-----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, AQ7FEbOPXW0Yw1v0z46VrHzoNwgml6tYf8k0jgnmJ45mksMHenYrFezsrVD5HY5V Cs6JCvXqN1eiIGylHf1wZg== 0000890566-00-000282.txt : 20000315 0000890566-00-000282.hdr.sgml : 20000315 ACCESSION NUMBER: 0000890566-00-000282 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 4 CONFORMED PERIOD OF REPORT: 19991231 FILED AS OF DATE: 20000314 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-K SEC ACT: SEC FILE NUMBER: 000-14517 FILM NUMBER: 568788 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-K 1 UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, DC 20549 FORM 10-K [X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934 For the fiscal year ended December 31, 1999 or [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from __________ to _________ Commission file number 000-14517 TEXAS REGIONAL BANCSHARES, INC. (Exact name of registrant as specified in its charter) TEXAS 74-2294235 (State or other jurisdiction (I.R.S. Employer of incorporation or organization) Identification No.) POST OFFICE BOX 5910 3900 NORTH 10TH STREET, 11TH FLOOR MCALLEN, TEXAS 78502-5910 (Address of principal executive offices) (Zip Code) (956) 631-5400 (Registrant's telephone number, including area code) Securities registered pursuant to Section 12(b) of the Act: TITLE OF EACH CLASS NAME OF EACH EXCHANGE ON WHICH REGISTERED None None Securities registered pursuant to Section 12(g) of the Act: CLASS A VOTING COMMON, $1.00 PAR VALUE PER SHARE (Title of class) Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes [X] No [ ] Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation Sec. (Sec. 229.405 of this chapter) is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [ ] Aggregate market value of voting stock held by non-affiliates of the registrant, computed by reference to the closing price of the stock, as of March 2, 2000: $303,853,675 Number of shares outstanding of the registrant's Class A Voting Common Stock, $1.00 par value, as of March 2, 2000: 14,525,400 DOCUMENTS INCORPORATED BY REFERENCE Portions of the Registrant's definitive Proxy Statement for its 2000 Annual Meeting of Stockholders are incorporated into Part III; Items 10-13 of this Form 10-K, to be filed not later than 120 days after the close of the Registrant's fiscal year. PART I ITEM 1. BUSINESS GENERAL Texas Regional Bancshares, Inc. ("Texas Regional" or the "Company") is a Texas business corporation incorporated in 1983 and headquartered in McAllen, Texas. The Company is a bank holding company within the meaning of the Bank Holding Company Act of 1956 ("the BHCA") and as such is registered with the Board of Governors of the Federal Reserve System ("Federal Reserve Board"). Texas Regional Delaware, Inc., incorporated under the laws of Delaware as a wholly owned second tier bank holding company subsidiary, owns Texas State Bank (the "Bank"), the Company's primary operating subsidiary. The Bank has two wholly owned subsidiaries: (i) TSB Securities, Inc., incorporated in 1997 to provide full service broker-dealer services and (ii) TSB Properties, Inc., incorporated in 1998 to receive and liquidate foreclosed assets. Recently, the Company has grown rapidly through a series of strategic acquisitions. The Bank acquired the Rio Grande City and Roma branches of First National Bank of South Texas during 1995. The Company completed a secondary public offering of 2.5 million shares of the Company's Class A Voting Common Stock on May 14, 1996. Concurrently, the Company also completed the acquisition of First State Bank & Trust Co., Mission, Texas and The Border Bank, Hidalgo, Texas, through merger with the Bank. On February 19, 1998, the Company acquired Brownsville National Bank, Brownsville, Texas, Texas Bank and Trust, Brownsville, Texas and Bank of Texas, Raymondville, Texas through merger with the Bank. The Company acquired The Harlingen National Bank, Harlingen, Texas on October 1, 1999 through merger with the Bank. The Bank operates twenty six banking locations in the Rio Grande Valley including four banking locations in McAllen (including its main office), four banking locations in Brownsville, four banking locations in Harlingen, three banking locations in Mission, two banking locations in Weslaco, and one banking location each in Edinburg, Hidalgo, La Feria, Mercedes, Palm Valley, Penitas, Raymondville, Rio Grande City and Roma. At December 31, 1999, the Company had consolidated total assets of $2.1 billion, loans outstanding (net of unearned discount) of $1.4 billion, deposits of $1.9 billion, and shareholders' equity of $188.2 million. The Company's business strategy is to provide its customers with the financial sophistication and breadth of products of a regional bank, while retaining the local appeal and level of service of a community bank. The Board of Directors and management have maintained the Bank's community orientation by tailoring products and services to meet community and customer needs. Management believes that the Bank is well positioned in its market due to its responsive customer service, the strong community involvement of management and employees, the recent trends in the Texas banking environment and the vitality of the Rio Grande Valley economy. Management's strategy is to provide a business culture in which individual customers and small and medium sized businesses are accorded the highest priority in all aspects of the Company's operations. For its business customers, the Bank offers checking facilities, certificates of deposit, short-term loans for working capital purposes, construction financing, mortgage loans, term loans for fixed asset and expansion needs and other commercial loans. The services provided for individuals by the Bank include checking accounts, savings accounts, certificates of deposit, individual retirement accounts and consumer loan programs, including installment loans for home repair and for purchases of consumer goods, including automobiles, trucks and boats, and mortgage loans. The Bank also provides travelers checks, money orders and safe deposit facilities, and offers trust services. The Bank has also expanded the services that it provides to third party correspondent banks. The Bank's data processing center, for example, presently serves six banks in addition to providing data processing services for all of the Bank's banking locations. Management believes there may be opportunities to expand by acquiring other banks or by acquiring assets and deposits that will allow the Company to enter geographically adjacent markets or further increase market share in existing markets. Management intends to pursue acquisition opportunities in strategic markets in circumstances in which management believes that its managerial, operational and capital resources will enhance the performance of acquired institutions. There are currently no agreements or understandings related to any acquisition. COMPETITION The Company's operations are located in the Rio Grande Valley, which consists of Cameron, Hidalgo, Starr and Willacy Counties. Cameron, Hidalgo and Starr Counties are each directly adjacent to the Rio Grande River, which forms part of the border between the United States and Mexico. The Bank encounters intense competition in its commercial banking business, primarily from other banks located in its market area. The Bank also competes with insurance, finance and mortgage companies, savings and loan institutions, credit unions, money market funds and other financial institutions. Competition is based upon interest rates offered on deposit PAGE 2 accounts, interest rates charged on loans and other credit and service charges, the quality and scope of the services rendered, the convenience of banking facilities, and, in the case of loans to commercial borrowers, relative lending limits. A substantial number of the commercial banks in the Rio Grande Valley are branches of much larger organizations affiliated with national, regional or state-wide banking companies which are larger than the Bank in terms of capital, resources and personnel. However, as a major independent community bank headquartered in its primary market area, management believes that the Company's community commitment and involvement in its primary market area, as well as its commitment to quality and personalized banking services, are factors that contribute to the Company's competitiveness. REGULATION AND SUPERVISION In addition to the generally applicable state and federal laws governing businesses and employers, special federal and state laws applicable only to financial institutions and their parent companies extensively regulate the Company and the Bank. Virtually all aspects of the Company's operations are subject to specific requirements or restrictions and general regulatory oversight, from laws regulating consumer finance transactions, such as the Truth In Lending Act, the Home Mortgage Disclosure Act and the Equal Credit Opportunity Act, to laws regulating collections and confidentiality, such as the Fair Debt Collections Practices Act, the Fair Credit Reporting Act and the Right to Financial Privacy Act. With few exceptions, state and federal banking laws have as their principal objective either the maintenance of the safety and soundness of the federal deposit insurance system or the protection of consumers or classes of consumers, rather than the specific protection of shareholders of the Company. To the extent the following material describes statutory or regulatory provisions, it is qualified in its entirety by reference to the particular statute or regulation. References to statutes, regulations, decisions and interpretations contained herein are only intended to be brief summaries or portions thereof, do not purport to be complete and are qualified in their entirety by reference to the actual text of the relevant statutes, regulations, decisions and interpretations. REGULATION OF THE COMPANY The Company is a bank holding company within the meaning of the Bank Holding Company Act of 1956 (the "BHCA"), as amended, and therefore is subject to regulation and supervision by the Board of Governors of the Federal Reserve System (the "FRB"). In addition, the Company is required to file reports with and to furnish such other information as the FRB may require pursuant to the BHCA, and to subject itself to examination by the FRB. The FRB has the authority to issue bank holding companies orders to cease and desist from unsound practices and violations of conditions imposed by, or violation of agreements with, the FRB. The FRB is also empowered to assess civil penalties against companies or individuals who violate the BHCA or orders or regulations thereunder in amounts up to $1.0 million per day, to order termination of non-approved activities and to order termination of ownership and control of non-approved subsidiaries. Certain violations may also result in criminal penalties. The FRB and the Federal Deposit Insurance Corporation (the "FDIC"), as appropriate, are authorized to exercise comparable authority, under the Federal Deposit Insurance Act (the "FDI Act") and other statutes, with respect to subsidiary banks. The FRB takes the position that a bank holding company is required to serve as a source of financial and managerial strength to its subsidiary banks and may not conduct its operations in an unsafe or unsound manner. In addition, it is the FRB's position that, in serving as a source of strength to its subsidiary banks, a bank holding company should stand ready to use available resources to provide adequate capital funds to its subsidiary banks during periods of financial stress or adversity and should maintain the financial flexibility and capital-raising capacity to obtain additional resources for assisting its subsidiary banks. A bank holding company's failure to meet its obligations to serve as a source of strength to its subsidiary banks will generally be considered by the FRB to be an unsafe and unsound banking practice or a violation of the FRB regulations or both. Changes in the FDI Act made by the Federal Deposit Insurance Corporation Improvement Act of 1991 (the "FDICIA") now require an undercapitalized institution to submit to the FRB a capital restoration plan with a guaranty, by each company having control of the bank, of the bank's compliance with the plan. The BHCA and the Change in Bank Control Act, together with regulations promulgated by the FRB, require that, depending on the particular circumstances, either FRB approval must be obtained or notice must be furnished to the FRB and not disapproved prior to any person or company acquiring "control" of a bank holding company, such as the Company, subject to certain exemptions for certain transactions. Control is conclusively presumed to exist if an individual or company acquires 25% or more of any class of voting securities of the bank holding company. Control is rebuttably presumed to exist if a person acquires 10% or more but less than 25% of any class of voting securities and either the company has registered securities under Section 12 of the Exchange Act or no other person will own a greater percentage of that class of voting securities immediately after the transaction. The regulations provide a procedure for challenge of the rebuttable control presumption. As a bank holding company, the Company is required to obtain approval prior to merging or consolidating with any other bank holding company, acquiring all or substantially all of the assets of any bank or acquiring ownership or control of shares of a bank or bank holding company if, after the acquisition, the Company would directly or indirectly own or control 5% or more of the voting shares of such bank or bank holding company. PAGE 3 Historically, the Company has been prohibited from acquiring a direct or indirect interest in or control of more than 5% of the voting shares of any company which is not a bank or bank holding company and from engaging directly or indirectly in activities other than those of banking, managing or controlling banks or furnishing services to its subsidiary bank, except that FRB has permitted bank holding companies to engage in and own shares of companies engaged in certain activities found by the FRB to be so closely related to banking or managing and controlling banks as to be a proper incident thereto. These activities include, among others, operating a mortgage, finance, credit card, or factoring company; performing certain data processing operations; providing investment and financial advice; acting as an insurance agent for certain types of credit-related insurance; leasing personal property on a full pay out, non-operating basis; and providing certain stock brokerage and investment advisory services. In approving acquisitions or the addition of activities, the FRB has considered whether the acquisition or the additional activities can reasonably be expected to produce benefits to the public, such as greater convenience, increased competition, or gains in efficiency, that outweigh such possible adverse effects as undue concentration of resources, decreased or unfair competition, conflicts of interest or unsound banking practices. In considering any application for approval of an acquisition or merger, the FRB is also required to consider the financial and managerial resources of the companies and the banks concerned, as well as the applicant's record of compliance with the Community Reinvestment Act (the "CRA"). The CRA generally requires a financial institution to take affirmative action to ascertain and meet the credit needs of its entire community, including low and moderate income neighborhoods. The Gramm-Leach-Bliley Act ("Gramm-Leach"), enacted by Congress in November 1999, now permits bank holding companies with subsidiary banks meeting certain capital and management requirements to elect to become "financial holding companies". Beginning in March 2000, financial holding companies may engage in a full range of financial activities, including not only banking, insurance and securities activities, but also merchant banking and additional activities determined to be "financial in nature". Gramm-Leach also provides that the list of permissible activities will be expanded as necessary for a financial holding company to keep abreast of competitive and technological change. Although it preserves the Federal Reserve as the umbrella supervisor of financial holding companies, Gramm-Leach adopts an administrative approach to regulation that defers to the approval and supervisory requirements of the functional regulators of insurers and insurance agents, broker-dealers, investment companies, and banks. Thus, the various state and federal regulators of a financial holding company's operating subsidiaries would retain their jurisdiction and authority over the operating entities. As the umbrella supervisor, however, the Federal Reserve has the potential to affect the operations and activities of financial holding companies' subsidiaries through its power over the financial holding company parent. In addition, Gramm-Leach contains numerous trigger points related to legal noncompliance and other serious problems affecting bank affiliates that could lead to direct Federal Reserve involvement and to the possible exercise of remedial authority affecting both financial holding companies and their affiliated operating companies. The Company has not, as of the date hereof, elected to become a financial holding company. The BHCA imposes certain limitations on extensions of credit and other transactions by and between banks that are members of the Federal Reserve System and other banks and non-bank companies in the same holding company. Under the BHCA and the FRB's regulations, a bank holding company and its subsidiaries are prohibited from engaging in certain tie-in arrangements in connection with any extension of credit, lease or sale of property or furnishing of services. The Company, as an affiliate of the Bank, is subject to certain restrictions regarding transactions between a bank and companies with which it is affiliated. These provisions limit extensions of credit (including guarantees of loans) by the Bank to affiliates, investments in the stock or other securities of the Company by the Bank, and the nature and amount of collateral that the Bank may accept from any affiliate to secure loans extended to the affiliate. REGULATION OF THE BANK The Bank is a state-chartered bank subject to regulation by the Texas Department of Banking. The Bank, whose deposits are insured by the Bank Insurance Fund (the "BIF") of the FDIC, is also a member of the Federal Reserve System, and therefore the FRB is the primary federal regulator for the Bank. The requirements and restrictions applicable to the Bank under laws of the United States and the State of Texas include (i) the requirement that reserves be maintained, (ii) restrictions on the nature and amount of loans which can be made, (iii) restrictions on the business activities in which the Bank may engage, (iv) restrictions on the payment of dividends to shareholders, and (v) the maintenance of minimum capital requirements. The Company is dependent upon dividends received from the Bank for discharge of the Company's obligations and for payment of dividends to the Company's shareholders. However, the application of minimum capital requirements and other rules and regulations applicable to the Bank restrict the amount of dividends that it may declare without prior regulatory approval. The Texas Banking Department and the FRB can each further limit payment of dividends if the regulatory authority finds that the payment of dividends would constitute an unsafe or unsound practice. Except to absorb losses in excess of undivided profits and uncertified surplus, such certified surplus may not be reduced without the prior written consent of the Banking Commissioner. PAGE 4 The laws of the State of Texas primarily govern interest rate limitations for the Bank. The maximum annual interest rate that may be charged on most loans made by the Bank is based on doubling the average auction rate, to the nearest 0.25%, for United States Treasury Bills, as computed by the Office of Consumer Credit Commissioner of the State of Texas. However, the maximum rate does not decline below 18% or rise above 24% (except for loans in excess of $250,000 that are made for business, commercial, investment or other similar purposes (excluding agricultural loans), in which case the maximum annual rate may not rise above 28%, rather than 24%). On fixed rate closed-end loans, the maximum non-usurious rate is to be determined at the time the rate is contracted; while on floating rate and open-end loans (such as credit cards), the rate varies over the term of the indebtedness. Federal law has preempted state usury laws (but not late charge limitations) for loans secured by a first lien on residential real property. Banks are affected by the credit policies of other monetary authorities, including the FRB, which regulate the national supply of bank credit. Such regulation influences overall growth of bank loans, investments, and deposits and may also affect interest rates charged on loans and paid on deposits. The monetary policies of the FRB have had a significant effect on the operating results of commercial banks in the past and are expected to continue to do so in the future. FDICIA FDICIA requires that federal bank regulatory authorities take "prompt corrective action" with respect to any depository institution that does not meet specified minimum capital requirements. The applicable regulations establish five capital levels which require or permit the FRB and other regulatory authorities to take supervisory action. The relevant classifications range from "well capitalized" to "critically undercapitalized". Under these regulations, an institution is considered "well capitalized" if it has a total risk-based capital ratio of 10.0% or greater, a Tier I risk-based capital ratio of 6.0% or greater, and a leverage ratio of 5.0% or greater, and it is not subject to an order, written agreement, capital directive, or prompt corrective action directive to meet and maintain a specific capital level for any capital measure. An institution is considered "adequately capitalized" if it has a total risk-based capital ratio of 8.0% or greater, a Tier I risk-based capital ratio of 4.0% or greater and a leverage capital ratio of 3.0% or greater (if the institution is rated composite 1 in its most recent report of examination, subject to appropriate federal banking agency guidelines), and the institution does not meet the definition of a "well capitalized" institution. An institution is considered "undercapitalized" if it has a total risk-based capital ratio that is less than 8.0%, a Tier I risk-based capital ratio that is less than 4.0%, or a leverage ratio that is less than 4.0% (or a leverage ratio that is less than 3.0% if the institution is rated composite 1 in its most recent report of examination, subject to appropriate federal banking agency guidelines). A "significantly undercapitalized" institution is one which has a total risk-based capital ratio that is less than 6.0%, a Tier I risk-based capital ratio that is less than 3.0%, or a leverage ratio that is less than 3.0%. A "critically undercapitalized" institution is one that has a ratio of tangible equity to total assets that is equal to or less than 2.0%. With certain exceptions, an institution will be prohibited from making capital distributions or paying management fees if the payment of such distributions or fees will cause the institution to become "undercapitalized". Furthermore, "undercapitalized" institutions will be required to file capital restoration plans with the appropriate federal regulator. Pursuant to FDICIA, "undercapitalized" institutions also will be subject to restrictions on growth, acquisitions, branching and engaging in new lines of business unless they have an approved capital plan that permits otherwise. The FRB also may, among other things, require an "undercapitalized" institution to issue shares or obligations, which could be voting stock, to recapitalize the institution or, under certain circumstances to divest itself of any subsidiary. The FRB is authorized to take various enforcement actions against any "significantly undercapitalized" institution and any "undercapitalized institution" that fails to submit an acceptable capital restoration plan or fails to implement a plan accepted by the appropriate agency. These powers include, among other things, requiring the institution to be recapitalized, prohibiting asset growth, restricting interest rates paid, requiring prior approval of capital distributions by any bank holding company which controls the institution, requiring divestiture by the institution of its subsidiaries or by the holding company of the institution itself, requiring a new election of directors, and requiring the dismissal of directors and officers. If imposed, these restrictions, either individually or in aggregate, could have a significant adverse impact on the operations of the Bank. "Critically undercapitalized" institutions may be subject to more extensive control and supervision and the FRB may prohibit any "critically undercapitalized" institution from, among other things, entering into any material transaction not in the ordinary course of business, amending its charter or bylaws, or engaging in certain transactions with affiliates. In addition, "critically undercapitalized" institutions generally will be prohibited from making payments of principal or interest on outstanding subordinated debt. Within 90 days of an institution becoming "critically undercapitalized", the FRB must appoint a receiver or conservator unless certain findings are made with respect to the prospect for the institution's continued operation. Management believes that the Company meets all capital adequacy requirements to which it is subject at December 31, 1999. The Bank's capital ratios exceeded the minimum requirements for "well capitalized" institutions under the regulatory framework for prompt corrective action at December 31, 1999. As a result, the Company does not believe that FDICIA's prompt corrective action regulations will have any material effect on the activities or operations of the Bank. It should be noted, however, that a bank's capital category is determined solely for the purpose of applying the FDIC's "prompt corrective action" regulations and that the capital category may not constitute an accurate representation of the Bank's overall financial condition or prospects. PAGE 5 FDICIA also requires the FDIC to establish a schedule to increase (over a period of not more than 15 years) the reserve ratio of the BIF, which insures deposits of Texas State Bank, to 1.25% of insured deposits, and impose higher deposit insurance premiums on BIF members, if necessary, to achieve that ratio. FDICIA also requires a risk-based assessment system for deposit insurance premiums commencing January 1, 1994. Since BIF reached its designated reserve ratio in mid-1995, the FDIC adjusted the BIF assessments, so that the assessment rate now in effect ranges from a minimum of zero to a maximum of $0.27 per $100 of deposits. FDICIA contains numerous other provisions, including accounting, auditing and reporting requirements, the termination of the "too big to fail" doctrine except in special cases, regulatory standards in areas such as asset quality, earnings and compensation, and revised regulatory standards for the powers of state chartered banks, real estate lending, bank closures and capital adequacy. DEPOSIT INSURANCE The Deposit Insurance Funds Act of 1996 (the "Funds Act") was enacted on September 30, 1996. Among its provisions, the Funds Act authorizes the Financing Corporation (the "FICO") to impose periodic assessments on depository institutions that are members of BIF in addition to institutions that are members of the Savings Association Insurance Fund (the "SAIF") in order to spread the cost of the interest payments on the outstanding FICO bonds over a larger number of institutions. Until this change in the law, only SAIF-member institutions bore the cost of funding these interest payments. Thus, BIF-member institutions will share in the cost of financing outstanding FICO bonds. An institution's FICO assessments will fluctuate based on a defined rate applied to deposits held in periods after the date the legislation was enacted. Currently, the FICO BIF annual rate is 2.12 cents for each $100 of qualified deposits. ACQUISITIONS Absent an election to become a financial holding company, the BHCA limits acquisitions by the Company to commercial banks and companies engaged in activities that the Federal Reserve Board has determined to be so closely related to banking as to be a proper incident thereto. The Company's direct activities are generally limited to furnishing to its subsidiaries services that qualify under the prescribed regulatory tests. Prior Federal Reserve Board approval is required under the BHCA for new activities and acquisitions of most nonbanking companies. The BHCA, the Federal Bank Merger Act and the Texas Banking Code regulate the acquisition of commercial banks. The BHCA requires the prior approval of the Federal Reserve Board for the direct or indirect acquisition of more than five percent of the voting shares of a commercial bank or bank holding company. With respect to the Company's subsidiary bank, the approval of the Texas Department of Banking is required for branching, purchasing the assets of other banks and for bank mergers. In reviewing bank acquisition and merger applications, the bank regulatory authorities will consider, among other things, the competitive effect and public benefits of the transactions, the capital position of the combined organization, and the applicant's record under the Community Reinvestment Act and fair housing laws. The Corporation regularly evaluates acquisition opportunities and regularly conducts due diligence activities in connection with possible acquisitions. As a result, acquisition discussions and, in some cases negotiations, regularly take place and future acquisitions could occur. INTERSTATE BANKING AND BRANCHING LEGISLATION The Riegle-Neal Interstate Branching Efficiency Act of 1994 ("IBBEA") authorizes interstate acquisitions of banks and bank holding companies without geographic limitation beginning one year after enactment. In addition, beginning June 1, 1997 IBBEA authorizes a bank to merge with a bank in another state as long as neither of the states has opted out of interstate branching between the date of enactment of IBBEA and May 31, 1997. IBBEA further provides that states may enact laws permitting interstate bank merger transactions prior to June 1, 1997. A bank may establish a de novo branch in a state in which the bank does not maintain a branch if the state expressly permits de novo branching. Once a bank has established branches in a state through an interstate merger transaction, the bank may establish and acquire additional branches at any location in the state where any bank involved in the merger transaction could have established or acquired branches under applicable federal or state law. A bank that has established a branch in a state through de novo branching may establish and acquire additional branches in such state in the same manner and to the same extent as a bank having a branch in such state as a result of an interstate merger. If a state opts out of interstate branching within the specified time period, no bank in any other state may establish a branch in the opting out state, whether through an acquisition or de novo. PAGE 6 Texas enacted legislation opting out of interstate branching in 1995. However, the decision to opt out was rendered ineffective with the 1998 decision of the United States District Court for the Northern District of Texas affirming the Comptroller of the Currency's decision to permit an interstate merger involving a Texas national bank. The Texas Legislature responded in 1999 by passing The Interstate Banking and Branching Bill, which became effective September 1, 1999. This legislation provides a framework for interstate branching in Texas, providing for de novo branching by banks headquartered in states offering reciprocity to Texas institutions or institutions authorized to branch in Texas. For banks in other, non-reciprocal states, a five-year minimum age requirement is retained. The legislation also clarifies other provisions of Texas law related to interstate banks operating in Texas, and includes a "super parity" provision which provides a framework for a bank chartered in Texas, upon application, to conduct any of the activities allowed any other state or federal financial institution in the nation. BROKER-DEALER LICENSING REQUIREMENTS Texas State Bank's subsidiary, TSB Securities, Inc. a broker-dealer registered with and licensed by the National Association of Securities Dealers, Inc. ("NASD") and the Texas State Securities Board, is subject to reporting requirements and regulatory controls imposed by the NASD and the State Securities Board. ECONOMIC ENVIRONMENT The earnings of the Bank are affected not only by general economic conditions but also by the policies of various governmental regulatory authorities. The FRB regulates the supply of credit in order to influence general economic conditions, primarily through open market operations in United States government obligations, varying the discount rate of financial institution borrowings and varying reserve requirements against financial institutions and their subsidiaries. The deregulation of interest rates has had and is expected to continue to have an impact on the competitive environment in which the Bank operates. Governmental policies have had a significant effect on the operating results of commercial banks in the past and are expected to continue to do so in the future. However, the Company cannot accurately predict the nature or extent of any effect that such policies may have on its future business and earnings. PERSONNEL The Company employed 888 full-time equivalent employees at December 31, 1999. Employees enjoy a variety of employee benefit programs, including an employee stock ownership plan with 401(k) provisions, medical, accident, group life and long-term disability plans, and paid vacations. The Company's employees are not unionized, and management believes employee relations to be favorable. ITEM 2. PROPERTIES The executive offices of the Company, as well as the principal banking quarters of Texas State Bank, are housed in an eleven-story office tower located in McAllen, Texas. This building, completed during 1998, also includes space for lease to third party tenants and for future growth. The Company also owns the Kerria Plaza building, adjacent to the new headquarters building, and leases space to third party tenants. All of the Company's banking locations are owned, except for the branch in Roma, Texas and the branch at 2302 South 77 Sunshine Strip in Harlingen, Texas. The Brownsville, Edinburg, Harlingen, Hidalgo, McAllen, Mission, Penitas and Weslaco, Texas banking locations include extensive drive-through facilities. Management believes that it will be desirable in the future to consider the establishment of additional banking locations. ITEM 3. LEGAL PROCEEDINGS The Company is involved in routine litigation in the normal course of its business which, in the opinion of management, will not have a material adverse effect on the financial condition or results of operations of the Company. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS None PAGE 7 PART II ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS. Since March 1994, the Corporation's Class A Voting Common Stock has traded on The Nasdaq Stock Market(R) under the symbol TRBS. The following table shows (i) high and low prices of the Common Stock as provided to the Company by The Nasdaq Stock Market(R) for transactions occurring on The Nasdaq Stock Market(R) during the past two years, and (ii) the total number of shares involved in such transactions. PRICE PER SHARE CASH ---------------------- DIVIDENDS VOLUME QUARTER ENDED HIGH LOW DECLARED TRADED - -------------------------------------------------------------------------------- March 31, 1998 $35.63 $27.00 $0.110 1,897,668 June 30, 1998 35.13 29.25 0.110 1,421,623 September 30, 1998 34.00 21.00 0.125 1,824,207 December 31, 1998 27.38 17.00 0.125 2,416,388 March 31, 1999 27.94 22.75 0.125 1,832,459 June 30, 1999 29.50 26.00 0.125 1,832,235 September 30, 1999 28.31 23.56 0.125 1,707,584 December 31, 1999 29.50 24.63 0.140 1,822,008 - -------------------------------------------------------------------------------- On December 31, 1999, there were 919 holders of record of the Company's Class A Common Stock. During the two years ended December 31, 1999, an aggregate of 64,617 shares purchased by the Texas Regional Bancshares, Inc. Employee Stock Ownership Plan (with 401(k) provisions) are included in the foregoing table. The final determination of the timing, amount and payment of dividends on the Common Stock is at the discretion of the Company's Board of Directors. There can be no assurance as to future dividends because they are dependent on future earnings, capital requirements and financial conditions. The Company's principal source of the funds to pay dividends on the Common Stock is dividends from Texas State Bank. The payment of dividends by the Bank is subject to certain restrictions imposed by federal and state banking laws, regulations and authorities. At December 31, 1999, an aggregate of $21.3 million was available for payment of dividends by the Bank to the Company under the applicable limitations and without regulatory approval. ITEM 6. SELECTED FINANCIAL DATA The following table sets forth selected consolidated financial data for the Company and its subsidiaries for, and as of, each of the years in the five-year period ended December 31, 1999. This selected financial data has been derived from the consolidated financial statements and accounting records of the Company. The data presented below should be read in conjunction with the consolidated financial statements, related notes and other financial information included herein: PAGE 8
AT / FOR YEARS ENDED DECEMBER 31, ---------------------------------------------------------------------------- SELECTED FINANCIAL DATA 1999 1998 1997 1996 1995 - ------------------------------------------------------------------------------------------------------------------------------ (Amounts in Thousands, Except Per Share Data) Income Statement Data Interest Income $ 143,841 $ 125,649 $ 112,745 $ 88,075 $ 55,193 Interest Expense 62,221 58,384 50,618 37,494 22,071 - ------------------------------------------------------------------------------------------------------------------------------- Net Interest Income 81,620 67,265 62,127 50,581 33,122 - ------------------------------------------------------------------------------------------------------------------------------- Provision for Loan Losses 5,432 9,729 2,947 2,173 1,705 Noninterest Income 17,399 17,663 12,972 10,656 7,683 Noninterest Expense 45,888 41,102 37,170 32,096 23,065 - ------------------------------------------------------------------------------------------------------------------------------- Income Before Income Tax Expense 47,699 34,097 34,982 26,968 16,035 Income Tax Expense 16,849 11,623 11,860 8,794 5,515 - ------------------------------------------------------------------------------------------------------------------------------- Net Income $ 30,850 $ 22,474 $ 23,122 $ 18,174 $ 10,520 =============================================================================================================================== Per Common Share Data Basic Earnings Per Share $ 2.14 $ 1.56 $ 1.61 $ 1.40 $ 0.99 Diluted Earnings Per Share 2.11 1.54 1.58 1.39 0.99 Book Value at End of Period 12.96 12.31 11.21 9.97 7.26 Cash Dividends Declared 0.52 0.47 0.40 0.29 0.29 Dividend Payout Ratio 24.64% 30.52% 25.32% 20.86% 29.29% Weighted Average Shares Outstanding Basic Earnings Per Share 14,410 14,402 14,371 12,936 10,577 Diluted Earnings Per Share 14,626 14,628 14,603 13,117 10,614 Shares Outstanding at End of Period 14,525 14,405 14,396 14,361 10,581 =============================================================================================================================== Balance Sheet Data Total Assets $2,120,690 $1,762,332 $1,538,769 $1,370,809 $ 778,359 Loans 1,374,759 1,089,505 951,316 818,598 511,414 Securities 533,948 470,267 416,921 371,002 182,761 Interest-Earning Assets 1,913,784 1,592,325 1,387,322 1,214,875 706,985 Deposits 1,885,346 1,562,942 1,362,783 1,215,636 685,810 Shareholders' Equity 188,188 177,274 161,358 143,116 76,793 =============================================================================================================================== Average Balance Sheet Data Total Assets $1,896,880 $1,654,135 $1,439,956 $1,144,162 $ 708,162 Loans 1,209,609 1,023,527 875,839 680,530 430,049 Securities 488,506 432,767 386,221 313,088 184,854 Interest-Earning Assets 1,720,083 1,491,211 1,301,959 1,032,100 640,737 Deposits 1,684,730 1,462,215 1,274,442 1,017,280 629,178 Shareholders' Equity 183,390 171,427 152,635 116,310 72,675 =============================================================================================================================== Performance Ratios Return on Average Assets 1.63% 1.36% 1.61% 1.59% 1.49% Return on Average Equity 16.82 13.11 15.15 15.63 14.48 Net Interest Margin(1) 4.84 4.61 4.89 5.06 5.21 Efficiency Ratio 45.29 48.86 48.82 51.49 55.77 =============================================================================================================================== Asset Quality Ratios Nonperforming Assets to Total Loans and Repossessed Assets 1.04% 1.44% 1.22% 0.97% 0.82% Net Loan Charge-Offs to Average Total Loans 0.29 0.79 0.28 0.20 0.23 Allowance for Loan Losses to Total Loans 1.22 1.21 1.19 1.32 1.05 Allowance for Loans Losses to Nonperforming Loans 200.35 127.10 135.14 158.87 220.24 =============================================================================================================================== Capital Ratios Total Risk-Based Capital Ratio 11.94% 14.04% 14.73% 15.11% 14.24% Tier 1 Risk-Based Capital Ratio 10.79 12.90 13.60 13.83 13.24 Leverage Capital Ratio 7.58 8.84 9.21 8.78 9.29 Equity to Assets Ratio 8.87 10.06 10.49 10.44 9.87 ===============================================================================================================================
(1) Taxable-equivalent basis assuming a 35% federal income tax rate. PAGE 9 ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Certain statements in this Annual Report on Form 10-K include forward-looking information within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended, and are subject to the "safe harbor" created by those sections. These forward-looking statements involve certain risks and uncertainties that could cause actual results to differ materially from those in the forward-looking statements. Such risks and uncertainties include, but are not limited to, the following factors: competitive pressure in the banking industry significantly increasing; changes in the interest rate environment reducing margins; general economic conditions, either nationally or regionally, are less favorable than expected, resulting in, among other things, a deterioration in credit quality and an increase in the provision for possible loan losses; changes in the regulatory environment; changes in business conditions; volatility of rate sensitive deposits; operational risks including data processing system failures or fraud; asset/liability matching risks and liquidity risks; and changes in the securities markets. The following discussion addresses information pertaining to the financial condition and results of operations of Texas Regional Bancshares, Inc. and subsidiaries (the "Company") that may not be otherwise apparent from a review of the consolidated financial statements and related footnotes. It should be read in conjunction with those statements, as well as with the other information presented throughout the report. In addition to historical information, this discussion and other sections contained in this Annual Report include certain forward-looking statements regarding events and trends which may affect the Company's future results. Such statements are subject to risks and uncertainties that could cause the Company's actual results to differ materially. Such factors include, but are not limited to, those described in this discussion and analysis. ACQUISITIONS On February 19, 1998, the Company completed the acquisition of three bank holding companies and their three subsidiary banks (the "Mergers"). The acquisition of Brownsville Bancshares, Inc. and its subsidiary, Brownsville National Bank, included two banking locations in Brownsville, Cameron County, Texas, with assets of approximately $100.1 million, loans of $42.6 million, deposits of $87.2 million and equity of $12.1 million. The Company achieved this acquisition by the exchange of 984,806 shares of Company stock for all of the outstanding shares of Brownsville Bancshares, Inc. and cancellation of outstanding stock options. Brownsville National Bank merged with and into the Bank. The second acquisition was TB&T Bancshares, Inc. and its subsidiary, Texas Bank and Trust of Brownsville, Cameron County, Texas. Texas Bank and Trust of Brownsville had assets of approximately $44.9 million, loans of $21.9 million, deposits of $40.3 million and equity of $4.1 million. This acquisition was achieved by exchange of 301,483 shares of Company stock for all of the outstanding shares of TB&T Bancshares, Inc. Texas Bank and Trust of Brownsville merged with and into the Bank. The third acquisition was Raymondville Bancorp, Inc. and its subsidiary, Bank of Texas. Bank of Texas was headquartered in Raymondville, Willacy County, Texas, with one additional banking facility in Brownsville, Texas. The shareholder of Raymondville Bancorp, Inc. received cash consideration of $9.6 million in this acquisition, and the Company paid $100,000 in consideration for a covenant not to compete. The Company discharged approximately $330,000 of existing Raymondville Bancorp, Inc. indebtedness. Bank of Texas had assets of approximately $63.9 million, loans of $25.5 million, deposits of $56.5 million and equity of $5.1 million. Bank of Texas was merged with and into the Bank. The Company accounted for its acquisition of Brownsville Bancshares, Inc. and TB&T Bancshares, Inc. under the pooling-of-interests method of accounting, and as such, the enclosed financial information has been restated for all periods presented to include the results of operations and financial position of these acquired entities. A One Time Charge-Acquisitions of $728,000 or $0.03 per diluted common share, net of federal income tax, reduced net income for the year ended December 31, 1998. These expenses, primarily professional fees and computer conversion costs, related to business combinations accounted for by the pooling-of-interests method. The Company accounted for its acquisition of Raymondville Bancorp, Inc. under the purchase method of accounting; therefore, the results of operations are included in the consolidated financial statements from the date of acquisition, February 19, 1998. On October 1, 1999, the Company completed the acquisition of Harlingen Bancshares, Inc. and its subsidiary, The Harlingen National Bank. The acquisition included its main office and two banking locations in Harlingen, Cameron County, Texas; one banking location in La Feria, Cameron County, Texas; one banking location in Palm Valley, Cameron County, Texas, and one banking location in Mercedes, Hidalgo County, Texas. The shareholders of Harlingen Bancshares, Inc. received aggregate consideration of $34.0 million, including $1.0 million deposited into escrow pending the outcome of certain contingencies. Simultaneously, the shareholders of Harlingen Bancshares, Inc. or their affiliates purchased certain assets of Harlingen Bancshares, Inc. for book value totaling $2.4 million. The Company also agreed to pay $1.0 million over a term of ten years in consideration of a covenant not to compete from certain principals of Harlingen Bancshares, Inc. The Harlingen National Bank had assets of approximately $204.2 million, loans of $110.7 million, deposits of $183.6 million and equity of $19.9 million. The Company accounted for the acquisition under the purchase method of accounting; therefore, the results of operations are included in the consolidated financial statements from the date of acquisition, October 1, 1999. PAGE 10 OVERVIEW Total assets at December 31, 1999, 1998 and 1997 were $2.1 billion, $1.8 billion and $1.5 billion, respectively. Total deposits at December 31, 1999, 1998 and 1997 were $1.9 billion, $1.6 billion, and $1.4 billion, respectively, with deposit growth in each period resulting from internal growth and acquisitions, principally in 1999. Loans were $1.4 billion at December 31, 1999, an increase of $285.3 million or 26.2% from $1.1 billion at the end of 1998. Loans were $951.3 million at year end 1997. Shareholders' equity was $188.2 million, $177.3 million, and $161.4 million at December 31, 1999, 1998 and 1997, respectively. Net income was $30.9 million, $22.5 million and $23.1 million for the years ended December 31, 1999, 1998 and 1997, respectively, and diluted earnings per share were $2.11, $1.54, and $1.58 for these same periods. An increase in provision for loan losses, primarily associated with loans to agricultural businesses suffering the effects of severe drought throughout the entire region, adversely affected profits during 1998. Earnings growth from 1998 to 1999 resulted principally from loan growth. The Company posted returns on average assets of 1.63%, 1.36% and 1.61% and returns on average equity of 16.82%, 13.11% and 15.15% for the years ended 1999, 1998 and 1997, respectively. The Company's efficiency ratio was 45.29% in 1999, 48.86% in 1998 and 48.82% in 1997. ANALYSIS OF FINANCIAL CONDITION CASH AND CASH EQUIVALENTS The Company offers a broad range of commercial banking services to individuals and businesses in its service area. It also acts as a correspondent to a number of banks in its service area, providing check clearing, wire transfer, federal funds transactions, loan participations and other correspondent services. The amount of cash and cash equivalents held on any day is significantly influenced by temporary changes in cash items in process of collection. The Company had cash and cash equivalents totaling $71.9 million at December 31, 1999. Comparatively, the Company had $90.8 million in cash and cash equivalents at December 31, 1998, a decrease of $18.9 million or 20.8%. SECURITIES Securities consist of U.S. Treasury, federal agency, mortgage-backed and state, county and municipal securities. The Company classifies debt and equity securities into one of three categories: held to maturity, trading or available for sale. At each reporting date, management reassesses the appropriateness of the classification. Investments in debt securities are classified as held to maturity and measured at amortized cost in the consolidated balance sheet only if management has the positive intent and ability to hold those securities to maturity. Securities that are bought and held principally for the purpose of selling them in the near term are classified as trading and measured at fair value in the consolidated balance sheet with unrealized holding gains and losses included in earnings. Securities not classified as either held to maturity or trading are classified as available for sale and measured at fair value in the consolidated balance sheet with unrealized holding gains and losses reported in a separate component of shareholders' equity, net of applicable income taxes until realized. At December 31, 1999 and December 31, 1998, no securities were classified as trading. The Company does not currently engage in trading activities or use derivative instruments to control interest rate risk. Even though such activities may be permitted with the approval of the Board of Directors, the Company does not intend to engage in such activities in the immediate future. The following table displays the carrying amount (fair value) of securities available for sale: DECEMBER 31, ---------------------------------- SECURITIES AVAILABLE FOR SALE 1999 1998 1997 - ----------------------------------------------------------------------------- (Dollars in Thousands) U.S. Treasury $ 3,004 $ -- $ 7,002 U.S. Government Agency 344,601 313,970 277,764 Mortgage-Backed 127,631 101,365 15,561 States and Political Subdivisions 46,370 36,988 20,898 Other 4,332 3,613 2,952 - ----------------------------------------------------------------------------- Total $525,938 $455,936 $324,177 ============================================================================= PAGE 11 The following table presents the maturities, amortized cost, estimated market value and weighted average yields of securities available for sale at December 31, 1999:
AMORTIZED COST MATURING --------------------------------------------------------- AFTER ONE AFTER FIVE ESTIMATED ONE YEAR THROUGH THROUGH AFTER AMORTIZED MARKET SECURITIES AVAILABLE FOR SALE OR LESS FIVE YEARS TEN YEARS TEN YEARS COST VALUE - ---------------------------------------------------------------------------------------------------------------------------------- (Dollars in Thousands) U.S. Treasury $ 2,999 $ -- $ -- $ -- $ 2,999 $ 3,004 U.S. Government Agency 4,600 188,805 166,153 -- 359,558 344,601 Mortgage-Backed -- 7,908 31,471 92,320 131,699 127,631 States and Political Subdivisions 568 9,229 13,877 24,524 48,198 46,370 Other 25 100 250 3,957 4,332 4,332 - ---------------------------------------------------------------------------------------------------------------------------------- Total $ 8,192 $ 206,042 $ 211,751 $ 120,801 $ 546,786 $525,938 ================================================================================================================================== Weighted Average Yields (Taxable-Equivalent Basis) - ---------------------------------------------------------------------------------------------------------------------------------- U.S. Treasury 5.97% --% --% --% 5.97% U.S. Government Agency 5.68 5.90 6.10 -- 5.99 Mortgage-Backed -- 6.24 5.77 6.04 5.98 States and Political Subdivisions 6.48 6.99 6.85 6.63 6.76 Other 7.50 7.62 7.05 5.68 5.82 - ---------------------------------------------------------------------------------------------------------------------------------- Total 5.85% 5.96% 6.10% 6.15% 6.06% ==================================================================================================================================
Net unrealized holding gains (losses), net of related tax effect, of $(13.4) million and $609,000 at December 31, 1999 and December 31, 1998, respectively, on securities available for sale are reported as a separate component of shareholders' equity as accumulated other comprehensive income. The following table displays the carrying amount (amortized cost) of securities held to maturity: DECEMBER 31, ------------------------------------ SECURITIES HELD TO MATURITY 1999 1998 1997 - ------------------------------------------------------------------------------ (Dollars in Thousands) U.S. Treasury $ 5,001 $10,013 $20,249 U.S. Government Agency -- -- 64,171 Mortgage-Backed -- -- 750 States and Political Subdivisions 3,009 4,318 7,474 Other -- -- 100 - ------------------------------------------------------------------------------ Total $ 8,010 $14,331 $92,744 ============================================================================== PAGE 12 The following table presents the maturities, amortized cost, estimated market value and weighted average yields of securities held to maturity at December 31, 1999:
AMORTIZED COST MATURING ---------------------------------------------- AFTER ONE AFTER FIVE ESTIMATED ONE YEAR THROUGH THROUGH AFTER AMORTIZED MARKET SECURITIES HELD TO MATURITY OR LESS FIVE YEARS TEN YEARS TEN YEARS COST VALUE - -------------------------------------------------------------------------------------------------------------- (Dollars in Thousands) U.S. Treasury $5,001 $ -- $ -- $ -- $5,001 $5,018 States and Political Subdivisions 532 1,737 740 -- 3,009 3,053 - -------------------------------------------------------------------------------------------------------------- Total $5,533 $1,737 $ 740 $ -- $8,010 $8,071 ============================================================================================================== Weighted Average Yields (Taxable-Equivalent Basis) - -------------------------------------------------------------------------------------------------------------- U.S. Treasury 6.69% --% --% --% 6.69% -- States and Political Subdivisions 8.29 8.32 10.13 -- 8.76 -- - -------------------------------------------------------------------------------------------------------------- Total 6.84% 8.32% 10.13% --% 7.47% -- ==============================================================================================================
All investments in states and political subdivisions, with the exception of two obtained with the Harlingen Bancshares, Inc. acquisition, are investments in entities within the State of Texas. No single issuer accounted for as much as 10.0% of total shareholders' equity at December 31, 1999. Of the obligations of states and political subdivisions held by the Company at December 31, 1999, 76.5% were rated A or better by Moody's Investor Services, Inc. and 51.1% of the non-rated issues or $5.6 million are local issues purchased in private placement transactions. LOANS The Company manages its credit risk by establishing and implementing strategies and guidelines appropriate to the characteristics of borrowers, industries, geographic locations and risk products. Diversification of risk within each of these areas is a primary objective. Policies and procedures are developed to ensure that loan commitments conform to current strategies and guidelines. Management continually refines the Company's credit policies and procedures to address the risks in the current and prospective environment and to reflect management's current strategic focus. The credit process is controlled with continuous credit review and analysis, and review by internal and external auditors and regulatory authorities. The Company's loans are widely diversified by borrower and industry group. The Company has collateral management policies in place so that collateral lending of all types is approached on a basis consistent with safe and sound standards. Valuation analysis is utilized to take into consideration the potentially adverse economic conditions under which liquidation could occur. Collateral accepted against the commercial loan portfolio includes accounts receivable and inventory, marketable securities, equipment and agricultural products. Autos, deeds of trust, life insurance and marketable securities are accepted as collateral for the installment loan portfolio. Management of the Company believes that the Company has benefited from increased loan demand due to passage of the North American Free Trade Agreement ("NAFTA") and the strong population growth in the Rio Grande Valley. More recently, the continued devaluation of the Mexican peso relative to the U.S. dollar has reduced retail sales to residents of Mexico. However, the effects of NAFTA and the devaluation have also increased cross-border trade and industrial development including activity at twin manufacturing plants located on each side of the border (referred to as maquiladoras) which benefit the Rio Grande Valley economy. Management believes the on-going Mexican financial problems will not have a material adverse effect on the Company's growth and earnings prospects, in part because the Company presently has a low percentage of loans secured by Mexican assets or that otherwise rely on collateral located in Mexico. The extension of credits denominated in a currency other than that of the country in which a borrower is located are called "cross-border" credits. The Company has some dollar-denominated cross-border credits to individuals or companies that are residents of, or domiciled in Mexico. The Company's total cross-border credits at December 31, 1999 of $8.9 million represented 0.6% of total loans. See "Nonperforming Assets" for additional information on cross-border credits. Total loans of $1.4 billion for the year ended December 31, 1999 increased $285.3 million or 26.2% compared to the year ended December 31, 1998 levels of $1.1 billion. The loan growth during 1999, which increased $138.2 million or 14.5% for the year ended December 31, 1998 compared to levels of $951.3 million at December 31, 1997. The increase in total loans for the year ended December 31, 1999 is primarily attributable to an increased volume of business conducted by the Company including bank acquisitions. The increase in total loans for the year ended December 31, 1999 reflects growth in all loan categories and is representative in part to the vitality of the Rio Grande Valley economy. A substantial portion of the increase in loans classified as Real Estate-Commercial Mortgage loans consists of loans secured by real estate and other assets to commercial customers. The following table presents the composition of the loan portfolio at the end of each of the last five years: PAGE 13
DECEMBER 31, ---------------------------------------------------------------------- LOAN PORTFOLIO COMPOSITION 1999 1998 1997 1996 1995 - ------------------------------------------------------------------------------------------------------- (Dollars in Thousands) Commercial $ 391,855 $ 311,966 $ 249,819 $ 219,346 $ 131,006 Commercial Tax-Exempt 22,160 22,155 29,024 34,777 34,419 - ------------------------------------------------------------------------------------------------------- Total Commercial Loans 414,015 334,121 278,843 254,123 165,425 - ------------------------------------------------------------------------------------------------------- Agricultural 59,437 52,302 51,346 32,756 25,284 - ------------------------------------------------------------------------------------------------------- Real Estate Construction 101,376 66,018 69,477 49,103 31,620 Commercial Mortgage 456,507 354,134 304,215 259,041 146,584 Agricultural Mortgage 38,256 34,440 31,949 29,654 18,047 1-4 Family Mortgage 160,786 128,945 122,043 116,485 75,911 - ------------------------------------------------------------------------------------------------------- Total Real Estate 756,925 583,537 527,684 454,283 272,162 - ------------------------------------------------------------------------------------------------------- Consumer 144,382 119,545 93,443 77,436 48,543 - ------------------------------------------------------------------------------------------------------- Total Loans $1,374,759 $1,089,505 $ 951,316 $ 818,598 $ 511,414 =======================================================================================================
The contractual maturity schedule of the loan portfolio at December 31, 1999 follows:
ONE AFTER ONE YEAR AFTER YEAR THROUGH FIVE LOAN MATURITIES OR LESS FIVE YEARS YEARS TOTAL - ---------------------------------------------------------------------------------------- (Dollars in Thousands) Commercial $ 203,059 $ 151,054 $ 37,742 $ 391,855 Commercial Tax-Exempt 997 16,229 4,934 22,160 - ---------------------------------------------------------------------------------------- Total Commercial Loans 204,056 167,283 42,676 414,015 - ---------------------------------------------------------------------------------------- Agricultural 46,310 12,020 1,107 59,437 - ---------------------------------------------------------------------------------------- Real Estate Construction 84,609 15,342 1,425 101,376 Commercial Mortgage 75,017 301,471 80,019 456,507 Agricultural Mortgage 9,380 25,348 3,528 38,256 1-4 Family Mortgage 19,911 117,374 23,501 160,786 - ---------------------------------------------------------------------------------------- Total Real Estate 188,917 459,535 108,473 756,925 - ---------------------------------------------------------------------------------------- Consumer 48,204 95,698 480 144,382 - ---------------------------------------------------------------------------------------- Total Loans $ 487,487 $ 734,536 $ 152,736 $1,374,759 ======================================================================================== Variable-Rate Loans $ 188,275 $ 250,711 $ 107,423 $ 546,409 Fixed-Rate Loans 299,212 483,825 45,313 828,350 - ---------------------------------------------------------------------------------------- Total Loans $ 487,487 $ 734,536 $ 152,736 $1,374,759 ========================================================================================
The Company's policy on maturity extensions and rollovers is based on management's assessment of individual loans. Approvals for the extension or renewal of loans without reduction of principal for more than one twelve-month period are generally avoided, unless the loans are fully secured and properly margined by cash or marketable securities, or are revolving lines subject to annual analysis and renewal. NONPERFORMING ASSETS The Company has several procedures in place to assist in maintaining the overall quality of its loan portfolio. The Bank has established underwriting guidelines to be followed by its officers and monitors its delinquency levels for any negative or adverse trends. PAGE 14 Nonperforming assets consist of nonaccrual loans, loans for which the interest rate has been renegotiated below originally contracted rates and real estate or other assets that have been acquired in partial or full satisfaction of loan obligations. The Company's policy generally is to place a loan on nonaccrual status when payment of principal or interest is contractually past due 90 days, or earlier when concern exists as to the ultimate collection of principal and interest. At the time a loan is placed on nonaccrual status, interest previously accrued but uncollected is reversed and charged against current income. The Company's classification of nonperforming loans includes those loans for which management believes collection is doubtful. Management is not aware of any specific borrower relationships that are not reported as nonperforming where management has serious doubts as to the ability of such borrowers to comply with the present loan repayment terms which would cause nonperforming assets to increase materially. Nonperforming assets of $14.3 million at December 31, 1999 decreased $1.5 million, 9.4% compared to December 31, 1998 levels of $15.8 million, which increased $4.1 million or 35.1% compared with December 31, 1997 levels of $11.7 million. Nonaccrual loans of $8.3 million at December 31, 1999 decreased $2.1 million or 19.9% compared to $10.4 million at December 31, 1998. Nonaccrual loans at December 31, 1998 increased $2.1 million or 24.6% compared with December 31, 1997 levels of $8.4 million. The decrease in nonaccrual loans during 1999 was due to the Bank charging off or foreclosing on a larger amount of nonaccrual loans outstanding as of December 31, 1998 as compared to the amount of nonaccrual loans added and outstanding as of December 31, 1999. Cross-border nonaccrual loans at December 31, 1999 of $4.3 million increased by $1.7 million or 65.2% compared to $2.6 million at December 31, 1998. The increase in foreclosed assets during 1999 was primarily attributable to a higher amount of foreclosure loans with real estate collateral, net of write downs and liquidations. Management actively seeks buyers for all Foreclosed Assets. See "Noninterest Expense" below. Loans which are contractually past due 90 days or more, which are both well secured or guaranteed by financially responsible third parties and in the process of collection, generally are not placed on nonaccrual status. The amount of such loans past due 90 days or more at December 31, 1999, 1998 and 1997 that are not classified as nonaccrual totaled $2.7 million, $3.1 million and $3.3 million, respectively. The decrease in accruing loans past due 90 days or more at December 31, 1999 as compared to the year ended December 31, 1998 is partly attributable to several large credits that were paid off during 1999. The ratio of Nonperforming Assets Plus Accruing Loans 90 Days or More Past Due as a percent of Total Loans and Foreclosed Assets at December 31, 1999 decreased to 1.23% from 1.72% at December 31, 1998 due primarily to the decrease in nonaccrual loans. An analysis of the components of nonperforming assets for each of the last five years follows:
DECEMBER 31, ----------------------------------------------------------- NONPERFORMING ASSETS 1999 1998 1997 1996 1995 - -------------------------------------------------------------------------------------------------------------------- (Dollars in Thousands) Nonaccrual Loans $ 8,341 $10,414 $ 8,355 $ 6,801 $ 2,435 Renegotiated Loans -- -- -- 1 6 - -------------------------------------------------------------------------------------------------------------------- Nonperforming Loans 8,341 10,414 8,355 6,802 2,441 Foreclosed Assets 5,958 5,368 3,331 1,121 1,749 - -------------------------------------------------------------------------------------------------------------------- Total Nonperforming Assets 14,299 15,782 11,686 7,923 4,190 Accruing Loans 90 Days or More Past Due 2,697 3,099 3,287 5,328 781 - -------------------------------------------------------------------------------------------------------------------- Total Nonperforming Assets and Accruing Loans 90 Days or More Past Due $16,996 $18,881 $14,973 $13,251 $ 4,971 ==================================================================================================================== Nonperforming Loans as a % of Total Loans 0.61% 0.96% 0.88% 0.83% 0.48% Nonperforming Assets as a % of Total Loans and Foreclosed Assets 1.04 1.44 1.22 0.97 0.82 Nonperforming Assets as a % of Total Assets 0.67 0.90 0.76 0.58 0.54 Nonperforming Assets Plus Accruing Loans 90 Days or More Past Due as a % of Total Loans and Foreclosed Assets 1.23 1.72 1.57 1.62 0.97 ====================================================================================================================
PAGE 15 Management regularly reviews and monitors the loan portfolio to identify borrowers experiencing financial difficulties. Management believes that, at December 31, 1999, all such loans had been identified and included in the nonaccrual, renegotiated or 90 days or more past due loan totals reflected in the table above. Management continues to emphasize maintaining a low level of nonperforming assets and returning nonperforming assets to an earning status. ALLOWANCE FOR LOAN LOSSES Management analyzes the loan portfolio to determine the adequacy of the allowance for loan losses and the appropriate provision required to maintain an adequate allowance. In assessing the adequacy of the allowance, management reviews the size, quality and risks of loans in the portfolio and considers factors such as specific known risks, past experience, the status and amount of nonperforming assets and economic conditions. A specific percentage is allocated to total loans in good standing and not specifically reserved while additional amounts are added for individual loans considered to have specific loss potential. Loans identified as losses are charged-off. In addition, the loan review committee of the Bank reviews the assessments of management in determining the adequacy of the Bank's allowance for loan losses. Based on total allocations, the provision is recorded to maintain the allowance at a level deemed appropriate by management. While management uses available information to recognize losses on loans, there can be no assurance that future additions to the allowance will not be necessary. The allowance for loan losses at December 31, 1999 totaled $16.7 million, representing a net increase of $3.5 million or 26.3% compared to $13.2 million at December 31, 1998. The increase in the allowance is primarily due to an increase in the loan portfolio by 26.2% in 1999 compared to 1998. Management believes that the allowance for loan losses at December 31, 1999 adequately reflects the risks in the loan portfolio. Various regulatory agencies, as an integral part of their examination process, periodically review the Bank's allowance for loan losses. Such agencies may require the Bank to recognize additions to the allowance based on their judgments of information available to them at the time of their examination. The following table summarizes the activity in the allowance for loan losses:
YEARS ENDED DECEMBER 31, ---------------------------------------------------------- ALLOWANCE FOR LOAN LOSS ACTIVITY 1999 1998 1997 1996 1995 - ------------------------------------------------------------------------------------------------------------------ (Dollars in Thousands) Balance at Beginning of Period $13,236 $11,291 $10,806 $ 5,376 $ 4,274 Balance from Acquisitions 1,576 308 -- 4,647 450 Provision for Loan Losses 5,432 9,729 2,947 2,173 1,705 Charge-Offs Commercial 2,279 1,600 1,778 968 869 Agricultural 106 5,453 477 158 416 Real Estate 192 875 59 82 138 Consumer 1,561 1,230 907 732 346 - ------------------------------------------------------------------------------------------------------------------ Total Charge-Offs 4,138 9,158 3,221 1,940 1,769 - ------------------------------------------------------------------------------------------------------------------ Recoveries Commercial 268 370 136 193 509 Agricultural 5 72 48 -- 66 Real Estate 48 376 350 165 60 Consumer 284 248 225 192 81 - ------------------------------------------------------------------------------------------------------------------ Total Recoveries 605 1,066 759 550 716 - ------------------------------------------------------------------------------------------------------------------ Net Charge-Offs 3,533 8,092 2,462 1,390 1,053 - ------------------------------------------------------------------------------------------------------------------ Balance at End of Period $16,711 $13,236 $11,291 $10,806 $ 5,376 ================================================================================================================== Ratio of Allowance for Loan Losses to Loans Outstanding, Net of Unearned Discount 1.22% 1.21% 1.19% 1.32% 1.05% Ratio of Allowance for Loan Losses to Nonperforming Loans 200.35 127.10 135.14 158.87 220.24 Ratio of Net Charge-Offs to Average Total Loans Outstanding, Net of Unearned Discount 0.29 0.79 0.28 0.20 0.23 ==================================================================================================================
PAGE 16 The allocation of the allowance for loan losses by loan category and the percentage of loans in each category to total loans at the end of each of the last five years follows:
YEARS ENDED DECEMBER 31, ------------------------------------------------------------------------------------------------------------------- 1999 1998 1997 1996 1995 ------------------------------------------------------------------------------------------------------------------- LOANS AS LOANS AS LOANS AS LOANS AS LOANS AS ALLOCATION OF THE PERCENT PERCENT PERCENT PERCENT PERCENT ALLOWANCE FOR OF TOTAL OF TOTAL OF TOTAL OF TOTAL OF TOTAL LOAN LOSSES AMOUNT LOANS AMOUNT LOANS AMOUNT LOANS AMOUNT LOANS AMOUNT LOANS - ------------------------------------------------------------------------------------------------------------------------------------ (Dollars in Thousands) Commercial $ 6,493 30.1% $ 4,301 30.7% $ 2,672 29.3% $ 2,264 31.0% $ 1,142 32.3% Agricultural 648 4.3 589 4.8 1,427 5.4 421 4.0 360 4.9 Real Estate 7,238 55.1 5,247 53.5 5,627 55.5 6,101 55.5 2,842 53.3 Consumer 950 10.5 738 11.0 527 9.8 465 9.5 350 9.5 Unallocated 1,382 -- 2,361 -- 1,038 -- 1,555 -- 682 -- - ------------------------------------------------------------------------------------------------------------------------------------ Total $16,711 100.0% $13,236 100.0% $11,291 100.0% $10,806 100.0% $ 5,376 100.0% - ------------------------------------------------------------------------------------------------------------------------------------
PREMISES AND EQUIPMENT, NET Premises and equipment of $75.6 million at December 31, 1999 increased $5.8 million or 8.2% compared to $69.8 million at December 31, 1998 and increased $17.4 million or 33.1% for December 31, 1998 compared to $52.4 million at December 31, 1997. The increase for the year ended December 31, 1999 resulted primarily from $5.6 million in premises and equipment obtained through the Harlingen Bancshares, Inc. acquisition. The increase for the year ended December 31, 1998 resulted primarily from completion costs of the Company's new headquarters in McAllen of $10.2 million, net of construction in progress of $9.4 million as of December 31, 1997. GOODWILL AND IDENTIFIABLE INTANGIBLES Intangibles of $44.8 million at December 31, 1999 increased $17.9 million or 66.6% compared to $26.9 million at December 31, 1998 and increased $2.8 million or 11.8% compared to $24.1 million at December 31, 1997. The net increase in 1999 is primarily due to $21.0 million in intangibles added for the Harlingen Bancshares, Inc. acquisition partially offset by the $3.2 million in amortization. The net increase in 1998 is due to amortization of intangibles and the acquisition of Raymondville Bancorp, Inc. DEPOSITS Total deposits of $1.9 billion at December 31, 1999 increased $322.4 million or 20.6% compared to December 31, 1998 levels of $1.6 billion which increased $200.2 million or 14.7% compared to December 31, 1997 levels of $1.4 billion. The increase in total deposits for the year ended December 31, 1999 is primarily attributable to $183.6 million recorded with the Harlingen Bancshares, Inc. acquisition and the growth in the volume of business conducted by the Company. The increase in total deposits for the year ended December 31, 1998 is attributable in part to the vitality of the Rio Grande Valley economy. Total non-interest bearing deposits of $285.9 million for the year ended December 31, 1999 represented an increase of $51.2 million or 21.8% compared to the year ended December 31, 1998 and increased $26.2 million or 12.6% compared to the year ended December 31, 1997. Total public funds deposits (consisting of Public Funds Demand Deposits, Savings, Money Market Checking and Savings and Time Deposits) of $389.5 million for the year ended December 31, 1999 increased $123.0 million or 46.1% compared to $266.5 million for the year ended December 31, 1998. The Bank actively seeks consumer and commercial deposits, including deposits from correspondent banks and public funds deposits. PAGE 17 The following table presents the composition of total deposits at the end of the last three years:
DECEMBER 31, ------------------------------------------ DEPOSIT COMPOSITION 1999 1998 1997 - --------------------------------------------------------------------------------------- (Dollars in Thousands) Demand Deposits Commercial and Individual $ 277,729 $ 226,605 $ 203,325 Public Funds 8,137 8,050 5,098 - --------------------------------------------------------------------------------------- Total Demand Deposits 285,866 234,655 208,423 - --------------------------------------------------------------------------------------- Interest-Bearing Deposits Savings Commercial and Individual 118,512 106,446 100,917 Public Funds 246 1,265 771 Money Market Checking and Savings Commercial and Individual 298,668 236,157 203,292 Public Funds 78,791 65,081 39,547 Time Deposits Commercial and Individual 800,934 727,205 647,959 Public Funds 302,329 192,133 161,874 - --------------------------------------------------------------------------------------- Total Interest-Bearing Deposits 1,599,480 1,328,287 1,154,360 - --------------------------------------------------------------------------------------- Total Deposits $1,885,346 $1,562,942 $1,362,783 ======================================================================================= Weighted Average Rate on Interest-Bearing Deposits 4.41% 4.67% 4.67% =======================================================================================
Time deposits of $100,000 or more are solicited from markets served by the Bank and are not sought through brokered sources. Time deposits continue to be a significant source of funds. The following table presents the maturities of time deposits of $100,000 or more as of December 31, 1999 (dollars in thousands): MATURITIES OF TIME DEPOSITS OF $100,000 OR MORE - -------------------------------------------------------------------------- Three Months or Less $366,625 After Three through Six Months 137,629 After Six through Twelve Months 108,283 After Twelve Months 74,892 - -------------------------------------------------------------------------- Total $687,429 ========================================================================== Weighted Average Rate on Time Deposits of $100,000 or More 5.33% ========================================================================== Mexico is a part of the trade territory of the Company and foreign deposits from Mexican sources have traditionally been a source of funding. In December 1995, the Mexican government announced a 20% devaluation of the Mexican peso relative to the United States dollar, and the Mexican peso has since continued to decline relative to the dollar. The Company does not anticipate any negative impact on foreign deposits due to these recent devaluations of the peso. The increase in foreign deposits is primarily attributable to Mexican deposits obtained from acquisitions. The following table presents foreign deposits, primarily from Mexican sources: PAGE 18 DECEMBER 31, --------------------- FOREIGN DEPOSITS 1999 1998 - ----------------------------------------------------------------------- (Dollars in Thousands) Demand Deposits $ 10,318 $ 10,667 - ----------------------------------------------------------------------- Interest-Bearing Deposits Savings 20,882 21,638 Money Market Checking and Savings 32,243 32,324 Time Deposits Under $100,000 71,319 66,104 Time Deposits of $100,000 or more 147,711 133,641 - ----------------------------------------------------------------------- Total Interest-Bearing Deposits 272,155 253,707 - ----------------------------------------------------------------------- Total Foreign Deposits $282,473 $264,374 ======================================================================= Percent of Total Deposits 14.98% 16.92% ======================================================================= Weighted Average Rate on Foreign Deposits 4.31% 4.60% ======================================================================= SHAREHOLDERS' EQUITY AND CAPITAL RESOURCES Shareholders' equity increased by $10.9 million or 6.2%, during the year ended December 31, 1999 due to comprehensive income of $16.8 million less cash dividends of $7.4 million. Comprehensive income for the period included net income of $30.9 million and unrealized loss on securities available for sale, net of tax, of $14.1 million. Bank holding companies are required to maintain capital ratios in accordance with guidelines adopted by the Federal Reserve Board ("FRB"). The guidelines are commonly known as Risk-Based Capital Guidelines. The table below reflects various measures of regulatory capital:
DECEMBER 31, 1999 DECEMBER 31, 1998 ------------------------------------------------------- RISK-BASED CAPITAL AMOUNT RATIO AMOUNT RATIO - ---------------------------------------------------------------------------------------------------------------- (Dollars in Thousands) Total Shareholders' Equity before unrealized gains or losses on Securities Available for Sale $ 201,636 $176,665 Less Goodwill and Other Deductions (44,796) (26,894) - ---------------------------------------------------------------------------------------------------------------- Total Tier I Capital 156,840 149,771 Total Tier II Capital 16,711 13,236 - ---------------------------------------------------------------------------------------------------------------- Total Qualifying Capital $ 173,551 $163,007 ================================================================================================================ Total Risk-Based Capital $ 173,551 11.94% $163,007 14.04% Total Risk-Based Capital Minimum 116,313 8.00 92,884 8.00 - ---------------------------------------------------------------------------------------------------------------- Tier I Risk-Based Capital 156,840 10.79 149,771 12.90 Tier I Risk-Based Capital Minimum 58,157 4.00 46,442 4.00 - ---------------------------------------------------------------------------------------------------------------- Tier I Leverage Capital 156,840 7.58 149,771 8.84 Tier I Leverage Capital Minimum 82,777 4.00 67,772 4.00 ================================================================================================================
At December 31, 1999, the Company and the Bank met the criteria for classification as a "well-capitalized" institution under the prompt corrective action rules promulgated under the Federal Deposit Insurance Act. Designation as a well-capitalized institution under these regulations does not constitute a recommendation or endorsement of the Company or the Bank by Federal bank regulators. ANALYSIS OF RESULTS OF OPERATIONS NET INCOME Net income available for common shareholders was $30.9 million in 1999, compared to $22.5 million in 1998 and $23.1 million in 1997. The increase in net income in 1999 from 1998 by $8.4 million or 37.3% was primarily due to an increase in interest-earning assets and a decrease in the provision for loan losses. The provision for loan losses was $5.4 million in 1999 compared to $9.7 million in 1998. The $9.7 million provision in 1998 was recorded to bring the allowance for loan losses back up to a level deemed appropriate by management after considering loans charged off and written down during third quarter 1998. Total loans charged off or written down in the third quarter of 1998 amounted to $6.8 million, of which $4.8 million or 71.1% related to agricultural loans. Total interest income in the amount of $1.2 million was also charged off of which $863,000 or PAGE 19 72.9% related to agricultural loans. These charge-offs and write-downs were primarily the result of a severe drought and its impact on agricultural growers, shippers, suppliers and consumers throughout the Rio Grande Valley region. Earnings per diluted common share were $2.11, $1.54 and $1.58 for the years ended December 31, 1999, 1998, and 1997, respectively. Return on assets averaged 1.63%, 1.36% and 1.61%, respectively, while return on shareholders' equity averaged 16.82%, 13.11%, and 15.15%, respectively, for the years ended December 31, 1999, 1998, and 1997, respectively. NET INTEREST INCOME The following table presents for the periods indicated the total dollar amount of interest income from average interest-earning assets and the resultant yields, reported on a tax-equivalent basis, and the interest expense on average interest-bearing liabilities, expressed both in dollars and rates. Average balances are derived from average daily balances and the yields and costs are established by dividing income or expense by the average balance of the asset or liability. Income and yield on interest-earning assets include amounts to convert tax-exempt income to a taxable-equivalent basis, assuming a 35% effective tax rate for 1999, 1998, and 1997 (dollars in thousands):
YEARS ENDED DECEMBER 31, ---------------------------------------------------------------------------------------- 1999 1998 ------------------------------------------- --------------------------------------- AVERAGE YIELD/ AVERAGE YIELD/ TAXABLE-EQUIVALENT BASIS (1) BALANCE INTEREST RATE BALANCE INTEREST RATE - -------------------------------------------------------------------------------------------------------------------------- Assets Interest-Earning Assets Loans Commercial $ 427,828 $ 38,560 9.01% $ 355,014 $ 32,085 9.04% Real Estate 650,168 61,578 9.47 556,800 54,158 9.73 Consumer 131,613 13,745 10.44 111,713 11,474 10.27 - -------------------------------------------------------------------------------------------------------------------------- Total Loans 1,209,609 113,883 9.41 1,023,527 97,717 9.55 - -------------------------------------------------------------------------------------------------------------------------- Securities Taxable 444,021 27,244 6.14 402,457 25,138 6.25 Tax-Exempt 44,485 3,170 7.13 30,310 2,357 7.78 - -------------------------------------------------------------------------------------------------------------------------- Total Securities 488,506 30,414 6.23 432,767 27,495 6.35 - -------------------------------------------------------------------------------------------------------------------------- Time Deposits 1,621 114 7.03 1,300 76 5.85 Federal Funds Sold 20,347 1,000 4.91 33,617 1,829 5.44 - -------------------------------------------------------------------------------------------------------------------------- Total Interest-Earning Assets 1,720,083 $ 145,411 8.45% 1,491,211 $127,117 8.52% - -------------------------------------------------------------------------------------------------------------------------- Cash and Due from Banks 56,414 54,531 Premises and Equipment, Net 71,001 64,937 Other Assets 64,310 55,866 Allowance for Loan Losses (14,928) (12,410) - -------------------------------------------------------------------------------------------------------------------------- Total Assets $1,896,880 $1,654,135 ========================================================================================================================== Liabilities Interest-Bearing Liabilities Savings $ 112,948 $ 2,517 2.23% $ 105,243 $ 2,986 2.84% Money Market Checking and Savings 316,929 9,018 2.85 258,885 7,521 2.91 Time Deposits 1,001,399 49,960 4.99 879,379 47,590 5.41 - -------------------------------------------------------------------------------------------------------------------------- Total Savings and Time Deposits 1,431,276 61,495 4.30 1,243,507 58,097 4.67 - -------------------------------------------------------------------------------------------------------------------------- Federal Funds Purchased and Securities Sold Under Repurchase Agreements 15,377 726 4.72 5,772 287 4.97 - -------------------------------------------------------------------------------------------------------------------------- Total Interest-Bearing Liabilities 1,446,653 $ 62,221 4.30% 1,249,279 $ 58,384 4.67% - -------------------------------------------------------------------------------------------------------------------------- Demand Deposits 253,454 218,708 Other Liabilities 13,383 14,721 - -------------------------------------------------------------------------------------------------------------------------- Total Liabilities 1,713,490 1,482,708 - -------------------------------------------------------------------------------------------------------------------------- Shareholders' Equity 183,390 171,427 - -------------------------------------------------------------------------------------------------------------------------- Total Liabilities and Shareholders' Equity $1,896,880 $1,654,135 ========================================================================================================================== Net Interest Income $ 83,190 $ 68,733 ========================================================================================================================== Net Yield on Total Interest- Earning Assets 4.84% 4.61% ========================================================================================================================== YEARS ENDED DECEMBER 31, ------------------------------------------- 1997 ------------------------------------------- AVERAGE YIELD/ TAXABLE-EQUIVALENT BASIS (1) BALANCE INTEREST RATE - ----------------------------------------------------------------------------- Assets Interest-Earning Assets Loans Commercial $ 303,683 $ 29,398 9.68% Real Estate 489,611 48,650 9.94 Consumer 82,545 8,615 10.44 - ----------------------------------------------------------------------------- Total Loans 875,839 86,663 9.89 - ----------------------------------------------------------------------------- Securities Taxable 359,898 23,124 6.43 Tax-Exempt 26,323 2,303 8.75 - ----------------------------------------------------------------------------- Total Securities 386,221 25,427 6.58 - ----------------------------------------------------------------------------- Time Deposits 242 14 5.79 Federal Funds Sold 39,657 2,195 5.53 - ----------------------------------------------------------------------------- Total Interest-Earning Assets 1,031,959 $ 114,299 8.78% - ----------------------------------------------------------------------------- Cash and Due from Banks 55,515 Premises and Equipment, Net 43,728 Other Assets 49,840 Allowance for Loan Losses (11,086) - ----------------------------------------------------------------------------- Total Assets $1,439,956 ============================================================================= Liabilities Interest-Bearing Liabilities Savings $ 101,903 $ 3,235 3.17% Money Market Checking and Savings 241,765 7,142 2.95 Time Deposits 738,643 40,189 5.44 - ----------------------------------------------------------------------------- Total Savings and Time Deposits 1,082,311 50,566 4.67 - ----------------------------------------------------------------------------- Federal Funds Purchased and Securities Sold Under Repurchase Agreements 988 52 5.26 - ----------------------------------------------------------------------------- Total Interest-Bearing Liabilities 1,083,299 $ 50,618 4.67% - ----------------------------------------------------------------------------- Demand Deposits 192,131 Other Liabilities 11,891 - ----------------------------------------------------------------------------- Total Liabilities 1,287,321 - ----------------------------------------------------------------------------- Shareholders' Equity 152,635 - ----------------------------------------------------------------------------- Total Liabilities and Shareholders' Equity $1,439,956 ============================================================================= Net Interest Income $ 63,681 ============================================================================= Net Yield on Total Interest- Earning Assets 4.89% =============================================================================
(1) For analytical purposes, income from tax-exempt assets, primarily securities issued by state and local governments or authorities, is adjusted by an increment that equates tax-exempt income to interest from taxable assets (assuming a 35% tax rate). PAGE 20 Net interest income, reported on a tax equivalent basis, increased $14.5 million or 21.0% to $83.2 million in 1999, compared to $68.7 million in 1998. The increase in net interest income was largely due to growth of 15.3% in average interest-earning assets, which rose to $1.7 billion in 1999 compared to $1.5 billion in 1998. The increase was partially offset by lower yields on interest-earning assets. Loan yield for 1999 decreased as a result of a decrease in the average prime rate from 8.36% in 1998 to 7.99% in 1999. In addition, the decrease in securities yield in 1999 compared to 1998 resulted from higher yielding securities maturing and the reinvesting of the proceeds into lower yielding securities. The net interest margin increased to 4.84% in 1999, compared to 4.61% in 1998. Tax-equivalent net interest income was $68.7 million for 1998, an increase of $5.1 million or 7.9% compared to 1997. The decrease in the interest margin for 1998 reflected decreases in the rates earned on interest-earning assets. The decrease in loan yield for 1998 reflected a lower market rate in response to Federal Reserve Bank actions and continued strong competition from local financial institutions and, to a lesser extent, the charge-off of $900,000 in interest income on agricultural loans during third quarter 1998. The rate paid on interest-bearing liabilities during 1998 did not change due to competition from local financial institutions and time deposit maturities, which prevent the Company from rapidly lowering deposit rates. The net interest margin for 1998 was 4.61% compared to 4.89% in 1997. The net interest income and the yield on earning assets were reduced by interest foregone on nonaccrual loans. If interest on those loans had been accrued at the original contractual rates, additional interest income would have approximated $1.9 million, $2.2 million and $1.6 million for the years ended December 31, 1999, 1998 and 1997, respectively. The amount of interest income on nonaccrual loans included in net income for cash payments received was $156,000 in 1999, $232,000 in 1998, and $238,000 in 1997. The following table presents the effects of changes in volume, rate and rate/volume on interest income and interest expense for major categories of interest-earning assets and interest-bearing liabilities. Nonaccrual loans are included in assets, thereby reducing yields (see "Nonperforming Assets"). The allocation of the rate/volume variance has been made pro-rata on the percentage that volume and rate variances produce in each category. An analysis of changes in net interest income follows (dollars in thousands):
INCREASE (DECREASE) ------------------------------------------------------------------------------------------------ YEAR ENDED DECEMBER 31, YEAR ENDED DECEMBER 31, 1999 COMPARED TO 1998 1998 COMPARED TO 1997 ------------------------------------------------------------------------------------------------ DUE TO CHANGE IN DUE TO CHANGE IN NET ------------------ RATE/ NET ------------------ RATE/ TAXABLE-EQUIVALENT BASIS (1) CHANGE VOLUME RATE VOLUME CHANGE VOLUME RATE VOLUME - ------------------------------------------------------------------------------------------------------------------------------------ Interest Income Loans $16,166 $17,765 $(1,353) $ (246) $11,054 $14,606 $(2,978) $(574) Securities Taxable 2,106 2,596 (444) (46) 2,014 2,737 (648) (75) Tax-Exempt 813 1,102 (197) (92) 54 349 (255) (40) Time Deposits in Bank 38 19 15 4 62 61 -- 1 Federal Funds Sold (829) (722) (177) 70 (366) (334) (36) 4 - ------------------------------------------------------------------------------------------------------------------------------------ Total Interest Income 18,294 20,760 (2,156) (310) 12,818 17,419 (3,917) (684) - ------------------------------------------------------------------------------------------------------------------------------------ Interest Expense Deposits 3,398 8,773 (4,670) (705) 7,531 7,528 -- 3 Federal Funds Purchased and Securities Sold Under Repurchase Agreements 439 477 (14) (24) 235 252 (3) (14) - ------------------------------------------------------------------------------------------------------------------------------------ Total Interest Expense 3,837 9,250 (4,684) (729) 7,766 7,780 (3) (11) - ------------------------------------------------------------------------------------------------------------------------------------ Net Interest Income Before Allocation of Rate/Volume 14,457 11,510 2,528 419 5,052 9,639 (3,914) (673) Allocation of Rate/Volume -- (765) 1,184 (419) -- (545) (128) 673 - ------------------------------------------------------------------------------------------------------------------------------------ Changes in Net Interest Income $14,457 $10,745 $ 3,712 $ - $ 5,052 $ 9,094 $ (4,042) $ - ====================================================================================================================================
(1) For analytical purposes, income from tax-exempt assets, primarily securities issued by state and local governments or authorities, is adjusted by an increment that equates tax-exempt income to interest from taxable assets (assuming a 35% effective federal income tax rate for 1999 and 1998). PAGE 21 PROVISION FOR LOAN LOSSES The Company recorded a provision for loan losses of $5.4 million for 1999, compared to $9.7 million for 1998 and $2.9 million for 1997. Net charge-offs totaled $3.5 million and $8.1 million for 1999 and 1998, respectively, and decreased to 0.29% of average loans in 1999 compared to 0.79% of average loans in 1998. Charge-offs of $5.5 million on agricultural loans during 1998, as previously discussed, factored heavily in the decrease in the provision for loan losses by $4.3 million or 44.2% in 1999 compared to 1998. Net charge-offs were $2.5 million or 0.28% of average loans in 1997. The provision for loan losses reflected an increase of $6.8 million or 230.1% in 1998 compared to 1997, primarily due to the $5.5 million in charge-offs on agricultural loans during 1998 and, to a lesser extent, loan growth of $138.2 million. Management charges provisions for loan losses to earnings to bring the total allowance for loan losses to a level deemed appropriate. Management bases its decision on many factors which include historical experience, the volume and type of lending conducted by the Company, the amount of nonperforming assets, regulatory policies, generally accepted accounting principles, and general economic conditions, particularly as they relate to the Company's lending area. For additional information on charge-offs and recoveries and the aggregate provision for loan losses, see the "Allowance for Loan Losses" section of this Report. NONINTEREST INCOME Noninterest Income totaled $17.4 million for 1999 compared to $17.7 million for 1998 and $13.0 million for 1997. Excluding Net Realized Gains (Losses) on Sales of Securities Available for Sale, Noninterest Income increased $2.6 million or 17.9% in 1999 compared to 1998 and $2.5 million or 20.6% in 1998 compared to 1997. The Noninterest Income growth in 1999 and 1998 resulted primarily from the increased volume of business conducted by the Company and, in part, because of the Harlingen Bancshares, Inc. acquisition in 1999 and the Raymondville merger in 1998. Total Service Charges were $12.1 million for 1999 compared to $10.1 million for 1998 and $8.6 million for 1997. The increase in Total Service Charges during 1999 by $1.9 million or 19.1% is attributable to increased account transaction fees generated by deposit growth, an increase in amount charged for overdrafts, and a decrease in the percentage of overdraft charges waived. The increase in Total Service Charges in 1998 by $1.5 million or 17.8% compared to 1997 is primarily due to increased fees resulting from deposit growth experienced by the Company and as a result of the Raymondville merger. Trust Service Fees were $2.0 million for 1999 compared to $1.8 million for 1998 and $1.7 million for 1997. The increase in Trust Service Fees during 1999 by $195,000 or 11.0% is attributable to an increase in the market value of trust accounts managed. The fair market value of assets managed was $357.6 million at December 31, 1999 compared to $328.7 million at December 31, 1998, representing an increase of 8.8%. Trust Service Fees increased by $79,000 or 4.7% in 1998 compared to 1997 primarily due to an increase in the number of trust accounts. The fair market value of assets managed at December 31, 1997 was $250.8 million. Assets held by the trust department of the Bank in fiduciary or agency capacities are not assets of the Company and are not included in the consolidated balance sheets. Net Realized Gains on Sales of Securities Available for Sale were $1,000 for 1999 compared to $2.9 million for 1998 and $734,000 for 1997. Market opportunities to realize bond profits were limited as bond prices generally fell during 1999. During the latter half of 1998, long-term interest rates reached or neared 30 year lows. This coupled with management's belief in the fundamental underlying strength of the U.S., Texas and Rio Grande Valley economies, presented an opportunity to realize some of the gains in the Securities Available for Sale portfolio. During 1997, the gains were a result of the Company's decision to reduce asset sensitivity of callable bonds and improve bond quality. Data Processing Service Fees of $2.1 million for 1999 increased $589,000 or 38.9% compared to $1.5 million for 1998. This increase primarily arose from the acquisition of an additional banking client during 1999, the recognition of a full year's income on the two banking clients obtained during 1998 and increased utilization of services offered to existing clients. Data Processing Service Fees of $1.5 million in 1998 increased by $435,000 or 40.3% compared to $1.1 million in 1997 as a result of the acquisition of two banking clients during 1998 and increased utilization of services by existing clients. The number of data processing clients as of December 31, 1999, 1998 and 1997 was 7, 6, and 4, respectively. Other Operating Income of $1.2 million for 1999 was comparable to $1.3 million reported for 1998. Other Operating Income increased by $469,000 or 55.0% in 1998 compared to $852,000 for 1997. The increase in Other Operating Income for 1998 was primarily attributable to the increased volume of deposit accounts and other business conducted by the Company. NONINTEREST EXPENSE Noninterest Expense of $45.9 million for 1999 increased $4.8 million or 11.6% compared to $41.1 million for 1998. Noninterest Expense of $41.1 million for 1998 increased $3.9 million or 10.6% compared to $37.2 million for 1997. The efficiency ratio of expense to total revenue improved to 45.29% compared to 48.86% for 1998 and 48.82% for 1997. The efficiency ratio is defined as Noninterest Expense (excluding other real estate income and expense) divided by the total of taxable-equivalent Net Interest Income and Noninterest Income (excluding any gains and losses on sale of securities). Excluding PAGE 22 One Time Charge - Acquisitions of $728,000 in 1998, Noninterest Expense increased $5.5 million or 13.7% in 1999 over 1998. The increase results primarily from higher personnel costs and occupancy expenses associated with the new corporate headquarters building in McAllen, Texas opened in mid-1998. Salaries and Employee Benefits, the largest category of Noninterest Expense, were $22.4 million in 1999, $18.5 million in 1998 and $17.7 million in 1997. The increase in 1999 over 1998 by $3.9 million or 20.8% reflects increases in base salaries and higher levels of staff, including the staff acquired as a result of the Harlingen Bancshares, Inc. acquisition. In addition, during 1999 the Company paid bonuses to its officers totaling $908,000. The increase in 1998 over 1997 by $834,000 or 4.7% was primarily due to staffing increases, including the staff acquired as a result of the Raymondville merger. At the end of 1999, the Company had approximately 888 full-time equivalent employees, compared to 727 at year end 1998 and 564 at year end 1997. Salaries and Employee Benefits averaged 1.18% of average assets in 1999 compared to 1.12% in 1998 and 1.23% in 1997. Net Occupancy Expense of $3.8 million for 1999 was comparable to $3.6 million for 1998, decreasing by only $136,000 or 3.7%. Although expenses associated with the new corporate headquarters building in McAllen, Texas, which opened mid-1998, increased in 1999, the increase was offset by an increase in rental income generated from leasing space in the new building. Net Occupancy Expense of $3.6 million for 1998 increased $944,000 or 35.1% compared to $2.7 million for 1997. Expenses associated with the new corporate headquarters contributed to the increase in Net Occupancy Expense during 1998. Equipment Expense of $5.1 million for 1999 increased $528,000 or 11.5% compared to $4.6 million for 1998. During 1998, Equipment Expense increased $821,000 or 21.7% compared to $3.8 million for 1997. Expenses associated with the new corporate headquarters building contributed to the increase in Equipment Expense during 1998. Other Real Estate Expense, Net, includes rental income from foreclosed properties, gain or loss on sale of other real estate properties and direct expenses of foreclosed real estate including property taxes, maintenance costs and write-downs. Write-downs of other real estate are required if the fair value of an asset acquired in a loan foreclosure subsequently declines below its carrying value. Other Real Estate Expense, Net of $332,000 for 1999 was comparable to $307,000 reported for 1998, increasing by only $25,000 or 8.1%. Other Real Estate Expense, Net increased $202,000 or 192.4% in 1998 compared to $105,000 for 1997. The net increase in 1998 was primarily attributable to higher volumes in Other Real Estate Owned offsetting increased operating income and gain on sale of foreclosed properties. Management is actively seeking buyers for all Other Real Estate. Amortization of Goodwill and Identifiable Intangibles of $3.2 million for 1999 increased $520,000 or 19.5% compared to $2.7 million for 1998. The increase in Amortization of Goodwill and Identifiable Intangibles during 1999 compared to 1998 was attributable to the amortization of $21.0 million of goodwill and other intangibles added in 1999 with the Harlingen Bancshares, Inc. acquisition. Amortization of Goodwill and Identifiable Intangibles increased to $2.7 million in 1998 compared to $2.3 million in 1997, an increase of $408,000 or 18.1%. The increase was due to the amortization of goodwill and core deposit premiums associated with the 1998 acquisitions. An impairment loss of $630,000 was recorded during the three months ended June 30, 1997 to reflect the impairment of an existing bank building. The building was razed to provide additional parking upon completion of the new headquarters building in McAllen, Texas. The new bank building completed in 1998 serves as the headquarters for Texas State Bank and Texas Regional Bancshares, Inc. The amount of the impairment loss represented the book value of the building at June 30, 1997. One Time Charge - Acquisitions of $728,000 in 1998 related primarily to professional fees and computer conversion costs resulting from the Company's 1998 acquisitions. Other Noninterest Expense of $11.1 million for 1999 is comparable to $10.7 million reported for 1998, increasing by only $453,000 or 4.3%. Other Noninterest Expense of $10.7 million for 1998 increased by $625,000 or 6.2% compared to $10.0 million for 1997. The increases for 1999 and 1998 were primarily attributable to an increased volume of business, primarily due to the 1999 and 1998 acquisitions. PAGE 23 A detailed summary of Noninterest Expense during the last three years follows (dollars in thousands):
1999 1998 1997 - ---------------------------------------------------------------------------------------------- Salaries and Wages $ 17,841 $ 15,108 $ 14,442 Employee Benefits 4,537 3,418 3,250 - ---------------------------------------------------------------------------------------------- Total Salaries and Employee Benefits 22,378 18,526 17,692 - ---------------------------------------------------------------------------------------------- Net Occupancy Expense 3,767 3,631 2,687 - ---------------------------------------------------------------------------------------------- Equipment Expense 5,127 4,599 3,778 - ---------------------------------------------------------------------------------------------- Other Real Estate Expense, Net Rental Income (389) (154) (71) Gain on Sale (171) (257) (115) Expenses 875 674 267 Write-Downs 17 44 24 - ---------------------------------------------------------------------------------------------- Total Other Real Estate Expense, Net 332 307 105 - ---------------------------------------------------------------------------------------------- Amortization of Goodwill and Identifiable Intangibles 3,180 2,660 2,252 - ---------------------------------------------------------------------------------------------- Impairment Loss -- -- 630 - ---------------------------------------------------------------------------------------------- One Time Charge - Acquisitions -- 728 -- - ---------------------------------------------------------------------------------------------- Other Noninterest Expense Advertising and Public Relations 1,495 1,536 1,372 Data Processing and Check Clearing 1,480 1,183 1,120 Director Fees 344 333 515 Franchise Tax 334 600 533 Insurance 400 430 327 FDIC Insurance 191 166 150 Legal 663 1,255 1,050 Professional Fees 1,136 638 775 Postage, Delivery and Freight 916 816 689 Printing, Stationery and Supplies 1,447 1,325 1,056 Telephone 628 534 433 Other Losses 759 68 837 Miscellaneous Expense 1,311 1,767 1,169 - ---------------------------------------------------------------------------------------------- Total Other Noninterest Expense 11,104 10,651 10,026 - ---------------------------------------------------------------------------------------------- Total Noninterest Expense $ 45,888 $ 41,102 $ 37,170 ==============================================================================================
INCOME TAX EXPENSE The Company recorded income tax expense of $16.8 million for 1999 compared to $11.6 million for 1998 and $11.9 million for 1997. The changes in income tax expense are due primarily to changes in the level of pretax income. CAPITAL AND LIQUIDITY Bank holding companies are required to maintain capital ratios in accordance with guidelines adopted by the Federal Reserve Board ("FRB"). The guidelines are commonly known as Risk-Based Capital Guidelines. On December 31, 1999, the Company exceeded all applicable capital requirements, having a total risk-based capital ratio of 11.94%, a Tier I risk-based capital ratio of 10.79%, and a leverage ratio of 7.58%. Liquidity management assures that adequate funds are available to meet deposit withdrawals, loan demand and maturing liabilities. Insufficient liquidity can result in higher costs of obtaining funds, while excessive liquidity can lead to a decline in earnings due to the cost of foregoing alternative investments. The ability to renew and acquire additional deposit liabilities is a major source of liquidity. The Company's principal sources of funds are primarily within the local markets of the Bank and consist of deposits, interest and principal payments on loans and securities, sales of loans and securities and borrowings. Cash and assets which are readily marketable, or which can be pledged, or which will mature in the near future provide asset liquidity. These include cash, federal funds sold, time deposits, U.S. Treasury, U.S. Government Agency and mortgage-backed securities. At December 31, 1999, the Company's liquidity ratio, defined as cash, U.S. Treasury, U.S. Government Agency, mortgage-backed securities, time deposits and federal funds sold as a percentage of deposits, was 30.3% compared to 33.0% at December 31, 1998 and 34.3% at December 31, 1997. PAGE 24 Liability liquidity is provided by access to core funding sources, principally various customers' interest-bearing and noninterest-bearing deposit accounts in the Company's trade area. The Company does not have nor does it solicit brokered deposits. Federal funds purchased and short-term borrowings are additional sources of liquidity. These sources of liquidity are short-term in nature, and are used, as necessary, to fund asset growth and meet short-term liquidity needs. During 1999, funds for $188.6 million of securities purchases and $179.0 million of net loan growth came from various sources, including a net increase in deposits of $138.8 million, $125.9 million in proceeds from maturing securities and $30.9 million of net income. The Company is dependent on dividend and interest income from the Bank and the sale of stock for its liquidity. Applicable Federal Reserve Board regulations provide that bank holding companies are permitted by regulatory authorities to pay cash dividends on their common or preferred stock if consolidated earnings and consolidated capital are within regulatory guidelines. EFFECTS OF INFLATION Financial institutions are impacted differently by inflation than are industrial companies. While industrial and manufacturing companies generally have significant investments in inventories and fixed assets, financial institutions ordinarily do not have such investments. As a result, financial institutions are generally in a better position than industrial companies to respond to inflationary trends by monitoring the spread between interest costs and interest income yields through adjustments of maturities and interest rates of assets and liabilities. In addition, inflation tends to increase demand for loans from financial institutions as industrial companies attempt to maintain a constant level of goods in inventory and assets. As consumers of goods and services, financial institutions are affected by inflation as prices increase, causing an increase in costs of salaries, employee benefits, occupancy expense and similar items. PAGE 25 ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISKS Market risk is the exposure to loss resulting from changes in interest rates, foreign currency exchange rates, commodity prices and equity prices. The primary market risk to which the Company is exposed is interest rate risk. Interest rate risk occurs when assets and liabilities reprice at different times as interest rates change. For example, if fixed-rate loans are funded with floating-rate deposits, the spread between loan and deposit rates will decline or turn negative if rates increase. Other types of market risk, such as foreign currency exchange rate risk and commodity price risk, do not arise in the normal course of the Company's business activities. The Company's interest rate risk arises from transactions entered into for purposes other than trading. The Company does not currently engage in trading activities or use derivative instruments to control interest rate risk. Even though such activities may be permitted with the approval of the Board of Directors, the Company does not intend to engage in such activities in the immediate future. Interest rate risk is managed within the funds management policy of the Company. The principal objectives of the funds management policy is to avoid fluctuating net interest margins and to maintain consistent growth of net interest income through periods of changing interest rates. The Board of Directors oversees implementation of strategies to control interest rate risk. The Company may take steps to alter its net sensitivity position by offering deposit and/or loan structures that tend to counter the natural rate risk profile of the Company. Funding positions are kept within predetermined limits designed to ensure that risk-taking is not excessive and that liquidity is properly managed. Because of the volatility of market rates and uncertainties, there can be no assurance of the effectiveness of management programs to achieve a targeted moderation of risk. In order to measure earnings and fair value sensitivity to changing rates, the Company utilizes three different measurement tools including static gap analysis, simulation earnings, and market value sensitivity (fair value at risk). The primary analytical tool used by the Company to quantify interest rate risk is a simulation model to project changes in net interest income that result from forecast changes in interest rates. This analysis estimates a percentage of change in net interest income from the stable rate scenario under scenarios of rising and falling market interest rates over a twelve month time horizon. The prime rate serves as a "driver" and is made to rise (or fall) evenly in 100 basis point increments over the 12-month forecast interval. These simulations incorporate assumptions regarding balance sheet growth and mix, pricing and the repricing and maturity characteristics of the existing and projected balance sheet. The following table summarizes the simulated change in net interest income over a 12-month period as of December 31, 1999 and December 31, 1998: INCREASE (DECREASE) IN NET INTEREST INCOME CHANGES IN INTEREST ESTIMATED NET ---------------------- RATES (BASIS POINTS) INTEREST INCOME AMOUNT PERCENT - --------------------------------------------------------------------- (Dollars in Thousands) December 31, 1999 +100 $99,136 $ 1,189 1.2% - 97,947 - - -100 95,954 (1,993) (2.0) December 31, 1998 +100 77,223 2,317 3.1 - 74,906 - - -100 69,940 (4,966) (6.6) - --------------------------------------------------------------------- All the measurements of risk described above are made based upon the Company's business mix and interest rate exposures at the particular point in time. An immediate 100 basis point decline in interest rates is a hypothetical rate scenario, used to calibrate risk, and does not necessarily represent management's current view of future market developments. Because of uncertainties as to the extent of customer behavior, refinance activity, absolute and relative loan and deposit pricing levels, competitor pricing and market behavior, product volumes and mix, and other unexpected changes in economic events impacting movements and volatility in market rates, there can be no assurance that simulation results are reliable indicators of net interest income under such conditions. The interest rate sensitivity gap represents the dollar amount of difference between rate sensitive assets and rate sensitive liabilities within a given time period ("GAP"). A GAP ratio is determined by dividing rate sensitive assets by rate sensitive liabilities. A ratio of 1.0 indicates a perfectly matched position, in which case the effect on net interest income due to interest rate movements would be zero. The following table summarizes interest rate sensitive assets and liabilities by their repricing dates at December 31, 1999: PAGE 26
0-3 4-6 7-12 1-5 OVER INTEREST RATE SENSITIVITY ANALYSIS MONTHS MONTHS MONTHS YEARS 5 YEARS TOTAL - ------------------------------------------------------------------------------------------------------------------------------------ (Dollars in Thousands) Loans $ 657,392 $ 70,301 $ 117,928 $483,825 $ 45,313 $1,374,759 Securities Available for Sale 961 1,001 6,225 202,374 315,377 525,938 Held to Maturity 5,424 3 106 1,737 740 8,010 Time Deposits 1,218 -- 1,683 2,176 -- 5,077 - ------------------------------------------------------------------------------------------------------------------------------------ Total Interest-Bearing Assets 664,995 71,305 125,942 690,112 361,430 1,913,784 - ------------------------------------------------------------------------------------------------------------------------------------ Savings 118,758 -- -- -- -- 118,758 Money Market Checking and Savings Accounts 377,458 -- -- -- -- 377,458 Time Deposits 516,633 235,532 204,569 146,445 85 1,103,264 Federal Funds Purchased and Securities Sold under Repurchase Agreements 34,608 -- -- -- -- 34,608 - ------------------------------------------------------------------------------------------------------------------------------------ Total Interest-Bearing Liabilities 1,047,457 235,532 204,569 146,445 85 1,634,088 - ------------------------------------------------------------------------------------------------------------------------------------ Rate Sensitivity GAP (1) $ (382,462) $(164,227) $ (78,627) $543,667 $361,345 $ 279,696 - ------------------------------------------------------------------------------------------------------------------------------------ Cumulative Rate Sensitivity GAP $ (382,462) $(546,689) $(625,316) $(81,649) $279,696 - ------------------------------------------------------------------------------------------------------------------------------------ Ratio of Cumulative Rate Sensitivity GAP to Total Assets (18.03)% (25.78)% (29.49)% Ratio of Cumulative Rate Sensitive Interest-Earning Assets to Cumulative Rate Sensitive Interest-Bearing Liabilities 0.63:1 0.57:1 0.58:1 - ------------------------------------------------------------------------------------------------------------------------------------
(1) Rate sensitive interest-earning assets less rate sensitive interest-bearing liabilities. YEAR 2000 The Year 2000 problem affects all companies. This problem is rooted in storage constraints of systems developed in the 1960's and 1970's. Many computer codes used only two-digit year codes, e.g., 98 instead of four digits, 1998. Thus, many computer applications interpret the year "00" as 1900 and accordingly need to be modified to process in the next century. Over the past two years, the Company formalized and implemented a comprehensive plan to address the Year 2000 problem which encompassed its in-house and third party computer systems, vendors, customers, and business partners. In the process, the Company expended approximately $472,000, including $188,000 expended during 1999. As of the date of this filing, the Company has not experienced any Year 2000 problems that have affected its operations, the realization of financial assets, or its results of operations. The Company believes that there is no remaining significant risk or exposure to the Company as a result of the Year 2000 issue. CURRENT ACCOUNTING ISSUES The Financial Accounting Standards Board's Statement No. 133 ("Statement 133"), "Accounting for Derivative Instruments and for Hedging Activities," requires companies to recognize all derivatives as either assets or liabilities in the statement of financial position and measure those instruments at fair value. Statement 133 requires that changes in fair value of a derivative be recognized currently in earnings unless specific hedge accounting criteria are met. Upon implementation of Statement 133, hedging relationships may be redesignated and securities held to maturity may be transferred to available for sale or trading. The Financial Accounting Standards Board's Statement No. 137, "Accounting for Derivative Instruments and Hedging Activities-Deferral of the Effective Date of Statement No. 133", deferred the effective date of Statement 133 to fiscal years beginning after June 15, 2000. The Company will adopt Statement 133 on January 1, 2001 and is evaluating the impact, if any, this statement may have on its future consolidated financial statements. FOURTH QUARTER RESULTS The fourth quarter net income for 1999 of $8.3 million or $0.57 per diluted common share reflected an increase of $1.2 million or 17.6% compared to $7.1 million or $0.48 per share for fourth quarter 1998. Results for fourth quarter 1999 reflected increases in net interest income, noninterest income and noninterest expense compared to fourth quarter 1998. Net interest income, on a tax-equivalent basis, of $23.4 million for fourth quarter 1999 increased $5.6 million or 31.5% compared to $17.8 million for fourth quarter 1998. The increase resulted from an increased volume of earning assets due to the 1999 acquisition of Harlingen Bancshares, Inc. and in part to the vitality of the Rio Grande Valley economy. Average earning PAGE 28 assets of $1.9 billion for fourth quarter 1999 increased by $338.1 million or 21.7% compared to $1.6 billion for fourth quarter 1998. Net interest margin for fourth quarter 1999 was 4.88% compared to 4.52% for fourth quarter 1998. The provision for loan losses charged against earnings in fourth quarter 1999 totaled $1.0 million compared to $650,000 for fourth quarter 1998, reflecting an increase of $360,000 or 55.4%. Net charge-offs (recoveries) of $954,000 for fourth quarter 1999 increased $985,000 or 3,177.4% compared to $(31,000) for fourth quarter 1998. Noninterest income of $4.8 million for fourth quarter 1999 increased $537,000 or 12.7% compared to $4.2 million for fourth quarter 1998. The increase is primarily due to an increase in service charges on deposit accounts and data processing fees and is partially offset by a decrease in realized gains on securities available for sale. Noninterest expense of $13.8 million for fourth quarter 1999 increased $3.4 million or 33.1% compared to $10.4 million for fourth quarter 1998, primarily due to an increase in salaries and employee benefits and other noninterest expense. The efficiency ratio of expense to total revenue averaged 48.81% for fourth quarter 1999 compared to 46.66% for fourth quarter 1998. The fourth quarter net income for 1999 was $8.3 million or $0.57 per diluted common share reflected an increase of $305,000 or 3.8% compared to $8.0 million or $0.55 per diluted common share for third quarter 1999. Operating results for fourth quarter 1999 reflected an increase in net interest income, provision for loan losses, noninterest income and noninterest expense from third quarter 1999. Net interest income, on a tax-equivalent basis, of $23.4 million for fourth quarter 1999 increased $2.7 million or 12.8% compared to $20.7 million for third quarter 1999, reflecting a continued increase in volume of earning assets. Average earning assets of $1.9 billion for fourth quarter 1999 increased $201,000 or 11.8% compared to $1.7 billion for third quarter 1999. The fourth quarter 1999 net interest margin of 4.88% compared to 4.84% in third quarter 1999. The provision for loan losses charged against earnings in fourth quarter 1999 of $1.0 million compared to $1.6 million for third quarter 1999, reflecting a decrease of $590,000 or 36.9%. Net charge-offs of $954,000 for fourth quarter 1999 increased $172,000 or 22.0% compared to net charge-offs of $782,000 for third quarter 1999. Noninterest income of $4.8 million for fourth quarter 1999 increased $476,000 or 11.1% compared to $4.3 million for third quarter 1999. The increase was primarily due to an increase in service charges due to deposit growth resulting from the Harlingen Bancshares, Inc. acquisition. Noninterest expense of $13.8 million for fourth quarter 1999 increased $3.1 million or 29.4% compared to $10.6 million for third quarter 1999. The increase was largely attributable to an increase in salaries and employee benefits resulting from the Harlingen Bancshares, Inc. acquisition during fourth quarter 1999, as well as officer bonuses paid during the fourth quarter. In addition, increases in other noninterest expense were attributable to increased business resulting from the Harlingen Bancshares, Inc. acquisition. The efficiency ratio of expense to total revenue averaged 48.81% for fourth quarter 1999 compared to 42.26% for third quarter 1999. The nonaccrual and renegotiated loans at December 31, 1999 of $8.3 million increased $717,000 or 9.4% compared to $7.6 million at September 30, 1999 primarily due to higher nonaccrual loan volumes. PAGE 28 ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA MANAGEMENT'S REPORT ON RESPONSIBILITY FOR FINANCIAL REPORTING To Our Shareholders The management of Texas Regional Bancshares, Inc. and its subsidiaries has the responsibility for preparing the accompanying consolidated financial statements and for their integrity and objectivity. The statements were prepared in accordance with generally accepted accounting principles. The consolidated financial statements include amounts that are based on management's best estimates and judgments. Management also prepared the other information in the annual report and is responsible for its accuracy and consistency with the consolidated financial statements. Management maintains a comprehensive system of internal control to assure the proper authorization of transactions, the safeguarding of assets, and the reliability of the financial records. The system of internal control provides for appropriate division of responsibility and is documented by written policies and procedures that are communicated to employees. The Company maintains a strong internal auditing program that independently assesses the effectiveness of the internal controls and recommends possible improvements thereto. Management believes that as of December 31, 1999, the Company maintains an effective system of internal control. The Audit Committee of the Board of Directors reviews the systems of internal control and financial reporting. The Committee meets and consults regularly with management, the internal auditors and the independent accountants to review the scope and results of their work. The accounting firm of KPMG LLP has performed an independent audit of the Company's consolidated financial statements. Management has made available to KPMG LLP all of the Company's financial records and related data, as well as the minutes of shareholders' and directors' meetings. Furthermore, management believes that all representations made to KPMG LLP during its audit were valid and appropriate. The firm's report appears below. Glen E. Roney R. T. Pigott, Jr. Chairman of the Board, President Executive Vice President & Chief Executive Officer & Chief Financial Officer January 28, 2000 INDEPENDENT AUDITORS' REPORT Board of Directors Texas Regional Bancshares, Inc. We have audited the accompanying consolidated balance sheets of Texas Regional Bancshares, Inc. and subsidiaries (the "Company") as of December 31, 1999 and 1998, the related consolidated statements of income and comprehensive income, changes in shareholders' equity and cash flows for each of the years in the three-year period ended December 31, 1999. These consolidated financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Texas Regional Bancshares, Inc. and subsidiaries at December 31, 1999 and 1998, and the results of their operations and their cash flows for each of the years in the three-year period ended December 31, 1999 in conformity with generally accepted accounting principles. KPMG LLP Houston, Texas January 28, 2000 PAGE 29 CONSOLIDATED FINANCIAL STATEMENTS
TEXAS REGIONAL BANCSHARES, INC. AND SUBSIDIARIES DECEMBER 31, CONSOLIDATED BALANCE SHEETS --------------------------- (DOLLARS IN THOUSANDS, EXCEPT SHARE DATA) 1999 1998 - ----------------------------------------------------------------------------------------------------------- Assets Cash and Due From Banks (Note 2) $ 66,819 $ 58,274 Time Deposits 5,077 553 Federal Funds Sold - 32,000 - ----------------------------------------------------------------------------------------------------------- Total Cash and Cash Equivalents 71,896 90,827 Securities Available for Sale, at Fair Value (Note 3) 525,938 455,936 Securities Held to Maturity, at Amortized Cost (Fair Value of $8,071 in 1999 and $14,650 in 1998) (Note 3) 8,010 14,331 Loans, Net of Unearned Discount of $5,154 in 1999 and $4,886 in 1998 1,374,759 1,089,505 Less: Allowance for Loan Losses (16,711) (13,236) - ----------------------------------------------------------------------------------------------------------- Net Loans (Note 4) 1,358,048 1,076,269 Premises and Equipment, Net (Note 5) 75,583 69,827 Accrued Interest Receivable 19,869 16,416 Other Real Estate 5,268 4,178 Goodwill and Identifiable Intangibles 44,796 26,894 Other Assets 11,282 7,654 - ----------------------------------------------------------------------------------------------------------- Total Assets $2,120,690 $1,762,332 =========================================================================================================== Liabilities Deposits Demand 285,866 $ 234,655 Savings 118,758 107,711 Money Market Checking and Savings 377,458 301,238 Time Deposits (Note 6) 1,103,264 919,338 - ----------------------------------------------------------------------------------------------------------- Total Deposits 1,885,346 1,562,942 Federal Funds Purchased and Securities Sold Under Repurchase Agreements (Note 7) 34,608 7,407 Accounts Payable and Accrued Liabilities 12,548 14,709 - ----------------------------------------------------------------------------------------------------------- Total Liabilities 1,932,502 1,585,058 - ----------------------------------------------------------------------------------------------------------- Commitments and Contingencies (Notes 11, 12, 18 and 19) Shareholders' Equity Preferred Stock; $1.00 Par Value, 10,000,000 Shares Authorized; None Issued and Outstanding (Note 9) - - Common Stock - Class A; $1.00 Par Value, 50,000,000 Shares Authorized; Issued and Outstanding 14,524,739 Shares in 1999 and 14,405,027 Shares in 1998 (Note 10) 14,525 14,405 Paid-In Capital 88,834 87,396 Retained Earnings (Note 16) 98,277 74,864 Accumulated Other Comprehensive Income (Loss) (Note 3) (13,448) 609 - ----------------------------------------------------------------------------------------------------------- Total Shareholders' Equity 188,188 177,274 - ----------------------------------------------------------------------------------------------------------- Total Liabilities and Shareholders' Equity $2,120,690 $1,762,332 =========================================================================================================== The accompanying notes are an integral part of the consolidated financial statements.
PAGE 30
TEXAS REGIONAL BANCSHARES, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF INCOME AND COMPREHENSIVE YEARS ENDED DECEMBER 31, INCOME ------------------------------------- (DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA) 1999 1998 1997 - ----------------------------------------------------------------------------------------------------------- Interest Income Loans, Including Fees $113,382 $97,064 $85,905 Securities Taxable 27,244 25,138 23,124 Tax-Exempt 2,101 1,542 1,507 Time Deposits 114 76 14 Federal Funds Sold 1,000 1,829 2,195 - ----------------------------------------------------------------------------------------------------------- Total Interest Income 143,841 125,649 112,745 - ----------------------------------------------------------------------------------------------------------- Interest Expense Deposits 61,495 58,097 50,566 Federal Funds Purchased and Securities Sold Under Repurchase Agreements 726 287 52 - ----------------------------------------------------------------------------------------------------------- Total Interest Expense 62,221 58,384 50,618 - ----------------------------------------------------------------------------------------------------------- Net Interest Income Before Provision for Loan Losses 81,620 67,265 62,127 Provision for Loan Losses (Note 4) 5,432 9,729 2,947 - ----------------------------------------------------------------------------------------------------------- Net Interest Income After Provision for Loan Losses 76,188 57,536 59,180 - ----------------------------------------------------------------------------------------------------------- Noninterest Income Service Charges on Deposit Accounts 9,799 8,025 7,009 Other Service Charges 2,286 2,122 1,606 Trust Service Fees 1,965 1,770 1,691 Net Realized Gains on Sales of Securities Available for Sale (Note 3) 1 2,910 734 Data Processing Service Fees 2,104 1,515 1,080 Other Noninterest Income 1,244 1,321 852 - ----------------------------------------------------------------------------------------------------------- Total Noninterest Income 17,399 17,663 12,972 - ----------------------------------------------------------------------------------------------------------- Noninterest Expense Salaries and Employee Benefits (Note 11) 22,378 18,526 17,692 Net Occupancy Expense 3,767 3,631 2,687 Equipment Expense 5,127 4,599 3,778 Other Real Estate Expense, Net 332 307 105 Amortization of Goodwill and Identifiable Intangibles 3,180 2,660 2,252 Impairment Loss (Note 5) - - 630 One Time Charge - Acquisitions - 728 - Other Noninterest Expense (Note 13) 11,104 10,651 10,026 - ----------------------------------------------------------------------------------------------------------- Total Noninterest Expense 45,888 41,102 37,170 - ----------------------------------------------------------------------------------------------------------- Income Before Income Tax Expense 47,699 34,097 34,982 Income Tax Expense (Note 8) 16,849 11,623 11,860 - ----------------------------------------------------------------------------------------------------------- Net Income 30,850 22,474 23,122 Other Comprehensive Income (Loss), Net of Tax Net Unrealized Gains (Losses) on Securities Available for Sale Net Unrealized Holding Gains (Losses) Arising During Period (14,056) 1,594 916 Less: Reclassification Adjustment for Net Realized Gains Included in Net Income 1 1,892 477 - ----------------------------------------------------------------------------------------------------------- Total Other Comprehensive Income (Loss) (14,057) (298) 439 - ----------------------------------------------------------------------------------------------------------- Comprehensive Income $16,793 $22,176 $23,561 =========================================================================================================== Net Income Per Common Share (Note 14) Basic $ 2.14 $ 1.56 $ 1.61 Diluted 2.11 1.54 1.58 ===========================================================================================================
The accompanying notes are an integral part of the consolidated financial statements. PAGE 31
ACCUMULATED TEXAS REGIONAL BANCSHARES, INC. AND SUBSIDIARIES OTHER CONSOLIDATED STATEMENTS OF CHANGES COMMON COMPREHENSIVE TOTAL IN SHAREHOLDERS' EQUITY STOCK - PAID-IN RETAINED INCOME SHAREHOLDERS' (DOLLARS IN THOUSANDS) CLASS A CAPITAL EARNINGS (LOSS) EQUITY - -------------------------------------------------------------------------------------------------------------------------- Balance, December 31, 1996 $ 9,993 $86,430 $46,225 $ 468 $143,116 Net Income - - 23,122 - 23,122 Net Change in Unrealized Gains (Losses) on Securities Available for Sale, Net of Tax And Reclassification Adjustment - - - 439 439 - -------------------------------------------------------------------------------------------------------------------------- Total Comprehensive Income - - 23,122 439 23,561 - -------------------------------------------------------------------------------------------------------------------------- Exercise of Stock Options, 35,814 Shares of Class A Common Stock 36 458 - - 494 Class A Common Stock Cash Dividends - $0.40 per share - - (5,809) - (5,809) Class A Common Stock 3 for 2 Split 4,367 - (4,371) - (4) - -------------------------------------------------------------------------------------------------------------------------- Balance, December 31, 1997 14,396 86,888 59,167 907 161,358 Net Income - - 22,474 - 22,474 Net Change in Unrealized Gains (Losses) on Securities Available for Sale, Net of Tax And Reclassification Adjustment - - - (298) (298) - -------------------------------------------------------------------------------------------------------------------------- Total Comprehensive Income - - 22,474 (298) 22,176 - -------------------------------------------------------------------------------------------------------------------------- Exercise of Stock Options, 8,099 Shares of Class A Common Stock 9 64 - - 73 Tax Effect of Nonqualified Stock Options Exercised - 444 - - 444 Class A Common Stock Cash Dividends - $0.47 per share - - (6,769) - (6,769) Cash Dividends Paid on Fractional Shares - - (8) - (8) - -------------------------------------------------------------------------------------------------------------------------- Balance, December 31, 1998 14,405 87,396 74,864 609 177,274 Net Income - - 30,850 - 30,850 Net Change in Unrealized Gains (Losses) on Securities Available for Sale, Net of Tax And Reclassification Adjustment - - - (14,057) (14,057) - -------------------------------------------------------------------------------------------------------------------------- Total Comprehensive Income - - 30,850 (14,057) 16,793 - -------------------------------------------------------------------------------------------------------------------------- Exercise of Stock Options, 119,743 Shares of Class A Common Stock 120 846 - - 966 Tax Effect of Nonqualified Stock Options Exercised - 592 - - 592 Class A Common Stock Cash Dividends - $0.515 per share - - (7,437) - (7,437) - -------------------------------------------------------------------------------------------------------------------------- Balance, December 31, 1999 $14,525 $88,834 $98,277 $(13,448) $188,188 ==========================================================================================================================
The accompanying notes are an integral part of the consolidated financial statements. PAGE 32
TEXAS REGIONAL BANCSHARES, INC. AND SUBSIDIARIES YEAR ENDED DECEMBER 31, CONSOLIDATED STATEMENTS OF CASH FLOWS ------------------------------------- (DOLLARS IN THOUSANDS) 1999 1998 1997 - --------------------------------------------------------------------------------------------------------------------- Cash Flows from Operating Activities Net Income $ 30,850 $ 22,474 $ 23,122 Adjustments to Reconcile Net Income to Net Cash Provided by Operating Activities Depreciation, Amortization and Accretion, Net 8,917 3,149 3,360 Provision for Loan Losses 5,432 9,729 2,947 Provision for Estimated Losses on Other Real Estate and Other Assets 549 49 70 Gain on Sale of Securities Available for Sale (1) (2,910) (734) (Gain) Loss on Sale of Other Assets 76 57 (13) Gain on Sale of Other Real Estate (171) (257) (113) Gain on Sale of Premises and Equipment (41) (218) (2) Impairment Loss -- -- 630 Change in Assets and Liabilities, Net of Effects from Merger Decrease in Deferred Income Tax Asset 2,366 -- -- Decrease in Deferred Income Tax Liability (4,487) (571) (1,001) (Increase) Decrease in Accrued Interest Receivable and Other Assets (3,300) 1,554 17,339 Increase (Decrease) in Accounts Payable and Accrued Liabilities 1,596 175 1,587 - --------------------------------------------------------------------------------------------------------------------- Net Cash Provided by Operating Activities 41,786 33,231 47,192 - --------------------------------------------------------------------------------------------------------------------- Cash Flows from Investing Activities Proceeds from Sales of Securities Available for Sale 27,040 378,411 105,989 Proceeds from Maturing Securities Available for Sale 119,638 274,617 47,450 Purchases of Securities Available for Sale (188,575) (719,971) (269,458) Proceeds from Maturing Securities Held to Maturity 6,300 37,306 91,003 Purchases of Securities Held to Maturity -- -- (19,453) Proceeds from Sale of Loans 1,431 2,104 46 Purchases of Loans (4,020) (176) (1,051) Loan Originations and Advances, Net (178,951) (127,627) (138,400) Recoveries of Charged-Off Loans 605 1,066 759 Proceeds from Sale of Premises and Equipment 221 554 2 Purchases of Premises and Equipment (5,875) (19,410) (16,304) Proceeds from Sale of Other Real Estate 1,212 1,355 1,019 Proceeds from Sale of Other Assets 675 716 277 Net Cash Provided By (Used in) Mergers (133) 5,160 -- - --------------------------------------------------------------------------------------------------------------------- Net Cash Used in Investing Activities (220,432) (165,895) (198,121) - --------------------------------------------------------------------------------------------------------------------- Cash Flows from Financing Activities Net Increase in Demand Deposits, Savings, Money Market Checking and Savings Accounts 16,479 62,728 2,606 Net Increase in Time Deposits 122,274 80,973 144,542 Net Increase in Federal Funds Purchased And Securities Sold Under Repurchase Agreements 27,201 4,782 1,169 Cash Dividends Paid on Class A Common Stock (7,205) (6,410) (5,242) Cash Dividends Paid on Fractional Shares -- (8) -- Proceeds from the Exercise of Stock Options 966 73 494 - --------------------------------------------------------------------------------------------------------------------- Net Cash Provided by Financing Activities 159,715 142,138 143,569 - --------------------------------------------------------------------------------------------------------------------- Increase (Decrease) in Cash and Cash Equivalents (18,931) 9,474 (7,360) Cash and Cash Equivalents at Beginning of Period 90,827 81,353 88,713 - --------------------------------------------------------------------------------------------------------------------- Cash and Cash Equivalents at End of Period $ 71,896 $ 90,827 $ 81,353 =====================================================================================================================
(Continued) PAGE 33
TEXAS REGIONAL BANCSHARES, INC. AND SUBSIDIARIES YEAR ENDED DECEMBER 31, CONSOLIDATED STATEMENTS OF CASH FLOWS -------------------------------- (DOLLARS IN THOUSANDS) 1999 1998 1997 - --------------------------------------------------------------------------------------------------------------------- Supplemental Disclosures of Cash Flow Information Interest Paid $ 61,321 $ 58,385 $ 49,747 Income Taxes Paid 18,270 12,003 12,660 Supplemental Schedule of Noncash Investing and Financing Activities Foreclosure and Repossession in Partial Satisfaction of Loans Receivable 5,354 7,915 3,538 Financing Provided For Sales of Other Real Estate 2,577 4,088 -- Net Increase in Dividends Payable 232 359 567 The Company acquired Harlingen Bancshares, Inc. and its subsidiary, Harlingen National Bank, on October 1, 1999. Assets acquired and liabilities assumed are as follows: Fair Value of Assets Acquired 204,627 -- -- Cash Paid 32,248 -- -- Liabilities Assumed 185,076 -- -- The Company acquired Raymondville Bancorp, Inc. and its subsidiary, Bank of Texas, on February 19, 1998. Assets acquired and liabilities assumed are as follows: Fair Value of Assets Acquired -- 63,944 -- Cash Paid -- 9,600 -- Liabilities Assumed -- 58,512 -- ====================================================================================================================
The accompanying notes are an integral part of the consolidated financial statements. PAGE 34 TEXAS REGIONAL BANCSHARES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 1999, 1998 AND 1997 NOTE 1: SUMMARY OF SIGNIFICANT ACCOUNTING PRINCIPLES Texas Regional Bancshares, Inc. (the "Parent" or "Corporation") and subsidiaries (collectively, the "Company") is headquartered in McAllen, Texas. The Company provides a broad array of customary banking services and operates twenty-six banking offices throughout the Rio Grande Valley at December 31, 1999. The accounting and reporting policies followed by the Company conform to generally accepted accounting principles and to general practices within the banking industry. PRINCIPLES OF CONSOLIDATION The consolidated financial statements include the accounts of Texas Regional Bancshares, Inc. and its wholly owned subsidiaries, Texas Regional Delaware, Inc. and Texas State Bank (the "Bank"). The Company eliminates all significant intercompany transactions and balances in consolidation. The Corporation accounts for investments in the subsidiaries on the equity method in the Parent's financial statements. USE OF ESTIMATES The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosures of contingent assets and liabilities at the date of the consolidated financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from these estimates. TRUST ASSETS Assets held by the trust department of the Bank in fiduciary or agency capacities are not assets of the Company and are not included in the consolidated balance sheets. CASH AND CASH EQUIVALENTS For purposes of the consolidated statements of cash flows, cash and cash equivalents include cash on hand, amounts due from banks and investments with original maturities of three months or less. SECURITIES Securities that management has both the positive intent and ability to hold to maturity are classified as securities held to maturity and are carried at cost, adjusted for amortization of premium or accretion of discount using the interest method. Securities that may be sold prior to maturity for asset/liability management purposes, or that may be sold in response to changes in interest rates, to changes in prepayment risk, to increase regulatory capital or other similar factors, are classified as securities available for sale and carried at fair value with any adjustments to fair value reported in shareholders' equity as a component of accumulated other comprehensive income (loss), net of tax. Declines in the fair value of individual held to maturity and available for sale securities below their cost that are other than temporary result in write-downs of the individual securities to their fair value. The related write-downs are included in earnings as realized losses. Securities purchased for trading purchases are held on the trading portfolio at fair value, with changes in fair value included in noninterest income. Interest and dividends on securities, including the amortization of premiums and the accretion of discounts, are reported in interest and dividends on securities using the interest method. Gains and losses on the sale of securities are recorded on the trade date and are calculated using the specific identification method. LOANS Loans that management has the intent and ability to hold for the foreseeable future or until maturity or pay-off generally are reported at their outstanding unpaid principal balances adjusted for charge-offs, the allowance for loan losses, and any deferred fees or costs on originated loans or unamortized premiums or discounts on purchased loans. The Company recognizes interest income on discounted loans on the sum-of-the-months-digits method, which approximates the interest method. Interest income accrues on the unpaid principal balance of other loans. Interest income includes discounts and premiums amortized using the interest method. Loan origination fees, net of certain direct origination costs, are deferred and recognized as an adjustment of the yield (interest method). PAGE 35 NONACCRUAL LOANS The Company discontinues the accrual of interest on loans at the time the loan is 90 days delinquent unless the credit is well secured and in process of collection. In all cases, loans must be placed on nonaccrual or charged-off at an earlier date if collection of principal or interest is considered doubtful. All interest accrued but not collected for loans that are placed on nonaccrual or charged off is reversed against interest income. The interest on these loans is accounted for on the cash basis or cost-recovery method, until qualifying for a return to accrual status. Loans are returned to accrual status when all the principal and interest amounts contractually due are reasonably assured of repayment within a reasonable period and when the borrower has demonstrated payment performance history. ALLOWANCE FOR LOAN LOSSES The Company has established the allowance for loan losses through provisions for loan losses charged against income. The Company charges off portions of loans deemed uncollectible against the allowance for loan losses, and credits subsequent recoveries, if any, to the allowance. The allowance for loan losses related to impaired loans that are identified for evaluation is based on discounted cash flows using the loan's initial effective interest rate, or for collateral-dependent loans, the fair value, less selling costs, of the collateral. By the time a loan becomes probable of foreclosure, the Company charges it down to fair value, less estimated cost to sell. Management's periodic evaluation of the adequacy of the allowance is based on the Company's past loan loss experience, known and inherent risks in the portfolio, adverse situations that may affect the borrower's ability to repay (including the timing of future payments), the estimated value of any underlying collateral, composition of the loan portfolio, and current economic conditions. This evaluation is inherently subjective, as it requires material estimates that are susceptible to significant change including the amounts and timing of future cash flows expected to be received on impaired loans. Management believes that the allowance for loan losses at December 31, 1999 adequately reflects the risks in the loan portfolio. Various regulatory agencies, as an integral part of their examination process, periodically review the Company's allowance for loan losses. Such agencies may require the Company to recognize additions to the allowance based on their judgements of information available to them at the time of their examination. FORECLOSED ASSETS Foreclosed assets, which includes other foreclosed assets included in other assets, include properties acquired through foreclosure in full or partial satisfaction of the related loan. The Company records foreclosed assets initially at the lower of fair value, net of estimated selling costs, or cost, at the date of foreclosure. After foreclosure, the Company carries the assets at the lower of (1) cost or (2) fair value, less estimated costs to sell, based on valuations periodically performed by management. Revenue and expenses from operations and changes in the valuation allowance are included in noninterest expense. INCOME TAXES Deferred income tax assets and liabilities are determined using the asset and liability (or balance sheet) method. Under this method, the net deferred tax asset or liability is determined based on the tax effects of the differences between the book and tax basis of the various balance sheet assets and liabilities and gives current recognition to changes in tax rates and laws. The Company files a consolidated federal income tax return with its subsidiaries. PREMISES AND EQUIPMENT Premises and equipment are stated at cost, net of accumulated depreciation and amortization. Depreciable assets are depreciated over their estimated useful lives. For financial reporting, depreciation is computed using the straight-line method; in computing federal income tax, both the straight-line and accelerated methods are used. Maintenance and repairs which do not extend the life of premises and equipment are charged to noninterest expense. GOODWILL AND IDENTIFIABLE INTANGIBLES Goodwill represents the excess of the purchase price over the estimated fair value of identifiable net assets associated with acquisition transactions. The Company amortizes goodwill on a straight-line basis over 15 years and identifiable intangibles on a straight-line basis over their estimated periods of benefit. The Company reviews its intangible assets periodically for other-than-temporary impairment. If such impairment is indicated, recoverability of the asset is assessed based on expected undiscounted net cash flows. PAGE 36 STOCK OPTION PLAN Prior to January 1, 1996, the Company accounted for its stock compensation programs in accordance with the provisions of Accounting Principles Board ("APB") Opinion No. 25, "Accounting for Stock Issued to Employees," and related interpretations. As such, compensation expense would be recorded on the date of grant only if the current market price of the underlying stock exceeded the exercise price. On January 1, 1996, the Company adopted the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 123, ("Statement 123") "Accounting for Stock-Based Compensation," which permits entities to recognize as expense over the vesting period the fair value of all stock-based awards on the date of grant. Alternatively, Statement 123 also allows entities to continue to apply the provisions of APB Opinion No. 25 and provide pro forma net income and pro forma earnings per share disclosures for employee stock option grants made in 1995 and future years as if the fair-value-based method defined in Statement 123 had been applied. The Company has elected to continue to apply the provisions of APB Opinion No. 25 and provide the pro forma disclosure provisions of Statement 123. EARNINGS PER COMMON SHARE COMPUTATIONS In February 1997, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 128, ("Statement 128") "Earnings per Share." Statement 128 specifies the computation, presentation, and disclosure requirements for earnings per share (EPS) for entities with publicly held common stock or potential common stock. Statement 128 replaces primary EPS and fully diluted EPS on the face of the income statement for all entities with complex capital structures and requires a reconciliation of the basic EPS computation to the diluted EPS. Basic EPS is calculated by dividing net income available to common shareholders, by the weighted average number of common shares outstanding. The computation of diluted EPS assumes the issuance of common shares for all dilutive potential common shares outstanding during the reporting period. The dilutive effect of stock options are considered in earnings per share calculations if dilutive, using the treasury stock method. Statement 128 is effective for financial statements issued for periods ending after December 15, 1997, including interim periods. The Company adopted Statement 128 in 1997. IMPAIRMENT OF LONG-LIVED ASSETS Long-lived assets and certain identifiable intangibles are reviewed by the Company for impairment whenever events or changes indicate that the carrying amount of an asset may not be recoverable. DISCLOSURES ABOUT SEGMENTS OF AN ENTERPRISE AND RELATED INFORMATION In June 1997, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 131, ("Statement 131") "Disclosures about Segments of an Enterprise and Related Information." Statement 131 establishes standards for the way that public business enterprises report information about operation segments in annual financial statements and requires that those enterprises report selected information about operation segments in interim financial reports issued to shareholders. Statement 131 also establishes standards for related disclosures about products and services, geographic areas, and major customers. Statement 131 is effective for financial statements for periods beginning after December 15, 1997. The Company did not identify any reportable operating segments based on the requirements of Statement 131. ACCOUNTING FOR DERIVATIVE INSTRUMENTS AND FOR HEDGING ACTIVITIES The Financial Accounting Standards Board's Statement No. 133 ("Statement 133"), "Accounting for Derivative Instruments and for Hedging Activities," was issued in June 1998. Statement 133 requires companies to recognize all derivatives as either assets or liabilities in the statement of financial condition and measure those instruments at fair value. Statement 133 requires that changes in fair value of a derivative be recognized currently in earnings unless specific hedge accounting criteria are met. The Financial Accounting Standards Board's Statement No. 137 ("Statement 137"), "Accounting for Derivative Instruments and Hedging Activities-Deferral of the Effective Date of FASB Statement No. 133", deferred the effective date of Statement 133 to fiscal years beginning after June 15, 2000. The Company will adopt Statement 133 on January 1, 2001 and is evaluating the impact, if any, this statement may have on its future consolidated financial statements. RECLASSIFICATION Certain amounts in the prior year's presentation have been reclassified to conform to the current presentation. These reclassifications have no effect on previously reported net income. NOTE 2: CASH AND DUE FROM BANKS The Federal Reserve Bank requires the Bank to maintain average reserve balances for certain deposit balances. There were no required reserves as of December 31, 1999 and 1998. PAGE 37 NOTE 3: SECURITIES An analysis of securities available for sale as of December 31, 1999 follows:
GROSS GROSS ESTIMATED AMORTIZED UNREALIZED UNREALIZED FAIR (DOLLARS IN THOUSANDS) COST GAINS LOSSES VALUE - -------------------------------------------------------------------------------------------------- U.S. Treasury $ 2,999 $ 5 $ -- $ 3,004 U.S. Government Agency 359,558 18 (14,975) 344,601 Mortgage-Backed 131,699 5 (4,073) 127,631 States and Political Subdivisions 48,198 164 (1,992) 46,370 Other 4,332 -- -- 4,332 - -------------------------------------------------------------------------------------------------- Total $546,786 $ 192 $(21,040) $525,938 ==================================================================================================
The carrying amount and estimated fair value of securities held to maturity as of December 31, 1999 follow:
GROSS GROSS ESTIMATED AMORTIZED UNREALIZED UNREALIZED FAIR (DOLLARS IN THOUSANDS) COST GAINS LOSSES VALUE - -------------------------------------------------------------------------------------------------- U.S. Treasury $5,001 $ 17 -- $5,018 States and Political Subdivisions 3,009 50 (6) 3,053 - -------------------------------------------------------------------------------------------------- Total $8,010 $ 67 $ (6) $8,071 ==================================================================================================
An analysis of securities available for sale as of December 31, 1998 follows:
GROSS GROSS ESTIMATED AMORTIZED UNREALIZED UNREALIZED FAIR (DOLLARS IN THOUSANDS) COST GAINS LOSSES VALUE - -------------------------------------------------------------------------------------------------- U.S. Government Agency $313,647 $ 1,289 $ (966) $313,970 Mortgage-Backed 101,670 206 (511) 101,365 States and Political Subdivisions 36,112 994 (118) 36,988 Other 3,562 51 -- 3,613 - -------------------------------------------------------------------------------------------------- Total $454,991 $ 2,540 $ (1,595) $455,936 ==================================================================================================
The carrying amount and estimated fair value of securities held to maturity as of December 31, 1998 follow:
GROSS GROSS ESTIMATED AMORTIZED UNREALIZED UNREALIZED FAIR (DOLLARS IN THOUSANDS) COST GAINS LOSSES VALUE - -------------------------------------------------------------------------------------------------- U.S. Treasury $10,013 $ 173 $ -- $10,186 States and Political Subdivisions 4,318 146 -- 4,464 - -------------------------------------------------------------------------------------------------- Total $14,331 $ 319 $ -- $14,650 ==================================================================================================
Net unrealized holding gains (losses), net of related tax effect, of $(13.4) million and $609,000 at December 31, 1999 and 1998, respectively, on securities available for sale are reported as a separate component of shareholders' equity as accumulated other comprehensive income. Proceeds from the sale of securities available for sale portfolio totaled $27.0 million, $378.4 million and $106.0 million in 1999, 1998, and 1997. Gross realized gains and gross realized losses on sales of securities available for sale were $3,000 and $2,000, respectively, in 1999, $3.0 million and $93,000, respectively, in 1998 and $781,000 and $47,000 respectively, in 1997. There were no sales of securities held to maturity in 1999, 1998 or 1997. The scheduled maturities of securities available for sale and securities held to maturity at December 31, 1999 follow. The remaining contractual maturities for mortgage-backed securities were allocated assuming no prepayments. Actual maturities will differ from contractual maturities because borrowers may have the right to call or prepay obligations with or without call or prepayment penalties. PAGE 38
SECURITIES AVAILABLE SECURITIES HELD FOR SALE TO MATURITY ------------------------------------------------------------ ESTIMATED ESTIMATED MATURITY IN YEARS AMORTIZED MARKET AMORTIZED MARKET (DOLLARS IN THOUSANDS) COST VALUE COST VALUE - -------------------------------------------------------------------------------------------- 1 Year or Less $ 8,192 $ 8,187 $5,533 $5,538 1 to 5 Years 206,042 202,374 1,737 1,771 5 to 10 Years 211,751 199,121 740 762 Over 10 Years 120,801 116,256 - - - ------------------------------------------------------------------------------------------- Total $546,786 $525,938 $8,010 $8,071 ===========================================================================================
Securities with carrying values of $516.8 million at December 31, 1999 and $351.7 million at December 31, 1998 were pledged to secure public funds, trust assets on deposit and for other purposes required or permitted by law. NOTE 4: LOANS AND ALLOWANCE FOR LOAN LOSSES Loans consisted of the following: DECEMBER 31, ------------------------- (DOLLARS IN THOUSANDS) 1999 1998 - ------------------------------------------------------------------------- Commercial $ 391,855 $ 311,966 Commercial Tax-Exempt 22,160 22,155 - ------------------------------------------------------------------------- Total Commercial Loans 414,015 334,121 Agricultural 59,437 52,302 - ------------------------------------------------------------------------- Real Estate Construction 101,376 66,018 Commercial Mortgage 456,507 354,134 Agricultural Mortgage 38,256 34,440 1-4 Family Mortgage 160,786 128,945 - ------------------------------------------------------------------------- Total Real Estate 756,925 583,537 Consumer 144,382 119,545 - ------------------------------------------------------------------------- Total Loans $1,374,759 $1,089,505 ========================================================================= In the ordinary course of business, the Company's subsidiary bank makes loans to its officers and directors, including entities related to those individuals. These loans are made on substantially the same terms and conditions as those prevailing at the time for comparable transactions with other persons and do not involve more than the normal risk of collectibility or present other unfavorable features. As of December 31, 1999 and 1998, loans outstanding to directors, officers and their affiliates were approximately $6.4 million and $5.8 million, respectively. The activity in the allowance for loan losses follows:
DECEMBER 31, ------------------------------------------ (DOLLARS IN THOUSANDS) 1999 1998 1997 - -------------------------------------------------------------------------------------------- Balance at Beginning of Year $ 13,236 $ 11,291 $ 10,806 Balance from Acquisitions 1,576 308 -- Provision for Loan Losses 5,432 9,729 2,947 Loans Charged Off (4,138) (9,158) (3,221) Recoveries of Loans Previously Charged Off 605 1,066 759 - -------------------------------------------------------------------------------------------- Balance at End of Year $ 16,711 $ 13,236 $ 11,291 ============================================================================================
The Company identifies loans to be reported as impaired when such loans are on nonaccrual status or are considered troubled debt restructurings due to the granting of a below-market rate of interest or a partial forgiveness of indebtedness on an existing loan. The balance of impaired loans was $8.3 million at December 31, 1999 and $10.4 million at December 31, 1998. The total allowance for loan losses related to these loans was $1.6 million and $1.4 million on December 31, 1999 and 1998, respectively. At December 31, 1999 and 1998, the Company had $112,000 and $35,000, respectively, in impaired loans for which there was no related allowance for loan losses. The average recorded investment in impaired loans during 1999 and 1998 was $7.6 million and $11.2 million, respectively. Interest income on impaired loans of $156,000, $232,000 and $238,000 was recognized for cash payments received during 1999, 1998 and 1997, respectively. If interest on these impaired loans had been PAGE 39 accrued at the original contractual rates, interest income would have been increased by approximately $1.9 million, $2.2 million and $1.6 million for the years ended December 31, 1999, 1998 and 1997, respectively. NOTE 5: PREMISES AND EQUIPMENT A summary of premises and equipment and related accumulated depreciation and amortization follows:
DECEMBER 31, ESTIMATED -------------------- (DOLLARS IN THOUSANDS) USEFUL LIVES 1999 1998 - ---------------------------------------------------------------------------------------------- Land $11,567 $10,373 Buildings and Leasehold Improvements 2-40 Years 61,559 56,569 Construction in Progress 1,327 168 Furniture and Equipment 3-10 Years 25,142 22,896 - ---------------------------------------------------------------------------------------------- Subtotal 99,595 90,006 Less: Accumulated Depreciation and Amortization (24,012) (20,179) - ---------------------------------------------------------------------------------------------- Total $75,583 $69,827 ==============================================================================================
Depreciation and amortization expense for the years ended December 31, 1999, 1998 and 1997 was approximately $5.3 million, $4.4 million and $3.4 million, respectively. The Company recorded an impairment loss of $630,000 during the three months ended June 30, 1997 to reflect the impairment of an existing bank building. During 1998, construction of a new corporate headquarters building in McAllen, Texas was completed adjacent to this site and the existing building was razed to provide additional parking. The amount of the impairment loss was the book value of the building at June 30, 1997. NOTE 6: TIME DEPOSITS Time deposits of $100,000 or more totaled $687.4 million and $545.7 million at December 31, 1999 and 1998, respectively. Interest expense for the years ended December 31, 1999, 1998 and 1997 on time deposits of $100,000 or more was approximately $32.4 million, $28.7 million and $23.3 million, respectively. The maturities of time deposits as of December 31, 1999 follows: (DOLLARS IN THOUSANDS) - ------------------------------------------------------ 1 Year or Less $ 956,734 1 to 2 Years 117,828 2 to 3 Years 15,976 3 to 4 Years 7,779 4 to 5 Years 4,862 After 5 Years 85 - ------------------------------------------------------ Total $1,103,264 ====================================================== PAGE 40 NOTE 7: FEDERAL FUNDS PURCHASED AND SECURITIES SOLD UNDER REPURCHASE AGREEMENTS The following table summarizes selected information regarding federal funds purchased and securities sold under repurchase agreements:
DECEMBER 31, ------------------------------------- (DOLLARS IN THOUSANDS) 1999 1998 1997 - -------------------------------------------------------------------------------- Balance at End of Year $34,608 $7,407 $1,801 Rate on Balance at End of Year 5.45% 4.52% 5.98% Average Daily Balance $15,377 $5,772 $980 Average Interest Rate 4.72% 4.97% 5.27% Maximum Month-End Balance $46,162 $14,835 $11,100 ================================================================================
Securities sold under agreements to repurchase are comprised of customer deposit agreements with maturities ranging from overnight to six months. These obligations are not federally insured but are collateralized by a security interest in various securities. These pledged securities are segregated and maintained by a third party bank. NOTE 8: INCOME TAX The components of income tax expense consisted of the following:
YEAR ENDED DECEMBER 31, ------------------------------------------ (DOLLARS IN THOUSANDS) 1999 1998 1997 - ---------------------------------------------------------------------------------------- Current Income Tax Expense Federal $ 18,314 $ 12,091 $ 12,559 State 656 107 320 - ---------------------------------------------------------------------------------------- Total Current Income Tax Expense 18,970 12,198 12,879 - ---------------------------------------------------------------------------------------- Deferred Income Tax Benefit Federal (2,047) (572) (999) State (74) (3) (20) - ---------------------------------------------------------------------------------------- Total Deferred Income Tax Benefit (2,121) (575) (1,019) - ---------------------------------------------------------------------------------------- Total Income Tax Expense $ 16,849 $ 11,623 $ 11,860 ========================================================================================
Following is a reconciliation between the amount of reported income tax expense and the amount computed by multiplying the income before tax by the federal statutory tax rate:
YEAR ENDED DECEMBER 31, ------------------------------------------------------------ 1999 1998 1997 ----------------- ----------------- ------------------- (DOLLARS IN THOUSANDS) AMOUNT RATE AMOUNT RATE AMOUNT RATE - ------------------------------------------------------------------------------------------------------ Tax at Statutory Rate $16,695 35% $11,934 35% $12,244 35% Additions (Reductions) Tax-Exempt Interest (898) (2) (828) (2) (860) (3) State Earned Surplus Tax, Net of Federal Income Tax Effect 378 1 67 - 221 1 Goodwill Amoritzation 486 1 404 1 344 1 Change in Anticipated State Income Tax Rate 135 - - - - - Other, Net 53 - 46 - (89) - - ------------------------------------------------------------------------------------------------------ Total Income Tax Expense $16,849 35% $11,623 34% $11,860 34% ======================================================================================================
PAGE 41 The net deferred tax asset (liability) included in the accompanying consolidated balance sheets is comprised of the following deferred tax assets and liabilities.
DECEMBER 31, ------------------------- (DOLLARS IN THOUSANDS) 1999 1998 - ----------------------------------------------------------------------------------------- Deferred Tax Liability Premises and Equipment $ 5,627 $ 5,039 Identifiable Intangibles 5,473 3,170 Loan Origination Costs 626 571 Other Real Estate 252 -- Unrealized Gain on Securities Available for Sale -- 335 Other 180 208 - ----------------------------------------------------------------------------------------- Total Deferred Tax Liability 12,158 9,323 - ----------------------------------------------------------------------------------------- Deferred Tax Asset Unrealized Loss on Securities Available for Sale 7,402 -- Allowance for Loan Losses 5,491 3,868 Deferred Compensation 504 462 State Income Taxes 241 38 Other Foreclosed Assets 194 1 Loans 425 61 Other Real Estate -- 28 Other 148 78 - ----------------------------------------------------------------------------------------- Total Deferred Tax Asset Before Valuation Allowance 14,405 4,536 Valuation Allowance (36) (35) - ----------------------------------------------------------------------------------------- Net Deferred Tax Asset (Liability) $ 2,211 $ (4,822) =========================================================================================
For the years ended December 31, 1999 and December 31, 1998, the deferred tax liability results primarily from the use of accelerated methods of depreciation of equipment for tax purposes and the amortization of core deposits for financial statement purposes. The deferred tax asset results from differences in the bad debts written-off for financial statement purposes and the amount allowed under tax law for both years ended December 31, 1999 and 1998. For 1999, the deferred tax asset also includes the net unrealized gain (loss) on securities available for sale. Based upon the level of historical taxable income and projections for future taxable income over the periods which the deferred tax assets are deductible, management believes it is more likely than not the Company will realize the benefits of these deductible differences, net of the existing valuation allowances at December 31, 1999. The Company's conclusion that it is "more likely than not" that the deferred tax assets will be realized is based on federal taxable income of $67.4 million in the carry back period, as well as a history of growth in earnings and the prospects for continued growth. The amount of the deferred tax asset considered realizable, however, could be reduced in the near term if estimates of future taxable income during the carryforward period are reduced. NOTE 9: PREFERRED STOCK The Corporation has 10.0 million authorized shares of $1 par value preferred stock. The articles of incorporation of the Corporation grant discretion to the Board of Directors to establish series of preferred stock with such rights, preferences and limitations as may be determined by resolution of the Board. No shares of preferred stock are currently outstanding. NOTE 10: COMMON STOCK The Corporation has 50.0 million authorized shares of $1 par value common stock. At December 31, 1999, 1998 and 1997, the number of common shares outstanding are 14,524,739, 14,405,027 and 14,396,928, respectively. NOTE 11: EMPLOYEE BENEFITS The Company has an Employee Stock Ownership Plan (with section 401(k) provisions) (the "KSOP") covering substantially all of their employees. Employer contributions to the KSOP are discretionary, and as such, determined at the sole discretion of the Board of Directors. The KSOP covers employees who have completed twelve consecutive months of credited service, as defined in the plan, and attained age 21. A participant's account balance will be fully vested after six years of credited service. Contribution expense, which includes employer matching for the years ended December 31, 1999, 1998 and 1997 was $962,000, $469,000 and $652,000, respectively. The Company acquired existing 401(k) plans in connection with its acquisitions of the Bank of Texas and Harlingen Bancshares, Inc. The plans are restricted to pre-acquisition participation by qualified employees. PAGE 42 The Company has granted stock options providing for the purchase of Class A Common shares by certain key employees under five separate option plans approved by the shareholders. The following discussion concerning stock option plans has been restated to retroactively give effect for the three-for-two stock split declared and distributed by the Corporation during the third quarter of 1997. The 1985 Nonstatutory Stock Option Plan ("the 1985 NSO Plan") authorized the award of stock options for 190,076 shares to the chief executive officer at a price determined by a committee of directors on the grant date. Options to acquire 90,076 shares at a weighted average exercise price of $8.00 per share were outstanding and exercisable under 1985 NSO Plan expiring on May 10, 2000 at December 31, 1999. The 1985 Incentive Stock Option Plan ("the 1985 ISO Plan") provided for the grant of options for 190,076 shares at an exercise price of fair market value on the grant date to certain key employees of the Company. Options to acquire 3,822 shares at a weighted average exercise price of $8.00 per share were outstanding and exercisable under 1985 ISO Plan expiring on May 10, 2000 at December 31, 1999. The 1995 Nonstatutory Stock Option Plan ("the 1995 NSO Plan") authorized the award of options up to an aggregate maximum of 135,000 shares at an exercise price of fair market value on the grant date. The Company granted options in 1996 with contractual terms of seven years and a vesting period of four years. Options to acquire 120,875 shares at a weighted average exercise price of $11.50 per share were outstanding and exercisable, under 1995 NSO Plan expiring on July 1, 2002 at December 31, 1999. The 1997 Nonstatutory Stock Option Plan ("the 1997 NSO Plan") authorized the award of options up to an aggregate maximum of 125,000 shares at an exercise price of fair market value on the grant date. The Company granted options in 1998 with contractual terms of approximately five years and a vesting period of approximately three years. Options to acquire 125,000 shares at a weighted average exercise price of $33.56 per share were outstanding, with 60,988 exercisable, under the 1997 NSO Plan expiring on July 1, 2003 at December 31, 1999. The 1997 Incentive Stock Option Plan ("the 1997 ISO Plan") authorized the award of options up to an aggregate maximum of 100,000 shares at an exercise price of fair market value on the grant date. The Company granted options in 1998 with contractual terms of approximately five years and a vesting period of approximately three years. Options to acquire 92,864 shares at a weighted average exercise price of $33.68 per share were outstanding, with 45,694 exercisable, under the 1997 ISO Plan expiring on July 1, 2003 at December 31, 1999. The Company applies APB Opinion 25 and related interpretations in accounting for its plans. Accordingly, no compensation cost has been recognized for its fixed stock option plans. Had compensation cost for the Company's stock-based compensation plans been determined based on the fair value at the grant dates for awards under those plans consistent with the method of FASB Statement 123 adopted in 1995, the Company's net income and earnings per share would have been reduced to the pro forma amounts indicated below:
YEAR ENDED DECEMBER 31, ------------------------------------ (DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA) 1999 1998 1997 - --------------------------------------------------------------------------------------- Net Income As Reported $ 30,850 $ 22,474 23,122 Pro Forma 30,490 21,917 23,036 - --------------------------------------------------------------------------------------- Basic Earnings Per Share As Reported 2.14 1.56 1.61 Pro Forma 2.12 1.52 1.60 - --------------------------------------------------------------------------------------- Diluted Earnings Per Share As Reported 2.11 1.54 1.58 Pro Forma 2.08 1.50 1.58 =======================================================================================
The fair value of options at date of grant was estimated using the Black-Scholes option pricing model with the following weighted-average assumptions: DECEMBER 31, --------------------------- 1999 1998 1997 - ------------------------------------------------------------- Expected Life in Years - 3.46 - Interest Rate - 5.52% - Volatility - 30.00 - Dividend Yield - 1.49 - - ------------------------------------------------------------- No options were granted during the years ended December 31, 1999 and 1997. Pro forma net income reflects options granted in 1998 and 1995. PAGE 43 A summary of the status of the Company's five fixed option plans as of December 31, 1999, 1998 and 1997, and changes during the years ending on those dates is presented below:
YEAR ENDED DECEMBER 31, --------------------------------------------------------------------------------- 1999 1998 1997 --------------------------------------------------------------------------------- WEIGHTED WEIGHTED WEIGHTED SHARES AVERAGE SHARES AVERAGE SHARES AVERAGE UNDERLYING EXERCISE UNDERLYING EXERCISE UNDERLYING EXERCISE FIXED OPTIONS OPTIONS PRICE OPTIONS PRICE OPTIONS PRICE - --------------------------------------------------------------------------------------------------------------------------------- Outstanding at Beginning of Year 557,516 $19.07 343,927 $ 9.29 391,324 $9.21 Granted -- -- 234,000 33.63 -- -- Exercised (119,743) 8.07 (8,099) 9.05 (47,397) 8.58 Forfeited (5,136) 33.88 (12,312) 31.49 -- -- - --------------------------------------------------------------------------------------------------------------------------------- Outstanding at End of Year 432,637 $21.88 557,516 $19.07 343,927 $9.29 - --------------------------------------------------------------------------------------------------------------------------------- Options Exercisable at End of Year 321,455 $17.86 356,079 $12.82 276,428 $8.75 Options Available for Grant at End of Year 8,448 3,312 -- Weighted Average Fair Value of Options Granted During the Year -- $ 8.71 -- - ---------------------------------------------------------------------------------------------------------------------------------
The following table summarizes information about fixed stock options outstanding at December 31, 1999.
OPTIONS OUTSTANDING OPTIONS EXERCISABLE ----------------------------------------- --------------------------- WEIGHTED WEIGHTED EXERCISABLE WEIGHTED SHARES AVERAGE AVERAGE SHARES AVERAGE UNDERLYING REMAINING EXERCISE UNDERLYING EXERCISE RANGE OF EXERCISE PRICES OPTIONS LIFE (YEARS) PRICE OPTIONS PRICE - ----------------------------------------------------------------------------------------------------- $ 8.00 93,898 0.4 $8.00 93,898 $8.00 11.50 120,875 2.5 11.50 120,875 11.50 27.38 9,000 3.5 27.38 2,250 27.38 33.88 208,864 3.5 33.88 104,432 33.88 - ----------------------------------------------------------------------------------------------------- $8.00 to $33.88 432,637 2.5 $21.88 321,455 $17.86 =====================================================================================================
Effective as of December 14, 1993, the Company adopted a Deferred Compensation Plan for the benefit of Glen E. Roney, Chief Executive Officer of the Company. The Deferred Compensation Plan provides for a retirement benefit payable to Mr. Roney (or his designated beneficiary or his estate if Mr. Roney dies prior to payment of the full amount of deferred compensation) of $100,000 per year commencing October 29, 2002, and continuing annually thereafter for fourteen years. In the event payments are to commence after October 30, 2002, the Company shall pay to Employee on the Late Retirement Date a lump sum equal to the amount of money that would have been paid to Employee had payments commenced on October 30, 2002 (the "Catch-Up Amount"), and in addition, the Company shall pay to Employee $100,000 per year commencing on October 30 of the year next following the Late Retirement Date and continuing regularly on the same calendar day of each year thereafter, (including the Catch-Up Amount and all other payments) the aggregate sum of $1,500,000; and on the Late Retirement Date, the Company shall pay Employee an amount intended to compensate for Employee's lost earnings potential on the Catch-Up Amount. If Mr. Roney dies prior to commencement of the retirement benefit, payments would commence immediately and be paid to his designated beneficiary or his estate. The Company also adopted the Trust Under Glen E. Roney Deferred Compensation Plan, in the form prescribed by applicable regulations adopted by the Internal Revenue Service for nonqualified deferred compensation plans. Among other things, the Plan and Trust provide for an initial deposit into the Trust by the Company and subsequent deposits at the discretion of the Board of Directors, and further provide for full funding of the amount necessary to discharge the retirement benefit in the event of a change of control, as that term is defined in the Trust. With the consummation of the Mergers the Company acquired four existing separate deferred compensation plans for the benefit of certain Texas State Bank employees. The plans provide for retirement benefits to be paid to the specific employee (or a designated beneficiary or estate if death occurs prior to payment of the full amount of deferred compensation) on reaching age 65. One plan entered into on December 10, 1963, commenced payments of approximately $13,000 each year on January 4, 1988, continuing annually thereafter through June 2003. A second plan, entered into on September 1, 1979, provides for payments of approximately $13,000 each year which was scheduled to commence on April 1, 1990, continuing annually thereafter through June 2005; however, the employee elected to receive an amount less than that provided for in the plan over a longer period of time. The third plan provides for a retirement benefit payable of $50,000 per year commencing in March 1999 and continuing annually thereafter for 20 years. The fourth plan provides for a retirement benefit payable of $13,350 each year beginning March 15, 1995 and continuing annually thereafter for fourteen years. The Company has incurred deferred compensation expense of $152,000, $152,000 and $130,000 for the years ended December 31, 1999, 1998 and 1997, respectively, related to the five deferred compensation plans previously discussed. PAGE 44 The Bank owns and is the beneficiary of five life insurance policies on the former employees covered by the deferred compensation plans. The life insurance policies' face values are amounts equal to the total benefits paid under the plans. NOTE 12: COMMITMENTS AND CONTINGENCIES In the normal course of business, the Company enters into various transactions which, in accordance with generally accepted accounting principles, are not included on the consolidated balance sheets. These transactions are referred to as "off-balance sheet commitments." The Company enters into these transactions to meet the financing needs of its customers. These transactions include commitments to extend credit and letters of credit which involve elements of credit risk in excess of the amounts recognized in the consolidated balance sheets. The Company's exposure to credit loss in the event of nonperformance by the other party to these financial instruments is represented by the contractual notional amount of those instruments. The Company attempts to minimize its exposure to loss under these commitments by subjecting them to the same credit approval and monitoring procedures as its other credit facilities. The Company enters into contractual commitments to extend credit, normally with fixed expiration dates or termination clauses, at specified rates and for specific purposes. Customers use credit commitments to ensure that funds will be available for working capital purposes, for capital expenditures and to ensure access to funds at specified terms and conditions. Substantially all of the Company's commitments to extend credit are contingent on customers maintaining specific credit standards at the time of loan funding. Management assesses the credit risk associated with certain commitments to extend credit in determining the level of the allowance for possible loan losses. Letters of credit are written for conditional commitments issued by the Company to guarantee the performance of a customer to a third party. The Company's policies generally require that letters of credit arrangements contain security and debt covenants similar to those contained in loan agreements. At December 31, 1999, the Company had outstanding commitments to extend credit of approximately $193.4 million and standby letters of credit of approximately $17.2 million. The Company was obligated under noncancelable leases for premises and equipment with terms, including renewal options, ranging from one to twenty years. Minimum future lease payments on operating leases, with terms of one year or more, as of December 31, 1999 are as follows: OFFICE (DOLLARS IN THOUSANDS) SPACE EQUIPMENT TOTAL - ------------------------------------------------------------------------ 2000 $36 $ 56 $ 92 2001 36 12 48 2002 27 9 36 2003 - 7 7 2004 - 4 4 Thereafter - 18 18 - ------------------------------------------------------------------------ Total Minimum Lease Payments $99 $106 $205 ======================================================================== In the normal course of business, the Company also leases space in buildings it owns. Minimum future rentals from buildings owned as of December 31, 1999 are as follows: (DOLLARS IN THOUSANDS) TOTAL - ----------------------------------------------------------- 2000 $1,005 2001 934 2002 698 2003 553 2004 297 Thereafter 73 - ----------------------------------------------------------- Total Minimum Future Rentals $3,560 =========================================================== The Company is a defendant in various legal proceedings arising in connection with its ordinary course of business. In the opinion of management, the financial position of the Company will not be materially affected by the final outcome of these legal proceedings. PAGE 45 NOTE 13: OTHER NONINTEREST EXPENSE Other noninterest expense consisted of the following: YEAR ENDED DECEMBER 31, ---------------------------------- (DOLLARS IN THOUSANDS) 1999 1998 1997 - ----------------------------------------------------------------------------- Advertising and Public Relations $1,495 $1,536 $1,372 Data Processing and Check Clearing 1,480 1,183 1,120 Directors Fees 344 333 515 Franchise Tax 334 600 533 Insurance 400 430 327 FDIC Insurance 191 166 150 Legal 663 1,255 1,050 Professional 1,136 638 775 Postage, Delivery and Freight 916 816 689 Printing, Stationery and Supplies 1,447 1,325 1,056 Telephone 628 534 433 Other Losses 759 68 837 Miscellaneous Expense 1,311 1,767 1,169 - ----------------------------------------------------------------------------- Total $11,104 $10,651 $10,026 - ----------------------------------------------------------------------------- NOTE 14: EARNINGS PER COMMON SHARE COMPUTATIONS Basic earnings per share was computed by dividing net income available to common shareholders by the weighted average number of common stock outstanding during the year, retroactively adjusted for stock splits effected as a stock dividend. Diluted earnings per share was computed by dividing net income by the weighted average number of common stock and common stock equivalents outstanding during the year, retroactively adjusted for stock splits effected as a stock dividend. The diluted earnings per share computations include the effects of common stock equivalents applicable to stock option contracts. The number of shares outstanding and related earnings per share amounts have been restated to retroactively give effect for the three-for-two stock split declared and distributed by the Corporation during the third quarter of 1997. The table below presents a reconciliation of basic and diluted earnings per share computations.
YEAR ENDED DECEMBER 31, -------------------------------------------- (DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA) 1999 1998 1997 - ----------------------------------------------------------------------------------------------------- Net Income Available to Common Shareholders $ 30,850 $ 22,474 $ 23,122 - ----------------------------------------------------------------------------------------------------- Weighted Average Number of Common Shares Outstanding Used in Basic EPS Calculation 14,410,164 14,401,977 14,371,438 Add Assumed Exercise of Outstanding Stock Options as Adjustments for Dilutive Securities 215,637 225,679 231,566 - ----------------------------------------------------------------------------------------------------- Weighted Average Number of Common Shares Outstanding Used in Diluted EPS Calculations 14,625,801 14,627,656 14,603,004 - ----------------------------------------------------------------------------------------------------- Basic EPS $2.14 $1.56 $1.61 Diluted EPS 2.11 1.54 1.58 - -----------------------------------------------------------------------------------------------------
PAGE 46 NOTE 15: TEXAS REGIONAL BANCSHARES, INC. (PARENT ONLY) CONDENSED FINANCIAL STATEMENTS DECEMBER 31, CONDENSED BALANCE SHEETS ------------------------ (DOLLARS IN THOUSANDS) 1999 1998 - ------------------------------------------------------------------------------ Assets Cash in Subsidiary Bank $ 9,085 $ 5,473 - ------------------------------------------------------------------------------ Total Cash and Cash Equivalents 9,085 5,473 Investments in Consolidated Subsidiaries 180,621 173,766 Furniture and Equipment 90 45 Other Assets 491 33 - ------------------------------------------------------------------------------ Total Assets $190,287 $179,317 - ------------------------------------------------------------------------------ Liabilities Accounts Payable and Accrued Liabilities $ 65 $ 242 Dividends Payable 2,034 1,801 - ------------------------------------------------------------------------------ Total Liabilities 2,099 2,043 Shareholders' Equity 188,188 177,274 - ------------------------------------------------------------------------------ Total Liabilities and Shareholders' Equity $190,287 $179,317 ==============================================================================
YEARS ENDED DECEMBER 31, CONDENSED STATEMENTS OF INCOME ---------------------------------------- (DOLLARS IN THOUSANDS) 1999 1998 1997 - ---------------------------------------------------------------------------------------------- Income Interest Income $ - $ - $ 451 Dividends Received 10,206 10,439 17 - ---------------------------------------------------------------------------------------------- Total Income 10,206 10,439 468 - ---------------------------------------------------------------------------------------------- Expense Occupancy Expense 12 5 6 Equipment Expense 17 17 17 Directors Fees 118 103 113 Franchise Tax - 189 198 Legal and Professional 106 97 55 Printing, Stationery and Supplies 133 109 96 Organizational Expense - 65 3 Other 29 76 48 - ---------------------------------------------------------------------------------------------- Total Expense 415 661 536 - ---------------------------------------------------------------------------------------------- Income (Loss) Before Income Tax Expense and Equity In Undistributed Net Income of Subsidiaries 9,791 9,778 (68) Income Tax Benefit (147) (239) (49) - ---------------------------------------------------------------------------------------------- Income (Loss) Before Equity in Undistributed Net Income of Subsidiaries 9,938 10,017 (19) Equity in Undistributed Net Income of Subsidiaries 20,912 12,457 23,141 - ---------------------------------------------------------------------------------------------- Net Income $30,850 $22,474 $23,122 - ----------------------------------------------------------------------------------------------
PAGE 47
YEARS ENDED DECEMBER 31, CONDENSED STATEMENTS OF CASH FLOWS ----------------------------------------------- (DOLLARS IN THOUSANDS) 1999 1998 1997 - ------------------------------------------------------------------------------------------------------------------------ Cash Flows from Operating Activities Net Income $ 30,850 $ 22,474 $ 23,122 Adjustment to Reconcile Net Income to Net Cash Provided by (Used in) Operating Activities Depreciation and Amortization 14 11 14 Undistributed Net Income of Subsidiaries (20,912) (12,457) (23,141) Decrease in Other Assets 21 65 16 Increase (Decrease) in Income Taxes Payable 592 (12) 6 (Increase) Decrease in Deferred Income Taxes (479) 34 2 Increase (Decrease) in Accounts Payable and Accrued Liabilities (177) 12 3 - ----------------------------------------------------------------------------------------------------------------------- Net Cash Provided by Operating Activities 9,909 10,127 22 - ----------------------------------------------------------------------------------------------------------------------- Cash Flows from Investing Activities Investment in Subsidiaries -- (8,000) (250) Purchase of Fixed Assets (59) -- -- - ----------------------------------------------------------------------------------------------------------------------- Net Cash Used in Investing Activities (59) (8,000) (250) - ----------------------------------------------------------------------------------------------------------------------- Cash Flows from Financing Activities Cash Dividends Paid on Common Stock (7,204) (6,421) (4,236) Proceeds from Exercise of Stock Options 966 73 494 - ----------------------------------------------------------------------------------------------------------------------- Net Cash Used in Financing Activities (6,238) (6,348) (3,742) - ----------------------------------------------------------------------------------------------------------------------- Net Increase (Decrease) in Cash and Cash Equivalents 3,612 (4,221) (3,970) Cash and Cash Equivalents at Beginning of Year 5,473 9,694 13,664 - ----------------------------------------------------------------------------------------------------------------------- Cash and Cash Equivalents at End of Year $ 9,085 $ 5,473 $ 9,694 ======================================================================================================================= Supplemental Disclosures of Cash Flow Information Income Taxes Paid $ 18,271 $ 12,003 $ 12,660 =======================================================================================================================
NOTE 16: RESTRICTIONS ON RETAINED EARNINGS The Bank is subject to certain restrictions on the amount of dividends that it may declare without prior regulatory approval. The amount of retained earnings in the Bank at December 31, 1999 was $36.5 million. On December 31, 1999, the aggregate amount of dividends, which legally could be paid to the Corporation without prior approval of various regulatory agencies, totaled $21.3 million. NOTE 17: REGULATORY MATTERS The Company is subject to various regulatory capital requirements administered by the federal banking agencies. Failure to meet minimum capital requirements can initiate certain mandatory, and possibly additional discretionary, actions by regulators that, if undertaken, could have a direct material effect on the Company's financial statements. Under capital adequacy guidelines and the regulatory framework for prompt corrective action, the Company must meet specific capital guidelines that involve quantitative measures of the Company's assets, liabilities, and certain off-balance-sheet items as calculated under regulatory accounting practices. The Company's capital amounts and classification are also subject to qualitative judgments by the regulators about components, risk weightings, and other factors. Quantitative measures established by regulation to ensure capital adequacy require the Company to maintain minimum amounts and ratios (set forth in the table below) of Total and Tier I capital (as defined in the regulations) to risk-weighted assets (as defined), and of Tier I capital (as defined) to average assets (as defined). Management believes that the Company meets all capital adequacy requirements to which it is subject at December 31, 1999. At December 31, 1999, the most recent notification from the Federal Reserve Board categorized the Company as well capitalized under the regulatory framework for prompt corrective action. To be categorized as well capitalized, the Company must maintain minimum total risk-based, Tier I risk-based, and Tier I leverage ratios as set forth in the table. There are no conditions or events since that notification that management believes have changed the institution's category. The Company's actual capital amounts and ratios are also presented in the table. PAGE 48
TO BE WELL CAPITALIZED FOR CAPITAL UNDER PROMPT ACTUAL ADEQUACY PURPOSES ACTION PROVISIONS ------------------------- ------------------------- --------------------------- (DOLLARS IN THOUSANDS) AMOUNT RATIO AMOUNT RATIO AMOUNT RATIO - ---------------------------------------------------------------------------------------------------------------------------------- December 31, 1999 Total Capital (to risk weighted assets) $173,551 11.94% $116,313 8.00% $145,392 10.00% Tier 1 Capital (to risk weighted assets) 156,840 10.79 58,157 4.00 87,235 6.00 Tier 1 Capital (to average assets) 156,840 7.58 82,777 4.00 103,471 5.00 December 31, 1998 Total Capital (to risk weighted assets) $163,007 14.04% $ 92,884 8.00% $116,105 10.00% Tier 1 Capital (to risk weighted assets) 149,771 12.90 46,442 4.00 69,663 6.00 Tier 1 Capital (to average assets) 149,771 8.84 67,772 4.00 84,715 5.00 ==================================================================================================================================
NOTE 18: FAIR VALUE OF FINANCIAL INSTRUMENTS DISCLOSURES ABOUT FAIR VALUE OF FINANCIAL INSTRUMENTS Statement of Financial Accounting Standards No. 107 ("Statement 107"), "Disclosures about Fair Value of Financial Instruments", requires that the Company disclose estimated fair values for its financial instruments. Fair value estimates, methods and assumptions are set forth below for the Company's financial instruments. SECURITIES For securities held, estimated fair value equals quoted market price, if available. If a quoted market price is not available, fair value is estimated using quoted market prices for a similar security. Securities not classified as held to maturity or trading are classified as available for sale and measured at fair value in the consolidated balance sheets with unrealized holding gains and losses reported as a separate component of shareholders' equity until realized. The following table presents the amortized cost and estimated fair value of securities classified as available for sale:
DECEMBER 31, ------------------------------------------------------------ 1999 1998 ------------------------------- ---------------------------- AMORTIZED ESTIMATED AMORTIZED ESTIMATED (DOLLARS IN THOUSANDS) COST FAIR VALUE COST FAIR VALUE - ---------------------------------------------------------------------------------------------------- U.S. Treasury $ 2,999 $ 3,004 $ -- $ -- U.S. Government Agency 359,558 344,601 313,647 313,970 Mortgage-Backed 131,699 127,631 101,670 101,365 States and Political Subdivisions 48,198 46,370 36,112 36,988 Other 4,332 4,332 3,562 3,613 - ---------------------------------------------------------------------------------------------------- Total $546,786 $525,938 $454,991 $455,936 ====================================================================================================
The following table presents the carrying value and estimated fair value of securities classified as held to maturity:
DECEMBER 31, ----------------------------------------------------------- 1999 1998 ------------------------------ ---------------------------- AMORTIZED ESTIMATED AMORTIZED ESTIMATED (DOLLARS IN THOUSANDS) COST FAIR VALUE COST FAIR VALUE - --------------------------------------------------------------------------------------------------- U.S. Treasury $5,001 $5,018 $10,013 $10,186 States and Political Subdivisions 3,009 3,053 4,318 4,464 - --------------------------------------------------------------------------------------------------- Total $8,010 $8,071 $ 14,331 $14,650 ===================================================================================================
PAGE 49 LOANS The Company does not consider its loan portfolio to have the homogeneous categories of loans for which the fair value could be estimated by using quoted market prices for securities backed by similar loans. Therefore, the fair value of all loans is estimated by discounting future cash flows using the current rates at which similar loans would be made to borrowers with similar credit ratings for the same remaining maturities. Assumptions regarding credit risk, cash flows and discount rates are judgmentally determined using available market information and specific borrower information. The following table presents information for loans:
DECEMBER 31, ------------------------------------------------------------------------------ 1999 1998 ------------------------------------ ------------------------------------- CARRYING AVERAGE ESTIMATED CARRYING AVERAGE ESTIMATED (DOLLARS IN THOUSANDS) AMOUNT YIELD FAIR VALUE AMOUNT YIELD FAIR VALUE - -------------------------------------------------------------------------------------------------------------- Commercial and Agricultural Adjustable $ 258,776 9.43% $ 257,555 $ 237,920 8.85% $ 236,818 Fixed 214,676 9.61 213,762 148,503 9.64 150,643 Real Estate Adjustable 285,398 9.50 282,540 232,857 9.15 231,413 Fixed 471,527 9.61 470,450 350,680 9.89 357,376 Consumer 144,382 11.33 143,331 119,545 11.49 120,081 - -------------------------------------------------------------------------------------------------------------- Total Loans, Net of Unearned Discount $1,374,759 9.73% $1,367,638 $1,089,505 9.65% $1,096,331 ==============================================================================================================
DEPOSIT LIABILITIES The fair value of demand deposits, savings accounts and certain money market deposits is the amount payable on demand at the reporting date. The fair value of certificates of deposit is based on the discounted value of contractual cash flows. The discount rate is estimated using the rates currently offered for deposits of similar remaining maturities. The following table presents the carrying value and estimated fair value of deposit liabilities at December 31, 1999 and December 31, 1998:
DECEMBER 31, ---------------------------------------------------------- 1999 1998 ----------------------------- ---------------------------- CARRYING ESTIMATED CARRYING ESTIMATED (DOLLARS IN THOUSANDS) AMOUNT FAIR VALUE AMOUNT FAIR VALUE - -------------------------------------------------------------------------------------------------------- Demand $ 285,866 $ 285,866 $ 234,655 $ 234,655 Savings 118,758 118,758 107,711 107,711 Money Market Checking and Savings 377,459 377,459 301,238 301,238 Time Deposits 1,103,263 1,105,414 919,338 926,256 - -------------------------------------------------------------------------------------------------------- Total Deposits $1,885,346 $1,887,497 $1,562,942 $1,569,860 ========================================================================================================
The fair value estimates above do not include the benefit that results from the low-cost funding provided by the deposit liabilities compared to the cost of borrowing funds in the market. The Company has not attempted to determine the amount of increase in net assets that would result from the benefit of considering the low-cost funding provided by deposit liabilities. COMMITMENTS TO EXTEND CREDIT, STANDBY LETTERS OF CREDIT AND FINANCIAL GUARANTEES WRITTEN These financial instruments are not sold or traded, and estimated fair values are not readily available. The carrying amount of commitments to extend credit and standby letters of credit is the net unamortized deferred cost or income arising from these unrecognized financial instruments. The estimated fair value of these commitments is considered to be the carrying value. Financial guarantees written consist of obligations for credit cards issued to certain customers. Substantially all of the liability for financial guarantees written is collateralized by deposits pledged to the Company. The following table presents the contract amount, carrying amount and estimated fair value for commitments to extend credit, standby letters of credit and financial guarantees written at December 31, 1999 and 1998: PAGE 50
DECEMBER 31, ------------------------------------------------------------------------------------- 1999 1998 ------------------------------------------ --------------------------------------- CONTRACT CARRYING ESTIMATED CONTRACT CARRYING ESTIMATED (DOLLARS IN THOUSANDS) AMOUNT AMOUNT FAIR VALUE AMOUNT AMOUNT FAIR VALUE - ----------------------------------------------------------------------------------------------------------------------------- Commitments to Extend Credit $191,591 $(2,482) $(2,482) $154,155 $(2,209) $(2,209) Standby Letters of Credit 17,223 2 2 11,722 5 5 Financial Guarantees Written 1,822 - - 1,846 - - - -----------------------------------------------------------------------------------------------------------------------------
LIMITATIONS Fair value estimates are made at a specific point in time, based on relevant market information and information about the financial instrument. These estimates do not reflect any premium or discount that could result from offering for sale at one time the Company's entire holdings of a particular financial instrument. Because no market exists for a significant portion of the Company's financial instruments, fair value estimates are based on judgments regarding future expected loss experience, current economic conditions, risk characteristics of various financial instruments and other factors. These estimates are subjective in nature and involve uncertainties and matters of significant judgment and therefore cannot be determined with precision. Changes in assumptions could significantly affect the estimates. Fair value estimates are based on existing on-and off-balance sheet financial instruments without attempting to estimate the value of anticipated future business and the value of assets and liabilities that are not considered financial instruments. For example, the Company has a substantial trust department that contributes net fee income annually. The trust department is not considered a financial instrument, and its value has not been incorporated into the fair value estimates. Other significant assets and liabilities that are not considered financial assets or liabilities include the deferred tax liabilities, premises, equipment and goodwill. In addition, the tax ramifications related to the realization of the unrealized gains and losses can have a significant effect on fair value estimates and have not been considered in many of the estimates. NOTE 19: ACQUISITION ACTIVITY On February 19, 1998, the Company completed the acquisition of three bank holding companies and their three subsidiary banks. The acquisition of Brownsville Bancshares, Inc. and its subsidiary, Brownsville National Bank, includes two banking locations in Brownsville, Cameron County, Texas, with assets of approximately $100.1 million, equity of $12.1 million, loans of $42.6 million, and deposits of $87.2 million. This acquisition was achieved by the exchange of 984,806 shares of Company stock for all of the outstanding shares of Brownsville Bancshares, Inc. and cancellation of outstanding stock options. Brownsville National Bank merged with and into Texas State Bank. The second acquisition was TB&T Bancshares, Inc. and its subsidiary, Texas Bank and Trust of Brownsville, Cameron County, Texas. Texas Bank and Trust of Brownsville had assets of approximately $44.9 million, equity of $4.1 million, loans of $21.9 million, and deposits of $40.3 million. This acquisition was achieved by exchange of 301,483 shares of Company stock for all of the outstanding shares of TB&T Bancshares, Inc. Texas Bank and Trust of Brownsville merged with and into Texas State Bank. The third acquisition was Raymondville Bancorp, Inc. and its subsidiary, Bank of Texas. Bank of Texas is headquartered in Raymondville, Willacy County, Texas, with one additional banking facility in Brownsville, Texas. The shareholder of Raymondville Bancorp, Inc. received cash consideration of $9.6 million in this acquisition, and the Company paid $100,000 in consideration for a covenant not to compete. The Company discharged approximately $330,000 of existing Raymondville Bancorp, Inc. indebtedness. Bank of Texas had assets of approximately $63.7 million, equity of $5.1 million, loans of $25.5 million, and deposits of $56.5 million. Bank of Texas merged with and into Texas State Bank. The acquisition of Brownsville Bancshares, Inc. and TB&T Bancshares, Inc. are accounted for under the pooling-of-interests method of accounting, and as such, the enclosed financial information has been restated for all periods presented to include the results of operations and financial position of these acquired entities. The acquisition of Raymondville Bancorp, Inc. was accounted for under the purchase method of accounting; therefore, the results of operations are included in the consolidated financial statements from the date of acquisition, February 19, 1998. The One Time Charge - Acquisitions of $728,000 primarily included professional fees and computer conversion costs related to effecting business combinations accounted for by the pooling-of-interests method. On October 1, 1999, the Company completed the acquisition of Harlingen Bancshares, Inc. and its subsidiary, Harlingen National Bank. The acquisition included its main office and two banking locations in Harlingen, Cameron County, Texas; one banking location in La Feria, Cameron County, Texas; one banking location in Palm Valley, Cameron County, Texas, and one banking location in Mercedes, Hidalgo County, Texas. The shareholders of Harlingen Bancshares, Inc. received aggregate consideration of $34.0 million, including $1.0 million deposited into escrow pending the outcome of certain contingencies. Simultaneously, the shareholders of Harlingen Bancshares, Inc. and their affiliates purchased certain assets of PAGE 51 Harlingen Bancshares, Inc. with a book value totaling $2.4 million. The Company also agreed to pay $1.0 million over a term of ten years in consideration of a covenant not to compete from certain principals of Harlingen Bancshares, Inc. Harlingen National Bank had assets of approximately $204.2 million, loans of $110.7 million, deposits of $183.6 million and equity of $19.9 million. The Company accounted for the acquisition under the purchase method of accounting; therefore, the results of operations are included in the consolidated financial statements from the date of acquisition, October 1, 1999. PAGE 52
SELECTED FINANCIAL DATA TEXAS REGIONAL BANCSHARES, INC. AND SUBSIDIARIES CONDENSED QUARTERLY INCOME STATEMENTS TAXABLE-EQUIVALENT BASIS FOURTH THIRD SECOND FIRST (DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA) QUARTER QUARTER QUARTER QUARTER - --------------------------------------------------------------------------------------------------------- 1999 - --------------------------------------------------------------------------------------------------------- Interest Income $40,945 $36,138 $34,965 $33,362 Interest Expense 17,577 15,420 14,862 14,362 - --------------------------------------------------------------------------------------------------------- Net Interest Income 23,368 20,718 20,103 19,000 Provision for Loan Losses 1,010 1,600 1,499 1,323 Noninterest Income 4,761 4,285 4,197 4,156 Noninterest Expense 13,782 10,648 10,919 10,539 - --------------------------------------------------------------------------------------------------------- Income Before Taxable-Equivalent Adjustment and Income Tax Expense 13,337 12,755 11,882 11,294 Tax-Equivalent Adjustment 450 376 374 369 Applicable Income Tax Expense 4,568 4,365 4,043 3,873 - --------------------------------------------------------------------------------------------------------- Net Income $ 8,319 $ 8,014 $7,465 $7,052 ========================================================================================================= Net Income Per Common Share Basic $ 0.58 $ 0.56 $ 0.52 $ 0.49 Diluted 0.57 0.55 0.51 0.48 ========================================================================================================= 1998 - --------------------------------------------------------------------------------------------------------- Interest Income $32,911 $31,499 $31,792 $30,915 Interest Expense 15,141 15,238 14,038 13,967 - --------------------------------------------------------------------------------------------------------- Net Interest Income 17,770 16,261 17,754 16,948 Provision for Loan Losses 650 7,157 981 941 Noninterest Income 4,224 5,854 3,623 3,962 Noninterest Expense 10,355 10,582 9,638 10,527 - --------------------------------------------------------------------------------------------------------- Income Before Taxable-Equivalent Adjustment and Income Tax Expense 10,989 4,376 10,758 9,442 Tax-Equivalent Adjustment 369 372 374 353 Applicable Income Tax Expense 3,546 1,207 3,624 3,246 - --------------------------------------------------------------------------------------------------------- Net Income $7,074 $2,797 $6,760 $5,843 ========================================================================================================= Net Income Per Common Share Basic $ 0.49 $ 0.19 $ 0.47 $ 0.41 Diluted 0.48 0.19 0.46 0.40 =========================================================================================================
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE. None. PART III ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT The information regarding directors and executive officers called for by Item 10 is incorporated herein by reference to the sections entitled "Election of Directors" and "Executive Officers" in the Company's Proxy Statement for its Annual Meeting of Shareholders to be held April 24, 2000. The Proxy Statement will be filed with the Securities and Exchange Commission within 120 days following the end of the Company's fiscal year. ITEM 11. EXECUTIVE COMPENSATION The information regarding executive compensation called for by Item 11 is incorporated herein by reference to the section entitled "Executive Officers" in the Company's Proxy Statement for its Annual Meeting of Shareholders to be held April 24, 2000. The Proxy Statement will be filed with the Securities and Exchange Commission within 120 days following the end of the Company's fiscal year. PAGE 53 ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT The information regarding ownership of the Company's common stock by certain beneficial owners and by management called for by Item 12 is incorporated herein by reference to the section entitled "Stock Ownership of Management and Others" in the Company's Proxy Statement for its Annual Meeting of Shareholders to be held April 24, 2000. The Proxy Statement will be filed with the Securities and Exchange Commission within 120 days following the end of the Company's fiscal year. ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS The information regarding transactions between management and others and the Company called for by Item 13 is incorporated herein by reference to the sections entitled "Transactions with Management and Others" in the Company's Proxy Statement for its Annual Meeting of Shareholders to be held April 24, 2000. The Proxy Statement will be filed with the Securities and Exchange Commission within 120 days following the end of the Company's fiscal year. PART IV ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K (a) The following documents are filed as part of this Annual Report on Form 10-K: (1) The following consolidated financial statements of the registrant and its subsidiaries, are included herein: (i) Independent Auditors' Report (ii) Consolidated Balance Sheets - December 31, 1999 and 1998 (iii) Consolidated Statements of Income and Comprehensive Income - Years Ended December 31, 1999, 1998 and 1997 (iv) Consolidated Statements of Changes in Shareholders' Equity - Years Ended December 31, 1999, 1998 and 1997 (v) Consolidated Statements of Cash Flows - Years Ended December 31, 1999, 1998 and 1997 (vi) Notes to Consolidated Financial Statements - Years Ended December 31, 1999, 1998 and 1997 (2) Financial Statement Schedules are omitted because the required information is not applicable. (3) Exhibits - The following exhibits are filed as a part of this Annual Report on Form 10-K: 2.1 Agreement and Plan of Reorganization dated as of October 15, 1997, by and between Texas Regional Bancshares, Inc. and Raymondville Bancorp, Inc. (incorporated by reference from 1998 Form 10-K, Commission File No. 000-14517). 2.2 Agreement and Plan of Reorganization dated as of October 20, 1997, by and between Texas Regional Bancshares, Inc. and Brownsville Bancshares, Inc. (incorporated by reference from Form S-4, Commission File No. 333-41959). 2.3 Agreement and Plan of Reorganization dated as of October 15, 1997, by and between Texas Regional Bancshares, Inc. and TB&T Bancshares, Inc. (incorporated by reference from Form S-4, Commission File No. 333-41945). 2.4 Agreement and Plan of Reorganization by and between Texas State Bank, McAllen, Texas, First State Bank & Trust Co., Mission, Texas ("First State Bank"), Texas Regional Bancshares, Inc., and certain shareholders of First State Bank, dated as of January 9, 1996 (incorporated by reference from Form 8-K, Commission File No. 000-14517). 2.5 Agreement and Plan of Reorganization by and between Texas State Bank, McAllen, Texas, The Border Bank, Hidalgo, Texas ("Border Bank"), Texas Regional Bancshares, Inc., and certain shareholders of Border Bank, dated as of January 9, 1996 (incorporated by reference from Form 8-K, Commission File No. 000-14517). 3.1 Articles of Incorporation of Texas Regional Bancshares, Inc. (incorporated by reference from Form 10, Commission File No. 000-14517). 3.2 Amendment to Articles of Incorporation of Texas Regional Bancshares, Inc., filed December 28, 1983 (incorporated by reference from Form 10, Commission File No. 000-14517). PAGE 54 3.3 Amendment to Articles of Incorporation of Texas Regional Bancshares, Inc., filed June 25, 1986 (incorporated by reference from Form S-1, Commission File No. 33-28340). 3.4 Amendment to Articles of Incorporation of Texas Regional Bancshares, Inc., filed April 4, 1988 (incorporated by reference from Form S-1, Commission File No. 33-28340). 3.5 Amendment to Articles of Incorporation of Texas Regional Bancshares, Inc., filed April 12, 1991 (incorporated by reference from Form 10-K, Commission File No. 000-14517). 3.6 Amendment to Articles of Incorporation of Texas Regional Bancshares, Inc., filed March 2, 1992 (incorporated by reference from Form 10-K, Commission File No. 000-14517). 3.7 Resolution Eliminating from the Articles of Incorporation certain preferred series of shares of Texas Regional Bancshares, Inc., filed February 21, 1995 (incorporated by reference from 1994 Form 10-K, Commission File No. 000-14517). 3.8 Bylaws of Texas Regional Bancshares, Inc., as amended (incorporated by reference from Form S-1, Commission File No. 33-74992). 4 Relevant portions of Texas Regional Bancshares, Inc. Articles of Incorporation and Bylaws (incorporated by reference from Form S-1, Commission File No. 333-1467). 10.1 Incentive Stock Option Plan (incorporated by reference from Form 10, Commission File No. 000-14517). 10.2 1985 Non-Statutory Stock Option Plan (incorporated by reference from Form 10, Commission File No. 000-14517). 10.3 1995 Non-Statutory Stock Option Plan (incorporated by reference from Form S-1, Commission File No. 333-1467). 10.4 Texas Regional Bancshares, Inc., 1997 Incentive Stock Option Plan (incorporated by reference from Form S-4, Commission File No. 000-14517). 10.5 Texas Regional Bancshares, Inc., 1997 Nonstatutory Stock Option Plan (incorporated by reference from Form S-4, Commission File No. 000-14517). 10.6 Texas Regional Bancshares, Inc. Employees Stock Ownership Plan (with 401(k) provisions) (incorporated by reference from Form S-8, Commission File No. 33-39386). 10.7 Amendment No. 1 to Texas Regional Bancshares, Inc. Employees Stock Ownership Plan, adopted July 9, 1991 (incorporated by reference from 1991 Form 10-K, Commission File No. 000-14517). 10.8 Amendment No. 2 to Texas Regional Bancshares, Inc. Employees Stock Ownership Plan, adopted May 12, 1992 (incorporated by reference from 1992 Form 10-K, Commission File No. 000-14517). 10.9 Amendment No. 3 to Texas Regional Bancshares, Inc. Employees Stock Ownership Plan, adopted September 8, 1992, effective January 1, 1992 (incorporated by reference from Form S-1, Commission File No. 33-74992). 10.10 Amendment No. 4 to Texas Regional Bancshares, Inc. Employees Stock Ownership Plan (with 401(k) provisions), adopted August 10, 1993 (incorporated by reference from Form S-1, Commission File No. 33-74992). 10.11 Amendment No. 5 to Texas Regional Bancshares, Inc. Employees Stock Ownership Plan (with 401(k) provisions), adopted August 10, 1993 (incorporated by reference from 1994 Form 10-K, Commission File No. 000-14517). 10.12 Amendment No. 6 to Texas Regional Bancshares, Inc. Employee Stock Ownership Plan (with 401(k) provisions), adopted as of August 8, 1995 (incorporated by reference from Form S-1, Commission File No. 333-1467). 10.13 Amendment No. 7 to Texas Regional Bancshares, Inc. Employees Stock Ownership Plan (with 401(k) provisions), adopted May 21, 1996 (incorporated by reference from 1996 Form 10-K, Commission File No. 000-14517). 10.14 Amendment No. 8 to Texas Regional Bancshares, Inc. Employee Stock Ownership Plan (with 401(k) provisions), adopted March 10, 1998 (incorporated by reference from 1998 Form 10-K, Commission File No. 000-14517). PAGE 55 10.15 Glen E. Roney Amended and Restated Deferred Compensation Plan dated as of March 11, 1997 (incorporated by reference from Form S-4, Commission File No. 333-41959). 10.16 Amendment No. 9 to Texas Regional Bancshares, Inc. Employee Stock Ownership Plan (with 401(k) provisions), adopted June 9, 1998 (incorporated by reference from Form 10-Q for quarter ended June 30, 1998, Commission File No. 000-14517). 10.17 Amendment No. 3 to Texas Regional Bancshares, Inc. Employee Stock Ownership Trust Agreement, adopted July 13, 1999 (incorporated by reference from Form 10-Q for quarter ended September 30, 1999, Commission File No. 000-14517). 10.18 Amendment No. 10 to Texas Regional Bancshares, Inc. Employee Stock Ownership Plan (with 401(k) provisions), adopted July 13, 1999 (incorporated by reference from Form 10-Q for quarter ended September 30, 1999, Commission File No. 000-14517). 10.19 Second Amendment to Bank of Texas Profit Sharing Plan, adopted August 27, 1999 (incorporated by reference from Form 10-Q for quarter ended September 30, 1999, Commission File No. 000-14517). 10.20 Amendment No. 11 to the Texas Regional Bancshares, Inc. Employee Stock Ownership Plan (with 401(k) provisions), adopted October 1, 1999 (filed herewith). 21 Subsidiaries of the Registrant (filed herewith) 27 Financial Data Schedule (filed herewith) (b) Reports of Form 8-K No report on Form 8-K was filed by Texas Regional Bancshares, Inc. during the three months ended December 31, 1999. PAGE 56 SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. TEXAS REGIONAL BANCSHARES, INC. (Registrant) March 14, 2000 /s/ G. E. Roney - -------------------- ---------------------------------- Glen E. Roney Chairman of the Board, President & Chief Executive Officer Pursuant to the requirement of the Securities Exchange Act of 1934, this report has signed below by the following persons on behalf of the Registrant and in the capacities and on the date indicated. Signature Title Date - -------------------------------------------------------------------------------- /s/ G. E. Roney Chairman of the Board, President March 14, 2000 - ---------------------------- and Chief Executive Officer ----------------- Glen E. Roney (principal executve officer) /s/ Morris Atlas Director March 14, 2000 - ---------------------------- ----------------- Morris Atlas /s/ Frank N. Boggus Director March 14, 2000 - ---------------------------- ----------------- Frank N. Boggus /s/ Robert G. Farris Director March 14, 2000 - ---------------------------- ----------------- Robert G. Farris /s/ C. Kenneth Landrum, M.D. Director March 14, 2000 - ---------------------------- ----------------- C. Kenneth Landrum, M.D. /s/ Julie G. Uhlhorn Director March 14, 2000 - ---------------------------- ----------------- Julie G. Uhlhorn /s/ Jack Whetsel Director March 14, 2000 - ---------------------------- ----------------- Jack Whetsel /s/ Paul S. Moxley Senior Executive Vice President March 14, 2000 - ---------------------------- ----------------- Paul S. Moxley /s/ R. T. Pigott, Jr. Executive Vice President March 14, 2000 - ---------------------------- and Chief Financial Officer ----------------- R. T. Pigott, Jr. (principal financial officer) /s/ Ann M. Sefcik Controller/Assistant Secretary March 14, 2000 - ---------------------------- (principal accounting officer) ----------------- Ann M. Sefcik INDEX TO EXHIBITS FILED HEREWITH EXHIBIT NUMBER SEQUENTIALLY NUMBERED EXHIBIT - -------- 10.20 Amendment Number 11 to the Texas Regional Bancshares, Inc. Employee Stock Ownership Plan (with 401(k) provisions) adopted October 1, 1999 21 Subsidiaries of the Registrant 27 Financial Data Schedule PAGE 57 EX-10.20 2 EXHIBIT 10.20 AMENDMENT NUMBER 11 TO THE TEXAS REGIONAL BANCSHARES, INC. EMPLOYEE STOCK OWNERSHIP PLAN (WITH 401(K) PROVISIONS) Texas Regional Bancshares, Inc., a corporation organized and operating under the laws of the State of Texas, and registered as a bank holding company under the Bank Holding Company Act of 1956, as amended (the "Corporation"), hereby adopts the following amendments to the Texas Regional Bancshares, Inc. Employee Stock Ownership Plan (with 401(k) provisions) (the "Plan"), effective as of October 1, 1999: WHEREAS, Texas Regional Delaware, Inc. is a wholly-owned subsidiary of the Corporation and, in turn, Texas Regional HBI Acquisition Corp. and Texas State Bank are wholly owned subsidiaries of Texas Regional Delaware, Inc.; and WHEREAS, the Corporation and Harlingen Bancshares, Inc. entered into an Agreement and Plan of Reorganization, pursuant to which, effective as of October 1, 1999, Harlingen Bancshares, Inc. and its wholly owned subsidiary, HN Bancshares of Delaware, Inc., will merge with and into Texas Regional HBI Acquisition Corp. and Harlingen National Bank will merge with and into Texas State Bank; and WHEREAS, as a part of those mergers, the Corporation will become the employer of the employees of former Harlingen Bancshares, Inc. and HN Bancshares of Delaware, Inc., and Texas State Bank will become the employer of the employees of the former Harlingen National Bank; and WHEREAS, it is the desire of the Corporation and its wholly owned subsidiary, Texas State Bank, that eligible former employees of Harlingen Bancshares, Inc., HN Bancshares of Delaware, Inc. and Harlingen National Bank, as a result of becoming employees of the Corporation and Texas State Bank pursuant to the mergers, be entitled to participate in the Texas Regional Bancshares, Inc. Employee Stock Ownership Plan (with 401(k) provisions); and WHEREAS, the Board of Directors desires to coordinate and consolidate the employee benefit programs available to all employees of the Corporation and its subsidiaries; NOW THEREFORE, IT IS HEREBY AGREED THAT the Texas Regional Bancshares, Inc. Employee Stock Ownership Plan (with 401(k) provisions) (the "ESOP"), is hereby amended effective as of October 1, 1999, as follows: 1. AMENDMENT RELATED TO DEFINITION OF "SERVICE". The definition of "Service" in Section 2 of the Plan (as originally stated in the Plan and as the same may have been previously amended) is hereby deleted and substituted therefor is the following language: "SERVICE. Employment with (i) the Company, (ii) an Affiliated Company, (iii) Mid Valley Bank, as predecessor to the Company's subsidiary, Texas State Bank (with respect to those Employee participants that were formerly participants in the Mid Valley Bank Employees' Pension Plan), (iv) First National Bank of South Texas (with respect to those Employees who were employed by First National Bank of South Texas as employees of the Rio Grande City and Roma branch bank facilities of First National Bank of South Texas as of the time of acquisition of such branch bank facilities by Texas State Bank), (v) First State Bank & Trust Co. and The Border Bank (with respect to those Employees who were employed by First State Bank & Trust Co. or The Border Bank as employees of such banks as of the time of the merger of such banks with and into Texas State Bank), (vi) Brownsville National Bank, Texas Bank & Trust and Bank of Texas (with respect to those Employees who were employed by Brownsville National Bank, Texas Bank & Trust or Bank of Texas as of the time of the merger of such banks with and into Texas State Bank), and/or (vii) Harlingen Bancshares, Inc., HN Bancshares of Delaware, Inc. and/or Harlingen National Bank (with respect to those individuals who are Employees as of October 1, 1999 and who were employed by Harlingen Bancshares, Inc., HN Bancshares of Delaware, Inc. and/or Harlingen National Bank as of August 15th, 1999)." 2. AMENDMENT RELATED TO CREDIT SERVICE. Section 13(a) of the Plan (as originally stated in the Plan and as the same may have been previously amended) is hereby amended in its entirety to read as follows: "(a) GENERAL RULE. For purposes of vesting, an Employee's Credited Service includes the number of Plan Years after January 1, 1984 in which he is credited with at least 1,000 Hours of Service. Credited Service shall include such Service with (i) the Company, (ii) any other Employer, (iii) an Affiliated Company, (iv) Mid Valley Bank (with respect to those Employee participants that were formerly participants in the Mid Valley Bank Employees' Pension Plan), (v) First National Bank of South Texas (with respect to those Employees who were employed by First National Bank of South Texas as PAGE 58 employees of the Rio Grande City and Roma branch bank facilities of First National Bank of South Texas as of the time of acquisition of such branch facilities by Texas State Bank), (vi) First State Bank & Trust Co. and The Border Bank (with respect to those Employees who were employed by First State Bank & Trust Co. or The Border Bank as of the time of the merger of First State Bank & Trust Co. and The Border Bank with and into Texas State Bank), (vii) Brownsville National Bank, Texas Bank & Trust and Bank of Texas (with respect to those employees who were employed by Brownsville National Bank, Texas Bank & Trust or Bank of Texas as of the time of the merger of Brownsville National Bank, Texas Bank & Trust and Bank of Texas with and into Texas State Bank) and (viii) Harlingen Bancshares, Inc., HN Bancshares of Delaware, Inc. and Harlingen National Bank (with respect to those individuals who are Employees as of October 1, 1999 and who were employed by Harlingen Bancshares, Inc., HN Bancshares of Delaware, Inc. or Harlingen National Bank as of August 15th, 1999)." 3. PARTICIPANTS. As a result of the amendments of the Plan pursuant to sections 1 and 2 of this Amendment Number 11, persons who were employees of Harlingen Bancshares, Inc., HN Bancshares of Delaware, Inc. or Harlingen National Bank as of August 15th, 1999 will become Participants (as that term is defined in the Plan) as of the date that such persons become employees of the Corporation and/or Texas State Bank, without regard to the requirement of entry on January 1st or July 1st subsequent to their initial dates of service, provided that they are otherwise qualified to be Participants as set forth in section 3 of the Plan. The Plan is hereby further amended to provide that such persons thus become Participants immediately upon commencement of employment by the Corporation and/or Texas State Bank, without regard to the requirement of entry on January 1st or July 1st subsequent to their initial dates of service, provided that they are otherwise qualified under section 3 of the Plan. Notwithstanding the foregoing, each such employee shall only be credited (pursuant to and in accordance with the rules set forth in the Plan) with the amount of compensation paid by the Corporation and/or Texas State Bank, and shall not be credited with any part of such employee's compensation paid by Harlingen Bancshares, Inc., HN Bancshares of Delaware, Inc. and/or Harlingen National Bank for purposes of determining allocations of Employer Contributions and Forfeitures and for all other purposes. 4. DEFINITIONS. Defined terms used herein and not otherwise defined herein shall have the meanings assigned to them in the Plan. IN WITNESS WHEREOF, the undersigned a duly authorized officer of Texas Regional Bancshares, Inc., hereby certifies the adoption of this Amendment Number 11 of the Texas Regional Bancshares, Inc. Employee Stock Ownership Plan (with 401(k) provisions) effective as of October 1, 1999. Texas Regional Bancshares, Inc. By: /s/ G.E. RONEY ----------------------------- Glen E. Roney, Chairman of the Board and Chief Executive Officer PAGE 59 EX-21 3 EXHIBIT 21 TEXAS REGIONAL BANCSHARES, INC. LIST OF SUBSIDIARIES DECEMBER 31, 1999 PERCENTAGE OF DECEMBER 31, 1999 JURISDICTION OF VOTING SECURITIES NAME DOMICILE ORGANIZATION OWNED - -------------------------------------------------------------------------------- Texas Regional Delaware, Inc. Wilmington, DE Delaware 100% Texas State Bank McAllen, TX Texas 100% TSB Securities, Inc. McAllen, TX Texas 100% TSB Properties, Inc. McAllen, TX Texas 100% - -------------------------------------------------------------------------------- PAGE 60 EX-27 4
9 This schedule contains summary financial information extracted from the Consolidated Balance Sheets, Consolidated Statements of Income, included herein and is qualified in its entirety by reference to such financial statements. 1,000 YEAR YEAR YEAR DEC-31-1999 DEC-31-1998 DEC-31-1997 DEC-31-1999 DEC-31-1998 DEC-31-1997 66,819 58,274 62,268 5,077 553 100 0 32,000 18,985 0 0 0 525,938 445,936 324,177 8,010 14,331 92,744 8,071 14,650 93,281 1,374,759 1,089,505 951,316 16,711 13,236 11,291 2,120,690 1,762,332 1,538,769 1,885,346 1,562,942 1,362,783 34,608 7,407 1,801 12,548 14,709 12,827 0 0 0 0 0 0 0 0 0 14,525 14,405 14,396 173,663 162,869 146,962 2,120,690 1,762,332 1,538,769 113,382 97,064 85,905 29,345 26,680 24,631 1,114 1,905 2,209 143,841 125,649 112,745 61,495 58,097 50,566 62,221 58,384 50,618 81,620 67,265 62,127 5,432 9,729 2,947 1 2,910 734 45,888 41,102 37,170 47,699 34,097 34,982 30,850 22,474 23,122 0 0 0 0 0 0 30,850 22,474 23,122 2.14 1.56 1.61 2.11 1.54 1.58 4.84 4.61 4.89 8,341 10,414 8,355 2,697 3,099 3,287 0 0 0 0 0 0 13,236 11,291 10,806 4,138 9,158 3,221 605 1,066 759 16,711 13,236 11,291 15,329 10,875 10,253 0 0 0 1,382 2,361 1,038
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