is to maintain a reasonably balanced position of rate sensitive assets and liabilities to avoid adverse changes in net interest income. Changes in net interest income occur when interest rates on loans and investments change in a different time period from that of changes in interest rates on liabilities, or when the mix and volume of interest-earning assets and interest-bearing liabilities change. In order to measure earnings and fair value sensitivity to changing rates, the Company uses three different measure tools including static gap analysis, simulation earnings, and market value sensitivity (fair value at risk). The static gap represents the dollar amount of difference between rate sensitive assets and rate sensitive liabilities within a given time period. Static gap analysis is the simplest representation of the Company's interest rate sensitivity. However, it cannot reveal the impact of factors such as administered rates (e.g., the prime lending rate), pricing strategies on consumer and business deposits, changes in balance sheet mix, or the effect of various options embedded in balance sheet instruments. Accordingly, the Funds Management Committee conducts simulations of net interest income under a variety of market interest rate scenarios. These simulations which consider forecasted balances sheet changes, and forecasted changes in interest rate spreads provide the Committee with an estimate of earnings at risk for given changes in interest rates. At March 31, 1999, based on these simulations, earnings at risk to an immediate 100 basis points decline in market interest rates was estimated to be 6.8 percent of projected net interest income for the following twelve months. An immediate 100 basis point decline in interest rates is a hypothetical rate scenario, used to calibrate risk, and does not necessarily represent management's current view of future market developments. All the measurements of risk described above are made based upon the Company's business mix and interest rate exposures at the particular point in time. The exposures change continuously as a result of the Company's ongoing business and its risk management initiatives. While management believes these measures provide a meaningful representation of the Company's interest rate sensitivity, they do not necessarily take in account all business developments that have an effect on net income, such as changes in credit quality or the size and composition of the balance sheet. The Company does not currently engage in trading activities or use derivative instruments to control interest rate risk. Even though such activities may be permitted with the approval of the Board of Directors, the Company does not intend to engage in such activities in the immediate future. Interest rate risk is the most significant market risk affecting the Company. Other types of market risk, such as foreign currency exchange rate risk and commodity price risk, do not arise in the normal course of the Company's business activities. Page 22 PART II. OTHER INFORMATION ITEM 1. LEGAL PROCEEDINGS The Company is involved in routine litigation in the normal course of its business, which in the opinion of management, will not have a material adverse effect on the financial condition or results of operations of the Company. ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS. None ITEM 3. DEFAULTS UPON SENIOR SECURITIES. None ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS. None ITEM 5. OTHER INFORMATION. ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K (a) The following documents are filed as part of this Quarterly Report on Form 10-Q: (1) Exhibits-- The following exhibits are filed as a part of this Quarterly Report on Form 10-Q: 27 Financial Data Schedule (b) Reports of Form 8-K No report on Form 8-K was filed by Texas Regional Bancshares, Inc. during the three months ended March 31, 1999 Page 23 SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. TEXAS REGIONAL BANCSHARES, INC. (Registrant) April 30, 1999 /s/ G. E. Roney G. E. Roney Chairman of the Board, President & Chief Executive Officer April 30, 1999 /s/ R. T. Pigott, Jr. R. T. Pigott, Jr. Executive Vice President & Chief Financial Officer Page 24 EX-27 2
9 This schedule contains summary financial information extracted from the Consolidated Balance Sheets and Consolidated Statements of Income, included herein and is qualified in its entirety by reference to such financial statements. 1,000 3-MOS DEC-31-1999 MAR-31-1999 55,199 330 29,500 0 466,682 13,322 0 1,144,172 13,673 1,822,475 1,614,508 9,008 17,559 0 0 0 14,412 166,988 1,822,475 25,776 6,873 344 32,993 14,269 14,362 18,631 1,323 0 10,539 10,925 7,052 0 0 7,052 .49 .48 4.80 7,124 5,863 0 0 13,236 996 110 13,673 10,939 0 2,734
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