-----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, UX8to+qFpUqCOXRj6wyYEjGLC3/jNB+toTTnCzO94fPlp3pPxE6prs+a70LieB65 5MXiwKCU/Csa2peZH1NL2A== /in/edgar/work/20000801/0000890566-00-001130/0000890566-00-001130.txt : 20000921 0000890566-00-001130.hdr.sgml : 20000921 ACCESSION NUMBER: 0000890566-00-001130 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 20000630 FILED AS OF DATE: 20000801 FILER: COMPANY DATA: COMPANY CONFORMED NAME: TEXAS REGIONAL BANCSHARES INC CENTRAL INDEX KEY: 0000787648 STANDARD INDUSTRIAL CLASSIFICATION: [6022 ] IRS NUMBER: 742294235 STATE OF INCORPORATION: TX FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: SEC FILE NUMBER: 000-14517 FILM NUMBER: 683561 BUSINESS ADDRESS: STREET 1: 3700 N TENTH STE 301 STREET 2: PO BOX 5910 CITY: MCALLEN STATE: TX ZIP: 78501 BUSINESS PHONE: 9566315400 MAIL ADDRESS: STREET 1: P O BOX 5910 STREET 2: P O BOX 5910 CITY: MCALLEN STATE: TX ZIP: 78501-5910 10-Q 1 0001.txt UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, DC 20549 FORM 10-Q (Mark One) [X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended June 30, 2000 or [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from _________ to _________ Commission file number 000-14517 TEXAS REGIONAL BANCSHARES, INC. (Exact name of registrant as specified in its charter) TEXAS 74-2294235 (State or other jurisdiction (I.R.S. Employer of incorporation or organization) Identification No.) POST OFFICE BOX 5910 3900 NORTH 10TH STREET, 11TH FLOOR MCALLEN, TEXAS 78502-5910 (Address of principal executive offices) (Zip Code) (956) 631-5400 (Registrant's telephone number, including area code) Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes [X] No [ ] There were 14,618,637 shares of the registrant's Class A Voting Common Stock, $1.00 par value, outstanding as of July 24, 2000. PART I. FINANCIAL INFORMATION ITEM 1. FINANCIAL STATEMENTS
Texas Regional Bancshares, Inc. and Subsidiaries Consolidated Balance Sheets JUNE 30, DECEMBER 31, (Dollars in Thousands, Except Share Data) 2000 1999 --------------- --------------- (UNAUDITED) Assets Cash and Due From Banks ................................................................. $ 63,428 $ 66,819 Time Deposits ........................................................................... 3,999 5,077 --------------- --------------- Total Cash and Cash Equivalents ....................................................... 67,427 71,896 Securities Available for Sale, at Fair Value ............................................ 554,241 525,938 Securities Held to Maturity, at Amortized Cost (Fair Value of $2,073 in 2000 and $8,071 in 1999) .................................................... 2,050 8,010 Loans, Net of Unearned Discount of $4,303 in 2000 and $5,154 in 1999 .................... 1,494,431 1,374,759 Less: Allowance for Loan Losses ......................................................... (18,239) (16,711) --------------- --------------- Net Loans ............................................................................. 1,476,192 1,358,048 Premises and Equipment .................................................................. 77,608 75,583 Accrued Interest Receivable ............................................................. 23,946 19,869 Other Real Estate ....................................................................... 4,485 5,268 Goodwill and Identifiable Intangibles ................................................... 42,597 44,796 Other Assets ............................................................................ 13,962 11,282 --------------- --------------- Total Assets .......................................................................... $ 2,262,508 $ 2,120,690 =============== =============== Liabilities Deposits Demand ................................................................................ $ 291,172 $ 285,866 Savings ............................................................................... 122,010 118,758 Money Market Checking and Savings ..................................................... 381,144 377,458 Time Deposits ......................................................................... 1,182,987 1,103,264 --------------- --------------- Total Deposits ...................................................................... 1,977,313 1,885,346 Other Borrowed Money .................................................................... 70,938 34,608 Accounts Payable and Accrued Liabilities ................................................ 14,880 12,548 --------------- --------------- Total Liabilities ..................................................................... 2,063,131 1,932,502 --------------- --------------- Commitments and Contingencies Shareholders' Equity Preferred Stock; $1.00 Par Value, 10,000,000 Shares Authorized; None Issued and Outstanding ......................................................... -- -- Common Stock - Class A; $1.00 Par Value, 50,000,000 Shares Authorized; Issued and Outstanding 14,618,637 Shares in 2000 and 14,524,739 Shares In 1999 ............................................................................. 14,619 14,525 Paid-In Capital ....................................................................... 90,060 88,834 Retained Earnings ..................................................................... 111,089 98,277 Accumulated Other Comprehensive Loss .................................................. (16,391) (13,448) --------------- --------------- Total Shareholders' Equity .......................................................... 199,377 188,188 --------------- --------------- Total Liabilities and Shareholders' Equity ............................................ $ 2,262,508 $ 2,120,690 =============== ===============
The accompanying notes are an integral part of the consolidated financial statements. PAGE 2
Texas Regional Bancshares, Inc. and Subsidiaries THREE MONTHS SIX MONTHS Consolidated Statements of Income and Comprehensive Income ENDED JUNE 30, ENDED JUNE 30, ---------------------------- ---------------------------- (Dollars in Thousands, Except Per Share Data) 2000 1999 2000 1999 ------------ ------------ ------------ ------------ (UNAUDITED) Interest Income Loans, Including Fees ........................................... $ 35,833 $ 27,064 $ 69,392 $ 52,840 Securities Taxable ....................................................... 8,003 6,689 15,727 13,076 Tax-Exempt .................................................... 590 510 1,169 996 Time Deposits ................................................... 62 4 131 9 Federal Funds Sold .............................................. 203 324 242 663 ------------ ------------ ------------ ------------ Total Interest Income ......................................... 44,691 34,591 86,661 67,584 ------------ ------------ ------------ ------------ Interest Expense Deposits ........................................................ 20,229 14,754 38,755 29,023 Other Borrowed Money ............................................ 589 108 875 201 ------------ ------------ ------------ ------------ Total Interest Expense ........................................ 20,818 14,862 39,630 29,224 ------------ ------------ ------------ ------------ Net Interest Income Before Provision for Loan Losses ............... 23,873 19,729 47,031 38,360 Provision for Loan Losses .......................................... 2,325 1,499 4,494 2,822 ------------ ------------ ------------ ------------ Net Interest Income After Provision for Loan Losses ............. 21,548 18,230 42,537 35,538 ------------ ------------ ------------ ------------ Noninterest Income Service Charges on Deposit Accounts ............................. 2,903 2,311 5,657 4,382 Other Service Charges ........................................... 658 575 1,605 1,318 Trust Service Fees .............................................. 589 495 1,064 976 Net Realized Losses on Sales of Securities Available for Sale ................................. -- (1) -- (1) Data Processing Service Fees .................................... 687 518 1,271 1,013 Other Operating Income .......................................... 566 299 1,014 665 ------------ ------------ ------------ ------------ Total Noninterest Income ...................................... 5,403 4,197 10,611 8,353 ------------ ------------ ------------ ------------ Noninterest Expense Salaries and Employee Benefits .................................. 6,149 5,551 12,808 10,518 Net Occupancy Expense ........................................... 1,045 1,008 2,001 1,993 Equipment Expense ............................................... 1,550 1,228 2,977 2,451 Other Real Estate Expense, Net .................................. 451 103 482 196 Amortization of Goodwill and Identifiable Intangibles ........... 1,108 679 2,253 1,359 Other Noninterest Expense ....................................... 3,258 2,350 6,303 4,941 ------------ ------------ ------------ ------------ Total Noninterest Expense ..................................... 13,561 10,919 26,824 21,458 ------------ ------------ ------------ ------------ Income Before Income Tax Expense ................................... 13,390 11,508 26,324 22,433 Income Tax Expense ................................................. 4,869 4,043 9,432 7,916 ------------ ------------ ------------ ------------ Net Income ......................................................... 8,521 7,465 16,892 14,517 Other Comprehensive Loss, Net of Tax Unrealized Losses on Securities Available for Sale Unrealized Holding Losses Arising During Period ............... (865) (6,829) (2,943) (8,149) Less: Reclassification Adjustment for Losses Included in Net Income ...................................... -- (1) -- (1) ------------ ------------ ------------ ------------ Total Other Comprehensive Loss .............................. (865) (6,828) (2,943) (8,148) ------------ ------------ ------------ ------------ Comprehensive Income ............................................... $ 7,656 $ 637 $ 13,949 $ 6,369 ============ ============ ============ ============ Net Income Per Common Share Basic ........................................................... $ 0.58 $ 0.52 $ 1.16 $ 1.01 Diluted ......................................................... 0.58 0.51 1.15 0.99 ============ ============ ============ ============
The accompanying notes are an integral part of the consolidated financial statements. PAGE 3
Texas Regional Bancshares, Inc. and ACCUMULATED Subsidiaries OTHER Consolidated Statements of Changes COMMON COMPREHENSIVE TOTAL In Shareholders' Equity STOCK - PAID-IN RETAINED INCOME SHAREHOLDERS' (Dollars in Thousands) CLASS A CAPITAL EARNINGS (LOSS) EQUITY --------- --------- --------- --------------- --------------- (UNAUDITED) Six Months Ended June 30, 1999 Balance, Beginning of Period ........................ $ 14,405 $ 87,396 $ 74,864 $ 609 $ 177,274 Net Income .......................................... -- -- 14,517 -- 14,517 Unrealized Loss on Securities, Net of Tax and Reclassification Adjustment ........ -- -- -- (8,148) (8,148) --------- --------- --------- --------------- --------------- Total Comprehensive Income ........................ -- -- 14,517 (8,148) 6,369 --------- --------- --------- --------------- --------------- Class A Common Stock Cash Dividends ................. -- -- (3,602) -- (3,602) --------- --------- --------- --------------- --------------- Balance, End of Period .............................. $ 14,405 $ 87,396 $ 85,779 $ (7,539) $ 180,041 ========= ========= ========= =============== =============== Six Months Ended June 30, 2000 Balance, Beginning of Period ........................ $ 14,525 $ 88,834 $ 98,277 $ (13,448) $ 188,188 Net Income .......................................... -- -- 16,892 -- 16,892 Unrealized Losses on Securities, Net of Tax and Reclassification Adjustment ........ -- -- -- (2,943) (2,943) --------- --------- --------- --------------- --------------- Total Comprehensive Income ........................ -- -- 16,892 (2,943) 13,949 --------- --------- --------- --------------- --------------- Exercise of Stock Options, 93,898 Shares of Class A Common Stock .............................. 94 657 -- -- 751 Tax Effect of Nonqualified Stock Options Exercised ........................................ -- 569 -- -- 569 Class A Common Stock Cash Dividends ................. -- -- (4,080) -- (4,080) --------- --------- --------- --------------- --------------- Balance, End of Period .............................. $ 14,619 $ 90,060 $ 111,089 $ (16,391) $ 199,377 ========= ========= ========= =============== ===============
The accompanying notes are an integral part of the consolidated financial statements. PAGE 4
Texas Regional Bancshares, Inc. and Subsidiaries SIX MONTHS Consolidated Statements of Cash Flows ENDED JUNE 30, --------------- --------------- (Dollars in Thousands) 2000 1999 --------------- --------------- (UNAUDITED) Cash Flows from Operating Activities Net Income ................................................................................ $ 16,892 $ 14,517 Adjustments to Reconcile Net Income to Net Cash Provided by Operating Activities Depreciation, Amortization and Accretion, Net ......................................... 5,121 4,136 Provision for Loan Losses ............................................................. 4,494 2,822 Provision for Estimated Losses on Other Real Estate and Other Assets .................. 425 16 Loss on Sale of Securities Available for Sale ......................................... -- 1 (Gain) Loss on Sale of Other Assets ................................................... (26) 21 Gain on Sale of Other Real Estate ..................................................... (78) (172) Gain on Sale of Premises and Equipment ................................................ (166) (39) (Increase) Decrease in Deferred Income Tax Asset ...................................... (1,356) 3,552 Decrease in Deferred Income Tax Liability ............................................. -- (4,487) Increase in Accrued Interest Receivable and Other Assets .............................. (4,214) (4,612) Increase in Accounts Payable and Accrued Liabilities .................................. 2,887 923 --------------- --------------- Net Cash Provided by Operating Activities .................................................... 23,979 16,678 --------------- --------------- Cash Flows from Investing Activities Proceeds from Sales of Securities Available for Sale ...................................... -- 2,206 Proceeds from Maturing Securities Available for Sale ...................................... 6,465 100,626 Purchases of Securities Available for Sale ................................................ (39,424) (126,668) Proceeds from Maturing Securities Held to Maturity ........................................ 5,940 6,000 Proceeds from Sale of Loans ............................................................... 1,370 690 Purchases of Loans ........................................................................ (6,137) (2,647) Loan Originations and Advances, Net ....................................................... (118,613) (91,491) Recoveries of Charged-Off Loans ........................................................... 221 182 Proceeds from Sale of Premises and Equipment .............................................. 169 220 Purchases of Premises and Equipment ....................................................... (4,773) (2,879) Proceeds from Sale of Other Real Estate ................................................... 534 650 Proceeds from Sale of Other Assets ........................................................ 818 359 --------------- --------------- Net Cash Used in Investing Activities ........................................................ (153,430) (112,752) --------------- --------------- Cash Flows from Financing Activities Net Increase in Demand Deposits, Savings, Money Market Checking and Savings Accounts .................................................... 12,244 8,428 Net Increase in Time Deposits ............................................................. 79,723 61,019 Net Increase in Other Borrowed Money ...................................................... 36,330 6,424 Cash Dividends Paid on Class A Common Stock ............................................... (4,066) (3,602) Proceeds from the Sale of Common Stock .................................................... 751 -- --------------- --------------- Net Cash Provided by Financing Activities .................................................... 124,982 72,269 --------------- --------------- Decrease in Cash and Cash Equivalents ........................................................ (4,469) (23,805) Cash and Cash Equivalents at Beginning of Period ............................................. 71,896 90,827 --------------- --------------- Cash and Cash Equivalents at End of Period ................................................... $ 67,427 $ 67,022 =============== ===============
(Continued) PAGE 5
Texas Regional Bancshares, Inc. and Subsidiaries SIX MONTHS Consolidated Statements of Cash Flows ENDED JUNE 30, --------------------------------- (Dollars in Thousands) 2000 1999 --------------- --------------- (UNAUDITED) Supplemental Disclosures of Cash Flow Information Interest Paid ............................................................................... $ 38,345 $ 29,237 Income Taxes Paid ........................................................................... 9,200 9,460 Supplemental Schedule of Noncash Investing and Financing Activities Foreclosure and Repossession in Partial Satisfaction of Loans Receivable .................... 1,294 4,006 Financing Provided For Sales of Other Real Estate ........................................... 773 2,371 Net Increase in Security Trades Not Settled ................................................. -- 7,500 Net Increase in Dividends Payable ........................................................... 14 -- =============== ===============
The accompanying notes are an integral part of the consolidated financial statements. PAGE 6 TEXAS REGIONAL BANCSHARES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 1: BASIS OF PRESENTATION The accompanying unaudited consolidated financial statements were prepared in accordance with instructions for Form 10-Q and, therefore, do not include all information and footnotes necessary for a complete presentation of financial position, results of operations, changes in shareholders' equity, and cash flows in conformity with generally accepted accounting principles. However, the consolidated financial statements include all adjustments that, in the opinion of management, are necessary for a fair presentation. All such adjustments were of a normal and recurring nature. The results of operations and cash flows for the six months ended June 30, 2000 and 1999 should not be considered indicative of the results to be expected for the full year. These consolidated financial statements should be read in conjunction with the consolidated financial statements and notes thereto included in the Texas Regional Bancshares, Inc. and Subsidiaries (the "Company") Annual Report on Form 10-K for the year ended December 31, 1999. The consolidated financial statements include the accounts of Texas Regional Bancshares, Inc. (the "Parent") and its wholly-owned subsidiaries, Texas Regional Delaware, Inc. and Texas State Bank (the "Bank"). The Company eliminates all significant intercompany transactions and balances in consolidation. The Company accounts for its investments in subsidiaries on the equity method in the Parent's financial statements. The Financial Accounting Standards Board's Statement No. 133 ("Statement 133"), "Accounting for Derivative Instruments and for Hedging Activities," was issued in June 1998 and subsequently amended by Financial Accounting Standards Board's Statement No. 138, "Accounting for Certain Derivative Instruments and Certain Hedging Activities". 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. NOTE 2: RECLASSIFICATION Certain amounts in the 1999 consolidated financial statements have been reclassified to conform to the 2000 presentation. These reclassifications have no effect on previously reported net income. NOTE 3: IMPAIRED LOANS A loan is impaired when, based on current information and events, it is probable that a creditor will be unable to collect all amounts due according to the contractual terms of the loan agreement. The Company identifies loans to be reported as impaired when such loans are on nonaccrual status or are considered troubled debt restructurings. A restructured loan is generally a loan that is accruing interest, but on which concessions in terms has been made as a result of deterioration in the borrower's financial condition. The balance of impaired loans was $22.7 million at June 30, 2000 for which there was a related allowance for loan losses of $4.1 million. At June 30, 2000, the Company had $219,000 in impaired loans for which there was no related allowance for loan losses. The average recorded investment in impaired loans during the six months ended June 30, 2000 was $11.9 million. Interest income on impaired loans of $154,000 was recognized during the six months ended June 30, 2000, including $104,000 recognized for cash payments received on nonaccrual loans. NOTE 4: COMMON STOCK On June 13, 2000, the Board of Directors approved a cash dividend of $0.14 per share for shareholders of record on July 3, 2000 and payable on July 14, 2000. PAGE 7 NOTE 5: EARNINGS PER COMMON SHARE COMPUTATIONS The table below presents a reconciliation of basic and diluted earnings per share computations.
THREE MONTHS SIX MONTHS ENDED JUNE 30, ENDED JUNE 30, ---------------------------- ---------------------------- (Dollars in Thousands, Except Share Data) 2000 1999 2000 1999 ----------- ----------- ----------- ----------- (UNAUDITED) Net Income Available to Common Shareholders .................... $ 8,521 $ 7,465 $ 16,892 $ 14,517 ----------- ----------- ----------- ----------- Weighted Average Number of Common Shares Outstanding Used in Basic EPS Calculation ............................... 14,594,690 14,405,027 14,559,998 14,405,027 Add Assumed Exercise of Outstanding Stock Options as Adjustments for Dilutive Securities ......................... 85,661 220,738 107,268 216,143 ----------- ----------- ----------- ----------- Weighted Average Number of Common Shares Outstanding Used in Diluted EPS Calculations ................ 14,680,351 14,625,765 14,667,266 14,621,170 ----------- ----------- ----------- ----------- Basic EPS ...................................................... $ 0.58 $ 0.52 $ 1.16 $ 1.01 Diluted EPS .................................................... 0.58 0.51 1.15 0.99 ----------- ----------- ----------- -----------
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS FORWARD-LOOKING STATEMENTS. This Management's Discussion and Analysis includes forward-looking statements. 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. Because of these uncertainties, actual future results may be materially different from the results indicated by these forward-looking statements. In addition, the Company's past results do not necessarily indicate its future results. Management's discussion and analysis of the Company's consolidated financial condition and results of operations at the dates and for the periods indicated follows. This discussion should be read in conjunction with the Company's consolidated financial statements and the accompanying notes. GENERAL Texas Regional Bancshares, Inc. ("Texas Regional" or the "Company") 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 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. By authority of the Board of Directors of the Company, Texas Regional in May 2000 filed a Declaration Electing to be a Financial Holding Company with the Federal Reserve Bank of Dallas. The Declaration became effective in June 2000. Texas State Bank operates twenty-six banking locations in the Rio Grande Valley including four banking locations each in McAllen (including its main office), Brownsville and 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 June 30, 2000, Texas Regional had consolidated total assets of $2.3 billion, loans (net of unearned discount) of $1.5 billion, deposits of $2.0 billion, and shareholders' equity of $199.4 million. PAGE 8 On October 1, 1999, the Company completed the acquisition of Harlingen Bancshares, Inc. and its wholly-owned subsidiary, Harlingen National Bank. The acquisition included its main office and three banking locations in Harlingen, Cameron County, Texas; one banking location in La Feria, Cameron County, Texas; and one banking location in Mercedes, Hidalgo County, Texas, with assets of $204.2 million, loans of $110.7 million, deposits of $183.6 million, and equity of $19.9 million. 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. Texas Regional 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. Texas Regional 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. FINANCIAL CONDITION CASH AND CASH EQUIVALENTS The Company, through its main office and branches, offers a broad range of commercial banking services to individuals and businesses in its service area. It also acts as a correspondent to a number of banks in its service area, providing check clearing, wire transfer, federal funds transactions, loan participations and other correspondent services. The amount of cash and cash equivalents held on any day is significantly influenced by temporary changes in cash items in process of collection. The Company had cash and cash equivalents totaling $67.4 million at June 30, 2000. Comparatively, the Company had $71.9 million in cash and cash equivalents at December 31, 1999, a decrease of $4.5 million or 6.2%. SECURITIES Securities consist of U.S. Treasury, federal agency, mortgage-backed and state, county and municipal securities. The Bank classifies debt and equity securities into one of three categories: held to maturity, trading or available for sale. At each reporting date, management reassesses the appropriateness of the classification. Investments in debt securities are classified as held to maturity and measured at amortized cost in the consolidated balance sheet only if management has the positive intent and ability to hold those securities to maturity. Securities that are bought and held principally for the purpose of selling them in the near term are classified as trading and measured at fair value in the consolidated balance sheets' 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 sheets' with unrealized holding gains and losses reported in a separate component of shareholders' equity, net of applicable income taxes until realized. At June 30, 2000 and December 31, 1999, 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. PAGE 9 The following table presents the amortized cost and estimated fair value of securities at June 30, 2000 and December 31, 1999 (dollars in thousands):
GROSS GROSS ESTIMATED AMORTIZED UNREALIZED UNREALIZED FAIR COST GAINS LOSSES VALUE --------------- --------------- --------------- --------------- Securities Available for Sale June 30, 2000 (Unaudited) U.S. Treasury ........................................ $ 1,999 $ 1 $ -- $ 2,000 U.S. Government Agency ............................... 391,996 31 (17,488) 374,539 Mortgage-Backed ...................................... 127,073 2 (5,160) 121,915 States and Political Subdivisions .................... 50,165 50 (2,849) 47,366 Other ................................................ 8,421 -- -- 8,421 --------------- --------------- --------------- --------------- Total .............................................. $ 579,654 $ 84 $ (25,497) $ 554,241 =============== =============== =============== =============== December 31, 1999 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 =============== =============== =============== =============== Securities Held to Maturity June 30, 2000 (Unaudited) States and Political Subdivisions .................... $ 2,050 $ 25 $ (2) $ 2,073 --------------- --------------- --------------- --------------- Total .............................................. $ 2,050 $ 25 $ (2) $ 2,073 =============== =============== =============== =============== December 31, 1999 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 =============== =============== =============== ===============
Net unrealized holding losses, net of related tax effect, of $16.4 million and $13.4 million at June 30, 2000 and December 31, 1999, respectively, on securities available for sale are reported as a separate component of shareholders' equity and as other comprehensive income. Securities with carrying values of $546.1 million at June 30, 2000 and $516.8 million at December 31, 1999 were pledged to secure public funds, trust assets on deposit and for other purposes required or permitted by law. LOANS The Company manages its credit risk by establishing and implementing strategies and guidelines appropriate to the characteristics of borrowers, industries, geographic locations and risk products. Diversification of risk within each of these areas is a primary objective. Policies and procedures are developed to ensure that loan commitments conform to current strategies and guidelines. Management continually refines the Company's credit policies and procedures to address the risks in the current and prospective environment and to reflect management's current strategic focus. The credit process is controlled with continuous credit review and analysis, and 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 PAGE 10 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 June 30, 2000 of $9.4 million represented 0.6% of total loans. See "Nonperforming Assets" for additional information on cross-border credits. Total loans of $1.5 billion at June 30, 2000 increased $119.7 million or 8.7% compared to December 31, 1999 levels of $1.4 billion. The increase in total loans for the six months ended June 30, 2000 reflects growth in all loan categories except Commercial Tax-Exempt and Consumer loans and is representative in part to the vitality of the Rio Grande Valley economy. The following table presents the composition of the loan portfolio (dollars in thousands): JUNE 30, DECEMBER 31, 2000 1999 --------------- --------------- (UNAUDITED) Commercial ................................. $ 431,860 $ 391,855 Commercial Tax-Exempt ...................... 13,667 22,160 --------------- --------------- Total Commercial Loans .................. 445,527 414,015 --------------- --------------- Agricultural ............................... 63,644 59,437 --------------- --------------- Real Estate Construction ............................ 143,922 101,376 Commercial Mortgage ..................... 496,795 456,507 Agricultural Mortgage ................... 42,158 38,256 1-4 Family Mortgage ..................... 168,976 160,786 --------------- --------------- Total Real Estate ..................... 851,851 756,925 --------------- --------------- Consumer ................................... 133,409 144,382 --------------- --------------- Total Loans ............................. $ 1,494,431 $ 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. Nonperforming assets consist of loans reported as impaired because such loans are on nonaccrual status or are considered troubled debt restructurings, and other assets, primarily real estate, acquired in partial or full satisfaction PAGE 11 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 unless the collateral provides more than adequate margin to ensure collection of that interest. A restructured loan is generally a loan that is accruing interest, but on which concessions in terms have been made as a result of deterioration in the borrower's financial condition. 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 $27.5 million at June 30, 2000 increased $13.2 million, 92.2% compared to December 31, 1999 levels of $14.3 million. Nonperforming loans of $22.7 million at June 30, 2000 increased $14.3 million or 171.9% compared to $8.3 million at December 31, 1999. Nonaccrual loans of $13.4 million at June 30, 2000 increased $5.1 million or 61.0% compared to $8.3 million at December 31, 1999. The increase in nonaccrual loans during 2000 resulted from the addition of a $4.6 million commercial loan in renegotiation. During second quarter 2000, the Company reduced interest rates on certain commercial loans to national prime rate, currently 9 1/2 percent. The Company identified these loans as troubled debt restructurings and reported $9.3 million as restructured loans at June 30, 2000. Cross-border nonaccrual loans at June 30, 2000 of $4.3 million did not change from December 31, 1999 levels. The decrease in foreclosed assets during 2000 was primarily attributable to the sale of the larger foreclosed assets. Management actively seeks buyers for all Other Real Estate. See "Noninterest Expense" below. Loans which are contractually past due 90 days or more, which are both well secured or guaranteed by financially responsible third parties and in the process of collection, generally are not placed on nonaccrual status. The amount of such loans past due 90 days or more at June 30, 2000 and December 31, 1999 that are not classified as nonaccrual totaled $4.0 million and $2.7 million, respectively. The increase in accruing loans past due 90 days or more at June 30, 2000 as compared to the year ended December 31, 1999 is partly attributable to the addition of a $1.4 million commercial loan. The ratio of Nonperforming Assets Plus Accruing Loans 90 Days or More Past Due as a percent of Total Loans and Foreclosed Assets at June 30, 2000 increased to 2.10% from 1.23% at December 31, 1999 due to the increase in nonperforming and past due commercial loans. An analysis of the components of nonperforming assets follows (dollars in thousands): JUNE 30, DECEMBER 31, 2000 1999 ------------ ------------ (UNAUDITED) Nonaccrual Loans ................................ $ 13,426 $ 8,341 Restructured Loans .............................. 9,253 -- ------------ ------------ Nonperforming Loans .......................... 22,679 8,341 Foreclosed Assets ............................... 4,806 5,958 ------------ ------------ Total Nonperforming Assets ................... 27,485 14,299 Accruing Loans 90 Days or More Past Due ......... 4,013 2,697 ------------ ------------ Nonperforming Loans as a % of Total Loans ....... 1.52% 0.61% Nonperforming Assets as a % of Total Loans and Foreclosed Assets ............................ 1.83 1.04 Nonperforming Assets as a % of Total Assets ..... 1.21 0.67 Nonperforming Assets Plus Accruing Loans 90 Days or More Past Due as a % of Total Loans and Foreclosed Assets ............................ 2.10 1.23 ============ ============ Management regularly reviews and monitors the loan portfolio to identify borrowers experiencing financial difficulties. Management believes that, at June 30, 2000, 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. PAGE 12 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 June 30, 2000 totaled $18.2 million, representing a net increase of $1.5 million or 9.1% compared to $16.7 million at December 31, 1999. The increase is primarily due to an increase in loans by 8.7% since December 31, 1999. Management believes that the allowance for loan losses at June 30, 2000 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 (dollars in thousands):
THREE MONTHS ENDED SIX MONTHS ENDED JUNE 30, JUNE 30, ---------------------------- ---------------------------- 2000 1999 2000 1999 ------------ ------------ ------------ ------------ (UNAUDITED) Balance at Beginning of Period ..................................... $ 17,666 $ 13,673 $ 16,711 $ 13,236 Provision for Loan Losses .......................................... 2,325 1,499 4,494 2,822 Charge-Offs Commercial ...................................................... 1,437 674 1,977 1,287 Agricultural .................................................... 7 -- 14 5 Real Estate ..................................................... 32 28 179 48 Consumer ........................................................ 382 281 1,017 639 ------------ ------------ ------------ ------------ Total Charge-Offs ............................................. 1,858 983 3,187 1,979 ------------ ------------ ------------ ------------ Recoveries Commercial ...................................................... 5 22 37 63 Agricultural .................................................... 25 2 26 5 Real Estate ..................................................... 4 2 9 12 Consumer ........................................................ 72 46 149 102 ------------ ------------ ------------ ------------ Total Recoveries .............................................. 106 72 221 182 ------------ ------------ ------------ ------------ Net Charge-Offs .................................................... 1,752 911 2,966 1,797 ------------ ------------ ------------ ------------ Balance at End of Period ........................................... $ 18,239 $ 14,261 $ 18,239 $ 14,261 ============ ============ ============ ============ Ratio of Allowance for Loan Losses to Loans Outstanding, Net of Unearned Discount ..................... 1.22% 1.21% 1.22% 1.21% Ratio of Allowance for Loan Losses to Nonperforming Loans ............................................. 80.42 219.06 80.42 219.06 Ratio of Net Charge-Offs to Average Total Loans Outstanding, Net of Unearned Discount ..................... 0.48 0.31 0.42 0.32 ============ ============ ============ ============
PREMISES AND EQUIPMENT, NET Premises and equipment of $77.6 million at June 30, 2000 increased $2.0 million or 2.7% compared to $75.6 million at December 31, 1999. The increase for the six months ended June 30, 2000 resulted primarily from additions in computer equipment and software, including equipment for the new check imaging system, and the completion of two new branch locations. PAGE 13 GOODWILL AND IDENTIFIABLE INTANGIBLES Intangibles of $42.6 million at June 30, 2000 decreased $2.2 million or 4.9% compared to $44.8 million at December 31, 1999. The net decrease for the six months ended June 30, 2000 is attributable to amortization of existing intangibles. DEPOSITS Total deposits of $2.0 billion at June 30, 2000 increased $92.0 million or 4.9% compared to December 31, 1999 levels of $1.9 billion. The increase in total deposits for the six months ended June 30, 2000 is primarily attributable to growth in the volume of business conducted by the Company and the vitality of the Rio Grande Valley economy. The following table presents the composition of total deposits (dollars in thousands): JUNE 30, DECEMBER 31, 2000 1999 --------------- --------------- (UNAUDITED) Demand Deposits Commercial and Individual ............ $ 284,653 $ 277,729 Public Funds ......................... 6,519 8,137 --------------- --------------- Total Demand Deposits .............. 291,172 285,866 --------------- --------------- Interest-Bearing Deposits Savings Commercial and Individual .......... 121,732 118,512 Public Funds ....................... 278 246 Money Market Checking and Savings Commercial and Individual .......... 314,526 298,668 Public Funds ....................... 66,618 78,791 Time Deposits Commercial and Individual .......... 844,826 800,934 Public Funds ....................... 338,161 302,329 --------------- --------------- Total Interest-Bearing Deposits .... 1,686,141 1,599,480 --------------- --------------- Total Deposits ................... $ 1,977,313 $ 1,885,346 =============== =============== OTHER BORROWED MONEY The components of other borrowed money are as follows (dollars in thousands): JUNE 30, DECEMBER 31, 2000 1999 --------------- --------------- (UNAUDITED) Federal Funds Purchased and Securities Sold Under Repurchase Agreements ....... $ 15,938 $ 34,608 Federal Home Loan Bank Advances .......... 55,000 -- --------------- --------------- Total Borrowed Money ................... $ 70,938 $ 34,608 =============== =============== At June 30, 2000, the Company had lines of credit totaling $30.0 million with correspondent banks for short-term liquidity needs. PAGE 14 SHAREHOLDERS' EQUITY Shareholders' equity increased by $11.2 million, or 5.9% during the six months ended June 30, 2000 due to comprehensive income of $13.9 million less cash dividends of $4.1 million. Comprehensive income for the period included net income of $16.9 million and unrealized loss on securities available for sale, net of tax, of $2.9 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 (dollars in thousands):
JUNE 30, 2000 DECEMBER 31, 1999 --------------------------- -------------------------- AMOUNT RATIO AMOUNT RATIO ----------- ----------- ----------- ----------- (UNAUDITED) Total Shareholders' Equity before unrealized gains or losses on Securities Available for Sale ................ $ 215,768 $ 201,636 Less Goodwill and Other Deductions ................................. (42,597) (44,796) ----------- ----------- ----------- ----------- Total Tier I Capital ............................................... 173,171 156,840 Total Tier II Capital .............................................. 18,239 16,711 ----------- ----------- ----------- ----------- Total Qualifying Capital ........................................... $ 191,410 $ 173,551 =========== =========== =========== =========== Total Risk-Based Capital ........................................... $ 191,410 12.00% $ 173,551 11.94% Total Risk-Based Capital Minimum ................................... 127,624 8.00 116,313 8.00 ----------- ----------- ----------- ----------- Tier I Risk-Based Capital .......................................... 173,171 10.86 156,840 10.79 Tier I Risk-Based Capital Minimum .................................. 63,812 4.00 58,157 4.00 ----------- ----------- ----------- ----------- Tier I Leverage Capital ............................................ 173,171 7.78 156,840 7.58 Tier I Leverage Capital Minimum .................................... 89,021 4.00 82,777 4.00 =========== =========== =========== ===========
At June 30, 2000, 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. RESULTS OF OPERATIONS NET INCOME Net income available for common shareholders was $8.5 million and $7.5 million and earnings per diluted common share were $0.58 and $0.51 for the three months ended June 30, 2000 and 1999, respectively. Net income increased due to sustained loan growth. Return on assets averaged 1.53% and 1.63% while return on shareholders' equity averaged 17.48% and 16.29% for the three months ended June 30, 2000 and 1999, respectively. For the six months ended June 30, 2000, net income available for common shareholders was $16.9 million compared to $14.5 million for the same period in 1999, representing an increase of $2.4 million or 16.4%. Earnings per diluted common share were $1.15 and $0.99, respectively, for the six months ended June 30, 2000 and 1999. Return on assets averaged 1.54% and return on shareholders' equity averaged 17.61% for the six months ended June 30, 2000 compared to 1.62% and 16.10%, respectively, for the same period in 1999. INTEREST INCOME Total interest income for the three months ended June 30, 2000 was $44.7 million, an increase of $10.1 million or 29.2% from the three months ended June 30, 1999. For the six months ended June 30, 2000, interest income was $86.7 million, a $19.1 million or 28.2% increase from the same period in 1999. This increase in interest income is due to a $363.7 million or 21.7% increase in average earning assets to $2.0 billion for the three months ended June 30, 2000 from the same period last year. Average earning assets increased by $352.8 million or 21.5% to $2.0 billion for the six months ended June 30, 2000. PAGE 15 Interest income on loans increased $8.8 million or 32.4% to $35.8 million for the three months ended June 30, 2000. A $306.1 million or 26.3% increase in average loans outstanding over the same period in 1999 propelled this increase. Interest income on securities increased to $8.6 million, a $1.4 million increase from the prior comparable period. This increase was attributable to a $67.8 million increase in average securities, up 14.0% when compared to the three months ended June 30, 1999. For the six months ended June 30, 2000, interest income on loans increased 31.3% to $69.4 million, up from $52.8 million for the same period in 1999. Interest income on securities increased to $16.9 million, an increase of $2.8 million or 20.1% from the prior period. These gains were principally related to an increase of average earning assets to $2.0 billion for the six months ended June 30, 2000, an increase of 21.5% from the same period last year. INTEREST EXPENSE Interest expense on deposits and other borrowings increased to $20.8 million for the three months ended June 30, 2000 compared to $14.9 million for the same period in 1999. For the six months ended June 30, 2000, interest expense of deposits and other borrowings was $39.6 million compared to $29.2 million for the same period in 1999. The increase in interest expense was attributable to a $335.6 million and $327.1 million increase in average interest-bearing liabilities from the three and six month comparable period, respectively. NET INTEREST INCOME Net interest income, reported on a tax equivalent basis, was $24.3 million for the three months ended June 30, 2000, compared with $20.1 million for the same period in 1999, an increase of $4.2 million or 20.7%. For the six months ended June 30, 1999, net interest income increased $8.8 million or 22.4% to $47.9 million from $39.1 million for the same period in 1999. The increase in net interest income during the three and six months ended June 30, 2000 was largely due to growth in average interest-earning assets, primarily loans. The net interest margin was 4.78% for the three months ended June 30, 2000, compared with 4.81% for the same period in 1999. This decrease was attributable to a fifty-six basis point increase in the cost of average interest-bearing liabilities to 4.82%, up from 4.26% for the same period last year. This was partially offset by an increase in the yield on average interest-earning assets by fifty-two basis points to 8.89% for the three months ended June 30, 2000. The net interest margin was 4.83% for the six months ended June 30, 2000, up from 4.81% for the same period in 1999. This increase was attributable to a forty-three basis point increase in the yield on average interest-earning assets of 8.83%, up from 8.40% for the same period last year. The cost of interest-bearing liabilities also increased by forty basis points to 4.69% for the six months ended June 30, 2000. The Company's net interest income is affected by changes in the amount and mix of interest-earning assets and interest-bearing liabilities, referred to as a "volume change". It is also affected by changes in yields earned on interest-earning assets and rates paid on interest-bearing deposits and other borrowed funds, referred to as a "rate change". The following tables present for 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 2000 and 1999 (dollars in thousands): PAGE 16
THREE MONTHS ENDED -------------------------------------------------------------------------------------------- JUNE 30, 2000 JUNE 30, 1999 ---------------------------------------------- ------------------------------------------ AVERAGE YIELD/ AVERAGE YIELD/ TAXABLE-EQUIVALENT BASIS (1) BALANCE INTEREST RATE (2) BALANCE INTEREST RATE (2) ------------ ------------ ------------ ------------ ------------ ------------ (UNAUDITED) Assets Interest-Earning Assets Loans Commercial .................... $ 509,145 $ 12,136 9.59% $ 418,128 $ 9,221 8.85% Real Estate ................... 825,971 20,190 9.83 619,561 14,587 9.44 Consumer ...................... 136,294 3,600 10.62 127,597 3,375 10.61 ------------ ------------ ------------ ------------ ------------ ------------ Total Loans ................. 1,471,410 35,926 9.82 1,165,286 27,183 9.36 ------------ ------------ ------------ ------------ ------------ ------------ Securities (3) Taxable ....................... 503,147 8,003 6.40 440,068 6,689 6.10 Tax-Exempt .................... 48,240 897 7.48 43,556 765 7.04 ------------ ------------ ------------ ------------ ------------ ------------ Total Securities ............ 551,387 8,900 6.49 483,624 7,454 6.18 ------------ ------------ ------------ ------------ ------------ ------------ Time Deposits ................... 3,991 62 6.25 355 4 4.52 Federal Funds Sold .............. 13,462 203 6.06 27,245 324 4.77 ------------ ------------ ------------ ------------ ------------ ------------ Total Interest-Earning Assets . 2,040,250 45,091 8.89% 1,676,510 34,965 8.37% ------------ ------------ ------------ ------------ ------------ ------------ Cash and Due from Banks ........... 62,437 54,891 Premises and Equipment, Net ....... 76,772 69,613 Other Assets ...................... 85,548 51,507 Allowance for Loan Losses ......... (18,260) (14,193) ------------ ------------ ------------ ------------ ------------ ------------ Total Assets .................... $ 2,246,747 $ 1,838,328 ============ ============ ============ ============ ============ ============ Liabilities Interest-Bearing Liabilities Savings ......................... $ 122,596 $ 671 2.20% $ 111,935 $ 622 2.23% Money Market Checking And Savings ................... 392,048 2,987 3.06 297,491 2,078 2.80 Time Deposits ................... 1,181,528 16,571 5.64 981,061 12,054 4.93 ------------ ------------ ------------ ------------ ------------ ------------ Total Savings and Time Deposits ............... 1,696,172 20,229 4.80 1,390,487 14,754 4.26 ------------ ------------ ------------ ------------ ------------ ------------ Other Borrowed Money .......... 40,225 589 5.89 10,345 108 4.19 ------------ ------------ ------------ ------------ ------------ ------------ Total Interest-Bearing Liabilities ................. 1,736,397 20,818 4.82% 1,400,832 14,862 4.26% ------------ ------------ ------------ ------------ ------------ ------------ Demand Deposits ................... 299,029 246,995 Other Liabilities ................. 15,278 6,648 ------------ ------------ ------------ ------------ ------------ ------------ Total Liabilities ............... 2,050,704 1,654,475 ------------ ------------ ------------ ------------ ------------ ------------ Shareholders' Equity .............. 196,043 183,853 ------------ ------------ ------------ ------------ ------------ ------------ Total Liabilities and Shareholders' Equity .......... $ 2,246,747 $ 1,838,328 ============ ============ ============ ============ ============ ============ Net Interest Income .................. $ 24,273 $ 20,103 ============ ============ ============ ============ ============ ============ Net Yield on Total Interest Earning Assets .................... 4.78% 4.81% ============ ============ ============ ============ ============ ============
(1) For analytical purposes, income from tax-exempt assets, primarily securities issued by state and local governments or authorities, is adjusted by an increment that equates tax-exempt income to interest from taxable assets (assuming a 35% tax rate). (2) Annualized. (3) Yield is based on amortized cost and does not include any component of unrealized gains or losses. PAGE 17
SIX MONTHS ENDED -------------------------------------------------------------------------------------- JUNE 30, 2000 JUNE 30, 1999 ------------------------------------------- --------------------------------------- AVERAGE YIELD/ AVERAGE YIELD/ TAXABLE-EQUIVALENT BASIS (1) BALANCE INTEREST RATE (2) BALANCE INTEREST RATE (2) ----------- ----------- ----------- ----------- ----------- ----------- (UNAUDITED) Assets Interest-Earning Assets Loans Commercial ...................... $ 496,659 $ 23,568 9.54% $ 409,255 $ 18,129 8.93% Real Estate ..................... 801,293 38,755 9.73 605,956 28,444 9.47 Consumer ........................ 139,056 7,282 10.53 125,060 6,510 10.50 ----------- ----------- ----------- ----------- ----------- ----------- Total Loans ................... 1,437,008 69,605 9.74 1,140,271 53,083 9.39 ----------- ----------- ----------- ----------- ----------- ----------- Securities (3) Taxable ......................... 496,002 15,727 6.38 429,148 13,076 6.14 Tax-Exempt ...................... 48,225 1,786 7.45 43,055 1,496 7.01 ----------- ----------- ----------- ----------- ----------- ----------- Total Securities .............. 544,227 17,513 6.47 472,203 14,572 6.22 ----------- ----------- ----------- ----------- ----------- ----------- Time Deposits ..................... 4,329 131 6.09 357 9 5.08 Federal Funds Sold ................ 8,016 242 6.07 27,989 663 4.78 ----------- ----------- ----------- ----------- ----------- ----------- Total Interest-Earning Assets ... 1,993,580 87,491 8.83% 1,640,820 68,327 8.40% ----------- ----------- ----------- ----------- ----------- ----------- Cash and Due from Banks ............. 64,510 56,727 Premises and Equipment, Net ......... 76,385 69,714 Other Assets ........................ 84,768 54,708 Allowance for Loan Losses ........... (17,947) (13,821) ----------- ----------- ----------- ----------- ----------- ----------- Total Assets ...................... $ 2,201,296 $ 1,808,148 =========== =========== =========== =========== =========== =========== Liabilities Interest-Bearing Liabilities Savings ........................... $ 121,743 $ 1,334 2.20% $ 110,657 $ 1,233 2.25% Money Market Checking And Savings ..................... 391,340 5,894 3.03 298,852 4,218 2.85 Time Deposits ..................... 1,155,930 31,527 5.48 954,227 23,572 4.98 ----------- ----------- ----------- ----------- ----------- ----------- Total Savings and Time Deposits ................. 1,669,013 38,755 4.67 1,363,736 29,023 4.29 ----------- ----------- ----------- ----------- ----------- ----------- Other Borrowed Money .............. 31,142 875 5.65 9,346 201 4.34 ----------- ----------- ----------- ----------- ----------- ----------- Total Interest-Bearing Liabilities ................... 1,700,155 39,630 4.69% 1,373,082 29,224 4.29% ----------- ----------- ----------- ----------- ----------- ----------- Demand Deposits ..................... 293,982 242,421 Other Liabilities ................... 14,211 10,776 ----------- ----------- ----------- ----------- ----------- ----------- Total Liabilities ................. 2,008,348 1,626,279 ----------- ----------- ----------- ----------- ----------- ----------- Shareholders' Equity ................ 192,948 181,869 ----------- ----------- ----------- ----------- ----------- ----------- Total Liabilities and Shareholders' Equity ............ $ 2,201,296 $ 1,808,148 =========== =========== =========== =========== =========== =========== Net Interest Income .................... $ 47,861 $ 39,103 =========== =========== =========== =========== =========== =========== Net Yield on Total Interest Earning Assets ...................... 4.83% 4.81% =========== =========== =========== =========== =========== ===========
(1) For analytical purposes, income from tax-exempt assets, primarily securities issued by state and local governments or authorities, is adjusted by an increment that equates tax-exempt income to interest from taxable assets (assuming a 35% tax rate). (2) Annualized. (3) Yield is based on amortized cost and does not include any component of unrealized gains or losses. PAGE 18 The following table presents the effects of changes in volume, rate and rate/volume on interest income and interest expense for major categories of interest-earning assets and interest-bearing liabilities. Nonaccrual loans are included in assets, thereby reducing yields (see "Nonperforming Assets"). The allocation of the rate/volume variance has been made pro-rata on the percentage that volume and rate variances produce in each category. An analysis of changes in net interest income follows (dollars in thousands):
THREE MONTHS ENDED JUNE 30, SIX MONTHS ENDED JUNE 30, 2000 COMPARED TO 1999 2000 COMPARED TO 1999 -------------------------------------------- -------------------------------------------- DUE TO CHANGE IN DUE TO CHANGE IN NET -------------------- RATE/ NET -------------------- RATE/ TAXABLE-EQUIVALENT BASIS (1) CHANGE VOLUME RATE VOLUME CHANGE VOLUME RATE VOLUME -------- -------- -------- -------- -------- -------- -------- -------- (UNAUDITED) Interest Income Loans ........................... $ 8,743 $ 7,047 $ 1,343 $ 353 $ 16,522 $ 14,000 $ 2,001 $ 521 Securities Taxable ....................... 1,314 938 329 47 2,651 2,079 495 77 Tax-Exempt .................... 132 80 47 5 290 185 94 11 Time Deposits in Bank ........... 58 40 2 16 122 100 2 20 Federal Funds Sold .............. (121) (165) 88 (44) (421) (472) 180 (129) -------- -------- -------- -------- -------- -------- -------- -------- Total Interest Income ......... 10,126 7,940 1,809 377 19,164 15,892 2,772 500 -------- -------- -------- -------- -------- -------- -------- -------- Interest Expense Deposits ........................ 5,475 3,194 1,870 411 9,732 6,595 2,563 574 Other Borrowed Money ............ 481 311 44 126 674 471 61 142 -------- -------- -------- -------- -------- -------- -------- -------- Total Interest Expense ........ 5,956 3,505 1,914 537 10,406 7,066 2,624 716 -------- -------- -------- -------- -------- -------- -------- -------- Net Interest Income Before Allocation of Rate/Volume ....... 4,170 4,435 (105) (160) 8,758 8,826 148 (216) Allocation of Rate/Volume .......... -- 654 (814) 160 -- 948 (1,164) 216 -------- -------- -------- -------- -------- -------- -------- -------- Changes in Net Interest Income ..... $ 4,170 $ 5,089 $ (919) $ -- $ 8,758 $ 9,774 $ (1,016) $ -- ======== ======== ======== ======== ======== ======== ======== ========
(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 2000 and 1999). PROVISION FOR LOAN LOSSES The Company recorded a provision for loan losses of $2.3 million for the three months ended June 30, 2000, compared to $1.5 million for the three months ended June 30, 1999. For the six months ended June 30, 2000, the Company recorded a provision for loan losses of $4.5 million compared to $2.8 million for the same period in 1999. The provision for loan losses reflected an increase of $826,000 or 55.1% for the three months ended June 30, 2000 and an increase of $1.7 million or 59.2% for the six months ended June 30, 2000 compared to the same period in 1999 necessary to maintain the total allowance for loan losses at an adequate level consistent with the Company's methodology. The increase resulted primarily from an increase in impaired loans, as well as management's evaluation of the specific reserve related to these loans. The specific reserve on impaired loans increased by $2.3 million and $2.5 million during the three and six months ending June 30, 2000. 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 loan loss experience, the volume and type of lending conducted by the Company, the amount of nonperforming assets, regulatory policies, generally accepted accounting principles, and general economic conditions, particularly as they relate to the Company's lending area. See "Allowance for Loan Losses." NONINTEREST INCOME The Company's primary sources of Noninterest Income are service charges on deposit accounts and other banking service related fees. Noninterest Income totaled $5.4 million for the three months ended June 30, 2000 compared to $4.2 million for 1999. Excluding Net Realized Gains (Losses) on Sales of Securities Available for Sale, Noninterest Income increased $1.2 million or 28.7% from 1999. For the six months ended June 30, 2000, Noninterest Income totaled $10.6 million, up from $8.4 million for the same period in 1999. Noninterest Income for the six months ended June 30, 2000, excluding Net Realized Gains (Losses) on Sales of Securities Available for Sale increased $2.3 million or 27.0% over the same period in 1999. The Noninterest Income growth in the three and six months ended June 30, 2000 compared to the same prior period in 1999 resulted primarily from the increased volume of business conducted by the Company and, in part, because of the Harlingen Bancshares, Inc. acquisition in fourth quarter 1999. PAGE 19 Total Service Charges of $3.6 million for the three months ended June 30, 2000 increased $675,000 or 23.4% compared to $2.9 million for the same period in 1999. Total Service Charges were $7.3 million for the six months ended June 30, 2000 compared to $5.7 million for the same period in 1999. The increase in Total Service Charges is attributable to increased account transaction fees generated by deposit growth experienced by the Company. Trust Service Fees of $589,000 for the three months ended June 30, 2000 increased $94,000 or 19.0% compared to $495,000 for comparable prior year period. Trust Service Fees were $1.1 million for the six months ended June 30, 2000 compared to $976,000 for the same period in 1999. The increase in Trust Service Fees is attributable to an increase in the number of trust accounts managed, as well as an increase in fees effective April 1, 2000. The fair market value of assets managed at June 30, 2000 was $374.7 million compared to $360.4 million at the end of the first quarter and $338.4 million a year ago. 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. There were no Net Realized Gains (Losses) on Sales of Securities Available for Sale for the three months ended June 30, 2000 compared to $1,000 net losses for 1999. In addition, there were no Net Realized Gains (Losses) on Sales of Securities Available for Sale for the six months ended June 30, 2000 compared to $1,000 net losses for the same period in 1999. Market opportunities to realize bond profits were limited as bond prices generally fell during the six months ended June 30, 1999 and 2000. Unrealized holding losses on securities available for sale totaled $25.4 million at June 30, 2000. (see "Shareholders' Equity"). Data Processing Service Fees of $687,000 for the three months ended June 30, 2000 increased $169,000 or 32.6% compared to $518,000 for the same period last year. During the six months ended June 30, 2000, data processing fees increased $258,000 or 25.5% to $1.3 million compared to $1.0 million during the same period in 1999. This increase arose from the acquisition of one additional data processing client during second quarter 1999 and one during second quarter 2000. Furthermore, increased utilization of services was provided to existing clients. The number of data processing clients as of June 30, 2000 and 1999 was 8 and 7, respectively. Other Operating Income of $566,000 for the three months ended June 30, 2000 increased $267,000 or 89.3% compared to $299,000 for the same 1999 period. During the six months ended June 30, 2000, Other Operating Income increased $349,000 or 52.5% to $1.0 million compared to $665,000 during the same period in 1999. The increase in Other Operating Income during the three and six months ended June 30, 2000 was primarily attributable to a $167,000 gain on the sale of land during second quarter 2000. In addition, income from the Rabbi Trust increased by $79,000 and $113,000 during the three and six months ending June 30, 2000, respectively. The Rabbi Trust was set up to provide funding for the Deferred Compensation Plan for the benefit of Glen E. Roney, Chief Executive Officer of the Company. NONINTEREST EXPENSE Noninterest Expense of $13.6 million for the three months ended June 30, 2000 increased $2.6 million or 24.2% compared to $10.9 million for 1999. For the six months ended June 30, 2000, noninterest expense totaled $26.8 million, an increase of $5.4 million or 25.0%, from $21.5 million for the same period in 1999. The efficiency ratio of expense to total revenue was 44.18% for the three months ended June 30, 2000 compared to 44.51% for the same period in 1999. For the six months ended June 30, 2000, the efficiency ratio was 45.05%, up from 44.80% for 1999. 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). The increase results primarily from higher personnel costs due to an increase in the number of employees since 1999. Salaries and Employee Benefits, the largest category of Noninterest Expense, of $6.1 million for the three months ended June 30, 2000 increased $598,000 or 10.8% compared to the same period last year of $5.6 million. Salary and Employee Benefits for the six months ended June 30, 2000 was $12.8 million, an increase of $2.3 million or 21.8% from the same period in 1999. The increase in 2000 over 1999 reflects increases in base salaries and higher levels of staff, including the staff acquired as a result of the Harlingen Bancshares, Inc. acquisition. The number of full-time equivalent employees of 927 at June 30, 2000 increased 20.4% from 770 at June 30, 1999. Salaries and Employee Benefits averaged 1.10% of average assets for the three months ended June 30, 2000 compared to 1.21% for the three months ended June 30, 1999. For the six months ended June 30, 2000 and 1999, Salaries and Employee Benefits averaged 1.17% of assets. Net Occupancy Expense of $1.0 million for the three months ended June 30, 2000 increased $37,000 or 3.7% compared to $1.0 million for 1999. For the six months ended June 30, 2000, Net Occupancy Expense increased $8,000 PAGE 20 or 0.4% from the same period a year ago to $2.0 million. Although occupancy expenses increased primarily with the acquisition of Harlingen Bancshares, Inc. during fourth quarter 1999, the increase was offset by increased rental income generated from the corporate headquarters building in McAllen, Texas. Equipment Expense of $1.6 million for the three months ended June 30, 2000 increased $322,000 or 26.2% compared to $1.2 million for 1999. During the six months ended June 30, 2000, Equipment Expense totaled $3.0 million, an increase of $526,000 or 21.5% over the same period in 1999. Depreciation and other equipment expenses associated with a 11.5% increase in premises and equipment since 1999, partly attributable to the Harlingen Bancshares, Inc. acquisition, contributed to the increase in Equipment Expense for the three and six months ended June 30, 2000. Other Real Estate Expense, Net, includes rent income from foreclosed properties, gain or loss on sale of other real estate properties and direct expenses of foreclosed real estate including property taxes, maintenance costs and write-downs. Write-downs of other real estate are required if the fair value of an asset acquired in a loan foreclosure subsequently declines below its carrying value. Other Real Estate Expense, Net of $451,000 for the three months ended June 30, 2000 increased $348,000 or 337.9% compared to $103,000 for the three months ended June 30, 1999. The net increase during second quarter 2000 is primarily attributable to a $410,000 write down on a foreclosed property. Other Real Estate Expense, Net increased $286,000 or 145.9% to $482,000 expense for the six months ended June 30, 2000 compared to the same period in 1999. During the six months ended June 30, 2000, the net increase resulting from the $410,000 write down was partially offset by a decrease in other real estate expenses by $158,000. The primarily reason for the decrease in other real estate expenses is attributable to the sale of a large foreclosed property in March 1999 with other real estate expenses totaling $183,000 for the six months ended June 30, 1999. Management is actively seeking buyers for all Other Real Estate. Amortization of Goodwill and Identifiable Intangibles of $1.1 million for the three months ended June 30, 2000 increased $429,000 or 63.2% compared to $679,000 for the same period in 1999. For the six months ended June 30, 2000, Amortization of Goodwill and Identifiable Intangibles totaled $2.3 million, an increase of $894,000 or 65.8% from the same period in 1999. The increase in Amortization of Goodwill and Identifiable Intangibles during the three and six months ended June 30, 2000 was due to the amortization of $21.0 million of goodwill and other intangibles added during fourth quarter 1999 with the Harlingen Bancshares, Inc. acquisition. PAGE 21 A detailed summary of Noninterest Expense follows (dollars in thousands):
THREE MONTHS ENDED SIX MONTHS ENDED JUNE 30, JUNE 30, ---------------------------------- ---------------------------------- 2000 1999 2000 1999 --------------- --------------- --------------- --------------- (UNAUDITED) Salaries and Wages ....................................... $ 4,981 $ 4,491 $ 10,253 $ 8,364 Employee Benefits ........................................ 1,168 1,060 2,555 2,154 --------------- --------------- --------------- --------------- Total Salaries and Employee Benefits .................. 6,149 5,551 12,808 10,518 --------------- --------------- --------------- --------------- Net Occupancy Expense .................................... 1,045 1,008 2,001 1,993 --------------- --------------- --------------- --------------- Equipment Expense ........................................ 1,550 1,228 2,977 2,451 --------------- --------------- --------------- --------------- Other Real Estate Expense, Net Rent Income ........................................... (81) (129) (241) (183) (Gain) Loss on Sale ................................... (34) 35 (77) (172) Expenses .............................................. 144 196 378 536 Write-Downs ........................................... 422 1 422 15 --------------- --------------- --------------- --------------- Total Other Real Estate Expense, Net ................ 451 103 482 196 --------------- --------------- --------------- --------------- Amortization of Goodwill and Identifiable Intangibles .... 1,108 679 2,253 1,359 --------------- --------------- --------------- --------------- Other Noninterest Expense Advertising and Public Relations ...................... 386 246 969 550 Data Processing and Check Clearing .................... 480 333 915 696 Director Fees ......................................... 61 102 159 181 Franchise Tax ......................................... 108 103 (94) 225 Insurance ............................................. 115 67 188 168 FDIC Insurance ........................................ 97 45 193 91 Legal ................................................. 170 154 338 295 Professional Fees ..................................... 293 213 628 496 Postage, Delivery and Freight ......................... 264 221 542 457 Printing, Stationery and Supplies ..................... 427 342 913 714 Telephone ............................................. 190 131 372 273 Other Losses .......................................... 255 81 350 170 Miscellaneous Expense ................................. 412 312 830 625 --------------- --------------- --------------- --------------- Total Other Noninterest Expense ..................... 3,258 2,350 6,303 4,941 --------------- --------------- --------------- --------------- Total Noninterest Expense ................................ $ 13,561 $ 10,919 $ 26,824 $ 21,458 =============== =============== =============== ===============
Professional Fees for the three months ended June 30, 2000 of $293,000 increased by $80,000 or 37.6% compared to $213,000 during the same period in 1999. For the six months ended June 30, 2000, Professional Fees increased by $132,000 or 26.6% to $628,000 compared to the same period in 1999. The increase was primarily attributable to consultation fees relating to the implementation of the check imaging system and the new call center. INCOME TAX EXPENSE The Company recorded income tax expense of $4.9 million for the three months ended June 30, 2000 compared to $4.0 million for the three months ended June 30, 1999. For the six months ended June 30, 2000, the provision for income taxes was $9.4 million, an increase of $1.5 million or 19.2% from $7.9 million provided for the same period in 1999. The increase in income tax expense is due primarily to an increased level of pretax income during first quarter 2000. 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 June 30, 2000, the Company exceeded all applicable capital requirements, having a total risk-based capital ratio of 12.00%, a Tier I risk-based capital ratio of 10.86%, and a leverage ratio of 7.78%. PAGE 22 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 June 30, 2000, 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 29.8% compared to 31.5% at June 30, 1999. Liability liquidity is provided by access to core funding sources, principally various customers' interest-bearing and noninterest-bearing deposit accounts in the Company's trade area. The Company does not have nor does it solicit brokered deposits. Federal funds purchased and short-term borrowings are additional sources of liquidity. These sources of liquidity are short-term in nature, and are used, as necessary, to fund asset growth and meet short-term liquidity needs. During the six months ended June 30, 2000, funds for $39.4 million of securities purchases and $118.6 million of net loan growth came from various sources, including a net increase in deposits of $92.0 million, $36.3 in net increase in other borrowed money and $12.4 million in proceeds from maturing securities and $16.9 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. NEGATIVE IMPACT OF LITIGATION POSSIBLE From time to time the Company is a party to legal proceedings including matters involving commercial banking issues and other proceedings arising in the ordinary course of business. Although not currently anticipated by management, the Company's results could be materially impacted by legal and settlement expenses related to such lawsuits. ITEM 3. 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 PAGE 23 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 June 30, 2000 and December 31, 1999 (dollars in thousands): INCREASE (DECREASE) IN NET INTEREST INCOME CHANGES IN INTEREST ESTIMATED NET --------------------------- RATES (BASIS POINTS) INTEREST INCOME AMOUNT PERCENT - -------------------- ---------------------- ------------- ------------ (Unaudited) June 30, 2000 +100 $108,376 $1,956 1.8% - 106,420 - - -100 103,873 (2,547) (2.4) December 31, 1999 +100 99,136 1,189 1.2 - 97,947 - - -100 95,954 (1,993) (2.0) - -------------------- ---------------------- ------------- ------------ 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. PART II. OTHER INFORMATION ITEM 1. LEGAL PROCEEDINGS The Company faces ordinary routine litigation arising in the normal course of business. In the opinion of management, liabilities (if any) arising from such claims will not have a material adverse effect upon the business, results of operations or financial condition of the Company. ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS. None PAGE 24 ITEM 3. DEFAULTS UPON SENIOR SECURITIES. None ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS. The Annual Meeting of Shareholders of the Corporation was held on April 24, 2000. The following matter was submitted to a vote of the Corporation's shareholders. Election of all eight director nominees was approved.
----------------------------------- -------------------- ------------------------- ------------------------- NOMINEE TOTAL VOTES FOR TOTAL VOTES WITHHELD TOTAL VOTES AGAINST ----------------------------------- -------------------- ------------------------- ------------------------- Morris Atlas 12,044,763 571,676 - Frank N. Boggus 12,066,728 549,711 - Robert G. Farris 12,067,428 549,011 - C. Kenneth Landrum, M.D. 12,074,094 542,345 - Glen E. Roney 12,067,378 549,061 - Julie G. Uhlhorn 12,067,928 548,511 - Jack Whetsel 12,071,819 544,620 - Mario Max Yzaguirre 12,074,048 542,391 - ----------------------------------- -------------------- ------------------------- -------------------------
ITEM 5. OTHER INFORMATION. None ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K (a) The following documents are filed as part of this Quarterly Report on Form 10-Q: (1) Exhibits -- The following exhibits are filed as a part of this Quarterly Report on Form 10-Q: 27 Financial Data Schedule (b) Reports of Form 8-K No report on Form 8-K was filed by Texas Regional Bancshares, Inc. during the three months June 30, 2000. PAGE 25 SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. TEXAS REGIONAL BANCSHARES, INC. (Registrant) August 1, 2000 /s/ G. E. Roney - -------------------- ------------------------------------- Glen E. Roney Chairman of the Board, President & Chief Executive Officer August 1, 2000 /s/ R. T. Pigott, Jr. - -------------------- ------------------------------------- R. T. Pigott, Jr. Executive Vice President & Chief Financial Officer PAGE 26 EX-27 2 0002.txt
9 This schedule contains summary financial information extracted from the Consolidated Balance Sheets and Consolidated Statements of Income and Comprehensive Income included herein and is qualified in its entirety by reference to such financial statements. 1,000 6-MOS DEC-31-2000 JUN-30-2000 63,428 3,999 0 0 554,241 2,050 2,073 1,494,431 18,239 2,262,508 1,977,313 70,938 14,880 0 0 0 14,619 184,758 2,262,508 69,392 16,896 373 86,661 38,755 39,630 47,031 4,494 0 26,824 26,324 26,324 0 0 16,892 1.16 1.15 4.83 13,426 4,013 9,253 0 16,711 3,187 221 18,239 16,743 0 1,496
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