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UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the fiscal year ended December 31, 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)
Securities registered pursuant to Section 12(b) of the Act:
TITLE OF EACH CLASS NAME OF EACH EXCHANGE ON WHICH REGISTERED
- ------------------- -----------------------------------------
None None
Securities registered pursuant to Section 12(g) of the Act:
CLASS A VOTING COMMON, $1.00 PAR VALUE PER SHARE
(Title of class)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes [X] No [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K (Sec. 229.405 of this chapter) is not contained herein, and
will not be contained, to the best of registrant's knowledge, in definitive
proxy or information statements incorporated by reference in Part III of this
Form 10-K or any amendment to this Form 10-K. [ ]
Aggregate market value of voting stock held by non-affiliates of the registrant,
computed by reference to the closing price of the stock, as of March 5,
2001: $491,903,352
Number of shares outstanding of the registrant's Class A Voting Common Stock,
$1.00 par value, as of March 5, 2001: 16,090,546
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Registrant's definitive Proxy Statement for its 2001
Annual Meeting of Stockholders are incorporated into Part III; Items 10-13 of
this Form 10-K, to be filed not later than 120 days after the close of the
Registrant's fiscal year.
PART I
ITEM 1. BUSINESS
GENERAL
Texas Regional Bancshares, Inc. ("Texas Regional" or the "Company") is a
Texas business corporation incorporated in 1983 and headquartered in McAllen,
Texas. The Company is a bank holding company within the meaning of the Bank
Holding Company Act of 1956 ("the BHCA") and as such is registered with the
Board of Governors of the Federal Reserve System ("Federal Reserve Board").
Texas Regional Delaware, Inc., incorporated under the laws of Delaware as a
wholly owned second tier bank holding company subsidiary, owns Texas State Bank
(the "Bank"), the Company's primary operating subsidiary. The Bank has two
wholly owned subsidiaries: (i) TSB Securities, Inc., incorporated in 1997 to
provide full service broker-dealer services and (ii) TSB Properties, Inc.,
incorporated in 1998 to receive and liquidate foreclosed assets.
Recently, the Company has grown rapidly through a series of strategic
acquisitions. The Bank acquired the Rio Grande City and Roma branches of First
National Bank of South Texas during 1995. The Company completed a secondary
public offering of 2.5 million shares of the Company's Class A Voting Common
Stock on May 14, 1996. Concurrently, the Company also completed the acquisition
of First State Bank & Trust Co., Mission, Texas and The Border Bank, Hidalgo,
Texas, through merger with the Bank. On February 19, 1998, the Company acquired
Brownsville National Bank, Brownsville, Texas, Texas Bank and Trust,
Brownsville, Texas and Bank of Texas, Raymondville, Texas through merger with
the Bank. The Company acquired Harlingen National Bank, Harlingen, Texas on
October 1, 1999 through merger with the Bank.
The Bank operates twenty-six banking locations in the Rio Grande Valley
including four banking locations in McAllen (including its main office), four
banking locations in Brownsville, four banking locations in Harlingen, three
banking locations in Mission, two banking locations in Weslaco, and one banking
location each in Edinburg, Hidalgo, La Feria, Mercedes, Palm Valley, Penitas,
Raymondville, Rio Grande City and Roma. At December 31, 2000, the Company had
consolidated total assets of $2.4 billion, loans outstanding (net of unearned
discount) of $1.6 billion, deposits of $2.1 billion, and shareholders' equity of
$227.7 million.
The Company's business strategy is to provide its customers with the
financial sophistication and breadth of products of a regional bank, while
retaining the local appeal and level of service of a community bank. The Board
of Directors and management have maintained the Bank's community orientation by
tailoring products and services to meet community and customer needs. Management
believes that the Bank is well positioned in its market due to its responsive
customer service, the strong community involvement of management and employees,
the recent trends in the Texas banking environment and the vitality of the Rio
Grande Valley economy. Management's strategy is to provide a business culture in
which individual customers and small and medium sized businesses are accorded
the highest priority in all aspects of the Company's operations.
For its business customers, the Bank offers checking facilities,
certificates of deposit, short-term loans for working capital purposes,
construction financing, mortgage loans, term loans for fixed asset and expansion
needs and other commercial loans. The services provided for individuals by the
Bank include checking accounts, savings accounts, certificates of deposit,
individual retirement accounts and consumer loan programs, including installment
loans for home repair and for purchases of consumer goods, including
automobiles, trucks and boats, and mortgage loans. The Bank also provides
travelers checks, money orders and safe deposit facilities, and offers trust
services.
The Bank has also expanded the services that it provides to third party
correspondent banks. The Bank's data processing center, for example, presently
serves seven banks in addition to providing data processing services for all of
the Bank's banking locations.
Management believes there may be opportunities to expand by acquiring
other banks or by acquiring assets and deposits that will allow the Company to
enter geographically adjacent markets or further increase market share in
existing markets. Management intends to pursue acquisition opportunities in
strategic markets in circumstances in which management believes that its
managerial, operational and capital resources will enhance the performance of
acquired institutions. There are currently no agreements or understandings
related to any acquisition.
COMPETITION
The Company's operations are located in the Rio Grande Valley, which
consists of Cameron, Hidalgo, Starr and Willacy Counties. Cameron, Hidalgo and
Starr Counties are each directly adjacent to the Rio Grande River, which forms
part of the border between the United States and Mexico.
The Bank encounters intense competition in its commercial banking
business, primarily from other banks located in its market area. The Bank also
competes with insurance, finance and mortgage companies, savings and loan
institutions, credit unions, money market funds and other financial
institutions. Competition is based upon interest rates offered on deposit
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accounts, interest rates charged on loans and other credit and service charges,
the quality and scope of the services rendered, the convenience of banking
facilities, and, in the case of loans to commercial borrowers, the banks'
lending limits. A substantial number of the commercial banks in the Rio Grande
Valley are branches of much larger organizations affiliated with national,
regional or state-wide banking companies which are larger than the Bank in terms
of capital, resources and personnel. However, as a major independent community
bank headquartered in its primary market area, management believes that the
Company's community commitment and involvement in its primary market area, as
well as its commitment to quality and personalized banking services, are factors
that contribute to the Company's competitiveness.
REGULATION AND SUPERVISION
In addition to the generally applicable state and federal laws governing
businesses and employers, special federal and state laws applicable only to
financial institutions and their parent companies extensively regulate the
Company and the Bank. Virtually all aspects of the Company's operations are
subject to specific requirements or restrictions and general regulatory
oversight, from laws regulating consumer finance transactions, such as the Truth
In Lending Act, the Home Mortgage Disclosure Act and the Equal Credit
Opportunity Act, to laws regulating collections and confidentiality, such as the
Fair Debt Collections Practices Act, the Fair Credit Reporting Act and the Right
to Financial Privacy Act. With few exceptions, state and federal banking laws
have as their principal objective either the maintenance of the safety and
soundness of the federal deposit insurance system or the protection of consumers
or classes of consumers, rather than the specific protection of shareholders of
the Company.
References to statutes, regulations, decisions and interpretations in this
Annual Report do not purport to be complete and are qualified in their entirety
by reference to the actual text of the relevant statutes, regulations, decisions
and interpretations.
REGULATION OF THE COMPANY
The Company is a bank holding company within the meaning of the Bank
Holding Company Act of 1956 (the "BHCA"), as amended, and therefore is subject
to regulation and supervision by the Board of Governors of the Federal Reserve
System (the "FRB"). In addition, the Company is required to file reports with
and to furnish such other information as the FRB may require pursuant to the
BHCA, and to subject itself to examination by the FRB. The FRB has the authority
to issue bank holding companies orders to cease and desist from unsound
practices and violations of conditions imposed by, or violation of agreements
with, the FRB. The FRB is also empowered to assess civil penalties against
companies or individuals who violate the BHCA or orders or regulations
thereunder in amounts up to $1.0 million per day, to order termination of
non-approved activities and to order termination of ownership and control of
non-approved subsidiaries. Certain violations may also result in criminal
penalties. The FRB and the Federal Deposit Insurance Corporation (the "FDIC"),
as appropriate, are authorized to exercise comparable authority, under the
Federal Deposit Insurance Act (the "FDI Act") and other statutes, with respect
to subsidiary banks.
The FRB takes the position that a bank holding company is required to
serve as a source of financial and managerial strength to its subsidiary banks
and may not conduct its operations in an unsafe or unsound manner. In addition,
it is the FRB's position that, in serving as a source of strength to its
subsidiary banks, a bank holding company should stand ready to use available
resources to provide adequate capital funds to its subsidiary banks during
periods of financial stress or adversity and should maintain the financial
flexibility and capital-raising capacity to obtain additional resources for
assisting its subsidiary banks. A bank holding company's failure to meet its
obligations to serve as a source of strength to its subsidiary banks will
generally be considered by the FRB to be an unsafe and unsound banking practice
or a violation of the FRB regulations or both. Changes in the FDI Act made by
the Federal Deposit Insurance Corporation Improvement Act of 1991 (the "FDICIA")
now require an undercapitalized institution to submit to the FRB a capital
restoration plan with a guaranty, by each company having control of the bank, of
the bank's compliance with the plan.
The BHCA and the Change in Bank Control Act, together with regulations
promulgated by the FRB, require that, depending on the particular circumstances,
either FRB approval must be obtained or notice must be furnished to the FRB and
not disapproved prior to any person or company acquiring "control" of a bank
holding company, such as the Company, subject to certain exemptions for certain
transactions. Control is conclusively presumed to exist if an individual or
company acquires 25% or more of any class of voting securities of the bank
holding company. Control is rebuttably presumed to exist if a person acquires
10% or more but less than 25% of any class of voting securities and either the
company has registered securities under Section 12 of the Exchange Act or no
other person will own a greater percentage of that class of voting securities
immediately after the transaction. The regulations provide a procedure for
challenge of the rebuttable control presumption.
As a bank holding company, the Company is required to obtain approval
prior to merging or consolidating with any other bank holding company, acquiring
all or substantially all of the assets of any bank or acquiring ownership or
control of shares of a bank or bank holding company if, after the acquisition,
the Company would directly or indirectly own or control 5% or more of the voting
shares of such bank or bank holding company.
Page 3
Historically, the Company has been prohibited from acquiring a direct or
indirect interest in or control of more than 5% of the voting shares of any
company which is not a bank or bank holding company and from engaging directly
or indirectly in activities other than those of banking, managing or controlling
banks or furnishing services to its subsidiary bank, except that FRB has
permitted bank holding companies to engage in and own shares of companies
engaged in certain activities found by the FRB to be so closely related to
banking or managing and controlling banks as to be a proper incident thereto.
These activities include, among others, operating a mortgage, finance, credit
card, or factoring company; performing certain data processing operations;
providing investment and financial advice; acting as an insurance agent for
certain types of credit-related insurance; leasing personal property on a full
pay out, non-operating basis; and providing certain stock brokerage and
investment advisory services. In approving acquisitions or the addition of
activities, the FRB has considered whether the acquisition or the additional
activities can reasonably be expected to produce benefits to the public, such as
greater convenience, increased competition, or gains in efficiency, that
outweigh such possible adverse effects as undue concentration of resources,
decreased or unfair competition, conflicts of interest or unsound banking
practices. In considering any application for approval of an acquisition or
merger, the FRB is also required to consider the financial and managerial
resources of the companies and the banks concerned, as well as the applicant's
record of compliance with the Community Reinvestment Act (the "CRA"). The CRA
generally requires a financial institution to take affirmative action to
ascertain and meet the credit needs of its entire community, including low and
moderate income neighborhoods.
The Gramm-Leach-Bliley Act ("Gramm-Leach"), enacted by Congress in
November 1999, now permits bank holding companies with subsidiary banks meeting
certain capital and management requirements to elect to become "financial
holding companies". Beginning in March 2000, financial holding companies may
engage in a full range of financial activities, including not only banking,
insurance and securities activities, but also merchant banking and additional
activities determined to be "financial in nature". Gramm-Leach also provides
that the list of permissible activities will be expanded as necessary for a
financial holding company to keep abreast of competitive and technological
change.
Although it preserves the Federal Reserve as the umbrella supervisor of
financial holding companies, Gramm-Leach adopts an administrative approach to
regulation that defers to the approval and supervisory requirements of the
functional regulators of insurers and insurance agents, broker-dealers,
investment companies, and banks. Thus, the various state and federal regulators
of a financial holding company's operating subsidiaries would retain their
jurisdiction and authority over the operating entities. As the umbrella
supervisor, however, the Federal Reserve has the potential to affect the
operations and activities of financial holding companies' subsidiaries through
its power over the financial holding company parent. In addition, Gramm-Leach
contains numerous trigger points related to legal noncompliance and other
serious problems affecting bank affiliates that could lead to direct Federal
Reserve involvement and to the possible exercise of remedial authority affecting
both financial holding companies and their affiliated operating companies.
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.
The BHCA imposes certain limitations on extensions of credit and other
transactions by and between banks that are members of the Federal Reserve System
and other banks and non-bank companies in the same holding company. Under the
BHCA and the FRB's regulations, a bank holding company and its subsidiaries are
prohibited from engaging in certain tie-in arrangements in connection with any
extension of credit, lease or sale of property or furnishing of services.
The Company, as an affiliate of the Bank, is subject to certain
restrictions regarding transactions between a bank and companies with which it
is affiliated. These provisions limit extensions of credit (including guarantees
of loans) by the Bank to affiliates, investments in the stock or other
securities of the Company by the Bank, and the nature and amount of collateral
that the Bank may accept from any affiliate to secure loans extended to the
affiliate.
REGULATION OF THE BANK
The Bank is a state-chartered bank subject to regulation by the Texas
Department of Banking. The Bank, whose deposits are insured by the Bank
Insurance Fund (the "BIF") of the FDIC, is also a member of the Federal Reserve
System, and therefore the FRB is the primary federal regulator for the Bank.
The requirements and restrictions applicable to the Bank under laws of the
United States and the State of Texas include (i) the requirement that reserves
be maintained, (ii) restrictions on the nature and amount of loans which can be
made, (iii) restrictions on the business activities in which the Bank may
engage, (iv) restrictions on the payment of dividends to shareholders, and (v)
the maintenance of minimum capital requirements.
The Company is dependent upon dividends received from the Bank for
discharge of the Company's obligations and for payment of dividends to the
Company's shareholders. However, the application of minimum capital requirements
and other rules and regulations applicable to the Bank restrict the amount of
dividends that it may declare without prior regulatory approval. The Texas
Banking Department and the FRB can each further limit payment of dividends if
the regulatory authority finds that the payment of dividends would constitute an
unsafe or unsound practice.
Page 4
The laws of the State of Texas also govern interest rate limitations for
the Bank. The maximum annual interest rate that may be charged on most loans
made by the Bank is based on doubling the average auction rate, to the nearest
0.25%, for United States Treasury Bills, as computed by the Office of Consumer
Credit Commissioner of the State of Texas. However, the maximum rate does not
decline below 18% or rise above 24% (except for loans in excess of $250,000 that
are made for business, commercial, investment or other similar purposes
(excluding agricultural loans), in which case the maximum annual rate may not
rise above 28%, rather than 24%). On fixed rate closed-end loans, the maximum
non-usurious rate is to be determined at the time the rate is contracted; while
on floating rate and open-end loans (such as credit cards), the rate varies over
the term of the indebtedness. Federal law has preempted state usury laws (but
not late charge limitations) for loans secured by a first lien on residential
real property.
Banks are affected by the credit policies of other monetary authorities,
including the FRB, which regulate the national supply of bank credit. Such
regulation influences overall growth of bank loans, investments, and deposits
and may also affect interest rates charged on loans and paid on deposits. The
monetary policies of the FRB have had a significant effect on the operating
results of commercial banks in the past and are expected to continue to do so in
the future.
FDICIA
FDICIA requires that federal bank regulatory authorities take "prompt
corrective action" with respect to any depository institution that does not meet
specified minimum capital requirements. The applicable regulations establish
five capital levels which require or permit the FRB and other regulatory
authorities to take supervisory action. The relevant classifications range from
"well capitalized" to "critically undercapitalized". Under these regulations, an
institution is considered "well capitalized" if it has a total risk-based
capital ratio of 10.0% or greater, a Tier I risk-based capital ratio of 6.0% or
greater, and a leverage ratio of 5.0% or greater, and it is not subject to an
order, written agreement, capital directive, or prompt corrective action
directive to meet and maintain a specific capital level for any capital measure.
An institution is considered "adequately capitalized" if it has a total
risk-based capital ratio of 8.0% or greater, a Tier I risk-based capital ratio
of 4.0% or greater and a leverage capital ratio of 3.0% or greater (if the
institution is rated composite 1 in its most recent report of examination,
subject to appropriate federal banking agency guidelines), and the institution
does not meet the definition of a "well capitalized" institution. An institution
is considered "undercapitalized" if it has a total risk-based capital ratio that
is less than 8.0%, a Tier I risk-based capital ratio that is less than 4.0%, or
a leverage ratio that is less than 4.0% (or a leverage ratio that is less than
3.0% if the institution is rated composite 1 in its most recent report of
examination, subject to appropriate federal banking agency guidelines). A
"significantly undercapitalized" institution is one which has a total risk-based
capital ratio that is less than 6.0%, a Tier I risk-based capital ratio that is
less than 3.0%, or a leverage ratio that is less than 3.0%. A "critically
undercapitalized" institution is one that has a ratio of tangible equity to
total assets that is equal to or less than 2.0%.
With certain exceptions, an institution will be prohibited from making
capital distributions or paying management fees if the payment of such
distributions or fees will cause the institution to become "undercapitalized".
Furthermore, "undercapitalized" institutions will be required to file capital
restoration plans with the appropriate federal regulator. Pursuant to FDICIA,
"undercapitalized" institutions also will be subject to restrictions on growth,
acquisitions, branching and engaging in new lines of business unless they have
an approved capital plan that permits otherwise. The FRB also may, among other
things, require an "undercapitalized" institution to issue shares or
obligations, which could be voting stock, to recapitalize the institution or,
under certain circumstances to divest itself of any subsidiary.
The FRB is authorized to take various enforcement actions against any
"significantly undercapitalized" institution and any "undercapitalized
institution" that fails to submit an acceptable capital restoration plan or
fails to implement a plan accepted by the appropriate agency. These powers
include, among other things, requiring the institution to be recapitalized,
prohibiting asset growth, restricting interest rates paid, requiring prior
approval of capital distributions by any bank holding company which controls the
institution, requiring divestiture by the institution of its subsidiaries or by
the holding company of the institution itself, requiring a new election of
directors, and requiring the dismissal of directors and officers. If imposed,
these restrictions, either individually or in aggregate, could have a
significant adverse impact on the operations of the Bank.
"Critically undercapitalized" institutions may be subject to more
extensive control and supervision and the FRB may prohibit any "critically
undercapitalized" institution from, among other things, entering into any
material transaction not in the ordinary course of business, amending its
charter or bylaws, or engaging in certain transactions with affiliates. In
addition, "critically undercapitalized" institutions generally will be
prohibited from making payments of principal or interest on outstanding
subordinated debt. Within 90 days of an institution becoming "critically
undercapitalized", the FRB must appoint a receiver or conservator unless certain
findings are made with respect to the prospect for the institution's continued
operation.
Management believes that the Company meets all capital adequacy
requirements to which it is subject at December 31, 2000. The Bank's capital
ratios exceeded the minimum requirements for "well capitalized" institutions
under the regulatory framework for prompt corrective action at December 31,
2000. As a result, the Company does not believe that FDICIA's prompt corrective
action regulations will have any material effect on the activities or operations
of the Bank. It should be noted, however, that a bank's capital category is
determined solely for the purpose of applying the FDICIA's prompt corrective
action
Page 5
regulations and that the capital category may not constitute an accurate
representation of the Bank's overall financial condition or prospects.
FDICIA also requires the FDIC to establish a schedule to increase (over a
period of not more than 15 years) the reserve ratio of the BIF, which insures
deposits of Texas State Bank, to 1.25% of insured deposits, and impose higher
deposit insurance premiums on BIF members, if necessary, to achieve that ratio.
FDICIA also requires a risk-based assessment system for deposit insurance
premiums commencing January 1, 1994. Since BIF reached its designated reserve
ratio in mid-1995, the FDIC adjusted the BIF assessments, so that the assessment
rate now in effect ranges from a minimum of zero to a maximum of $0.27 per $100
of deposits.
FDICIA contains numerous other provisions, including accounting, auditing
and reporting requirements, the termination of the "too big to fail" doctrine
except in special cases, regulatory standards in areas such as asset quality,
earnings and compensation, and revised regulatory standards for the powers of
state chartered banks, real estate lending, bank closures and capital adequacy.
DEPOSIT INSURANCE
The Deposit Insurance Funds Act of 1996 (the "Funds Act") was enacted on
September 30, 1996. Among its provisions, the Funds Act authorizes the Financing
Corporation (the "FICO") to impose periodic assessments on depository
institutions that are members of BIF in addition to institutions that are
members of the Savings Association Insurance Fund (the "SAIF") in order to
spread the cost of the interest payments on the outstanding FICO bonds over a
larger number of institutions. Until this change in the law, only SAIF-member
institutions bore the cost of funding these interest payments. Thus, BIF-member
institutions will share in the cost of financing outstanding FICO bonds. An
institution's FICO assessments will fluctuate based on a defined rate applied to
deposits held in periods after the date the legislation was enacted. Currently,
the FICO BIF annual rate is 1.96 cents for each $100 of qualified deposits.
ACQUISITIONS
Absent an election to become a financial holding company, the BHCA limits
acquisitions by the Company to commercial banks and companies engaged in
activities that the Federal Reserve Board has determined to be so closely
related to banking as to be a proper incident thereto. The Company's direct
activities are generally limited to furnishing to its subsidiaries services that
qualify under the prescribed regulatory tests. Prior Federal Reserve Board
approval is required under the BHCA for new activities and acquisitions of most
nonbanking companies.
The BHCA, the Federal Bank Merger Act and the Texas Banking Code regulate
the acquisition of commercial banks. The BHCA requires the prior approval of the
Federal Reserve Board for the direct or indirect acquisition of more than five
percent of the voting shares of a commercial bank or bank holding company. With
respect to the Company's subsidiary bank, the approval of the Texas Department
of Banking is required for branching, purchasing the assets of other banks and
for bank mergers.
In reviewing bank acquisition and merger applications, the bank regulatory
authorities will consider, among other things, the competitive effect and public
benefits of the transactions, the capital position of the combined organization,
and the applicant's record under the Community Reinvestment Act and fair housing
laws.
The Corporation regularly evaluates acquisition opportunities and
regularly conducts due diligence activities in connection with possible
acquisitions. As a result, acquisition discussions and, in some cases
negotiations, regularly take place and future acquisitions could occur.
INTERSTATE BANKING AND BRANCHING LEGISLATION
The Riegle-Neal Interstate Branching Efficiency Act of 1994 ("IBBEA")
authorizes interstate acquisitions of banks and bank holding companies without
geographic limitation beginning one year after enactment. In addition, beginning
June 1, 1997 IBBEA authorizes a bank to merge with a bank in another state as
long as neither of the states has opted out of interstate branching between the
date of enactment of IBBEA and May 31, 1997. IBBEA further provides that states
may enact laws permitting interstate bank merger transactions prior to June 1,
1997. A bank may establish a de novo branch in a state in which the bank does
not maintain a branch if the state expressly permits de novo branching. Once a
bank has established branches in a state through an interstate merger
transaction, the bank may establish and acquire additional branches at any
location in the state where any bank involved in the merger transaction could
have established or acquired branches under applicable federal or state law. A
bank that has established a branch in a state through de novo branching may
establish and acquire additional branches in such state in the same manner and
to the same extent as a bank having a branch in such state as a result of an
interstate merger. If a state opts out of interstate branching within the
specified time period, no bank in any other state may establish a branch in the
opting out state, whether through an acquisition or de novo.
Page 6
Texas enacted legislation opting out of interstate branching in 1995.
However, the decision to opt out was rendered ineffective with the 1998 decision
of the United States District Court for the Northern District of Texas affirming
the Comptroller of the Currency's decision to permit an interstate merger
involving a Texas national bank. The Texas Legislature responded in 1999 by
passing The Interstate Banking and Branching Bill, which became effective
September 1, 1999. This legislation provides a framework for interstate
branching in Texas, providing for de novo branching by banks headquartered in
states offering reciprocity to Texas institutions or institutions authorized to
branch in Texas. For banks in other, non-reciprocal states, a five-year minimum
age requirement is retained. The legislation also clarifies other provisions of
Texas law related to interstate banks operating in Texas, and includes a "super
parity" provision which provides a framework for a bank chartered in Texas, upon
application, to conduct any of the activities allowed any other state or federal
financial institution in the nation.
BROKER-DEALER LICENSING REQUIREMENTS
Texas State Bank's subsidiary, TSB Securities, Inc. a broker-dealer
registered with and licensed by the National Association of Securities Dealers,
Inc. ("NASD") and the Texas State Securities Board, is subject to reporting
requirements and regulatory controls imposed by the NASD and the State
Securities Board.
ECONOMIC ENVIRONMENT
The earnings of the Bank are affected not only by general economic
conditions but also by the policies of various governmental regulatory
authorities. The FRB regulates the supply of credit in order to influence
general economic conditions, primarily through open market operations in United
States government obligations, varying the discount rate of financial
institution borrowings and varying reserve requirements against financial
institutions and their subsidiaries. The deregulation of interest rates has had
and is expected to continue to have an impact on the competitive environment in
which the Bank operates.
Governmental policies have had a significant effect on the operating
results of commercial banks in the past and are expected to continue to do so in
the future. However, the Company cannot accurately predict the nature or extent
of any effect that such policies may have on its future business and earnings.
PERSONNEL
The Company employed 935 full-time equivalent employees at December 31,
2000. Employees enjoy a variety of employee benefit programs, including an
employee stock ownership plan with 401(k) provisions, medical, accident, group
life and long-term disability plans, and paid vacations. The Company's employees
are not unionized, and management believes employee relations to be favorable.
ITEM 2. PROPERTIES
The executive offices of the Company, as well as the principal banking
quarters of Texas State Bank, are housed in an eleven-story office tower located
in McAllen, Texas. This building, completed during 1998, also includes space for
lease to third party tenants and for future growth. The Company also owns the
Kerria Plaza building, adjacent to the headquarters building, and leases space
to third party tenants.
All of the Company's banking locations are owned, except for the branch in
Roma, Texas. The Brownsville, Edinburg, Harlingen, Hidalgo, McAllen, Mission,
Penitas and Weslaco, Texas banking locations include extensive drive-through
facilities.
Management believes that it will be desirable in the future to consider
the establishment of additional banking locations.
ITEM 3. LEGAL PROCEEDINGS
The Company is involved in routine litigation in the normal course of its
business which, in the opinion of management, will not have a material adverse
effect on the financial condition or results of operations of the Company.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None
Page 7
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
Since March 1994, the Corporation's Class A Voting Common Stock has traded
on The Nasdaq Stock Market(R) under the symbol TRBS. The following table shows
(i) high and low prices of the Common Stock as provided to the Company by The
Nasdaq Stock Market(R) for transactions occurring on The Nasdaq Stock Market(R)
during the past two years, and (ii) the total number of shares involved in such
transactions.
Price Per Share Cash
----------------------------- Dividends Volume
Quarter Ended High Low Declared Traded
- -------------------------------------------------------------------------------
March 31, 1999 $25.40 $20.68 $0.114 2,015,705
June 30, 1999 26.82 23.64 0.114 2,015,458
September 30, 1999 25.74 21.42 0.114 1,878,342
December 31, 1999 26.82 22.39 0.127 2,004,209
March 31, 2000 26.25 19.83 0.127 2,140,420
June 30, 2000 26.31 22.39 0.127 1,518,738
September 30, 2000 26.14 21.25 0.127 2,181,650
December 31, 2000 35.25 23.92 0.150 1,705,501
- -------------------------------------------------------------------------------
On December 31, 2000, there were 846 holders of record of the Company's
Class A Common Stock.
During the two years ended December 31, 2000, an aggregate of 78,650
shares purchased by the Texas Regional Bancshares, Inc. Employee Stock Ownership
Plan (with 401(k) provisions) are included in the foregoing table.
The final determination of the timing, amount and payment of dividends on
the Common Stock is at the discretion of the Company's Board of Directors. There
can be no assurance as to future dividends because they are dependent on future
earnings, capital requirements and financial conditions. The Company's principal
source of the funds to pay dividends on the Common Stock is dividends from Texas
State Bank. The payment of dividends by the Bank is subject to certain
restrictions imposed by federal and state banking laws, regulations and
authorities. At December 31, 2000, an aggregate of $26.9 million was available
for payment of dividends by the Bank to the Company under the applicable
limitations and without regulatory approval.
ITEM 6. SELECTED FINANCIAL DATA
The following table sets forth selected consolidated financial data for
the Company and its subsidiaries for, and as of, each of the years in the
five-year period ended December 31, 2000. This selected financial data has been
derived from the consolidated financial statements and accounting records of the
Company. The data presented below should be read in conjunction with the
consolidated financial statements, related notes and other financial information
included herein:
Page 8
AT / FOR YEARS ENDED DECEMBER 31,
----------------------------------------------------------------------------
SELECTED FINANCIAL DATA 2000 1999 1998 1997 1996
- ------------------------------------------------------------------------------------------------------------------------------
(Amounts in Thousands, Except Per Share Data)
Income Statement Data
Interest Income $181,537 $143,841 $125,649 $112,745 $88,075
Interest Expense 86,513 62,221 58,384 50,618 37,494
- ------------------------------------------------------------------------------------------------------------------------------
Net Interest Income 95,024 81,620 67,265 62,127 50,581
- ------------------------------------------------------------------------------------------------------------------------------
Provision for Loan Losses 8,927 5,432 9,729 2,947 2,173
Noninterest Income 21,574 17,399 17,663 12,972 10,656
Noninterest Expense 53,544 45,888 41,102 37,170 32,096
- ------------------------------------------------------------------------------------------------------------------------------
Income Before Income Tax Expense 54,127 47,699 34,097 34,982 26,968
Income Tax Expense 18,825 16,849 11,623 11,860 8,794
- ------------------------------------------------------------------------------------------------------------------------------
Net Income $35,302 $30,850 $22,474 $23,122 $18,174
- ------------------------------------------------------------------------------------------------------------------------------
Per Common Share Data
Basic Earnings Per Share (2) $2.20 $1.95 $1.42 $1.46 $1.28
Diluted Earnings Per Share (2) 2.19 1.92 1.40 1.44 1.26
Book Value at End of Period (2) 14.15 11.78 11.19 10.19 9.06
Cash Dividends Declared (2) 0.532 0.468 0.427 0.367 0.267
Dividend Payout Ratio 24.19% 24.64% 30.52% 25.32% 20.86%
Weighted Average Shares Outstanding (2)
Basic 16,050 15,851 15,842 15,807 14,230
Diluted 16,148 16,087 16,092 16,062 14,429
Shares Outstanding at End of Period (2) 16,091 15,977 15,845 15,836 15,797
- ------------------------------------------------------------------------------------------------------------------------------
Balance Sheet Data
Total Assets $2,426,097 $2,120,690 $1,762,332 $1,538,769 $1,370,809
Loans 1,587,827 1,374,759 1,089,505 951,316 818,598
Securities 621,945 533,948 470,267 416,921 371,002
Interest-Earning Assets 2,216,877 1,913,784 1,592,325 1,387,322 1,214,875
Deposits 2,109,748 1,885,346 1,562,942 1,362,783 1,215,636
Shareholders' Equity 227,704 188,188 177,274 161,358 143,116
- ------------------------------------------------------------------------------------------------------------------------------
Average Balance Sheet Data
Total Assets $2,257,193 $1,896,880 $1,654,135 $1,439,956 $1,144,162
Loans 1,482,628 1,209,609 1,023,527 875,839 680,530
Securities 560,116 488,506 432,767 386,221 313,088
Interest-Earning Assets 2,052,573 1,720,083 1,491,211 1,301,959 1,032,100
Deposits 1,999,028 1,684,730 1,462,215 1,274,442 1,017,280
Shareholders' Equity 202,498 183,390 171,427 152,635 116,310
- ------------------------------------------------------------------------------------------------------------------------------
Performance Ratios
Return on Average Assets 1.56% 1.63% 1.36% 1.61% 1.59%
Return on Average Equity 17.43 16.82 13.11 15.15 15.63
Net Interest Margin(1) 4.71 4.84 4.61 4.89 5.06
Efficiency Ratio 44.71 45.29 48.86 48.82 51.49
- ------------------------------------------------------------------------------------------------------------------------------
Asset Quality Ratios
Nonperforming Assets to Total Loans and
Repossessed Assets 1.08% 1.04% 1.44% 1.22% 0.97%
Net Loan Charge-Offs to Average Total
Loans 0.42 0.29 0.79 0.28 0.20
Allowance for Loan Losses to Total Loans 1.23 1.22 1.21 1.19 1.32
Allowance for Loans Losses to
Nonperforming Loans 155.90 200.35 127.10 135.14 158.87
- ------------------------------------------------------------------------------------------------------------------------------
Capital Ratios
Total Risk-Based Capital Ratio 12.35% 11.94% 14.04% 14.73% 15.11%
Tier 1 Risk-Based Capital Ratio 11.20 10.79 12.90 13.60 13.83
Leverage Capital Ratio 8.14 7.58 8.84 9.21 8.78
Equity to Assets Ratio 9.39 8.87 10.06 10.49 10.44
- ------------------------------------------------------------------------------------------------------------------------------
(1) Taxable-equivalent basis assuming a 35% federal income tax rate.
(2) Restated to retroactively give effect for the 10% stock dividend declared by
the Corporation during fourth quarter 2000 and distributed during first
quarter 2001.
Page 9
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
Certain statements in this Annual Report on Form 10-K include
forward-looking information within the meaning of Section 27A of the Securities
Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934,
as amended, and are subject to the "safe harbor" created by those sections.
These forward-looking statements involve certain risks and uncertainties that
could cause actual results to differ materially from those in the
forward-looking statements. Such risks and uncertainties include, but are not
limited to, the following factors: competitive pressure in the banking industry
significantly increasing; changes in the interest rate environment reducing
margins; general economic conditions, either nationally or regionally, are less
favorable than expected, resulting in, among other things, a deterioration in
credit quality and an increase in the provision for possible loan losses;
changes in the regulatory environment; changes in business conditions;
volatility of rate sensitive deposits; operational risks including data
processing system failures or fraud; asset/liability matching risks and
liquidity risks; and changes in the securities markets.
The following discussion addresses information pertaining to the financial
condition and results of operations of Texas Regional Bancshares, Inc. and
subsidiaries (the "Company") that may not be otherwise apparent from a review of
the consolidated financial statements and related footnotes. It should be read
in conjunction with those statements, as well as with the other information
presented throughout the report. In addition to historical information, this
discussion and other sections contained in this Annual Report include certain
forward-looking statements regarding events and trends which may affect the
Company's future results. Such statements are subject to risks and uncertainties
that could cause the Company's actual results to differ materially. Such factors
include, but are not limited to, those described in this discussion and
analysis.
ACQUISITIONS
On February 19, 1998, the Company completed the acquisition of three bank
holding companies and their three subsidiary banks (the "Mergers"). The
acquisition of Brownsville Bancshares, Inc. and its subsidiary, Brownsville
National Bank, included two banking locations in Brownsville, Cameron County,
Texas, with assets of approximately $100.1 million, loans of $42.6 million,
deposits of $87.2 million and equity of $12.1 million. The Company achieved this
acquisition by the exchange of 984,806 shares of Company stock for all of the
outstanding shares of Brownsville Bancshares, Inc. and cancellation of
outstanding stock options. Brownsville National Bank merged with and into the
Bank.
The second acquisition was TB&T Bancshares, Inc. and its subsidiary, Texas
Bank and Trust of Brownsville, Cameron County, Texas. Texas Bank and Trust of
Brownsville had assets of approximately $44.9 million, loans of $21.9 million,
deposits of $40.3 million and equity of $4.1 million. This acquisition was
achieved by exchange of 301,483 shares of Company stock for all of the
outstanding shares of TB&T Bancshares, Inc. Texas Bank and Trust of Brownsville
merged with and into the Bank.
The third acquisition was Raymondville Bancorp, Inc. and its subsidiary,
Bank of Texas. Bank of Texas was headquartered in Raymondville, Willacy County,
Texas, with one additional banking facility in Brownsville, Texas. The
shareholder of Raymondville Bancorp, Inc. received cash consideration of $9.6
million in this acquisition, and the Company paid $100,000 in consideration for
a covenant not to compete. The Company discharged approximately $330,000 of
existing Raymondville Bancorp, Inc. indebtedness. Bank of Texas had assets of
approximately $63.9 million, loans of $25.5 million, deposits of $56.5 million
and equity of $5.1 million. Bank of Texas was merged with and into the Bank.
The Company accounted for its acquisition of Brownsville Bancshares, Inc.
and TB&T Bancshares, Inc. under the pooling-of-interests method of accounting,
and as such, the enclosed financial information has been restated for all
periods presented to include the results of operations and financial position of
these acquired entities. A One Time Charge-Acquisitions of $728,000 or $0.03 per
diluted common share, net of federal income tax, reduced net income for the year
ended December 31, 1998. These expenses, primarily professional fees and
computer conversion costs, related to business combinations accounted for by the
pooling-of-interests method. The Company accounted for its acquisition of
Raymondville Bancorp, Inc. under the purchase method of accounting; therefore,
the results of operations are included in the consolidated financial statements
from the date of acquisition, February 19, 1998.
On October 1, 1999, the Company completed the acquisition of Harlingen
Bancshares, Inc. and its subsidiary, Harlingen National Bank. The acquisition
included its main office and two banking locations in Harlingen, Cameron County,
Texas; one banking location in La Feria, Cameron County, Texas; one banking
location in Palm Valley, Cameron County, Texas, and one banking location in
Mercedes, Hidalgo County, Texas. The shareholders of Harlingen Bancshares, Inc.
received aggregate consideration of $34.0 million, including $1.0 million
deposited into escrow pending the outcome of certain contingencies.
Simultaneously, the shareholders of Harlingen Bancshares, Inc. or their
affiliates purchased certain assets of Harlingen Bancshares, Inc. for book value
totaling $2.4 million. The Company also agreed to pay $1.0 million over a term
of ten years in consideration of a covenant not to compete from certain
principals of Harlingen Bancshares, Inc. Harlingen National Bank had assets of
approximately $204.2 million, loans of $110.7 million, deposits of $183.6
million and equity of $19.9 million. The Company accounted for the acquisition
under the purchase method of accounting; therefore, the results of operations
are included in the consolidated financial statements from the date of
acquisition, October 1, 1999.
Page 10
OVERVIEW
Total assets at December 31, 2000, 1999 and 1998 were $2.4 billion, $2.1
billion and $1.8 billion, respectively. Total deposits at December 31, 2000,
1999 and 1998 were $2.1 billion, $1.9 billion, and $1.6 billion, respectively,
with deposit growth in each period resulting from internal growth and
acquisitions. Loans were $1.6 billion at December 31, 2000, an increase of
$213.1 million or 15.5% from $1.4 billion at the end of 1999. Loans were $1.1
billion at year end 1998. Shareholders' equity was $227.7 million, $188.2
million, and $177.3 million at December 31, 2000, 1999 and 1998, respectively.
Net income was $35.3 million, $30.9 million and $22.5 million for the
years ended December 31, 2000, 1999 and 1998, respectively, and diluted earnings
per share were $2.19, $1.92, and $1.40 for these same periods. Earnings growth
from 1999 to 2000 resulted principally from loan growth. The Company posted
returns on average assets of 1.56%, 1.63% and 1.36% and returns on average
equity of 17.43%, 16.82% and 13.11% for the years ended 2000, 1999 and 1998,
respectively. The Company's efficiency ratio was 44.71% in 2000, 45.29% in 1999
and 48.86% in 1998.
ANALYSIS OF FINANCIAL CONDITION
CASH AND CASH EQUIVALENTS
The Company offers a broad range of commercial banking services to
individuals and businesses in its service area. It also acts as a correspondent
to a number of banks in its service area, providing check clearing, wire
transfer, federal funds transactions, loan participations and other
correspondent services. The amount of cash and cash equivalents held on any day
is significantly influenced by temporary changes in cash items in process of
collection. The Company had cash and cash equivalents totaling $81.6 million at
December 31, 2000. Comparatively, the Company had $71.9 million in cash and cash
equivalents at December 31, 1999, an increase of $9.7 million or 13.5%.
SECURITIES
Securities consist of U.S. Treasury, federal agency, mortgage-backed and
state, county and municipal securities. The Company classifies debt and equity
securities into one of three categories: held to maturity, trading or available
for sale. At each reporting date, management reassesses the appropriateness of
the classification. Investments in debt securities are classified as held to
maturity and measured at amortized cost in the consolidated balance sheet only
if management has the positive intent and ability to hold those securities to
maturity. Securities that are bought and held principally for the purpose of
selling them in the near term are classified as trading and measured at fair
value in the consolidated balance sheet with unrealized holding gains and losses
included in earnings. Securities not classified as either held to maturity or
trading are classified as available for sale and measured at fair value in the
consolidated balance sheet with unrealized holding gains and losses reported in
accumulated other comprehensive income, net of applicable income taxes, until
realized.
At December 31, 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.
The following table displays the carrying amount (fair value) of
securities available for sale:
DECEMBER 31,
-------------------------------------------------
SECURITIES AVAILABLE FOR SALE 2000 1999 1998
- ------------------------------------------------------------------------------------------
(Dollars in Thousands)
U.S. Treasury $ 400 $ 3,004 $ -
U.S. Government Agency 445,598 344,601 313,970
Mortgage-Backed 119,878 127,631 101,365
States and Political Subdivisions 45,390 46,370 36,988
Other 9,036 4,332 3,613
- ------------------------------------------------------------------------------------------
Total $620,302 $525,938 $455,936
- ------------------------------------------------------------------------------------------
Page 11
The following table presents the maturities, amortized cost, estimated
market value and weighted average yields of securities available for sale at
December 31, 2000:
AMORTIZED COST MATURING
------------------------------------------------------
AFTER ONE AFTER FIVE ESTIMATED
ONE YEAR THROUGH THROUGH AFTER AMORTIZED MARKET
SECURITIES AVAILABLE FOR SALE OR LESS FIVE YEARS TEN YEARS TEN YEARS COST VALUE
- ----------------------------------------------------------------------------------------------------------------------------------
(Dollars in Thousands)
U.S. Treasury $ 400 $ - $ - $ - $ 400 $ 400
U.S. Government Agency 18,587 302,569 126,368 - 447,524 445,598
Mortgage-Backed 415 9,750 24,473 86,031 120,669 119,878
States and Political Subdivisions 1,292 7,480 16,119 21,028 45,919 45,390
Other - 200 225 8,611 9,036 9,036
- ----------------------------------------------------------------------------------------------------------------------------------
Total $20,694 $319,999 $167,185 $115,670 $623,548 $620,302
- ----------------------------------------------------------------------------------------------------------------------------------
Weighted Average Yields
(Taxable-Equivalent Basis)
- ----------------------------------------------------------------------------------------------------------------------------------
U.S. Treasury 6.17% -% -% -% 6.17%
U.S. Government Agency 6.34 6.33 6.20 - 6.29
Mortgage-Backed 6.48 6.05 5.73 6.00 5.95
States and Political Subdivisions 6.84 6.74 6.79 6.60 6.69
Other - 7.49 7.22 6.12 6.18
- ----------------------------------------------------------------------------------------------------------------------------------
Total 6.37% 6.33% 6.19% 6.12% 6.26%
- ----------------------------------------------------------------------------------------------------------------------------------
Net unrealized holding losses, net of related tax effect, of $2.2 million
and $13.4 million at December 31, 2000 and December 31, 1999, respectively, on
securities available for sale are reported as a separate component of
shareholders' equity as accumulated other comprehensive income.
The following table displays the carrying amount (amortized cost) of
securities held to maturity:
DECEMBER 31,
----------------------------------------------
SECURITIES HELD TO MATURITY 2000 1999 1998
- ---------------------------------------------------------------------------------------
(Dollars in Thousands)
U.S. Treasury $ - $5,001 $10,013
States and Political Subdivisions 1,643 3,009 4,318
- ---------------------------------------------------------------------------------------
Total $1,643 $8,010 $14,331
- ---------------------------------------------------------------------------------------
Page 12
The following table presents the maturities, amortized cost, estimated
market value and weighted average yields of securities held to maturity at
December 31, 2000:
AMORTIZED COST MATURING
---------------------------------------------------------
AFTER ONE AFTER FIVE ESTIMATED
ONE YEAR THROUGH THROUGH AFTER AMORTIZED MARKET
SECURITIES HELD TO MATURITY OR LESS FIVE YEARS TEN YEARS TEN YEARS COST VALUE
- -----------------------------------------------------------------------------------------------------------------------------------
(Dollars in Thousands)
States and Political Subdivisions $499 $1,144 $ - $ - $1,643 $1,682
- -----------------------------------------------------------------------------------------------------------------------------------
Total $499 $1,144 $ - $ - $1,643 $1,682
- -----------------------------------------------------------------------------------------------------------------------------------
Weighted Average Yields
(Taxable-Equivalent Basis)
- -----------------------------------------------------------------------------------------------------------------------------------
States and Political Subdivisions 7.77% 8.92% -% -% 8.57%
- -----------------------------------------------------------------------------------------------------------------------------------
Total 7.77% 8.92% -% -% 8.57%
- -----------------------------------------------------------------------------------------------------------------------------------
All investments in states and political subdivisions are investments in
entities within the State of Texas. No single issuer accounted for as much as
10.0% of total shareholders' equity at December 31, 2000. Of the obligations of
states and political subdivisions held by the Company at December 31, 2000,
76.3% were rated A or better by Moody's Investor Services, Inc. and 52.0% of the
non-rated issues or $5.2 million are local issues purchased in private placement
transactions.
LOANS
The Company manages its credit risk by establishing and implementing
strategies and guidelines appropriate to the characteristics of borrowers,
industries, geographic locations and risk products. Diversification of risk
within each of these areas is a primary objective. Policies and procedures are
developed to ensure that loan commitments conform to current strategies and
guidelines. Management continually refines the Company's credit policies and
procedures to address the risks in the current and prospective environment and
to reflect management's current strategic focus. The credit process is
controlled with continuous credit review and analysis, and review by internal
and external auditors and regulatory authorities. The Company's loans are widely
diversified by borrower and industry group.
The Company has collateral management policies in place so that collateral
lending of all types is approached on a basis consistent with safe and sound
standards. Valuation analysis is utilized to take into consideration the
potentially adverse economic conditions under which liquidation could occur.
Collateral accepted against the commercial loan portfolio includes accounts
receivable and inventory, marketable securities, equipment and agricultural
products. Autos, deeds of trust, life insurance and marketable securities are
accepted as collateral for the installment loan portfolio.
Management of the Company believes that the Company has benefited from
increased loan demand due to passage of the North American Free Trade Agreement
("NAFTA") and the strong population growth in the Rio Grande Valley. More
recently, the continued devaluation of the Mexican peso relative to the U.S.
dollar has reduced retail sales to residents of Mexico. However, the effects of
NAFTA and the devaluation have also increased cross-border trade and industrial
development including activity at twin manufacturing plants located on each side
of the border (referred to as maquiladoras) which benefit the Rio Grande Valley
economy. Management believes the on-going Mexican financial problems will not
have a material adverse effect on the Company's growth and earnings prospects,
in part because the Company presently has a low percentage of loans secured by
Mexican assets or that otherwise rely on collateral located in Mexico.
The extension of credits denominated in a currency other than that of the
country in which a borrower is located are called "cross-border" credits. The
Company has some dollar-denominated cross-border credits to individuals or
companies that are residents of, or domiciled in Mexico. The Company's total
cross-border credits at December 31, 2000 of $8.4 million represented 0.5% of
total loans. See "Nonperforming Assets" for additional information on
cross-border credits.
Total loans of $1.6 billion for the year ended December 31, 2000 increased
$213.1 million or 15.5% compared to the year ended December 31, 1999 levels of
$1.4 billion. Loans increased $285.3 million or 26.2% for the year ended
December 31, 1999 compared to levels of $1.1 billion at December 31, 1998. The
increase in total loans for the year ended December 31, 2000 is primarily
attributable to an increased volume of business conducted by the Company. The
increase in total loans for the year ended December 31, 2000 reflects growth in
all loan categories except Commercial-Tax Exempt and Consumer and is
representative in part to the vitality of the Rio Grande Valley economy.
Page 13
The following table presents the composition of the loan portfolio at the
end of each of the last five years:
DECEMBER 31,
-----------------------------------------------------------------------------------
LOAN PORTFOLIO COMPOSITION 2000 1999 1998 1997 1996
- ---------------------------------------------------------------------------------------------------------------------------
(Dollars in Thousands)
Commercial $ 481,277 $ 391,855 $ 311,966 $249,819 $219,346
Commercial Tax-Exempt 13,213 22,160 22,155 29,024 34,777
- ---------------------------------------------------------------------------------------------------------------------------
Total Commercial Loans 494,490 414,015 334,121 278,843 254,123
- ---------------------------------------------------------------------------------------------------------------------------
Agricultural 71,482 59,437 52,302 51,346 32,756
- ---------------------------------------------------------------------------------------------------------------------------
Real Estate
Construction 143,023 101,376 66,018 69,477 49,103
Commercial Mortgage 536,856 456,507 354,134 304,215 259,041
Agricultural Mortgage 43,725 38,256 34,440 31,949 29,654
1-4 Family Mortgage 173,860 160,786 128,945 122,043 116,485
- ---------------------------------------------------------------------------------------------------------------------------
Total Real Estate 897,464 756,925 583,537 527,684 454,283
- ---------------------------------------------------------------------------------------------------------------------------
Consumer 124,391 144,382 119,545 93,443 77,436
- ---------------------------------------------------------------------------------------------------------------------------
Total Loans $1,587,827 $1,374,759 $1,089,505 $951,316 $818,598
- ---------------------------------------------------------------------------------------------------------------------------
The contractual maturity schedule of the loan portfolio at December 31,
2000 follows:
ONE AFTER ONE YEAR AFTER
YEAR THROUGH FIVE
LOAN MATURITIES OR LESS FIVE YEARS YEARS TOTAL
- ----------------------------------------------------------------------------------------------------------
(Dollars in Thousands)
Commercial $260,132 $167,154 $53,991 $ 481,277
Commercial Tax-Exempt 1,450 4,064 7,699 13,213
- ----------------------------------------------------------------------------------------------------------
Total Commercial Loans 261,582 171,218 61,690 494,490
- ----------------------------------------------------------------------------------------------------------
Agricultural 62,211 9,040 231 71,482
- ----------------------------------------------------------------------------------------------------------
Real Estate
Construction 112,312 29,357 1,354 143,023
Commercial Mortgage 85,585 376,774 74,497 536,856
Agricultural Mortgage 10,538 26,582 6,605 43,725
1-4 Family Mortgage 22,737 123,497 27,626 173,860
- ----------------------------------------------------------------------------------------------------------
Total Real Estate 231,172 556,210 110,082 897,464
- ----------------------------------------------------------------------------------------------------------
Consumer 43,929 79,867 595 124,391
- ----------------------------------------------------------------------------------------------------------
Total Loans $598,894 $816,335 $172,598 $1,587,827
- ----------------------------------------------------------------------------------------------------------
Variable-Rate Loans $298,981 $317,715 $127,263 $ 743,959
Fixed-Rate Loans 299,913 498,620 45,335 843,868
- ----------------------------------------------------------------------------------------------------------
Total Loans $598,894 $816,335 $172,598 $1,587,827
- ----------------------------------------------------------------------------------------------------------
The Company's policy on maturity extensions and rollovers is based on
management's assessment of individual loans. Approvals for the extension or
renewal of loans without reduction of principal for more than one twelve-month
period are generally avoided, unless the loans are fully secured and properly
margined by cash or marketable securities, or are revolving lines subject to
annual analysis and renewal.
NONPERFORMING ASSETS
The Company has several procedures in place to assist in maintaining the
overall quality of its loan portfolio. The Bank has established underwriting
guidelines to be followed by its officers and monitors its delinquency levels
for any negative or adverse trends.
Page 14
Nonperforming assets consist of loans that the Company does not expect to
collect the full principal and interest based on the terms of the original loan
agreement. These include loans on nonaccrual status or that have been
restructured, and other assets, primarily real estate, acquired in partial or
full satisfaction of loan obligations. The Company's policy generally is to
place a loan on nonaccrual status when payment of principal or interest is
contractually past due 90 days, or earlier when concern exists as to the
ultimate collection of principal and interest. At the time a loan is placed on
nonaccrual status, interest previously accrued but uncollected is reversed and
charged against current income 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 $17.2 million at December 31, 2000 increased $2.9
million, 20.4% compared to December 31, 1999 levels of $14.3 million, which
decreased $1.5 million or 9.4% compared with December 31, 1998 levels of $15.8
million. Nonperforming loans of $12.5 million at December 31, 2000 increased
$4.1 million or 49.6% compared to $8.3 million at December 31, 1999. The
increase in nonperforming loans during 2000 resulted primarily from the addition
of $5.2 million in restructured loans during second quarter 2000, when the
Company reduced interest rates on certain commercial loans to the national prime
rate. Nonperforming loans at December 31, 1999 decreased $2.1 million or 19.9%
compared with December 31, 1998 levels of $10.4 million. Nonaccrual loans of
$9.0 million at December 31, 2000 increased $658,000 or 7.9% compared with
December 31, 1999 levels of $8.3 million. The increase is primarily a result of
a 116.3% increase in the number of nonaccrual loans with the majority of the
additions consisting of smaller credits. Nonaccrual loans at December 31, 1999
decreased $2.1 million or 19.9% compared with December 31, 1998 levels of $10.4
million. Cross-border nonaccrual loans at December 31, 2000 of $4.0 million
decreased by $266,000 or 6.2% compared to $4.3 million at December 31, 1999. The
decrease in foreclosed assets during 2000 was primarily attributable to the sale
of the larger foreclosed assets and two large writedowns taken in 2000 totaling
$476,000. See "Noninterest Expense" below.
Loans which are contractually past due 90 days or more, which are both
well secured or guaranteed by financially responsible third parties and in the
process of collection, generally are not placed on nonaccrual status. The amount
of such loans past due 90 days or more at December 31, 2000, 1999 and 1998 that
are not classified as nonaccrual totaled $4.0 million, $2.7 million and $3.1
million, respectively. The increase in accruing loans past due 90 days or more
at December 31, 2000 as compared to the year ended December 31, 1999 is partly
attributable to the addition of several large credits. The ratio of
Nonperforming Assets Plus Accruing Loans 90 Days or More Past Due as a percent
of Total Loans and Foreclosed Assets at December 31, 2000 increased to 1.33%
from 1.23% at December 31, 1999 primarily as a result to the increase in
restructured loans.
An analysis of the components of nonperforming assets for each of the last
five years follows:
DECEMBER 31,
-------------------------------------------------------------------
NONPERFORMING ASSETS 2000 1999 1998 1997 1996
- ---------------------------------------------------------------------------------------------------------------------------
(Dollars in Thousands)
Nonaccrual Loans $ 8,999 $ 8,341 $10,414 $ 8,355 $ 6,801
Renegotiated Loans 3,482 - - - 1
- ---------------------------------------------------------------------------------------------------------------------------
Nonperforming Loans 12,481 8,341 10,414 8,355 6,802
Foreclosed and Other Assets 4,733 5,958 5,368 3,331 1,121
- ---------------------------------------------------------------------------------------------------------------------------
Total Nonperforming Assets 17,214 14,299 15,782 11,686 7,923
Accruing Loans 90 Days or More Past Due 4,022 2,697 3,099 3,287 5,328
- ---------------------------------------------------------------------------------------------------------------------------
Total Nonperforming Assets and Accruing Loans
90 Days or More Past Due $21,236 $16,996 $18,881 $14,973 $13,251
- ---------------------------------------------------------------------------------------------------------------------------
Nonperforming Loans as a % of Total Loans 0.79% 0.61% 0.96% 0.88% 0.83%
Nonperforming Assets as a % of Total Loans and
Foreclosed Assets 1.08 1.04 1.44 1.22 0.97
Nonperforming Assets as a % of Total Assets 0.71 0.67 0.90 0.76 0.58
Nonperforming Assets Plus Accruing Loans 90 Days
or More Past Due as a % of Total Loans and
Foreclosed Assets 1.33 1.23 1.72 1.57 1.62
- ---------------------------------------------------------------------------------------------------------------------------
Page 15
Management regularly reviews and monitors the loan portfolio to identify
borrowers experiencing financial difficulties. Management believes that, at
December 31, 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.
ALLOWANCE FOR LOAN LOSSES
Management analyzes the loan portfolio to determine the adequacy of the
allowance for loan losses and the appropriate provision required to maintain an
adequate allowance. In assessing the adequacy of the allowance, management
reviews the size, quality and risks of loans in the portfolio and considers
factors such as specific known risks, past experience, the status and amount of
nonperforming assets and economic conditions. A specific percentage is allocated
to total loans in good standing and not specifically reserved while additional
amounts are added for individual loans considered to have specific loss
potential. Loans identified as losses are charged-off. In addition, the loan
review committee of the Bank reviews the assessments of management in
determining the adequacy of the Bank's allowance for loan losses. Based on total
allocations, the provision is recorded to maintain the allowance at a level
deemed appropriate by management. While management uses available information to
recognize losses on loans, there can be no assurance that future additions to
the allowance will not be necessary.
The allowance for loan losses at December 31, 2000 totaled $19.5 million,
representing a net increase of $2.7 million or 16.4% compared to $16.7 million
at December 31, 1999. The increase in the allowance is primarily due to an
increase in the loan portfolio by 15.5% in 2000 compared to 1999. Management
believes that the allowance for loan losses at December 31, 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:
YEARS ENDED DECEMBER 31,
------------------------------------------------------------------------------
ALLOWANCE FOR LOAN LOSS ACTIVITY 2000 1999 1998 1997 1996
- ------------------------------------------------------------------------------------------------------------------------------------
(Dollars in Thousands)
Balance at Beginning of Period $16,711 $13,236 $11,291 $10,806 $5,376
Balance from Acquisitions - 1,576 308 - 4,647
Provision for Loan Losses 8,927 5,432 9,729 2,947 2,173
Charge-Offs
Commercial 4,722 2,279 1,600 1,778 968
Agricultural 48 106 5,453 477 158
Real Estate 247 192 875 59 82
Consumer 1,992 1,561 1,230 907 732
- ------------------------------------------------------------------------------------------------------------------------------------
Total Charge-Offs 7,009 4,138 9,158 3,221 1,940
- ------------------------------------------------------------------------------------------------------------------------------------
Recoveries
Commercial 84 268 370 136 193
Agricultural 441 5 72 48 -
Real Estate 10 48 376 350 165
Consumer 294 284 248 225 192
- ------------------------------------------------------------------------------------------------------------------------------------
Total Recoveries 829 605 1,066 759 550
- ------------------------------------------------------------------------------------------------------------------------------------
Net Charge-Offs 6,180 3,533 8,092 2,462 1,390
- ------------------------------------------------------------------------------------------------------------------------------------
Balance at End of Period $19,458 $16,711 $13,236 $11,291 $10,806
- ------------------------------------------------------------------------------------------------------------------------------------
Ratio of Allowance for Loan Losses to
Loans Outstanding, Net of Unearned Discount 1.23% 1.22% 1.21% 1.19% 1.32%
Ratio of Allowance for Loan Losses to
Nonperforming Loans 155.90 200.35 127.10 135.14 158.87
Ratio of Net Charge-Offs to Average Total
Loans Outstanding, Net of Unearned Discount 0.42 0.29 0.79 0.28 0.20
- ------------------------------------------------------------------------------------------------------------------------------------
Page 16
The allocation of the allowance for loan losses by loan category and the
percentage of loans in each category to total loans at the end of each of the
last five years follows:
YEARS ENDED DECEMBER 31,
-----------------------------------------------------------------------------------------------------------------
2000 1999 1998 1997 1996
---------------------- ---------------------- ---------------------- --------------------- --------------------
LOANS AS LOANS AS LOANS AS LOANS AS LOANS AS
ALLOCATION OF THE PERCENT PERCENT PERCENT PERCENT PERCENT
ALLOWANCE FOR OF TOTAL OF TOTAL OF TOTAL OF TOTAL OF TOTAL
LOAN LOSSES AMOUNT LOANS AMOUNT LOANS AMOUNT LOANS AMOUNT LOANS AMOUNT LOANS
- ------------------------------------------------------------------------------------------------------------------------------------
(Dollars in Thousands)
Commercial $ 6,377 31.1% $ 6,493 30.1% $ 4,301 30.7% $ 2,672 29.3% $ 2,264 31.0%
Agricultural 1,036 4.5 648 4.3 589 4.8 1,427 5.4 421 4.0
Real Estate 8,444 56.5 7,238 55.1 5,247 53.5 5,627 55.5 6,101 55.5
Consumer 730 7.9 950 10.5 738 11.0 527 9.8 465 9.5
Unallocated 2,871 - 1,382 - 2,361 - 1,038 - 1,555 -
- ------------------------------------------------------------------------------------------------------------------------------------
Total $19,458 100.0% $16,711 100.0% $13,236 100.0% $11,291 100.0% $10,806 100.0%
- ------------------------------------------------------------------------------------------------------------------------------------
PREMISES AND EQUIPMENT, NET
Premises and equipment of $76.5 million at December 31, 2000 was
comparable to the December 31, 1999 balance of $75.6 million, increasing by
$873,000 or 1.2%. Premises and equipment increased $5.8 million or 8.2% for
December 31, 1999 compared to $69.8 million at December 31, 1998. The increase
for the year ended December 31, 1999 resulted primarily from $5.6 million in
premises and equipment obtained through the Harlingen Bancshares, Inc.
acquisition.
GOODWILL AND IDENTIFIABLE INTANGIBLES
Intangibles of $40.4 million at December 31, 2000 decreased $4.4 million
or 9.8% compared to $44.8 million at December 31, 1999 and increased $17.9
million or 66.6% compared to $26.9 million at December 31, 1998. The net
decrease in 2000 is due to amortization of existing intangibles. The net
increase in 1999 is primarily due to $21.0 million in intangibles added for the
Harlingen Bancshares, Inc. acquisition partially offset by the $3.2 million in
amortization.
DEPOSITS
Total deposits of $2.1 billion at December 31, 2000 increased $224.4
million or 11.9% compared to December 31, 1999 levels of $1.9 billion, which
increased $322.4 million or 20.6% compared to December 31, 1998 levels of $1.6
billion. The increase in total deposits for the year ended December 31, 2000 is
attributable in part to the vitality of the Rio Grande Valley economy. The
increase in total deposits for the year ended December 31, 1999 is primarily
attributable to $183.6 million recorded with the Harlingen Bancshares, Inc.
acquisition and the growth in the volume of business conducted by the Company.
Total non-interest bearing deposits of $301.3 million for the year ended
December 31, 2000 represented an increase of $15.4 million or 5.4% compared to
the year ended December 31, 1999 and increased $51.2 million or 21.8% compared
to the year ended December 31, 1998. Total public funds deposits (consisting of
Public Funds Demand Deposits, Savings, Money Market Checking and Savings and
Time Deposits) of $433.6 million for the year ended December 31, 2000 increased
$44.1 million or 11.3% compared to $389.5 million for the year ended December
31, 1999. The Bank actively seeks consumer and commercial deposits, including
deposits from correspondent banks and public funds deposits.
Page 17
The following table presents the composition of total deposits at the end
of the last three years:
DECEMBER 31,
------------------------------------------------
DEPOSIT COMPOSITION 2000 1999 1998
- ----------------------------------------------------------------------------------------------
(Dollars in Thousands)
Demand Deposits
Commercial and Individual $294,046 $277,729 $226,605
Public Funds 7,240 8,137 8,050
- ----------------------------------------------------------------------------------------------
Total Demand Deposits 301,286 285,866 234,655
- ----------------------------------------------------------------------------------------------
Interest-Bearing Deposits
Savings
Commercial and Individual 110,947 118,512 106,446
Public Funds 365 246 1,265
Money Market Checking and Savings
Commercial and Individual 370,645 298,667 236,157
Public Funds 100,977 78,791 65,081
Time Deposits
Commercial and Individual 900,478 800,935 727,205
Public Funds 325,050 302,329 192,133
- ----------------------------------------------------------------------------------------------
Total Interest-Bearing Deposits 1,808,462 1,599,480 1,328,287
- ----------------------------------------------------------------------------------------------
Total Deposits $2,109,748 $1,885,346 $1,562,942
- ----------------------------------------------------------------------------------------------
Weighted Average Rate on
Interest-Bearing Deposits 5.29% 4.41% 4.67%
- ----------------------------------------------------------------------------------------------
Time deposits of $100,000 or more are solicited from markets served by the
Bank and are not sought through brokered sources. Time deposits continue to be a
significant source of funds. The following table presents the maturities of time
deposits of $100,000 or more as of December 31, 2000 (dollars in thousands):
MATURITIES OF TIME DEPOSITS
OF $100,000 OR MORE
- -------------------------------------------------------------------------------
Three Months or Less $337,755
After Three through Six Months 156,645
After Six through Twelve Months 168,049
After Twelve Months 89,923
- -------------------------------------------------------------------------------
Total $752,372
- -------------------------------------------------------------------------------
Weighted Average Rate on Time Deposits of $100,000 or More 6.28%
- -------------------------------------------------------------------------------
Mexico is a part of the trade territory of the Company and foreign
deposits from Mexican sources have traditionally been a source of funding. In
December 1995, the Mexican government announced a 20% devaluation of the Mexican
peso relative to the United States dollar, and the Mexican peso has since
continued to decline relative to the dollar. The Company does not anticipate any
negative impact on foreign deposits due to these recent devaluations of the
peso. The increase in foreign deposits is primarily attributable to Mexican
deposits obtained from acquisitions.
Page 18
The following table presents foreign deposits, primarily from Mexican
sources:
DECEMBER 31,
----------------------------
FOREIGN DEPOSITS 2000 1999
- ------------------------------------------------------------------------------
(Dollars in Thousands)
Demand Deposits $13,028 $10,318
- ------------------------------------------------------------------------------
Interest-Bearing Deposits
Savings 20,009 20,882
Money Market Checking and Savings 35,465 32,243
Time Deposits Under $100,000 79,737 71,319
Time Deposits of $100,000 or more 173,652 147,711
- ------------------------------------------------------------------------------
Total Interest-Bearing Deposits 308,863 272,155
- ------------------------------------------------------------------------------
Total Foreign Deposits $321,891 $282,473
- ------------------------------------------------------------------------------
Percent of Total Deposits 15.26% 14.98%
- ------------------------------------------------------------------------------
Weighted Average Rate on Foreign Deposits 5.19% 4.31%
- ------------------------------------------------------------------------------
SHAREHOLDERS' EQUITY AND CAPITAL RESOURCES
Shareholders' equity increased by $39.5 million or 21.0%, during the year
ended December 31, 2000 due to comprehensive income of $46.6 million less cash
dividends of $8.5 million. Comprehensive income for the period included net
income of $35.3 million and unrealized gain on securities available for sale,
net of tax, of $11.3 million.
Bank holding companies are required to maintain capital ratios in
accordance with guidelines adopted by the Federal Reserve Board ("FRB"). The
guidelines are commonly known as Risk-Based Capital Guidelines. The table below
reflects various measures of regulatory capital:
DECEMBER 31, 2000 DECEMBER 31, 1999
--------------------------------------------------------------
RISK-BASED CAPITAL AMOUNT RATIO AMOUNT RATIO
- -------------------------------------------------------------------------------------------------------------------
(Dollars in Thousands)
Total Shareholders' Equity before unrealized
gains or losses on Securities Available for Sale $229,866 $201,636
Less Goodwill and Other Deductions (40,397) (44,796)
- ---------------------------------------------------------------------------------------------------------------------
Total Tier I Capital 189,469 156,840
Total Tier II Capital 19,458 16,711
- ---------------------------------------------------------------------------------------------------------------------
Total Qualifying Capital $208,927 $173,551
- ---------------------------------------------------------------------------------------------------------------------
Total Risk-Based Capital $208,927 12.35% $173,551 11.94%
Total Risk-Based Capital Minimum 135,379 8.00 116,313 8.00
- ---------------------------------------------------------------------------------------------------------------------
Tier I Risk-Based Capital 189,469 11.20 156,840 10.79
Tier I Risk-Based Capital Minimum 67,689 4.00 58,157 4.00
- ---------------------------------------------------------------------------------------------------------------------
Tier I Leverage Capital 189,469 8.14 156,840 7.58
Tier I Leverage Capital Minimum 93,115 4.00 82,777 4.00
- ---------------------------------------------------------------------------------------------------------------------
At December 31, 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.
ANALYSIS OF RESULTS OF OPERATIONS
NET INCOME
Net income available for common shareholders was $35.3 million in 2000,
compared to $30.9 million in 1999 and $22.5 million in 1998. The increase in net
income in 2000 from 1999 by $4.4 million or 14.4% was primarily due to an
increase in interest-earning assets. Earnings per diluted common share were
$2.19, $1.92 and $1.40 for the years ended December 31, 2000, 1999, and 1998,
respectively. Return on assets averaged 1.56%, 1.63% and 1.36%, respectively,
while return on shareholders' equity averaged 17.43%, 16.82%, and 13.11%,
respectively, for the years ended December 31, 2000, 1999, and 1998,
respectively.
Page 19
NET INTEREST INCOME
The following table presents for the periods indicated the total dollar
amount of interest income from average interest-earning assets and the resultant
yields, reported on a tax-equivalent basis, and the interest expense on average
interest-bearing liabilities, expressed both in dollars and rates. Average
balances are derived from average daily balances and the yields and costs are
established by dividing income or expense by the average balance of the asset or
liability. Income and yield on interest-earning assets include amounts to
convert tax-exempt income to a taxable-equivalent basis, assuming a 35%
effective tax rate for 2000, 1999, and 1998 (dollars in thousands):
YEARS ENDED DECEMBER 31,
-----------------------------------------------------------------------------------------------------
2000 1999 1998
-------------------------------- ---------------------------------- ---------------------------------
AVERAGE YIELD/ AVERAGE YIELD/ AVERAGE YIELD/
TAXABLE-EQUIVALENT BASIS (1) BALANCE INTEREST RATE BALANCE INTEREST RATE BALANCE INTEREST RATE
- ------------------------------------------------------------------------------------------------------------------------------------
Assets
Interest-Earning Assets
Loans
Commercial $ 507,103 $49,400 9.74% $ 427,828 $ 38,560 9.01% $ 355,014 $32,085 9.04%
Real Estate 841,084 82,831 9.85 650,168 61,578 9.47 556,800 54,158 9.73
Consumer 134,441 14,407 10.72 131,613 13,745 10.44 111,713 11,474 10.27
- ------------------------------------------------------------------------------------------------------------------------------------
Total Loans 1,482,628 146,638 9.89 1,209,609 113,883 9.41 1,023,527 97,717 9.55
- ------------------------------------------------------------------------------------------------------------------------------------
Securities
Taxable 511,414 32,432 6.34 444,021 27,244 6.14 402,457 25,138 6.25
Tax-Exempt 48,702 3,587 7.37 44,485 3,170 7.13 30,310 2,357 7.78
- ------------------------------------------------------------------------------------------------------------------------------------
Total Securities 560,116 36,019 6.43 488,506 30,414 6.23 432,767 27,495 6.35
- ------------------------------------------------------------------------------------------------------------------------------------
Time Deposits 3,920 238 6.07 1,621 114 7.03 1,300 76 5.85
Federal Funds Sold 5,909 367 6.21 20,347 1,000 4.91 33,617 1,829 5.44
- ------------------------------------------------------------------------------------------------------------------------------------
Total Interest-Earning
Assets 2,052,573 $183,262 8.93% 1,720,083 $145,411 8.45% 1,491,211 $127,117 8.52%
- ------------------------------------------------------------------------------------------------------------------------------------
Cash and Due from Banks 62,797 56,414 54,531
Premises and Equipment, Net 76,613 71,001 64,937
Other Assets 83,848 64,310 55,866
Allowance for Loan Losses (18,638) (14,928) (12,410)
- ------------------------------------------------------------------------------------------------------------------------------------
Total Assets $2,257,193 $1,896,880 $1,654,135
- ------------------------------------------------------------------------------------------------------------------------------------
Liabilities
Interest-Bearing Liabilities
Savings $ 118,887 $2,624 2.21% $ 112,948 $ 2,517 2.23% $ 105,243 $ 2,986 2.84%
Money Market Checking
and Savings 413,863 14,051 3.40 316,929 9,018 2.85 258,885 7,521 2.91
Time Deposits 1,175,406 67,455 5.74 1,001,399 49,960 4.99 879,379 47,590 5.41
- ------------------------------------------------------------------------------------------------------------------------------------
Total Savings and
Time Deposits 1,708,156 84,130 4.93 1,431,276 61,495 4.30 1,243,507 58,097 4.67
- ------------------------------------------------------------------------------------------------------------------------------------
Other Borrowed Money 40,369 2,383 5.90 15,377 726 4.72 5,772 287 4.97
- ------------------------------------------------------------------------------------------------------------------------------------
Total Interest-Bearing
Liabilities 1,748,525 $86,513 4.95% 1,446,653 $62,221 4.30% 1,249,279 $58,384 4.67%
- ------------------------------------------------------------------------------------------------------------------------------------
Demand Deposits 290,872 253,454 218,708
Other Liabilities 15,298 13,383 14,721
- ------------------------------------------------------------------------------------------------------------------------------------
Total Liabilities 2,054,695 1,713,490 1,482,708
- ------------------------------------------------------------------------------------------------------------------------------------
Shareholders' Equity 202,498 183,390 171,427
- ------------------------------------------------------------------------------------------------------------------------------------
Total Liabilities and
Shareholders' Equity $2,257,193 $1,896,880 $1,654,135
- ------------------------------------------------------------------------------------------------------------------------------------
Net Interest Income $96,749 $83,190 $68,733
- ------------------------------------------------------------------------------------------------------------------------------------
Net Yield on Total Interest-
Earning Assets 4.71% 4.84% 4.61%
- ------------------------------------------------------------------------------------------------------------------------------------
(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).
Net interest income, reported on a tax equivalent basis, increased $13.6
million or 16.3% to $96.7 million in 2000, compared to $83.2 million in 1999.
The increase in net interest income was largely due to growth of 19.3% in
average interest-earning assets, which rose to $2.1 billion in 2000 compared to
$1.7 billion in 1999. Furthermore, the increase was facilitated by higher yields
on interest-earning assets. Loan yield for 2000 increased as a result of an
increase in the average prime rate from 7.99% in 1999 to 9.24% in 2000. In
addition, the increase in securities yield in 2000 compared to 1999 resulted
from lower yielding securities maturing and the reinvesting of the proceeds into
higher yielding securities. The increase in the rate paid on interest-bearing
liabilities during 2000 was primarily attributable to the general increase in
average short-term interest rates and increased competition from local financial
institutions. The net interest margin decreased to 4.71% in 2000, compared to
4.84% in 1999.
Page 20
Tax-equivalent net interest income was $83.2 million for 1999, an increase
of $14.5 million or 21.0% compared to 1998. The increase in net interest income
was largely due to growth of 15.3% in average interest-earning assets, which
rose to $1.7 billion in 1999 compared to $1.5 billion in 1998. The increase was
partially offset by lower yields on interest-earning assets. Loan yield for 1999
decreased as a result of a decrease in the average prime rate from 8.36% in 1998
to 7.99% in 1999. In addition, the decrease in securities yield in 1999 compared
to 1998 resulted from higher yielding securities maturing and the reinvesting of
the proceeds into lower yielding securities. The net interest margin for 1999
was 4.84% compared to 4.61% in 1998.
The net interest income and the yield on earning assets were reduced by
interest foregone on impaired loans. If interest on those loans had been accrued
at the original contractual rates, additional interest income would have
approximated $1.3 million, $1.9 million and $2.2 million for the years ended
December 31, 2000, 1999 and 1998, respectively. The amount of interest income on
impaired loans included in net income for cash payments received was $490,000 in
2000, $156,000 in 1999, and $232,000 in 1998.
The following table presents the effects of changes in volume, rate and
rate/volume on interest income and interest expense for major categories of
interest-earning assets and interest-bearing liabilities. Nonaccrual loans are
included in assets, thereby reducing yields (see "Nonperforming Assets"). The
allocation of the rate/volume variance has been made pro-rata on the percentage
that volume and rate variances produce in each category. An analysis of changes
in net interest income follows (dollars in thousands):
INCREASE (DECREASE)
-----------------------------------------------------------------------------------------------
YEAR ENDED DECEMBER 31, YEAR ENDED DECEMBER 31,
2000 COMPARED TO 1999 1999 COMPARED TO 1998
------------------------------------------------ ----------------------------------------------
DUE TO CHANGE IN DUE TO CHANGE IN
NET --------------------- RATE/ NET ---------------------- RATE/
TAXABLE-EQUIVALENT BASIS (1) CHANGE VOLUME RATE VOLUME CHANGE VOLUME RATE VOLUME
- ----------------------------------------------------------------------------------------------------------------------------------
Interest Income
Loans $32,755 $25,705 $ 5,752 $1,298 $16,166 $17,765 $(1,353) $(246)
Securities
Taxable 5,188 4,135 914 139 2,106 2,596 (444) (46)
Tax-Exempt 417 301 106 10 813 1,102 (197) (92)
Time Deposits in Bank 124 162 (16) (22) 38 19 15 4
Federal Funds Sold (633) (710) 264 (187) (829) (722) (177) 70
- ----------------------------------------------------------------------------------------------------------------------------------
Total Interest Income 37,851 29,593 7,020 1,238 18,294 20,760 (2,156) (310)
- ----------------------------------------------------------------------------------------------------------------------------------
Interest Expense
Deposits 22,635 11,896 8,998 1,741 3,398 8,773 (4,670) (705)
Other Borrowed Money 1,657 1,180 182 295 439 477 (14) (24)
- ----------------------------------------------------------------------------------------------------------------------------------
Total Interest Expense 24,292 13,076 9,180 2,036 3,837 9,250 (4,684) (729)
- ----------------------------------------------------------------------------------------------------------------------------------
Net Interest Income Before
Allocation of
Rate/Volume 13,559 16,517 (2,160) (798) 14,457 11,510 2,528 419
Allocation of Rate/Volume - (196) (602) 798 - (765) 1,184 (419)
- ----------------------------------------------------------------------------------------------------------------------------------
Changes in Net Interest Income $13,559 $16,321 $(2,762) $ - $14,457 $10,745 $ 3,712 $ -
- ----------------------------------------------------------------------------------------------------------------------------------
(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).
Page 21
PROVISION FOR LOAN LOSSES
The Company recorded a provision for loan losses of $8.9 million for 2000,
compared to $5.4 million for 1999 and $9.7 million for 1998. The increase in the
provision is primarily attributable to charge-offs in excess of specific
reserves by approximately $3.1 million for 2000. The majority or $2.0 million of
the excess charge-offs over specific reserves relates to excess charge-offs
taken on the loans restructured during second quarter 2000. Net charge-offs
totaled $6.2 million and $3.5 million for 2000 and 1999, respectively, and
increased to 0.42% of average loans in 2000 compared to 0.29% of average loans
in 1999. The increase in net charge-offs is primarily attributable to $2.6
million charged off on the restructured relationship. Net charge-offs were $8.1
million or 0.79% of average loans in 1998. Charge-offs of $5.5 million on
agricultural loans during 1998, factored heavily in the decrease in the
provision for loan losses by $4.3 million or 44.2% in 1999 compared to 1998.
Management charges provisions for loan losses to earnings to bring the
total allowance for loan losses to a level deemed appropriate. Management bases
its decision on many factors which include historical experience, the volume and
type of lending conducted by the Company, the amount of nonperforming assets,
regulatory policies, generally accepted accounting principles, and general
economic conditions, particularly as they relate to the Company's lending area.
For additional information on charge-offs and recoveries and the aggregate
provision for loan losses, see the "Allowance for Loan Losses" section of this
Report.
NONINTEREST INCOME
Noninterest Income totaled $21.6 million for 2000 compared to $17.4
million for 1999 and $17.7 million for 1998. Excluding Net Realized Gains
(Losses) on Sales of Securities Available for Sale, Noninterest Income increased
$4.2 million or 23.9% in 2000 compared to 1999 and $2.6 million or 17.9% in 1999
compared to 1998. The Noninterest Income growth in 2000 resulted primarily from
the increased volume of business conducted by the Company and the realization of
a full year of service charges assessed on deposits acquired through the
Harlingen Bancshares, Inc. acquisition during the latter part of 1999.
Total Service Charges were $14.8 million for 2000 compared to $12.1
million for 1999 and $10.1 million for 1998. The increase in Total Service
Charges in 2000 by $2.7 million or 22.4% compared to 1999 is primarily due to an
increase of $1.6 million or 27.2% in non-sufficient check and return item
charges. Furthermore, Total Service Charges also increased as a result of
deposit growth and the realization of a full year of charges assessed on
deposits acquired through the Harlingen Bancshares, Inc. acquisition. The
increase in Total Service Charges during 1999 by $1.9 million or 19.1% is
attributable to increased account transaction fees generated by deposit growth,
an increase in amount charged for checks drawn on non-sufficient funds, and a
decrease in the percentage of non-sufficient check charges waived.
Trust Service Fees were $2.3 million for 2000 compared to $2.0 million for
1999 and $1.8 million for 1998. The increase in Trust Service Fees during 2000
by $336,000 or 17.1% is attributable to an increase in the market value of trust
accounts managed by 7.6%, as well as an increase in fees effective April 1,
2000. The fair market value of assets managed was $384.6 million at December 31,
2000 compared to $357.6 million at December 31, 1999. In addition, the Trust
Service Fees increased by $195,000 or 11.0% in 1999 compared to 1998 primarily
due to an increase in the market value of trust accounts managed by 8.8%. The
fair market value of assets managed at December 31, 1998 was $328.7 million.
Assets held by the trust department of the Bank in fiduciary or agency
capacities are not assets of the Company and are not included in the
consolidated balance sheets.
Net Realized Gains on Sales of Securities Available for Sale were $12,000
for 2000 compared to $1,000 for 1999 and $2.9 million for 1998. During 2000 and
1999, market opportunities to realize bond profits were limited as bond prices
generally fell. During the latter half of 1998, long-term interest rates reached
or neared 30 year lows. This coupled with management's belief in the fundamental
underlying strength of the U.S., Texas and Rio Grande Valley economies,
presented an opportunity to realize some of the gains in the Securities
Available for Sale portfolio during 1998.
Data Processing Service Fees of $2.7 million for 2000 increased $572,000
or 27.2% compared to $2.1 million for 1999. This increase primarily arose from
the acquisition of an additional banking client during 2000, the recognition of
a full year's income on the banking client obtained during 1999 and increased
utilization of services offered to existing clients. Data Processing Service
Fees of $2.1 million in 1999 increased by $589,000 or 38.9% compared to $1.5
million in 1998 primarily due to the acquisition of an additional banking client
during 1999, the recognition of a full year's income on the two banking clients
obtained during 1998 and increased utilization in 1999 of services offered to
existing clients. The number of data processing clients as of December 31, 2000,
1999 and 1998 was 8, 7, and 6, respectively.
Other Operating Income of $1.8 million for 2000 increased $545,000 or
43.8% compared to $1.2 million reported for 1999. Other Operating Income in 1999
of $1.2 million was comparable to $1.3 million reported for 1998. The increase
in Other Operating Income during 2000 was primarily attributable to a $167,000
gain on a sale of land. In addition, income from the Rabbi Trust increased by
$103,000 during 2000 compared to 1999. 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. In addition, Check Order Charges
increased by $159,000 compared to 1999. The increase in Check Order Charges
resulted from an increase in the
Page 22
volume of deposit accounts, as well as $25,000 quarterly incentive rebates
received from the check printing company beginning first quarter 2000.
NONINTEREST EXPENSE
Noninterest Expense of $53.5 million for 2000 increased $7.7 million or
16.7% compared to $45.9 million for 1999. Noninterest Expense of $45.9 million
for 1999 increased $4.8 million or 11.6% compared to $41.1 million for 1998. The
increase results primarily from higher personnel costs and the amortization of
goodwill and intangible assets acquired with the Harlingen Bancshares, Inc.
acquisition. The efficiency ratio of expense to total revenue improved to 44.71%
compared to 45.29% for 1999 and 48.86% for 1998. 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).
Salaries and Employee Benefits, the largest category of Noninterest
Expense, were $26.6 million in 2000, $22.4 million in 1999 and $18.5 million in
1998. The increase in 2000 over 1999 by $4.3 million or 19.0% was primarily due
to the Company recognizing a full year's salary and benefits on staff acquired
as a result of the Harlingen Bancshares, Inc. acquisition, as well as increases
in annual base salaries and higher levels of staff. Furthermore, premiums on
medical insurance increased by approximately $693,000 in 2000 compared to 1999.
The increase in 1999 over 1998 by $3.9 million or 20.8% reflects increases in
base salaries and higher levels of staff, including the staff acquired as a
result of the Harlingen Bancshares, Inc. acquisition. In addition, during 1999
the Company paid bonuses to its officers totaling $908,000. At the end of 2000,
the Company had approximately 935 full-time equivalent employees, compared to
888 at year end 1999 and 727 at year end 1998. Salaries and Employee Benefits
averaged 1.18% of average assets in 2000 compared to 1.18% in 1999 and 1.12% in
1998.
Net Occupancy Expense of $4.0 million for 2000 was comparable to $3.8
million reported for 1999, increasing by only $199,000 or 5.3%. Although
expenses in this category generally increased, the increase was offset by an
additional $601,000 in rental income generated from leasing space in the
corporate building. Net Occupancy Expense of $3.8 million for 1999 was
comparable to $3.6 million for 1998, decreasing by only $136,000 or 3.7%.
Although expenses associated with the corporate headquarters building in
McAllen, Texas, which opened mid-1998, increased in 1999, the increase was
offset by an increase in rental income generated from leasing office space.
Equipment Expense of $6.1 million for 2000 increased $1.0 million or 19.5%
compared to $5.1 million for 1999. During 1999, Equipment Expense increased
$528,000 or 11.5% compared to $4.6 million for 1998. Expenses associated with
the corporate headquarters building contributed to the increase in Equipment
Expense during 1998.
Other Real Estate Expense, Net, includes rental income from foreclosed
properties, gain or loss on sale of other real estate properties and direct
expenses of foreclosed real estate including property taxes, maintenance costs
and write-downs. Write-downs of other real estate are required if the fair value
of an asset acquired in a loan foreclosure subsequently declines below its
carrying value. Other Real Estate Expense, Net increased $318,000 or 95.8% in
2000 compared to $332,000 for 1999. The net increase in the 2000 was primarily
attributable to a $326,000 write-down on a foreclosed property. Other Real
Estate Expense, Net of $332,000 for 1999 was comparable to $307,000 reported for
1998, increasing by only $25,000 or 8.1%. Management is actively seeking buyers
for all Other Real Estate.
Amortization of Goodwill and Identifiable Intangibles of $4.5 million for
2000 increased $1.3 million or 40.5% compared to $3.2 million for 1999.
Amortization of Goodwill and Identifiable Intangibles increased to $3.2 million
in 1999 compared to $2.7 million in 1998, an increase of $520,000 or 19.5%. The
increases in Amortization of Goodwill and Identifiable Intangibles were
attributable to the amortization of $21.0 million of goodwill and other
intangibles added in fourth quarter 1999 with the Harlingen Bancshares, Inc.
acquisition.
One Time Charge - Acquisitions of $728,000 in 1998 related primarily to
professional fees and computer conversion costs resulting from the Company's
1998 acquisitions.
Other Noninterest Expense of $11.7 million for 2000 increased by $592,000
or 5.3% compared to $11.1 million for 1999. Other Noninterest Expense of $11.1
million for 1999 is comparable to $10.7 million reported for 1998, increasing by
only $453,000 or 4.3%. The increases for 2000 and 1999 were primarily
attributable to an increased volume of business, primarily due to the 1999
acquisition. The increase in Other Noninterest Expense during 2000 was partially
offset by a $1.8 million judgement collected during the year.
Page 23
A detailed summary of Noninterest Expense during the last three years
follows (dollars in thousands):
2000 1999 1998
- --------------------------------------------------------------------------------------------------------------------
Salaries and Wages $21,168 $17,841 $15,108
Employee Benefits 5,468 4,537 3,418
- --------------------------------------------------------------------------------------------------------------------
Total Salaries and Employee Benefits 26,636 22,378 18,526
- --------------------------------------------------------------------------------------------------------------------
Net Occupancy Expense 3,966 3,767 3,631
- --------------------------------------------------------------------------------------------------------------------
Equipment Expense 6,127 5,127 4,599
- --------------------------------------------------------------------------------------------------------------------
Other Real Estate Expense, Net
Rental Income (620) (389) (154)
Gain on Sale (103) (171) (257)
Expenses 920 875 674
Write-Downs 453 17 44
- --------------------------------------------------------------------------------------------------------------------
Total Other Real Estate Expense, Net 650 332 307
- --------------------------------------------------------------------------------------------------------------------
Amortization of Goodwill and Identifiable Intangibles 4,469 3,180 2,660
- --------------------------------------------------------------------------------------------------------------------
One Time Charge - Acquisitions - - 728
- --------------------------------------------------------------------------------------------------------------------
Other Noninterest Expense
Advertising and Public Relations 1,971 1,495 1,536
Data Processing and Check Clearing 1,766 1,480 1,183
Director Fees 356 344 333
Franchise Tax (519) 334 600
Insurance 387 400 430
FDIC Insurance 405 191 166
Legal 817 663 1,255
Professional Fees 1,338 1,136 638
Postage, Delivery and Freight 1,009 916 816
Printing, Stationery and Supplies 1,779 1,447 1,325
Telephone 716 628 534
Other Losses 4 759 68
Miscellaneous Expense 1,667 1,311 1,767
- --------------------------------------------------------------------------------------------------------------------
Total Other Noninterest Expense 11,696 11,104 10,651
- --------------------------------------------------------------------------------------------------------------------
Total Noninterest Expense $53,544 $45,888 $41,102
- --------------------------------------------------------------------------------------------------------------------
Franchise Tax for 2000 decreased $853,000 or 255.4% compared to $334,000
for 1999. The decrease was attributable to $872,000 in franchise tax refunds
received during 2000 for overpayments made in previous years.
INCOME TAX EXPENSE
The Company recorded income tax expense of $18.8 million for 2000 compared
to $16.8 million for 1999 and $11.6 million for 1998. The changes in income tax
expense are due primarily to changes in the level of pretax income. Furthermore,
during 2000 the Company received state income tax refunds totaling $613,000
resulting in a decrease in income tax expense.
CAPITAL AND LIQUIDITY
Bank holding companies are required to maintain capital ratios in
accordance with guidelines adopted by the Federal Reserve Board ("FRB"). The
guidelines are commonly known as Risk-Based Capital Guidelines. On December 31,
2000, the Company exceeded all applicable capital requirements, having a total
risk-based capital ratio of 12.35%, a Tier I risk-based capital ratio of 11.20%
and a leverage ratio of 8.14%.
Liquidity management assures that adequate funds are available to meet
deposit withdrawals, loan demand and maturing liabilities. Insufficient
liquidity can result in higher costs of obtaining funds, while excessive
liquidity can lead to a decline in earnings due to the cost of foregoing
alternative investments. The ability to renew and acquire additional deposit
liabilities is a major source of liquidity. The Company's principal sources of
funds are primarily within the local markets of the Bank and consist of
deposits, interest and principal payments on loans and securities, sales of
loans and securities and borrowings.
Cash and assets which are readily marketable, or which can be pledged, or
which will mature in the near future provide asset liquidity. These include
cash, federal funds sold, time deposits, U.S. Treasury, U.S. Government Agency
and mortgage-backed securities. At December 31, 2000, the Company's liquidity
ratio, defined as cash, U.S. Treasury, U.S. Government
Page 24
Agency, mortgage-backed securities, time deposits and federal funds sold as a
percentage of deposits, was 30.8% compared to 30.3% at December 31, 1999 and
33.0% at December 31, 1998.
Liability liquidity is provided by access to core funding sources,
principally various customers' interest-bearing and noninterest-bearing deposit
accounts in the Company's trade area. The Company does not have nor does it
solicit brokered deposits. Federal funds purchased and short-term borrowings are
additional sources of liquidity. These sources of liquidity are short-term in
nature, and are used, as necessary, to fund asset growth and meet short-term
liquidity needs.
During 2000, funds for $172.9 million of securities purchases and $214.5
million of net loan growth came from various sources, including a net increase
in deposits of $224.4 million, $107.6 million in proceeds from maturing and sold
securities, $53.0 million from operating activities and $29.6 from borrowed
funds.
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.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISKS
Market risk is the exposure to loss resulting from changes in interest
rates, foreign currency exchange rates, commodity prices and equity prices. The
primary market risk to which the Company is exposed is interest rate risk.
Interest rate risk occurs when assets and liabilities reprice at different times
as interest rates change. For example, if fixed-rate loans are funded with
floating-rate deposits, the spread between loan and deposit rates will decline
or turn negative if rates increase. Other types of market risk, such as foreign
currency exchange rate risk and commodity price risk, do not arise in the normal
course of the Company's business activities. The Company's interest rate risk
arises from transactions entered into for purposes other than trading. The
Company does not currently engage in trading activities or use derivative
instruments to control interest rate risk. Even though such activities may be
permitted with the approval of the Board of Directors, the Company does not
intend to engage in such activities in the immediate future.
Interest rate risk is managed within the funds management policy of the
Company. The principal objectives of the funds management policy is to avoid
fluctuating net interest margins and to maintain consistent growth of net
interest income through periods of changing interest rates. The Board of
Directors oversees implementation of strategies to control interest rate risk.
The Company may take steps to alter its net sensitivity position by offering
deposit and/or loan structures that tend to counter the natural rate risk
profile of the Company. Funding positions are kept within predetermined limits
designed to ensure that risk-taking is not excessive and that liquidity is
properly managed. Because of the volatility of market rates and uncertainties,
there can be no assurance of the effectiveness of management programs to achieve
a targeted moderation of risk.
In order to measure earnings and fair value sensitivity to changing rates,
the Company utilizes three different measurement tools including static gap
analysis, simulation earnings, and market value sensitivity (fair value at
risk). The primary analytical tool used by the Company to quantify interest rate
risk is a simulation model to project changes in net interest income that result
from forecast changes in interest rates. This analysis estimates a percentage of
change in net interest income from the stable rate scenario under scenarios of
rising and falling market interest rates over a twelve month time horizon. The
prime rate serves as a "driver" and is made to rise (or fall) evenly in 100
basis point increments over the 12-month forecast interval. These simulations
incorporate assumptions regarding balance sheet growth and mix, pricing and the
repricing and maturity characteristics of the existing and projected balance
sheet. The following table summarizes the simulated change in net interest
income over a 12-month period as of December 31, 2000 and December 31, 1999:
Page 25
INCREASE (DECREASE) IN
NET INTEREST INCOME
CHANGES IN INTEREST ESTIMATED NET ----------------------------------------------------
RATES (BASIS POINTS) INTEREST INCOME AMOUNT PERCENT
- ----------------------------------------------------------------------------------------------------
(Dollars in Thousands)
December 31, 2000
+100 $96,684 $ 1,822 1.9%
- 94,862 - -
-100 91,521 (3,341) (3.5)
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.
The interest rate sensitivity gap represents the dollar amount of
difference between rate sensitive assets and rate sensitive liabilities within a
given time period ("GAP"). A GAP ratio is determined by dividing rate sensitive
assets by rate sensitive liabilities. A ratio of 1.0 indicates a perfectly
matched position, in which case the effect on net interest income due to
interest rate movements would be zero. The following table summarizes interest
rate sensitive assets and liabilities by their repricing dates at December 31,
2000:
0-3 4-6 7-12 1-5 OVER
INTEREST RATE SENSITIVITY ANALYSIS MONTHS MONTHS MONTHS YEARS 5 YEARS TOTAL
- --------------------------------------------- --------------- -------------- --------------- ------------- ------------- -----------
(Dollars in Thousands)
Loans $ 868,799 $ 80,098 $ 94,975 $498,620 $45,335 $1,587,827
Securities
Available for Sale 6,338 100 15,333 321,082 277,449 620,302
Held to Maturity 334 - 165 1,144 - 1,643
Time Deposits 724 198 888 495 - 2,305
Federal Funds Sold 4,800 - - - - 4,800
- --------------------------------------------- --------------- -------------- --------------- ------------- ------------- -----------
Total Interest-Bearing Assets 880,995 80,396 111,361 821,341 322,784 2,216,877
- --------------------------------------------- --------------- -------------- --------------- ------------- ------------- -----------
Savings 111,312 - - - - 111,312
Money Market Checking and Savings Accounts 471,622 - - - - 471,622
Time Deposits 466,239 277,100 313,744 167,976 469 1,225,528
Other Borrowed Money 64,229 - - - - 64,229
- --------------------------------------------- --------------- -------------- --------------- ------------- ------------- -----------
Total Interest-Bearing Liabilities 1,113,402 277,100 313,744 167,976 469 1,872,691
- --------------------------------------------- --------------- -------------- --------------- ------------- ------------- -----------
Rate Sensitivity GAP (1) $(232,407) $(196,704) $(202,383) $653,365 $322,315 $ 344,186
- --------------------------------------------- --------------- -------------- --------------- ------------- ------------- -----------
Cumulative Rate Sensitivity GAP $(232,407) $(429,111) $(631,494) $21,871 $344,186
- --------------------------------------------- --------------- -------------- --------------- ------------- ------------- -----------
Ratio of Cumulative Rate Sensitivity GAP to
Total Assets (9.58)% (17.69)% (26.03)%
Ratio of Cumulative Rate Sensitive
Interest-Earning Assets to Cumulative Rate
Sensitive Interest-Bearing Liabilities 0.79:1 0.69:1 0.63:1
- --------------------------------------------- --------------- -------------- --------------- ------------- ------------- -----------
(1) Rate sensitive interest-earning assets less rate sensitive
interest-bearing liabilities.
Page 26
CURRENT ACCOUNTING ISSUES
The Financial Accounting Standards Board's Statement No. 133 ("Statement
133"), "Accounting for Derivative Instruments and for Hedging Activities,"
requires companies to recognize all derivatives as either assets or liabilities
in the statement of financial position and measure those instruments at fair
value. Statement 133 requires that changes in fair value of a derivative be
recognized currently in earnings unless specific hedge accounting criteria are
met. Upon implementation of Statement 133, hedging relationships may be
redesignated and securities held to maturity may be transferred to available for
sale or trading. The Financial Accounting Standards Board's Statement No. 137,
"Accounting for Derivative Instruments and Hedging Activities-Deferral of the
Effective Date of Statement No. 133", deferred the effective date of Statement
133 to fiscal years beginning after June 15, 2000. The Financial Accounting
Standards Board's Statement No. 138, "Accounting for Certain Derivative
Instruments and Certain Hedging Activities", amended the accounting and
reporting under Statement 133 for certain derivative instruments, hedging
activities, and decisions made by the Derivatives Implementation Group. The
Company adopted these statements on January 1, 2001. The Company currently does
not hold any derivative instruments or embedded derivatives and does not hedge
or plan to hedge in the immediate future. The implementation of Statement 133
did not have an impact on its consolidated financial statements.
The Financial Accounting Standards Board's Statement No. 140 ("Statement
140"), "Accounting for Transfers and Servicing of Financial Assets and
Extinguishments of Liabilities", replaces the Financial Accounting Standards
Board's Statement No. 125 ("Statement 125"), "Accounting for Transfers and
Servicing of Financial Assets and Extinguishments of Liabilities", but carries
over most of Statement 125's provisions without change. Statement 140 elaborates
on the qualifications necessary for a special-purpose entity, clarifies sales
accounting criteria in certain circumstances, refines accounting for collateral,
and adds disclosures for collateral, securitizations, and retained interests in
securitized assets. This statement should be applied prospectively and is
effective for transactions occurring after March 31, 2001. Disclosure
requirements of this statement and any changes in accounting for collateral are
effective for fiscal years ending after December 15, 2000. The Company has
adopted the disclosure requirements and does not expect that the adoption of the
remaining provisions of Statement 140 to have a material impact on its
consolidated financial statements.
FOURTH QUARTER RESULTS
The fourth quarter net income for 2000 of $9.5 million or $0.59 per
diluted common share reflected an increase of $1.2 million or 14.1% compared to
$8.3 million or $0.52 per share for fourth quarter 1999. Results for fourth
quarter 2000 reflected increases in net interest income and noninterest income
compared to fourth quarter 1999.
Net interest income, on a tax-equivalent basis, of $24.6 million for
fourth quarter 2000 increased $1.2 million or 5.3% compared to $23.4 million for
fourth quarter 1999. The increase resulted from an increase in interest-earning
assets, primarily driven by strong loan growth of 15.0%. The funding of the loan
growth was facilitated primarily through growth in time deposits, which
contributed to a decrease in the interest margin. Average earning assets of $2.2
billion for fourth quarter 2000 increased by $254.7 million or 13.4% compared to
$1.9 billion for fourth quarter 1999. Net interest margin for fourth quarter
2000 was 4.55% compared to 4.88% for fourth quarter 1999.
The provision for loan losses charged against earnings in fourth quarter
2000 totaled $1.9 million compared to $1.0 million for fourth quarter 1999,
reflecting an increase of $865,000 or 85.6%. The increase in the provision is
primarily attributable to charge-offs in excess of specific reserves of
approximately $645,000 during fourth quarter 2000. Net charge-offs of $1.0
million for fourth quarter 2000 increased $65,000 or 6.8% compared to $954,000
for fourth quarter 1999. The Company recovered $410,000 during fourth quarter
2000 on an agricultural loan charged-off in 1998.
Noninterest income of $5.7 million for fourth quarter 2000 increased
$940,000 or 19.7% compared to $4.8 million for fourth quarter 1999. The increase
is primarily due to an increase in service charges on deposit accounts and data
processing.
Noninterest expense of $13.4 million for fourth quarter 2000 decreased
$394,000 or 2.9% compared to $13.8 million for fourth quarter 1999. Although
expenses in this category generally increased, the increase was offset by a $1.8
million judgement collected by the Company during fourth quarter 2000. The
efficiency ratio of expense to total revenue averaged 43.61% for fourth quarter
2000 compared to 48.81% for fourth quarter 1999.
The fourth quarter net income for 2000 was $9.5 million or $0.59 per
diluted common share reflected an increase of $574,000 or 6.4% compared to $8.9
million or $0.55 per diluted common share for third quarter 2000. Operating
results for fourth quarter 2000 reflected an increase in net interest income,
noninterest income and noninterest expense from third quarter 2000.
Net interest income, on a tax-equivalent basis, of $24.6 million for
fourth quarter 2000 increased $322,000 or 1.3% compared to $24.3 million for
third quarter 2000, reflecting a continued increase in volume of earning assets.
Average earning assets of $2.2 billion for fourth quarter 2000 increased $85,000
or 4.1% compared to $2.1 billion for third quarter 2000. The fourth quarter 2000
net interest margin of 4.55% compared to 4.67% in third quarter 2000.
Page 27
The provision for loan losses charged against earnings in fourth quarter
2000 of $1.9 million compared to $2.6 million for third quarter 2000, reflecting
a decrease of $683,000 or 26.7%. Net charge-offs of $1.0 million for fourth
quarter 2000 decreased $1.2 million or 53.6% compared to net charge-offs of $2.2
million for third quarter 2000.
Noninterest income of $5.7 million for fourth quarter 2000 increased
$439,000 or 8.3% compared to $5.3 million for third quarter 2000. The increase
was primarily due to an increase in service charges due to deposit growth.
Noninterest expense of $13.4 million for fourth quarter 2000 was
comparable to $13.3 million for third quarter 2000, increasing by $56,000 or
0.4%. The efficiency ratio of expense to total revenue averaged 43.61% for
fourth quarter 2000 compared to 45.15% for third quarter 2000.
The nonaccrual and renegotiated loans at December 31, 2000 of $12.5
million decreased $1.6 million or 11.7% compared to $14.1 million at September
30, 2000 primarily due to payments received on the restructured relationship.
Page 28
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
INDEPENDENT AUDITORS' REPORT
Board of Directors
Texas Regional Bancshares, Inc.
We have audited the accompanying consolidated balance sheets of Texas
Regional Bancshares, Inc. and subsidiaries (the "Company") as of December 31,
2000 and 1999, the related consolidated statements of income and comprehensive
income, changes in shareholders' equity and cash flows for each of the years in
the three-year period ended December 31, 2000. These consolidated financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these consolidated financial
statements based on our audits.
We conducted our audits in accordance with auditing standards generally
accepted in the United States of America. Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of Texas
Regional Bancshares, Inc. and subsidiaries at December 31, 2000 and 1999, and
the results of their operations and their cash flows for each of the years in
the three-year period ended December 31, 2000 in conformity with accounting
principles generally accepted in the United States of America.
KPMG LLP
Austin, Texas
January 15, 2001
Page 29
CONSOLIDATED FINANCIAL STATEMENTS
TEXAS REGIONAL BANCSHARES, INC. AND SUBSIDIARIES DECEMBER 31,
CONSOLIDATED BALANCE SHEETS ---------------------------------
(DOLLARS IN THOUSANDS, EXCEPT SHARE DATA) 2000 1999
- -----------------------------------------------------------------------------------------------------------------------------
Assets
Cash and Due From Banks $ 74,469 $ 66,819
Time Deposits 2,305 5,077
Federal Funds Sold 4,800 -
- -----------------------------------------------------------------------------------------------------------------------------
Total Cash and Cash Equivalents 81,574 71,896
Securities Available for Sale, at Fair Value 620,302 525,938
Securities Held to Maturity, at Amortized Cost (Fair Value of
$1,682 in 2000 and $8,071 in 1999) 1,643 8,010
Loans, Net of Unearned Discount of $3,624 in 2000 and $5,154 in 1999 1,587,827 1,374,759
Less: Allowance for Loan Losses (19,458) (16,711)
- -----------------------------------------------------------------------------------------------------------------------------
Net Loans 1,568,369 1,358,048
Premises and Equipment, Net 76,456 75,583
Accrued Interest Receivable 24,939 19,869
Other Real Estate 3,906 5,268
Goodwill and Identifiable Intangibles 40,397 44,796
Other Assets 8,511 11,282
- -----------------------------------------------------------------------------------------------------------------------------
Total Assets $2,426,097 $2,120,690
- -----------------------------------------------------------------------------------------------------------------------------
Liabilities
Deposits
Demand $ 301,286 $ 285,866
Savings 111,312 118,758
Money Market Checking and Savings 471,622 377,458
Time Deposits 1,225,528 1,103,264
- -----------------------------------------------------------------------------------------------------------------------------
Total Deposits 2,109,748 1,885,346
Other Borrowed Money 64,229 34,608
Accounts Payable and Accrued Liabilities 24,416 12,548
- -----------------------------------------------------------------------------------------------------------------------------
Total Liabilities 2,198,393 1,932,502
- -----------------------------------------------------------------------------------------------------------------------------
Commitments and Contingencies (Notes 10, 11, 17 and 18)
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 16,090,546 Shares in 2000 and 14,524,739 Shares
in 1999 16,091 14,525
Paid-In Capital 134,084 88,834
Retained Earnings 79,691 98,277
Accumulated Other Comprehensive Loss (2,162) (13,448)
- -----------------------------------------------------------------------------------------------------------------------------
Total Shareholders' Equity 227,704 188,188
- -----------------------------------------------------------------------------------------------------------------------------
Total Liabilities and Shareholders' Equity $2,426,097 $2,120,690
- -----------------------------------------------------------------------------------------------------------------------------
The accompanying notes are an integral part of the consolidated financial
statements.
Page 30
TEXAS REGIONAL BANCSHARES, INC. AND SUBSIDIARIES YEARS ENDED DECEMBER 31,
CONSOLIDATED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME -------------------------------------------
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA) 2000 1999 1998
- -----------------------------------------------------------------------------------------------------------------
Interest Income
Loans, Including Fees $146,145 $113,382 $97,064
Securities
Taxable 32,432 27,244 25,138
Tax-Exempt 2,355 2,101 1,542
Time Deposits 238 114 76
Federal Funds Sold 367 1,000 1,829
- -----------------------------------------------------------------------------------------------------------------
Total Interest Income 181,537 143,841 125,649
- -----------------------------------------------------------------------------------------------------------------
Interest Expense
Deposits 84,130 61,495 58,097
Federal Funds Purchased and Securities
Sold Under Repurchase Agreements 1,339 726 287
Federal Home Loan Bank Advances 1,044 - -
- -----------------------------------------------------------------------------------------------------------------
Total Interest Expense 86,513 62,221 58,384
- -----------------------------------------------------------------------------------------------------------------
Net Interest Income Before Provision for Loan Losses 95,024 81,620 67,265
Provision for Loan Losses 8,927 5,432 9,729
- -----------------------------------------------------------------------------------------------------------------
Net Interest Income After Provision for Loan Losses 86,097 76,188 57,536
- -----------------------------------------------------------------------------------------------------------------
Noninterest Income
Service Charges on Deposit Accounts 11,863 9,799 8,025
Other Service Charges 2,933 2,286 2,122
Trust Service Fees 2,301 1,965 1,770
Net Realized Gains on Sales of Securities
Available for Sale 12 1 2,910
Data Processing Service Fees 2,676 2,104 1,515
Other Noninterest Income 1,789 1,244 1,321
- -----------------------------------------------------------------------------------------------------------------
Total Noninterest Income 21,574 17,399 17,663
- -----------------------------------------------------------------------------------------------------------------
Noninterest Expense
Salaries and Employee Benefits 26,636 22,378 18,526
Net Occupancy Expense 3,966 3,767 3,631
Equipment Expense 6,127 5,127 4,599
Other Real Estate Expense, Net 650 332 307
Amortization of Goodwill and Identifiable Intangibles 4,469 3,180 2,660
One Time Charge - Acquisitions - - 728
Other Noninterest Expense, Net 11,696 11,104 10,651
- -----------------------------------------------------------------------------------------------------------------
Total Noninterest Expense 53,544 45,888 41,102
- -----------------------------------------------------------------------------------------------------------------
Income Before Income Tax Expense 54,127 47,699 34,097
Income Tax Expense 18,825 16,849 11,623
- -----------------------------------------------------------------------------------------------------------------
Net Income 35,302 30,850 22,474
Other Comprehensive Income (Loss), Net of Tax
Net Unrealized Gains (Losses) on Securities Available for Sale
Net Unrealized Holding Gains (Losses) Arising During
Period 11,294 (14,056) 1,594
Less: Reclassification Adjustment for Net Realized Gains
Included in Net Income 8 1 1,892
- -----------------------------------------------------------------------------------------------------------------
Total Other Comprehensive Income (Loss) 11,286 (14,057) (298)
- -----------------------------------------------------------------------------------------------------------------
Comprehensive Income $46,588 $16,793 $22,176
- -----------------------------------------------------------------------------------------------------------------
Net Income Per Common Share
Basic $ 2.20 $ 1.95 $ 1.42
Diluted 2.19 1.92 1.40
- -----------------------------------------------------------------------------------------------------------------
The accompanying notes are an integral part of the consolidated financial
statements.
Page 31
TEXAS REGIONAL BANCSHARES, INC. AND SUBSIDIARIES ACCUMULATED
CONSOLIDATED STATEMENTS OF CHANGES OTHER
IN SHAREHOLDERS' EQUITY COMMON COMPREHENSIVE TOTAL
(DOLLARS IN THOUSANDS) STOCK - PAID-IN RETAINED INCOME SHAREHOLDERS'
CLASS A CAPITAL EARNINGS (LOSS) EQUITY
- -------------------------------------------------------------------------------------------------------------------------------
Balance, December 31, 1997 $14,396 $86,888 $59,167 $ 907 $161,358
Net Income - - 22,474 - 22,474
Net Change in Unrealized Gains (Losses) on
Securities Available for Sale, Net of tax
and Reclassification Adjustment - - - (298) (298)
- -------------------------------------------------------------------------------------------------------------------------------
Total Comprehensive Income - - 22,474 (298) 22,176
- -------------------------------------------------------------------------------------------------------------------------------
Exercise of Stock Options, 8,099 Shares of
Class A Common Stock 9 64 - - 73
Tax Effect of Nonqualified Stock Options
Exercised - 444 - - 444
Class A Common Stock Cash Dividends - $0.427
per share - - (6,769) - (6,769)
Cash Dividends Paid on Fractional Shares - - (8) - (8)
- -------------------------------------------------------------------------------------------------------------------------------
Balance, December 31, 1998 14,405 87,396 74,864 609 177,274
Net Income - - 30,850 - 30,850
Net Change in Unrealized Gains (Losses) on
Securities Available for Sale, Net of tax
and Reclassification Adjustment - - - (14,057) (14,057)
- -------------------------------------------------------------------------------------------------------------------------------
Total Comprehensive Income - - 30,850 (14,057) 16,793
- -------------------------------------------------------------------------------------------------------------------------------
Exercise of Stock Options, 119,743 Shares
of Class A Common Stock 120 846 - - 966
Tax Effect of Nonqualified Stock Options
Exercised - 592 - - 592
Class A Common Stock Cash Dividends - $0.468
per share - - (7,437) - (7,437)
- -------------------------------------------------------------------------------------------------------------------------------
Balance, December 31, 1999 14,525 88,834 98,277 (13,448) 188,188
Net Income - - 35,302 - 35,302
Net Change in Unrealized Gains (Losses) on
Securities Available for Sale, Net of tax
and Reclassification Adjustment - - - 11,286 11,286
- -------------------------------------------------------------------------------------------------------------------------------
Total Comprehensive Income - - 35,302 11,286 46,588
- -------------------------------------------------------------------------------------------------------------------------------
Exercise of Stock Options, 103,523 Shares
of Class A Common Stock 104 758 - - 862
Tax Effect of Nonqualified Stock Options
Exercised - 624 - - 624
Class A Common Stock Cash Dividends - $0.532
per share - - (8,541) - (8,541)
10% Stock Dividend 1,462 43,868 (45,347) - (17)
- -------------------------------------------------------------------------------------------------------------------------------
Balance, December 31, 2000 $16,091 $134,084 $79,691 $(2,162) $227,704
- -------------------------------------------------------------------------------------------------------------------------------
The accompanying notes are an integral part of the consolidated financial
statements.
Page 32
TEXAS REGIONAL BANCSHARES, INC. AND SUBSIDIARIES YEAR ENDED DECEMBER 31,
CONSOLIDATED STATEMENTS OF CASH FLOWS -------------------------------------------
(DOLLARS IN THOUSANDS) 2000 1999 1998
- -----------------------------------------------------------------------------------------------------------------------------------
Cash Flows from Operating Activities
Net Income $35,302 $30,850 $22,474
Adjustments to Reconcile Net Income to
Net Cash Provided by Operating Activities
Depreciation, Amortization and Accretion, Net 10,056 8,917 3,149
Provision for Loan Losses 8,927 5,432 9,729
Provision for Estimated Losses on Other Real Estate and Other Assets 522 549 49
Gain on Sale of Securities Available for Sale (12) (1) (2,910)
(Gain) Loss on Sale of Other Assets (20) 76 57
Gain on Sale of Other Real Estate (109) (171) (257)
Gain on Sale of Premises and Equipment (175) (41) (218)
Change in Assets and Liabilities, Net of Effects from Merger
(Increase) Decrease in Deferred Income Tax Asset (5,191) 2,366 -
Increase (Decrease) in Deferred Income Tax Liability 3,162 (4,487) (571)
(Increase) Decrease in Accrued Interest Receivable and Other Assets (4,476) (3,300) 1,554
Increase (Decrease) in Accounts Payable and Accrued Liabilities 5,046 1,596 175
- -----------------------------------------------------------------------------------------------------------------------------------
Net Cash Provided by Operating Activities 53,032 41,786 33,231
- -----------------------------------------------------------------------------------------------------------------------------------
Cash Flows from Investing Activities
Proceeds from Sales of Securities Available for Sale 46,971 27,040 378,411
Proceeds from Maturing Securities Available for Sale 54,268 119,638 274,617
Purchases of Securities Available for Sale (172,872) (188,575) (719,971)
Proceeds from Maturing Securities Held to Maturity 6,340 6,300 37,306
Proceeds from Sale of Loans 1,379 1,431 2,104
Purchases of Loans (8,606) (4,020) (176)
Loan Originations and Advances, Net (214,493) (178,951) (127,627)
Recoveries of Charged-Off Loans 829 605 1,066
Proceeds from Sale of Premises and Equipment 184 221 554
Purchases of Premises and Equipment (6,475) (5,875) (19,410)
Proceeds from Sale of Other Real Estate 1,079 1,212 1,355
Proceeds from Sale of Other Assets 1,318 675 716
Net Cash Provided By (Used in) Mergers - (133) 5,160
- -----------------------------------------------------------------------------------------------------------------------------------
Net Cash Used in Investing Activities (290,078) (220,432) (165,895)
- -----------------------------------------------------------------------------------------------------------------------------------
Cash Flows from Financing Activities
Net Increase in Demand Deposits, Savings, Money Market
Checking and Savings Accounts 102,138 16,479 62,728
Net Increase in Time Deposits 122,264 122,274 80,973
Net Increase in Other Borrowed Money 29,621 27,201 4,782
Cash Dividends Paid on Class A Common Stock (8,161) (7,205) (6,410)
Cash Dividends Paid on Fractional Shares - - (8)
Proceeds from the Exercise of Stock Options 862 966 73
- -----------------------------------------------------------------------------------------------------------------------------------
Net Cash Provided by Financing Activities 246,724 159,715 142,138
- -----------------------------------------------------------------------------------------------------------------------------------
Increase (Decrease) in Cash and Cash Equivalents 9,678 (18,931) 9,474
Cash and Cash Equivalents at Beginning of Period 71,896 90,827 81,353
- -----------------------------------------------------------------------------------------------------------------------------------
Cash and Cash Equivalents at End of Period $81,574 $71,896 $90,827
- -----------------------------------------------------------------------------------------------------------------------------------
(Continued)
Page 33
TEXAS REGIONAL BANCSHARES, INC. AND SUBSIDIARIES YEAR ENDED DECEMBER 31,
CONSOLIDATED STATEMENTS OF CASH FLOWS -------------------------------------------
(DOLLARS IN THOUSANDS) 2000 1999 1998
- -----------------------------------------------------------------------------------------------------------------------------------
Supplemental Disclosures of Cash Flow Information
Interest Paid $84,461 $61,321 $58,385
Income Taxes Paid 19,575 18,270 12,003
Supplemental Schedule of Noncash Investing and Financing Activities
Foreclosure and Repossession in Partial Satisfaction of Loans Receivable 2,766 5,354 7,915
Financing Provided For Sales of Other Real Estate 1,115 2,577 4,088
Net Increase in Securities Trades Not Settled 5,007 - -
Net Increase in Dividends Payable 397 232 359
The Company acquired Harlingen Bancshares, Inc. and its subsidiary, Harlingen
National Bank, on October 1, 1999. Assets acquired and liabilities assumed are
as follows:
Fair Value of Assets Acquired - 204,627 -
Cash Paid - 32,248 -
Liabilities Assumed - 185,076 -
The Company acquired Raymondville Bancorp, Inc. and its subsidiary, Bank of
Texas, on February 19, 1998. Assets acquired and liabilities assumed are as
follows:
Fair Value of Assets Acquired - - 63,944
Cash Paid - - 9,600
Liabilities Assumed - - 58,512
- -----------------------------------------------------------------------------------------------------------------------------------
The accompanying notes are an integral part of the consolidated financial
statements.
Page 34
TEXAS REGIONAL BANCSHARES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2000, 1999 AND 1998
NOTE 1: SUMMARY OF SIGNIFICANT ACCOUNTING PRINCIPLES
Texas Regional Bancshares, Inc. (the "Parent" or "Corporation") and
subsidiaries (collectively, the "Company") is headquartered in McAllen, Texas.
The Company provides a broad array of customary banking services and operates
twenty-six banking offices throughout the Rio Grande Valley at December 31,
2000. The accounting and reporting policies followed by the Company conform to
generally accepted accounting principles and to general practices within the
banking industry.
PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the accounts of Texas
Regional Bancshares, Inc. and its wholly owned subsidiaries, Texas Regional
Delaware, Inc. and Texas State Bank (the "Bank"). The Company eliminates all
significant intercompany transactions and balances in consolidation. The
Corporation accounts for investments in the subsidiaries on the equity method in
the Parent's financial statements.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosures of contingent assets and liabilities at the date of the consolidated
financial statements and the reported amounts of revenues and expenses during
the reporting period. Actual results could differ from these estimates.
TRUST ASSETS
Assets held by the trust department of the Bank in fiduciary or agency
capacities are not assets of the Company and are not included in the
consolidated balance sheets.
CASH AND CASH EQUIVALENTS
For purposes of the consolidated statements of cash flows, cash and cash
equivalents include cash on hand, amounts due from banks and investments with
maturities of three months or less at date of purchase.
SECURITIES
Securities that management has both the positive intent and ability to
hold to maturity are classified as securities held to maturity and are carried
at cost, adjusted for amortization of premium or accretion of discount using the
interest method. Securities that may be sold prior to maturity for
asset/liability management purposes, or that may be sold in response to changes
in interest rates, to changes in prepayment risk, to increase regulatory capital
or other similar factors, are classified as securities available for sale and
carried at fair value with any adjustments to fair value reported in
shareholders' equity as a component of accumulated other comprehensive income
(loss), net of tax. Declines in the fair value of individual held to maturity
and available for sale securities below their cost that are other than temporary
result in write-downs of the individual securities to their fair value. The
related write-downs are included in earnings as realized losses. Securities
purchased for trading purchases are held on the trading portfolio at fair value,
with changes in fair value included in noninterest income.
Interest and dividends on securities, including the amortization of
premiums and the accretion of discounts, are reported in interest and dividends
on securities using the interest method. Gains and losses on the sale of
securities are recorded on the trade date and are calculated using the specific
identification method.
LOANS
Loans that management has the intent and ability to hold for the
foreseeable future or until maturity or pay-off generally are reported at their
outstanding unpaid principal balances adjusted for charge-offs, the allowance
for loan losses, and any deferred fees or costs on originated loans or
unamortized premiums or discounts on purchased loans. The Company recognizes
interest income on discounted loans on the sum-of-the-months-digits method,
which approximates the interest method. Interest income accrues on the unpaid
principal balance of other loans. Interest income includes discounts and
premiums amortized using the interest method. Loan origination fees, net of
certain direct origination costs, are deferred and recognized as an adjustment
of the yield (interest method).
Page 35
NONACCRUAL LOANS
The Company discontinues the accrual of interest on loans at the time the
loan is 90 days delinquent unless the credit is well secured and in process of
collection. In all cases, loans must be placed on nonaccrual or charged-off at
an earlier date if collection of principal or interest is considered doubtful.
All interest accrued but not collected for loans that are placed on
nonaccrual or charged off is reversed against interest income unless the
collateral provides more than adequate margin to ensure collection of that
interest. The interest on these loans is accounted for on the cash basis or
cost-recovery method, until qualifying for a return to accrual status. Loans are
returned to accrual status when all the principal and interest amounts
contractually due are reasonably assured of repayment within a reasonable period
and when the borrower has demonstrated payment performance history.
ALLOWANCE FOR LOAN LOSSES
The Company has established the allowance for loan losses through
provisions for loan losses charged against income. The Company charges off
portions of loans deemed uncollectible against the allowance for loan losses,
and credits subsequent recoveries, if any, to the allowance.
The allowance for loan losses related to impaired loans that are
identified for evaluation is based on discounted cash flows using the loan's
initial effective interest rate, or for collateral-dependent loans, the fair
value, less selling costs, of the collateral. By the time a loan becomes
probable of foreclosure, the Company charges it down to fair value, less
estimated cost to sell.
Management's periodic evaluation of the adequacy of the allowance is based
on the Company's past loan loss experience, known and inherent risks in the
portfolio, adverse situations that may affect the borrower's ability to repay
(including the timing of future payments), the estimated value of any underlying
collateral, composition of the loan portfolio, and current economic conditions.
This evaluation is inherently subjective, as it requires material estimates that
are susceptible to significant change including the amounts and timing of future
cash flows expected to be received on impaired loans.
Management believes that the allowance for loan losses at December 31,
2000 adequately reflects the risks in the loan portfolio. Various regulatory
agencies, as an integral part of their examination process, periodically review
the Company's allowance for loan losses. Such agencies may require the Company
to recognize additions to the allowance based on their judgements of information
available to them at the time of their examination.
FORECLOSED ASSETS
Foreclosed assets, which includes other foreclosed assets included in
other assets, include properties acquired through foreclosure in full or partial
satisfaction of the related loan.
The Company records foreclosed assets initially at the lower of fair
value, net of estimated selling costs, or cost, at the date of foreclosure.
After foreclosure, the Company carries the assets at the lower of (1) cost or
(2) fair value, less estimated costs to sell, based on valuations periodically
performed by management. Revenue and expenses from operations and changes in the
valuation allowance are included in noninterest expense.
INCOME TAXES
Deferred income tax assets and liabilities are determined using the asset
and liability (or balance sheet) method. Under this method, the net deferred tax
asset or liability is determined based on the tax effects of the differences
between the book and tax basis of the various balance sheet assets and
liabilities and gives current recognition to changes in tax rates and laws. The
Company files a consolidated federal income tax return with its subsidiaries.
PREMISES AND EQUIPMENT
Premises and equipment are stated at cost, net of accumulated depreciation
and amortization. Depreciable assets are depreciated over their estimated useful
lives. For financial reporting, depreciation is computed using the straight-line
method; in computing federal income tax, both the straight-line and accelerated
methods are used. Maintenance and repairs which do not extend the life of
premises and equipment are charged to noninterest expense.
GOODWILL AND IDENTIFIABLE INTANGIBLES
Goodwill represents the excess of the purchase price over the estimated
fair value of identifiable net assets associated with acquisition transactions.
The Company amortizes goodwill on a straight-line basis over 15 years and
identifiable intangibles on a straight-line basis over their estimated periods
of benefit.
Page 36
The Company reviews its intangible assets periodically for
other-than-temporary impairment. If such impairment is indicated, recoverability
of the asset is assessed based on expected undiscounted net cash flows.
STOCK OPTION PLAN
Prior to January 1, 1996, the Company accounted for its stock compensation
programs in accordance with the provisions of Accounting Principles Board
("APB") Opinion No. 25, "Accounting for Stock Issued to Employees," and related
interpretations. As such, compensation expense would be recorded on the date of
grant only if the current market price of the underlying stock exceeded the
exercise price. Effective January 1, 1996, the Financial Accounting Standards
Board issued Statement of Financial Accounting Standards No. 123, ("Statement
123") "Accounting for Stock-Based Compensation," which permits entities to
recognize as expense over the vesting period the fair value of all stock-based
awards on the date of grant. Alternatively, Statement 123 also allows entities
to continue to apply the provisions of APB Opinion No. 25 and provide pro forma
net income and pro forma earnings per share disclosures for employee stock
option grants made in 1995 and future years as if the fair-value-based method
defined in Statement 123 had been applied. The Company has elected to continue
to apply the provisions of APB Opinion No. 25 and provide the pro forma
disclosure provisions of Statement 123.
EARNINGS PER COMMON SHARE
Basic earnings per share ("EPS") is calculated by dividing net income
available to common shareholders, by the weighted-average number of common
shares outstanding during the period. The computation of diluted EPS assumes the
issuance of common shares for all dilutive potential common shares outstanding
during the reporting period. The dilutive effect of stock options are considered
in earnings per share calculations if dilutive, using the treasury stock method.
IMPAIRMENT OF LONG-LIVED ASSETS
Long-lived assets and certain identifiable intangibles are reviewed by the
Company for impairment whenever events or changes indicate that the carrying
amount of an asset may not be recoverable.
ACCOUNTING FOR DERIVATIVE INSTRUMENTS AND FOR HEDGING ACTIVITIES
The Financial Accounting Standards Board's Statement No. 133 ("Statement
133"), "Accounting for Derivative Instruments and for Hedging Activities," was
issued in June 1998. Statement 133 requires companies to recognize all
derivatives as either assets or liabilities in the statement of financial
condition and measure those instruments at fair value. Statement 133 requires
that changes in fair value of a derivative be recognized currently in earnings
unless specific hedge accounting criteria are met. The Financial Accounting
Standards Board's Statement No. 137 ("Statement 137"), "Accounting for
Derivative Instruments and Hedging Activities-Deferral of the Effective Date of
FASB Statement No. 133", deferred the effective date of Statement 133 to fiscal
years beginning after June 15, 2000. The Company adopted Statement 133 on
January 1, 2001. The Company currently does not hold any derivative instruments
or embedded derivatives and does not hedge or plan to hedge in the immediate
future. The implementation of Statement 133 did not have an impact on the
Company's consolidated financial statements.
TRANSFERS AND SERVICING OF FINANCIAL ASSETS AND EXTINGUISHMENTS OF LIABILITIES
The Financial Accounting Standards Board's Statement No. 140 ("Statement
140"), "Accounting for Transfers and Servicing of Financial Assets and
Extinguishments of Liabilities", replaces the Financial Accounting Standards
Board's Statement No. 125 ("Statement 125"), "Accounting for Transfers and
Servicing of Financial Assets and Extinguishments of Liabilities", but carries
over most of Statement 125's provisions without change. Statement 140 elaborates
on the qualifications necessary for a special-purpose entity, clarifies sales
accounting criteria in certain circumstances, refines accounting for collateral,
and adds disclosures for collateral, securitizations, and retained interests in
securitized assets. This statement should be applied prospectively and is
effective for transactions occurring after March 31, 2001. Disclosure
requirements of this statement and any changes in accounting for collateral are
effective for fiscal years ending after December 15, 2000. The Company has
adopted the disclosure requirements and does not expect the adoption of the
remaining provisions of Statement 140 to have a material impact on its
consolidated financial statements.
Page 37
NOTE 2: SECURITIES
An analysis of securities available for sale as of December 31, 2000
follows:
GROSS GROSS ESTIMATED
AMORTIZED UNREALIZED UNREALIZED FAIR
(DOLLARS IN THOUSANDS) COST GAINS LOSSES VALUE
- --------------------------------------------------------------------------------------------------------
U.S. Treasury $ 400 $ - $ - $ 400
U.S. Government Agency 447,524 2,017 (3,943) 445,598
Mortgage-Backed 120,669 22 (813) 119,878
States and Political Subdivisions 45,919 278 (807) 45,390
Other 9,036 - - 9,036
- --------------------------------------------------------------------------------------------------------
Total $623,548 $2,317 $ (5,563) $620,302
- --------------------------------------------------------------------------------------------------------
The carrying amount and estimated fair value of securities held to
maturity as of December 31, 2000 follow:
GROSS GROSS ESTIMATED
AMORTIZED UNREALIZED UNREALIZED FAIR
(DOLLARS IN THOUSANDS) COST GAINS LOSSES VALUE
- --------------------------------------------------------------------------------------------------------
States and Political Subdivisions $ 1,643 $ 39 $ - $ 1,682
- --------------------------------------------------------------------------------------------------------
Total $ 1,643 $ 39 $ - $ 1,682
- --------------------------------------------------------------------------------------------------------
An analysis of securities available for sale as of December 31, 1999
follows:
GROSS GROSS ESTIMATED
AMORTIZED UNREALIZED UNREALIZED FAIR
(DOLLARS IN THOUSANDS) COST GAINS LOSSES VALUE
- --------------------------------------------------------------------------------------------------------
U.S. Treasury $ 2,999 $ 5 $ - $ 3,004
U.S. Government Agency 359,558 18 (14,975) 344,601
Mortgage-Backed 131,699 5 (4,073) 127,631
States and Political Subdivisions 48,198 164 (1,992) 46,370
Other 4,332 - - 4,332
- --------------------------------------------------------------------------------------------------------
Total $546,786 $ 192 $(21,040) $525,938
- --------------------------------------------------------------------------------------------------------
The carrying amount and estimated fair value of securities held to
maturity as of December 31, 1999 follow:
GROSS GROSS ESTIMATED
AMORTIZED UNREALIZED UNREALIZED FAIR
(DOLLARS IN THOUSANDS) COST GAINS LOSSES VALUE
- --------------------------------------------------------------------------------------------------------
U.S. Treasury $ 5,001 $ 17 $ - $ 5,018
States and Political Subdivisions 3,009 50 (6) 3,053
- --------------------------------------------------------------------------------------------------------
Total $ 8,010 $ 67 $ (6) $ 8,071
- --------------------------------------------------------------------------------------------------------
The net change in unrealized holding gains (losses) on securities
available for sale, net of related tax effect, of $11.3 million and $(14.1)
million for 2000 and 1999, respectively, was included in a separate component of
shareholders' equity as accumulated other comprehensive income.
Proceeds from the sale of securities available for sale portfolio totaled
$47.0 million, $27.0 million and $378.4 million in 2000, 1999, and 1998,
respectively. Gross realized gains and gross realized losses on sales of
securities available for sale were $102,000 and $90,000, respectively, in 2000,
$3,000 and $2,000, respectively, in 1999 and $3.0 million and $93,000,
respectively, in 1998. There were no sales of securities held to maturity in
2000, 1999 or 1998.
Page 38
The scheduled maturities of securities available for sale and securities
held to maturity at December 31, 2000 follow. The remaining contractual
maturities for mortgage-backed securities were allocated assuming no
prepayments. Actual maturities will differ from contractual maturities because
borrowers may have the right to call or prepay obligations with or without call
or prepayment penalties.
SECURITIES AVAILABLE SECURITIES HELD
FOR SALE TO MATURITY
---------------------------------------------------------------
ESTIMATED ESTIMATED
MATURITY IN YEARS AMORTIZED MARKET AMORTIZED MARKET
(DOLLARS IN THOUSANDS) COST VALUE COST VALUE
- --------------------------------------------------------------------------------------------------------
1 Year or Less $ 20,694 $ 20,709 $ 499 $ 502
After 1 Year through 5 Years 319,999 321,082 1,144 1,180
After 5 Years through 10 Years 167,185 163,865 - -
After 10 Years 115,670 114,646 - -
- --------------------------------------------------------------------------------------------------------
Total $623,548 $620,302 $1,643 $1,682
- --------------------------------------------------------------------------------------------------------
Securities available for sale and securities held to maturity with
carrying values of $582.8 million and $1.2 million, respectively, at December
31, 2000 and $509.6 million and $7.2 million, respectively, at December 31, 1999
were pledged to secure public funds, trust assets on deposit and for other
purposes required or permitted by law.
NOTE 3: LOANS AND ALLOWANCE FOR LOAN LOSSES
Loans consisted of the following:
DECEMBER 31,
---------------------------------
(DOLLARS IN THOUSANDS) 2000 1999
- -----------------------------------------------------------------------------
Commercial $ 481,277 $ 391,855
Commercial Tax-Exempt 13,213 22,160
- -----------------------------------------------------------------------------
Total Commercial Loans 494,490 414,015
Agricultural 71,482 59,437
- -----------------------------------------------------------------------------
Real Estate
Construction 143,023 101,376
Commercial Mortgage 536,856 456,507
Agricultural Mortgage 43,725 38,256
1-4 Family Mortgage 173,860 160,786
- -----------------------------------------------------------------------------
Total Real Estate 897,464 756,925
Consumer 124,391 144,382
- -----------------------------------------------------------------------------
Total Loans $1,587,827 $1,374,759
- -----------------------------------------------------------------------------
In the ordinary course of business, the Company's subsidiary bank makes
loans to its officers and directors, including entities related to those
individuals. These loans are made on substantially the same terms and conditions
as those prevailing at the time for comparable transactions with other persons
and do not involve more than the normal risk of collectibility or present other
unfavorable features. As of December 31, 2000 and 1999, loans outstanding to
directors, officers and their affiliates were approximately $12.9 million and
$6.4 million, respectively.
The activity in the allowance for loan losses follows:
DECEMBER 31,
--------------------------------------
(DOLLARS IN THOUSANDS) 2000 1999 1998
- ----------------------------------------------------------------------------------------
Balance at Beginning of Year $16,711 $13,236 $11,291
Balance from Acquisitions - 1,576 308
Provision for Loan Losses 8,927 5,432 9,729
Loans Charged Off (7,009) (4,138) (9,158)
Recoveries of Loans Previously Charged Off 829 605 1,066
- ----------------------------------------------------------------------------------------
Balance at End of Year $19,458 $16,711 $13,236
- ----------------------------------------------------------------------------------------
The Company identifies loans to be reported as impaired when such loans
are on nonaccrual status or are considered troubled debt restructurings due to
the granting of a below-market rate of interest or a partial forgiveness of
indebtedness on an
Page 39
existing loan. The balance of impaired loans was $12.5 million at December 31,
2000 and $8.3 million at December 31, 1999. The total allowance for loan losses
related to these loans was $2.4 million and $1.6 million on December 31, 2000
and 1999, respectively. In addition to the total impaired loan balance of $12.5
million at December 31, 2000, the Company was committed to lend an additional
$1.5 million to one of these borrowers. At December 31, 2000 and 1999, the
Company had $1.8 million and $112,000, respectively, in impaired loans for which
there was no related allowance for loan losses. The average recorded investment
in impaired loans during 2000 and 1999 was $13.1 million and $7.6 million,
respectively. Interest income on impaired loans of $490,000, $156,000 and
$232,000 was recognized for cash payments received during 2000, 1999 and 1998,
respectively. If interest on these impaired loans had been accrued at the
original contractual rates, interest income would have been increased by
approximately $1.3 million, $1.9 million and $2.2 million for the years ended
December 31, 2000, 1999 and 1998, respectively.
NOTE 4: PREMISES AND EQUIPMENT
A summary of premises and equipment and related accumulated depreciation
and amortization follows:
DECEMBER 31,
ESTIMATED -------------------------
(DOLLARS IN THOUSANDS) USEFUL LIVES 2000 1999
- --------------------------------------------------------------------------------------------------
Land $ 12,001 $ 11,567
Buildings and Leasehold Improvements 2-40 Years 64,702 61,559
Construction in Progress 160 1,327
Furniture and Equipment 3-10 Years 27,177 25,142
- --------------------------------------------------------------------------------------------------
Subtotal 104,040 99,595
Less: Accumulated Depreciation and Amortization (27,584) (24,012)
- --------------------------------------------------------------------------------------------------
Total $ 76,456 $ 75,583
- --------------------------------------------------------------------------------------------------
Depreciation and amortization expense for the years ended December 31,
2000, 1999 and 1998 was approximately $5.7 million, $5.3 million and $4.4
million, respectively.
NOTE 5: TIME DEPOSITS
Time deposits of $100,000 or more totaled $752.4 million and $687.4
million at December 31, 2000 and 1999, respectively. Interest expense for the
years ended December 31, 2000, 1999 and 1998 on time deposits of $100,000 or
more was approximately $43.3 million, $32.4 million and $28.7 million,
respectively.
The maturities of time deposits as of December 31, 2000 follows:
(DOLLARS IN THOUSANDS)
- ----------------------------------------------------------------
1 Year or Less $1,057,083
1 to 2 Years 124,020
2 to 3 Years 32,023
3 to 4 Years 4,959
4 to 5 Years 6,974
After 5 Years 469
- ----------------------------------------------------------------
Total $1,225,528
- ----------------------------------------------------------------
NOTE 6: OTHER BORROWED MONEY
The components of other borrowed money are as follows (dollars in
thousands):
DECEMBER 31,
--------------------------
2000 1999
- ----------------------------------------------------------------------------
Federal Funds Purchased and Securities Sold
Under Repurchase Agreements $39,229 $34,608
Federal Home Loan Bank Advances 25,000 -
- ----------------------------------------------------------------------------
Total Borrowed Money $64,229 $34,608
- ----------------------------------------------------------------------------
Page 40
The following table summarizes selected information regarding other
borrowed money:
DECEMBER 31,
---------------------------------------
(DOLLARS IN THOUSANDS) 2000 1999 1998
- -------------------------------------------------------------------------------------------
Federal Funds Purchased and Securities Sold Under
Repurchase Agreements
Balance at End of Year $39,229 $34,608 $ 7,407
Rate on Balance at End of Year 5.74% 5.45% 4.52%
Average Daily Balance $24,706 $15,377 $ 5,772
Average Interest Rate 5.42% 4.72% 4.97%
Maximum Month-End Balance $53,572 $46,162 $14,835
Federal Home Loan Bank Advances
Balance at End of Year $25,000 - -
Rate on Balance at End of Year 6.46% - -
Average Daily Balance $15,663 - -
Average Interest Rate 6.66% - -
Maximum Month-End Balance $55,000 - -
- -------------------------------------------------------------------------------------------
Securities sold under agreements to repurchase are comprised of customer
deposit agreements with maturities ranging from overnight to six months. These
obligations are not federally insured but are collateralized by a security
interest in various securities available for sale. These pledged securities are
segregated and maintained by a third party bank.
At December 31, 2000, the Company had lines of credit totaling $40.0
million with correspondent banks for short-term liquidity needs and
approximately $144.4 million available at the Federal Home Loan Bank.
NOTE 7: INCOME TAX
The components of income tax expense consisted of the following:
YEAR ENDED DECEMBER 31,
--------------------------------------
(DOLLARS IN THOUSANDS) 2000 1999 1998
- ----------------------------------------------------------------------------------------
Current Income Tax Expense
Federal $20,811 $18,314 $12,091
State 58 656 107
- ----------------------------------------------------------------------------------------
Total Current Income Tax Expense 20,869 18,970 12,198
- ----------------------------------------------------------------------------------------
Deferred Income Tax Benefit
Federal (1,987) (2,047) (572)
State (57) (74) (3)
- ----------------------------------------------------------------------------------------
Total Deferred Income Tax Benefit (2,044) (2,121) (575)
- ----------------------------------------------------------------------------------------
Total Income Tax Expense $18,825 $16,849 $11,623
- ----------------------------------------------------------------------------------------
Following is a reconciliation between the amount of reported income tax
expense and the amount computed by multiplying the income before tax by the
federal statutory tax rate:
YEAR ENDED DECEMBER 31,
-----------------------------------------------------------
2000 1999 1998
------------------ ------------------- ------------------
(DOLLARS IN THOUSANDS) AMOUNT RATE AMOUNT RATE AMOUNT RATE
- -----------------------------------------------------------------------------------------------------
Tax at Statutory Rate $18,944 35% $16,695 35% $11,934 35%
Additions (Reductions)
Tax-Exempt Interest (861) (1) (898) (2) (828) (2)
State Earned Surplus Tax, Net of
Federal Income Tax Effect 1 - 378 1 67 -
Goodwill Amoritzation 708 1 486 1 404 1
Change in Anticipated State Income
Tax Rate - - 135 - - -
Other, Net 33 - 53 - 46 -
- -----------------------------------------------------------------------------------------------------
Total Income Tax Expense $18,825 35% $16,849 35% $11,623 34%
- -----------------------------------------------------------------------------------------------------
Page 41
The net deferred tax asset (liability) included in the accompanying
consolidated balance sheets is comprised of the following deferred tax assets
and liabilities.
DECEMBER 31,
---------------------------
(DOLLARS IN THOUSANDS) 2000 1999
- -------------------------------------------------------------------------------------------
Deferred Tax Liability
Premises and Equipment $ 5,628 $ 5,627
Identifiable Intangibles 4,756 5,473
Loan Origination Costs 623 626
Other Real Estate 194 252
Other 152 180
- -------------------------------------------------------------------------------------------
Total Deferred Tax Liability 11,353 12,158
- -------------------------------------------------------------------------------------------
Deferred Tax Asset
Unrealized Loss on Securities Available for Sale 1,152 7,402
Allowance for Loan Losses 6,688 5,491
Deferred Compensation 573 504
State Income Taxes 264 241
Other Foreclosed Assets - 194
Loans 429 425
Other 237 148
- -------------------------------------------------------------------------------------------
Total Deferred Tax Asset Before Valuation Allowance 9,343 14,405
Valuation Allowance - (36)
- -------------------------------------------------------------------------------------------
Net Deferred Tax Asset (Liability) $(2,010) $ 2,211
- -------------------------------------------------------------------------------------------
For the years ended December 31, 2000 and December 31, 1999, the deferred
tax liability results primarily from the use of accelerated methods of
depreciation of equipment for tax purposes and the amortization of core deposits
for financial statement purposes. The deferred tax asset results from
differences in the bad debts written-off for financial statement purposes and
the amount allowed under tax law for both years ended December 31, 2000 and
1999. For 2000 and 1999, the deferred tax asset also includes the net unrealized
loss on securities available for sale.
Based upon the level of historical taxable income and projections for
future taxable income over the periods which the deferred tax assets are
deductible, management believes it is more likely than not the Company will
realize the benefits of these deductible differences at December 31, 2000. The
Company's conclusion that it is "more likely than not" that the deferred tax
assets will be realized is based on federal taxable income of $84.5 million in
the carryback period, as well as a history of growth in earnings and the
prospects for continued growth. The amount of the deferred tax asset considered
realizable, however, could be reduced in the near term if estimates of future
taxable income during the carryforward period are reduced.
NOTE 8: PREFERRED STOCK
The Corporation has 10.0 million authorized shares of $1 par value
preferred stock. The articles of incorporation of the Corporation grant
discretion to the Board of Directors to establish series of preferred stock with
such rights, preferences and limitations as may be determined by resolution of
the Board. No shares of preferred stock are currently outstanding.
NOTE 9: COMMON STOCK
The Corporation has 50.0 million authorized shares of $1 par value common
stock. At December 31, 2000, 1999 and 1998, the number of common shares
outstanding are 16,090,546, 14,524,739 and 14,405,027, respectively.
On December 18, 2000, the Board of Directors declared a 10% stock dividend
to be distributed on January 12, 2001 to common shareholders of record on
January 2, 2001. The change to the capital structure was given retroactive
effect on the balance sheet as of December 31, 2000. Additionally, the per share
information for all years presented has been restated to retroactively give
effect to the stock dividend.
NOTE 10: EMPLOYEE BENEFITS
The Company has an Employee Stock Ownership Plan (with section 401(k)
provisions) (the "KSOP") covering substantially all of their employees. Employer
contributions to the KSOP are discretionary, and as such, determined at the sole
discretion of the Board of Directors. The KSOP covers employees who have
attained age 21 and completed twelve consecutive months of credited service, as
defined in the plan, except for the 401(k) and matching provisions which require
three consecutive months of credited service. A participant's account balance
will be fully vested after six years of credited service. Contribution expense,
which includes employer matching for the years ended December 31, 2000, 1999 and
1998 was $736,000, $962,000 and $469,000, respectively.
Page 42
The Company acquired existing 401(k) plans in connection with its
acquisitions of the Bank of Texas and Harlingen Bancshares, Inc. The plans are
restricted to pre-acquisition participation by qualified employees.
The Company has granted stock options providing for the purchase of Class
A Common Shares by certain key employees under five separate option plans
approved by the shareholders. The following discussion concerning stock option
plans has been restated to retroactively give effect for the three-for-two stock
split declared and distributed by the Corporation during the third quarter of
1997 and the 10% stock dividend declared during fourth quarter of 2000 and
distributed during January 2001.
The 1985 Nonstatutory Stock Option Plan ("the 1985 NSO Plan") authorized
the award of stock options for 209,083 shares to the chief executive officer at
a price determined by a committee of directors on the grant date. Options to
acquire 99,083 shares at a weighted average exercise price of $7.27 per share
were exercised under the 1985 NSO Plan during 2000. The plan expired on May 10,
2000.
The 1985 Incentive Stock Option Plan ("the 1985 ISO Plan") provided for
the grant of options for 209,083 shares at an exercise price of fair market
value on the grant date to certain key employees of the Company. Options to
acquire 4,204 shares at a weighted average exercise price of $7.27 per share
were exercised under the 1985 ISO Plan during 2000. The plan expired on May 10,
2000.
The 1995 Nonstatutory Stock Option Plan ("the 1995 NSO Plan") authorized
the award of options up to an aggregate maximum of 148,498 shares at an exercise
price of fair market value on the grant date. The Company granted options in
1996 with contractual terms of seven years and a vesting period of four years.
Options to acquire 122,375 shares at a weighted average exercise price of $10.45
per share were outstanding and exercisable, under the 1995 NSO Plan expiring on
July 1, 2002 at December 31, 2000.
The 1997 Nonstatutory Stock Option Plan ("the 1997 NSO Plan") authorized
the award of options up to an aggregate maximum of 137,495 shares at an exercise
price of fair market value on the grant date. The Company granted options in
1998 with contractual terms of approximately five years and a vesting period of
approximately three years. Options to acquire 137,495 shares at a weighted
average exercise price of $30.51 per share were outstanding, with 101,458
exercisable, under the 1997 NSO Plan expiring on July 1, 2003 at December 31,
2000.
The 1997 Incentive Stock Option Plan ("the 1997 ISO Plan") authorized the
award of options up to an aggregate maximum of 109,998 shares at an exercise
price of fair market value on the grant date. The Company granted options in
1998 with contractual terms of approximately five years and a vesting period of
approximately three years. Options to acquire 99,509 shares at a weighted
average exercise price of $30.60 per share were outstanding, with 73,818
exercisable, under the 1997 ISO Plan expiring on July 1, 2003 at December 31,
2000.
The Company applies APB Opinion 25 and related interpretations in
accounting for its plans. Accordingly, no compensation cost has been recognized
for its fixed stock option plans. Had compensation cost for the Company's
stock-based compensation plans been determined based on the fair value at the
grant dates for awards under those plans consistent with the method of FASB
Statement 123 adopted in 1995, the Company's net income and earnings per share
would have been reduced to the pro forma amounts indicated below:
YEAR ENDED DECEMBER 31,
--------------------------------------
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA) 2000 1999 1998
- -------------------------------------------------------------------------------------------------------------
Net Income As Reported $35,302 $30,850 $22,474
Pro Forma 34,972 30,490 21,917
- -------------------------------------------------------------------------------------------------------------
Basic Earnings Per Share As Reported 2.20 1.95 1.42
Pro Forma 2.18 1.92 1.38
- -------------------------------------------------------------------------------------------------------------
Diluted Earnings Per Share As Reported 2.19 1.92 1.40
Pro Forma 2.17 1.90 1.36
- -------------------------------------------------------------------------------------------------------------
The fair value of options at date of grant was estimated using the
Black-Scholes option pricing model with the following weighted-average
assumptions:
DECEMBER 31,
--------------------------------------
2000 1999 1998
- ------------------------------------------------------------------------------
Expected Life in Years - - 3.46
Interest Rate - - 5.52%
Volatility - - 30.00
Dividend Yield - - 1.35
- ------------------------------------------------------------------------------
Page 43
No options were granted during the years ended December 31, 2000 and 1999.
Pro forma net income reflects options granted in 1998 and 1995.
A summary of the status of the Company's five fixed option plans as of
December 31, 2000, 1999 and 1998, and changes during the years ending on those
dates is presented below:
YEAR ENDED DECEMBER 31,
----------------------------------------------------------------------------------
2000 1999 1998
-------------------------- ------------------------- ----------------------------
WEIGHTED WEIGHTED WEIGHTED
SHARES AVERAGE SHARES AVERAGE SHARES AVERAGE
UNDERLYING EXERCISE UNDERLYING EXERCISE UNDERLYING EXERCISE
FIXED OPTIONS OPTIONS PRICE OPTIONS PRICE OPTIONS PRICE
- ----------------------------------------------------------------------------------------------------------------------------------
Outstanding at Beginning of Year 475,893 $19.89 613,259 $17.34 378,317 $ 8.45
Granted - - - - 257,392 30.57
Exercised (113,874) 7.57 (131,717) 7.34 (8,908) 8.23
Forfeited (2,640) 30.80 (5,649) 30.80 (13,542) 28.63
- ----------------------------------------------------------------------------------------------------------------------------------
Outstanding at End of Year 359,379 $23.71 475,893 $19.89 613,259 $17.34
- ----------------------------------------------------------------------------------------------------------------------------------
Options Exercisable at End of Year 297,651 $22.33 353,600 $16.24 391,687 $11.65
Options Available for Grant at End of Year 11,932 9,292 3,643
Weighted Average Fair Value of Options
Granted During the Year - - $7.91
- ----------------------------------------------------------------------------------------------------------------------------------
The following table summarizes information about fixed stock options
outstanding at December 31, 2000:
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
------------------------------------------ ---------------------------
WEIGHTED WEIGHTED EXERCISABLE WEIGHTED
SHARES AVERAGE AVERAGE SHARES AVERAGE
UNDERLYING REMAINING EXERCISE UNDERLYING EXERCISE
RANGE OF EXERCISE PRICES OPTIONS LIFE (YEARS) PRICE OPTIONS PRICE
- -------------------------------------------------------------------------------------------------------
$10.4545 122,375 1.5 10.4545 122,375 10.4545
24.8864 9,899 2.5 24.8864 4,949 24.8864
30.7954 227,105 2.5 30.7954 170,327 30.7954
- -------------------------------------------------------------------------------------------------------
$10.4545 to $30.7954 359,379 2.2 $23.7062 297,651 $22.3343
- -------------------------------------------------------------------------------------------------------
Effective as of December 14, 1993, the Company adopted a Deferred
Compensation Plan for the benefit of Glen E. Roney, Chief Executive Officer of
the Company. The Deferred Compensation Plan provides for a retirement benefit
payable to Mr. Roney (or his designated beneficiary or his estate if Mr. Roney
dies prior to payment of the full amount of deferred compensation) of $100,000
per year commencing October 29, 2002, and continuing annually thereafter for
fourteen years. In the event payments are to commence after October 30, 2002,
the Company shall pay to Employee on the Late Retirement Date a lump sum equal
to the amount of money that would have been paid to Employee had payments
commenced on October 30, 2002 (the "Catch-Up Amount"), and in addition, the
Company shall pay to Employee $100,000 per year commencing on October 30 of the
year next following the Late Retirement Date and continuing regularly on the
same calendar day of each year thereafter, (including the Catch-Up Amount and
all other payments) the aggregate sum of $1,500,000; and on the Late Retirement
Date, the Company shall pay Employee an amount intended to compensate for
Employee's lost earnings potential on the Catch-Up Amount. If Mr. Roney dies
prior to commencement of the retirement benefit, payments would commence
immediately and be paid to his designated beneficiary or his estate. The Company
also adopted the Trust Under Glen E. Roney Deferred Compensation Plan, in the
form prescribed by applicable regulations adopted by the Internal Revenue
Service for nonqualified deferred compensation plans. Among other things, the
Plan and Trust provide for an initial deposit into the Trust by the Company and
subsequent deposits at the discretion of the Board of Directors, and further
provide for full funding of the amount necessary to discharge the retirement
benefit in the event of a change of control, as that term is defined in the
Trust.
With the consummation of the Mergers the Company acquired four existing
separate deferred compensation plans for the benefit of certain Texas State Bank
employees. The plans provide for retirement benefits to be paid to the specific
employee (or a designated beneficiary or estate if death occurs prior to payment
of the full amount of deferred compensation) on reaching age 65. One plan
entered into on December 10, 1963, commenced payments of approximately $13,000
each year on January 4, 1988, continuing annually thereafter through June 2003.
A second plan, entered into on September 1, 1979, provides for payments of
approximately $13,000 each year which was scheduled to commence on April 1,
1990, continuing annually thereafter through June 2005; however, the employee
elected to receive an amount less than that provided for in the plan over a
longer period of time. The third plan provides for a retirement benefit payable
of $50,000 per year commencing in March 1999 and continuing annually thereafter
for 20 years. The fourth plan provides for a retirement benefit payable of
$13,350 each year beginning March 15, 1995 and continuing annually thereafter
for fourteen years.
Page 44
The Company has incurred deferred compensation expense of $267,000,
$152,000 and $152,000 for the years ended December 31, 2000, 1999 and 1998,
respectively, related to the five deferred compensation plans previously
discussed.
The Bank owns and is the beneficiary of five life insurance policies on
the former employees covered by the deferred compensation plans. The life
insurance policies' face values are amounts equal to the total benefits paid
under the plans.
NOTE 11: COMMITMENTS AND CONTINGENCIES
In the normal course of business, the Company enters into various
transactions which, in accordance with generally accepted accounting principles,
are not included on the consolidated balance sheets. These transactions are
referred to as "off-balance sheet commitments." The Company enters into these
transactions to meet the financing needs of its customers. These transactions
include commitments to extend credit and letters of credit which involve
elements of credit risk in excess of the amounts recognized in the consolidated
balance sheets. The Company's exposure to credit loss in the event of
nonperformance by the other party to these financial instruments is represented
by the contractual notional amount of those instruments. The Company attempts to
minimize its exposure to loss under these commitments by subjecting them to the
same credit approval and monitoring procedures as its other credit facilities.
The Company enters into contractual commitments to extend credit, normally
with fixed expiration dates or termination clauses, at specified rates and for
specific purposes. Customers use credit commitments to ensure that funds will be
available for working capital purposes, for capital expenditures and to ensure
access to funds at specified terms and conditions. Substantially all of the
Company's commitments to extend credit are contingent on customers maintaining
specific credit standards at the time of loan funding. Management assesses the
credit risk associated with certain commitments to extend credit in determining
the level of the allowance for possible loan losses.
Letters of credit are written for conditional commitments issued by the
Company to guarantee the performance of a customer to a third party. The
Company's policies generally require that letters of credit arrangements contain
security and debt covenants similar to those contained in loan agreements.
At December 31, 2000, the Company had outstanding commitments to extend
credit of approximately $237.6 million and standby letters of credit of
approximately $10.8 million.
The Company was obligated under noncancelable leases for premises and
equipment with terms, including renewal options, ranging from one to twenty
years. Minimum future lease payments on operating leases, with terms of one year
or more, as of December 31, 2000 are as follows:
OFFICE
(DOLLARS IN THOUSANDS) SPACE EQUIPMENT TOTAL
- --------------------------------------------------------------------------------
2001 $36 $ 75 $111
2002 27 10 37
2003 - 7 7
2004 - 4 4
2005 - 4 4
Thereafter - 14 14
- --------------------------------------------------------------------------------
Total Minimum Lease Payments $63 $114 $177
- --------------------------------------------------------------------------------
In the normal course of business, the Company also leases space in
buildings it owns. Minimum future rentals from buildings owned as of December
31, 2000 are as follows:
(DOLLARS IN THOUSANDS) TOTAL
- -----------------------------------------------------
2001 $1,270
2002 1,027
2003 811
2004 525
2005 32
Thereafter 56
- -----------------------------------------------------
Total Minimum Future Rentals $3,721
- -----------------------------------------------------
The Company is a defendant in various legal proceedings arising in
connection with its ordinary course of business. In the opinion of management,
the financial position of the Company will not be materially affected by the
final outcome of these legal proceedings.
Page 45
NOTE 12: OTHER NONINTEREST EXPENSE
Other noninterest expense consisted of the following:
YEAR ENDED DECEMBER 31,
--------------------------------------
(DOLLARS IN THOUSANDS) 2000 1999 1998
- ----------------------------------------------------------------------------------------
Advertising and Public Relations $ 1,971 $ 1,495 $ 1,536
Data Processing and Check Clearing 1,766 1,480 1,183
Directors Fees 356 344 333
Franchise Tax (519) 334 600
Insurance 387 400 430
FDIC Insurance 405 191 166
Legal 817 663 1,255
Professional 1,338 1,136 638
Postage, Delivery and Freight 1,009 916 816
Printing, Stationery and Supplies 1,779 1,447 1,325
Telephone 716 628 534
Other Losses, Net 4 759 68
Miscellaneous Expense 1,667 1,311 1,767
- ----------------------------------------------------------------------------------------
Total $11,696 $11,104 $10,651
- ----------------------------------------------------------------------------------------
NOTE 13: EARNINGS PER COMMON SHARE COMPUTATIONS
Basic earnings per share was computed by dividing net income available to
common shareholders by the weighted average number of common stock outstanding
during the year, retroactively adjusted for the stock dividend.
Diluted earnings per share was computed by dividing net income by the
weighted average number of common stock and common stock equivalents outstanding
during the year, retroactively adjusted for the stock dividend. The diluted
earnings per share computations include the effects of common stock equivalents
applicable to stock option contracts.
The number of shares outstanding and related earnings per share amounts
have been restated to retroactively give effect to the 10% stock dividend
declared during December 2000 and distributed during first quarter 2001.
The table below presents a reconciliation of basic and diluted earnings
per share computations.
YEAR ENDED DECEMBER 31,
------------------------------------------------
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA) 2000 1999 1998
- ------------------------------------------------------------------------------------------------------------------
Net Income Available to Common Shareholders $35,302 $30,850 $22,474
- ------------------------------------------------------------------------------------------------------------------
Weighted Average Number of Common Shares Outstanding
Used in Basic EPS Calculation 16,050,261 15,850,640 15,841,634
Add Assumed Exercise of Outstanding Stock Options as
Adjustments for Dilutive Securities 97,117 235,929 250,516
- ------------------------------------------------------------------------------------------------------------------
Weighted Average Number of Common Shares
Outstanding Used in Diluted EPS Calculations 16,147,378 16,086,569 16,092,150
- ------------------------------------------------------------------------------------------------------------------
Basic EPS $2.20 $1.95 $1.42
Diluted EPS 2.19 1.92 1.40
- ------------------------------------------------------------------------------------------------------------------
Page 46
NOTE 14: TEXAS REGIONAL BANCSHARES, INC. (PARENT ONLY) CONDENSED FINANCIAL
STATEMENTS
DECEMBER 31,
CONDENSED BALANCE SHEETS ---------------------------------
(DOLLARS IN THOUSANDS) 2000 1999
- -----------------------------------------------------------------------------------------------------------------------------
Assets
Cash in Subsidiary Bank $ 11,425 $ 9,085
- -----------------------------------------------------------------------------------------------------------------------------
Total Cash and Cash Equivalents 11,425 9,085
Investments in Consolidated Subsidiaries 218,751 180,621
Furniture and Equipment 77 90
Other Assets 677 491
- -----------------------------------------------------------------------------------------------------------------------------
Total Assets $230,930 $190,287
- -----------------------------------------------------------------------------------------------------------------------------
Liabilities
Accounts Payable and Accrued Liabilities $ 796 $ 65
Dividends Payable 2,430 2,034
- -----------------------------------------------------------------------------------------------------------------------------
Total Liabilities 3,226 2,099
Shareholders' Equity 227,704 188,188
- -----------------------------------------------------------------------------------------------------------------------------
Total Liabilities and Shareholders' Equity $203,930 $190,287
- -----------------------------------------------------------------------------------------------------------------------------
YEARS ENDED DECEMBER 31,
CONDENSED STATEMENTS OF INCOME ---------------------------------------------
(DOLLARS IN THOUSANDS) 2000 1999 1998
- -----------------------------------------------------------------------------------------------------------------------------
Income
Dividends Received $ 8,730 $10,206 $10,439
- -----------------------------------------------------------------------------------------------------------------------------
Total Income 8,730 10,206 10,439
- -----------------------------------------------------------------------------------------------------------------------------
Expense
Occupancy Expense 10 12 5
Equipment Expense 25 17 17
Directors Fees 115 118 103
Franchise Tax - - 189
Legal and Professional 86 106 97
Printing, Stationery and Supplies 131 133 109
Organizational Expense - - 65
Other 55 29 76
- -----------------------------------------------------------------------------------------------------------------------------
Total Expense 422 415 661
- -----------------------------------------------------------------------------------------------------------------------------
Income Before Income Tax Expense and Equity
In Undistributed Net Income of Subsidiaries 8,308 9,791 9,778
Income Tax Benefit (150) (147) (239)
- -----------------------------------------------------------------------------------------------------------------------------
Income Before Equity in Undistributed Net
Income of Subsidiaries 8,458 9,938 10,017
Equity in Undistributed Net Income of Subsidiaries 26,844 20,912 12,457
- -----------------------------------------------------------------------------------------------------------------------------
Net Income $35,302 $30,850 $22,474
- -----------------------------------------------------------------------------------------------------------------------------
Page 47
YEARS ENDED DECEMBER 31,
CONDENSED STATEMENTS OF CASH FLOWS ---------------------------------------------
(DOLLARS IN THOUSANDS) 2000 1999 1998
- -----------------------------------------------------------------------------------------------------------------------------
Cash Flows from Operating Activities
Net Income $35,302 $30,850 $22,474
Adjustment to Reconcile Net Income to Net Cash
Provided by (Used in) Operating Activities
Depreciation and Amortization 13 14 11
Undistributed Net Income of Subsidiaries (26,844) (20,912) (12,457)
(Increase) Decrease in Other Assets (1) 21 65
Increase (Decrease) in Income Taxes Payable 1,300 592 (12)
(Increase) Decrease in Deferred Income Taxes (185) (479) 34
Increase (Decrease) in Accounts Payable and Accrued Liabilities 55 (177) 12
- -----------------------------------------------------------------------------------------------------------------------------
Net Cash Provided by Operating Activities 9,640 9,909 10,127
- -----------------------------------------------------------------------------------------------------------------------------
Cash Flows from Investing Activities
Investment in Subsidiaries - - (8,000)
Purchase of Fixed Assets - (59) -
- -----------------------------------------------------------------------------------------------------------------------------
Net Cash Used in Investing Activities - (59) (8,000)
- -----------------------------------------------------------------------------------------------------------------------------
Cash Flows from Financing Activities
Cash Dividends Paid on Common Stock (8,162) (7,204) (6,421)
Proceeds from Exercise of Stock Options 862 966 73
- -----------------------------------------------------------------------------------------------------------------------------
Net Cash Used in Financing Activities (7,300) (6,238) (6,348)
- -----------------------------------------------------------------------------------------------------------------------------
Net Increase (Decrease) in Cash and Cash Equivalents 2,340 3,612 (4,221)
Cash and Cash Equivalents at Beginning of Year 9,085 5,473 9,694
- -----------------------------------------------------------------------------------------------------------------------------
Cash and Cash Equivalents at End of Year $11,425 $ 9,085 $ 5,473
- -----------------------------------------------------------------------------------------------------------------------------
Supplemental Disclosures of Cash Flow Information
Income Taxes Paid $19,575 $18,271 $12,003
- -----------------------------------------------------------------------------------------------------------------------------
NOTE 15: RESTRICTIONS ON RETAINED EARNINGS
The Bank is subject to certain restrictions on the amount of dividends
that it may declare without prior regulatory approval. The amount of retained
earnings in the Bank at December 31, 2000 was $50.6 million. On December 31,
2000, the aggregate amount of dividends, which legally could be paid to the
Corporation without prior approval of various regulatory agencies, totaled $26.9
million.
NOTE 16: REGULATORY MATTERS
The Company is subject to various regulatory capital requirements
administered by the federal banking agencies. Failure to meet minimum capital
requirements can initiate certain mandatory, and possibly additional
discretionary, actions by regulators that, if undertaken, could have a direct
material effect on the Company's financial statements. Under capital adequacy
guidelines and the regulatory framework for prompt corrective action, the
Company must meet specific capital guidelines that involve quantitative measures
of the Company's assets, liabilities, and certain off-balance-sheet items as
calculated under regulatory accounting practices. The Company's capital amounts
and classification are also subject to qualitative judgments by the regulators
about components, risk weightings, and other factors.
Quantitative measures established by regulation to ensure capital adequacy
require the Company to maintain minimum amounts and ratios (set forth in the
table below) of Total and Tier I capital (as defined in the regulations) to
risk-weighted assets (as defined), and of Tier I capital (as defined) to average
assets (as defined). Management believes that the Company meets all capital
adequacy requirements to which it is subject at December 31, 2000.
At December 31, 2000, the most recent notification from the Federal
Reserve Board categorized the Company as well capitalized under the regulatory
framework for prompt corrective action. To be categorized as well capitalized,
the Company must maintain minimum total risk-based, Tier I risk-based, and Tier
I leverage ratios as set forth in the table. There are no conditions or events
since that notification that management believes have changed the institution's
category. The Company's actual capital amounts and ratios are also presented in
the table.
Page 48
TO BE WELL CAPITALIZED
FOR CAPITAL UNDER PROMPT
ACTUAL ADEQUACY PURPOSES ACTION PROVISIONS
------------------------- ------------------------- ---------------------------
(DOLLARS IN THOUSANDS) AMOUNT RATIO AMOUNT RATIO AMOUNT RATIO
- ----------------------------------------------------------------------------------------------------------------------------------
December 31, 2000
Total Capital (to risk weighted assets) $208,927 12.35% $135,379 8.00% $169,224 10.00%
Tier 1 Capital (to risk weighted assets) 189,469 11.20 67,689 4.00 101,534 6.00
Tier 1 Capital (to average assets) 189,469 8.14 93,115 4.00 116,394 5.00
December 31, 1999
Total Capital (to risk weighted assets) $173,551 11.94% $116,313 8.00% $145,392 10.00%
Tier 1 Capital (to risk weighted assets) 156,840 10.79 58,157 4.00 87,235 6.00
Tier 1 Capital (to average assets) 156,840 7.58 82,777 4.00 103,471 5.00
- ----------------------------------------------------------------------------------------------------------------------------------
NOTE 17: FAIR VALUE OF FINANCIAL INSTRUMENTS
DISCLOSURES ABOUT FAIR VALUE OF FINANCIAL INSTRUMENTS
Statement of Financial Accounting Standards No. 107 ("Statement 107"),
"Disclosures about Fair Value of Financial Instruments", requires that the
Company disclose estimated fair values for its financial instruments. Fair value
estimates, methods and assumptions are set forth below for the Company's
financial instruments.
SECURITIES
For securities held, estimated fair value equals quoted market price, if
available. If a quoted market price is not available, fair value is estimated
using quoted market prices for a similar security. Securities not classified as
held to maturity or trading are classified as available for sale and measured at
fair value in the consolidated balance sheets with unrealized holding gains and
losses reported as accumulated other comprehensive income, net of tax, until
realized. The following table presents the amortized cost and estimated fair
value of securities classified as available for sale:
DECEMBER 31,
-----------------------------------------------------------
2000 1999
------------------------------ ----------------------------
AMORTIZED ESTIMATED AMORTIZED ESTIMATED
(DOLLARS IN THOUSANDS) COST FAIR VALUE COST FAIR VALUE
- -------------------------------------------------------------------------------------------------
U.S. Treasury $ 400 $ 400 $ 2,999 $ 3,004
U.S. Government Agency 447,524 445,598 359,558 344,601
Mortgage-Backed 120,669 119,878 131,699 127,631
States and Political Subdivisions 45,919 45,390 48,198 46,370
Other 9,036 9,036 4,332 4,332
- -------------------------------------------------------------------------------------------------
Total $623,548 $620,302 $546,786 $525,938
- -------------------------------------------------------------------------------------------------
The following table presents the carrying value and estimated fair value
of securities classified as held to maturity:
DECEMBER 31,
-----------------------------------------------------------
2000 1999
------------------------------ ----------------------------
AMORTIZED ESTIMATED AMORTIZED ESTIMATED
(DOLLARS IN THOUSANDS) COST FAIR VALUE COST FAIR VALUE
- -------------------------------------------------------------------------------------------------
U.S. Treasury $ - $ - $ 5,001 $ 5,018
States and Political Subdivisions 1,643 1,682 3,009 3,053
- -------------------------------------------------------------------------------------------------
Total $ 1,643 $ 1,682 $ 8,010 $ 8,071
- -------------------------------------------------------------------------------------------------
Page 49
LOANS
The Company does not consider its loan portfolio to have the homogeneous
categories of loans for which the fair value could be estimated by using quoted
market prices for securities backed by similar loans. Therefore, the fair value
of all loans is estimated by discounting future cash flows using the current
rates at which similar loans would be made to borrowers with similar credit
ratings for the same remaining maturities. Assumptions regarding credit risk,
cash flows and discount rates are judgmentally determined using available market
information and specific borrower information. The following table presents
information for loans:
DECEMBER 31,
---------------------------------------------------------------------------------------
2000 1999
-------------------------------------------- ------------------------------------------
CARRYING AVERAGE ESTIMATED CARRYING AVERAGE ESTIMATED
(DOLLARS IN THOUSANDS) AMOUNT YIELD FAIR VALUE AMOUNT YIELD FAIR VALUE
- --------------------------------------------------------------------------------------------------------------------------
Commercial and Agricultural
Adjustable $ 348,748 10.40% $ 345,880 $ 258,776 9.43% $ 257,555
Fixed 217,224 10.23 215,070 214,676 9.61 213,762
Real Estate
Adjustable 392,597 10.28 386,282 285,398 9.50 282,540
Fixed 504,867 9.74 495,234 471,527 9.61 470,450
Consumer 124,391 11.56 122,659 144,382 11.33 143,331
- --------------------------------------------------------------------------------------------------------------------------
Total Loans, Net of
Unearned Discount $1,587,827 10.23% $1,565,125 $1,374,759 9.73% $1,367,638
- --------------------------------------------------------------------------------------------------------------------------
DEPOSIT LIABILITIES
The fair value of demand deposits, savings accounts and certain money
market deposits is the amount payable on demand at the reporting date. The fair
value of certificates of deposit is based on the discounted value of contractual
cash flows. The discount rate is estimated using the rates currently offered for
deposits of similar remaining maturities. The following table presents the
carrying value and estimated fair value of deposit liabilities at December 31,
2000 and December 31, 1999:
DECEMBER 31,
----------------------------------------------------------------
2000 1999
-------------------------------- -------------------------------
CARRYING ESTIMATED CARRYING ESTIMATED
(DOLLARS IN THOUSANDS) AMOUNT FAIR VALUE AMOUNT FAIR VALUE
- ------------------------------------------------------------------------------------------------------------
Demand $ 301,286 $ 301,286 $ 285,866 $ 285,866
Savings 111,312 111,312 118,758 118,758
Money Market Checking and Savings 471,622 471,622 377,458 377,459
Time Deposits 1,225,528 1,225,934 1,103,264 1,105,414
- ------------------------------------------------------------------------------------------------------------
Total Deposits $2,109,748 $2,110,154 $1,885,346 $1,887,497
- ------------------------------------------------------------------------------------------------------------
The fair value estimates above do not include the benefit that results
from the low-cost funding provided by the deposit liabilities compared to the
cost of borrowing funds in the market. The Company has not attempted to
determine the amount of increase in net assets that would result from the
benefit of considering the low-cost funding provided by deposit liabilities.
COMMITMENTS TO EXTEND CREDIT, STANDBY LETTERS OF CREDIT AND FINANCIAL GUARANTEES
WRITTEN
These financial instruments are not sold or traded, and estimated fair
values are not readily available. The carrying amount of commitments to extend
credit and standby letters of credit is the net unamortized deferred cost or
income arising from these unrecognized financial instruments. The estimated fair
value of these commitments is considered to be the carrying value. Financial
guarantees written consist of obligations for credit cards issued to certain
customers. Substantially all of the liability for financial guarantees written
is collateralized by deposits pledged to the Company.
The following table presents the contract amount, carrying amount and
estimated fair value for commitments to extend credit, standby letters of credit
and financial guarantees written at December 31, 2000 and 1999:
Page 50
DECEMBER 31,
-------------------------------------------------------------------------------------------
2000 1999
---------------------------------------------- --------------------------------------------
CONTRACT CARRYING ESTIMATED CONTRACT CARRYING ESTIMATED
(DOLLARS IN THOUSANDS) AMOUNT AMOUNT FAIR VALUE AMOUNT AMOUNT FAIR VALUE
- -------------------------------------------------------------------------------------------------------------------------------
Commitments to Extend Credit $235,866 $(2,543) $(2,543) $191,591 $(2,482) $(2,482)
Standby Letters of Credit 10,815 1 1 17,223 2 2
Financial Guarantees Written 1,699 - - 1,822 - -
- -------------------------------------------------------------------------------------------------------------------------------
LIMITATIONS
Fair value estimates are made at a specific point in time, based on
relevant market information and information about the financial instrument.
These estimates do not reflect any premium or discount that could result from
offering for sale at one time the Company's entire holdings of a particular
financial instrument. Because no market exists for a significant portion of the
Company's financial instruments, fair value estimates are based on judgments
regarding future expected loss experience, current economic conditions, risk
characteristics of various financial instruments and other factors. These
estimates are subjective in nature and involve uncertainties and matters of
significant judgment and therefore cannot be determined with precision. Changes
in assumptions could significantly affect the estimates.
Fair value estimates are based on existing on-and off-balance sheet
financial instruments without attempting to estimate the value of anticipated
future business and the value of assets and liabilities that are not considered
financial instruments. For example, the Company has a substantial trust
department that contributes net fee income annually. The trust department is not
considered a financial instrument, and its value has not been incorporated into
the fair value estimates. Other significant assets and liabilities that are not
considered financial assets or liabilities include the deferred tax liabilities,
premises, equipment and goodwill. In addition, the tax ramifications related to
the realization of the unrealized gains and losses can have a significant effect
on fair value estimates and have not been considered in many of the estimates.
NOTE 18: ACQUISITION ACTIVITY
On February 19, 1998, the Company completed the acquisition of three bank
holding companies and their three subsidiary banks. The acquisition of
Brownsville Bancshares, Inc. and its subsidiary, Brownsville National Bank,
includes two banking locations in Brownsville, Cameron County, Texas, with
assets of approximately $100.1 million, equity of $12.1 million, loans of $42.6
million, and deposits of $87.2 million. This acquisition was achieved by the
exchange of 984,806 shares of Company stock for all of the outstanding shares of
Brownsville Bancshares, Inc. and cancellation of outstanding stock options.
Brownsville National Bank merged with and into Texas State Bank.
The second acquisition was TB&T Bancshares, Inc. and its subsidiary, Texas
Bank and Trust of Brownsville, Cameron County, Texas. Texas Bank and Trust of
Brownsville had assets of approximately $44.9 million, equity of $4.1 million,
loans of $21.9 million, and deposits of $40.3 million. This acquisition was
achieved by exchange of 301,483 shares of Company stock for all of the
outstanding shares of TB&T Bancshares, Inc. Texas Bank and Trust of Brownsville
merged with and into Texas State Bank.
The third acquisition was Raymondville Bancorp, Inc. and its subsidiary,
Bank of Texas. Bank of Texas was headquartered in Raymondville, Willacy County,
Texas, with one additional banking facility in Brownsville, Texas. The
shareholder of Raymondville Bancorp, Inc. received cash consideration of $9.6
million in this acquisition, and the Company paid $100,000 in consideration for
a covenant not to compete. The Company discharged approximately $330,000 of
existing Raymondville Bancorp, Inc. indebtedness. Bank of Texas had assets of
approximately $63.7 million, equity of $5.1 million, loans of $25.5 million, and
deposits of $56.5 million. Bank of Texas merged with and into Texas State Bank.
The acquisition of Brownsville Bancshares, Inc. and TB&T Bancshares, Inc.
was accounted for under the pooling-of-interests method of accounting, and as
such, the enclosed financial information has been restated for all periods
presented to include the results of operations and financial position of these
acquired entities. The acquisition of Raymondville Bancorp, Inc. was accounted
for under the purchase method of accounting; therefore, the results of
operations are included in the consolidated financial statements from the date
of acquisition, February 19, 1998. The One Time Charge - Acquisitions of
$728,000 primarily included professional fees and computer conversion costs
related to effecting business combinations accounted for by the
pooling-of-interests method.
On October 1, 1999, the Company completed the acquisition of Harlingen
Bancshares, Inc. and its subsidiary, Harlingen National Bank. The acquisition
included its main office and two banking locations in Harlingen, Cameron County,
Texas; one banking location in La Feria, Cameron County, Texas; one banking
location in Palm Valley, Cameron County, Texas, and one banking location in
Mercedes, Hidalgo County, Texas. The shareholders of Harlingen Bancshares, Inc.
received aggregate consideration of $34.0 million, including $1.0 million
deposited into escrow pending the outcome of certain contingencies.
Simultaneously, the shareholders of Harlingen Bancshares, Inc. and their
affiliates purchased certain assets of
Page 51
Harlingen Bancshares, Inc. with a book value totaling $2.4 million. The Company
also agreed to pay $1.0 million over a term of ten years in consideration of a
covenant not to compete from certain principals of Harlingen Bancshares, Inc.
Harlingen National Bank had assets of approximately $204.2 million, loans of
$110.7 million, deposits of $183.6 million and equity of $19.9 million. The
Company accounted for the acquisition under the purchase method of accounting;
therefore, the results of operations are included in the consolidated financial
statements from the date of acquisition, October 1, 1999.
QUARTERLY FINANCIAL DATA
TEXAS REGIONAL BANCSHARES, INC. AND SUBSIDIARIES
CONDENSED QUARTERLY INCOME STATEMENTS
TAXABLE-EQUIVALENT BASIS FOURTH THIRD SECOND FIRST
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA) QUARTER QUARTER QUARTER QUARTER
- --------------------------------------------------------------------------------------------------------------------------------
2000
- --------------------------------------------------------------------------------------------------------------------------------
Interest Income $48,979 $46,792 $45,091 $42,400
Interest Expense 24,374 22,509 20,818 18,812
- --------------------------------------------------------------------------------------------------------------------------------
Net Interest Income 24,605 24,283 24,273 23,588
Provision for Loan Losses 1,875 2,558 2,325 2,169
Noninterest Income 5,701 5,262 5,403 5,208
Noninterest Expense 13,388 13,332 13,561 13,263
- --------------------------------------------------------------------------------------------------------------------------------
Income Before Taxable-Equivalent
Adjustment and Income Tax Expense 15,043 13,655 13,790 13,364
Tax-Equivalent Adjustment 439 456 400 430
Applicable Income Tax Expense 5,112 4,281 4,869 4,563
- --------------------------------------------------------------------------------------------------------------------------------
Net Income $9,492 $8,918 $8,521 $8,371
- --------------------------------------------------------------------------------------------------------------------------------
Net Income Per Common Share
Basic $ 0.59 $ 0.55 $ 0.53 $ 0.52
Diluted 0.59 0.55 0.53 0.52
- --------------------------------------------------------------------------------------------------------------------------------
1999
- --------------------------------------------------------------------------------------------------------------------------------
Interest Income $40,945 $36,138 $34,965 $33,362
Interest Expense 17,577 15,420 14,862 14,362
- --------------------------------------------------------------------------------------------------------------------------------
Net Interest Income 23,368 20,718 20,103 19,000
Provision for Loan Losses 1,010 1,600 1,499 1,323
Noninterest Income 4,761 4,285 4,197 4,156
Noninterest Expense 13,782 10,648 10,919 10,539
- --------------------------------------------------------------------------------------------------------------------------------
Income Before Taxable-Equivalent
Adjustment and Income Tax Expense 13,337 12,755 11,882 11,294
Tax-Equivalent Adjustment 450 376 374 369
Applicable Income Tax Expense 4,568 4,365 4,043 3,873
- --------------------------------------------------------------------------------------------------------------------------------
Net Income $8,319 $8,014 $7,465 $7,052
- --------------------------------------------------------------------------------------------------------------------------------
Net Income Per Common Share
Basic $ 0.52 $ 0.51 $ 0.47 $ 0.45
Diluted 0.52 0.50 0.46 0.44
- --------------------------------------------------------------------------------------------------------------------------------
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The information regarding directors and executive officers called for by
Item 10 is incorporated herein by reference to the sections entitled "Election
of Directors" and "Executive Officers" in the Company's Proxy Statement for its
Annual Meeting of Shareholders to be held April 23, 2001. The Proxy Statement
will be filed with the Securities and Exchange Commission within 120 days
following the end of the Company's fiscal year.
Page 52
ITEM 11. EXECUTIVE COMPENSATION
The information regarding executive compensation called for by Item 11 is
incorporated herein by reference to the section entitled "Executive Officers" in
the Company's Proxy Statement for its Annual Meeting of Shareholders to be held
April 23, 2001. The Proxy Statement will be filed with the Securities and
Exchange Commission within 120 days following the end of the Company's fiscal
year.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information regarding ownership of the Company's common stock by
certain beneficial owners and by management called for by Item 12 is
incorporated herein by reference to the section entitled "Stock Ownership of
Management and Others" in the Company's Proxy Statement for its Annual Meeting
of Shareholders to be held April 23, 2001. The Proxy Statement will be filed
with the Securities and Exchange Commission within 120 days following the end of
the Company's fiscal year.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information regarding transactions between management and others and
the Company called for by Item 13 is incorporated herein by reference to the
sections entitled "Transactions with Management and Others" in the Company's
Proxy Statement for its Annual Meeting of Shareholders to be held April 23,
2001. The Proxy Statement will be filed with the Securities and Exchange
Commission within 120 days following the end of the Company's fiscal year.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a) The following documents are filed as part of this Annual Report on Form
10-K:
(1) The following consolidated financial statements of the registrant and its
subsidiaries, are included herein:
(i) Independent Auditors' Report
(ii) Consolidated Balance Sheets - December 31, 2000 and 1999
(iii) Consolidated Statements of Income and Comprehensive Income - Years
Ended December 31, 2000, 1999 and 1998
(iv) Consolidated Statements of Changes in Shareholders' Equity - Years
Ended December 31, 2000, 1999 and 1998
(v) Consolidated Statements of Cash Flows - Years Ended December 31,
2000, 1999 and 1998
(vi) Notes to Consolidated Financial Statements - Years Ended December
31, 2000, 1999 and 1998
(2) Financial Statement Schedules are omitted because the required information
is not applicable.
(3) Exhibits - The following exhibits are filed as a part of this Annual
Report on Form 10-K:
2.1 Agreement and Plan of Reorganization dated as of October 15, 1997,
by and between Texas Regional Bancshares, Inc. and Raymondville
Bancorp, Inc. (incorporated by reference from 1998 Form 10-K,
Commission File No. 000-14517).
2.2 Agreement and Plan of Reorganization dated as of October 20, 1997,
by and between Texas Regional Bancshares, Inc. and Brownsville
Bancshares, Inc. (incorporated by reference from Form S-4,
Commission File No. 333-41959).
2.3 Agreement and Plan of Reorganization dated as of October 15, 1997,
by and between Texas Regional Bancshares, Inc. and TB&T Bancshares,
Inc. (incorporated by reference from Form S-4, Commission File No.
333-41945).
2.4 Agreement and Plan of Reorganization by and between Texas State
Bank, McAllen, Texas, First State Bank & Trust Co., Mission, Texas
("First State Bank"), Texas Regional Bancshares, Inc., and certain
shareholders of First State Bank, dated as of January 9, 1996
(incorporated by reference from Form 8-K, Commission File No.
000-14517).
Page 53
2.5 Agreement and Plan of Reorganization by and between Texas State
Bank, McAllen, Texas, The Border Bank, Hidalgo, Texas ("Border
Bank"), Texas Regional Bancshares, Inc., and certain shareholders of
Border Bank, dated as of January 9, 1996 (incorporated by reference
from Form 8-K, Commission File No. 000-14517).
3.1 Articles of Incorporation of Texas Regional Bancshares, Inc.
(incorporated by reference from Form 10, Commission File No.
000-14517).
3.2 Amendment to Articles of Incorporation of Texas Regional Bancshares,
Inc., filed December 28, 1983 (incorporated by reference from Form
10, Commission File No. 000-14517).
3.3 Amendment to Articles of Incorporation of Texas Regional Bancshares,
Inc., filed June 25, 1986 (incorporated by reference from Form S-1,
Commission File No. 33-28340).
3.4 Amendment to Articles of Incorporation of Texas Regional Bancshares,
Inc., filed April 4, 1988 (incorporated by reference from Form S-1,
Commission File No. 33-28340).
3.5 Amendment to Articles of Incorporation of Texas Regional Bancshares,
Inc., filed April 12, 1991 (incorporated by reference from Form
10-K, Commission File No. 000-14517).
3.6 Amendment to Articles of Incorporation of Texas Regional Bancshares,
Inc., filed March 2, 1992 (incorporated by reference from Form 10-K,
Commission File No. 000-14517).
3.7 Resolution Eliminating from the Articles of Incorporation certain
preferred series of shares of Texas Regional Bancshares, Inc., filed
February 21, 1995 (incorporated by reference from 1994 Form 10-K,
Commission File No. 000-14517).
3.8 Bylaws of Texas Regional Bancshares, Inc., as amended (incorporated
by reference from Form S-1, Commission File No. 33-74992).
4 Relevant portions of Texas Regional Bancshares, Inc. Articles of
Incorporation and Bylaws (incorporated by reference from Form S-1,
Commission File No. 333-1467).
10.1 Incentive Stock Option Plan (incorporated by reference from Form 10,
Commission File No. 000-14517).
10.2 1985 Non-Statutory Stock Option Plan (incorporated by reference from
Form 10, Commission File No. 000-14517).
10.3 1995 Non-Statutory Stock Option Plan (incorporated by reference from
Form S-1, Commission File No. 333-1467).
10.4 Texas Regional Bancshares, Inc., 1997 Incentive Stock Option Plan
(incorporated by reference from Form S-4, Commission File No.
000-14517).
10.5 Texas Regional Bancshares, Inc., 1997 Nonstatutory Stock Option Plan
(incorporated by reference from Form S-4, Commission File No.
000-14517).
10.6 Texas Regional Bancshares, Inc. Employees Stock Ownership Plan (with
401(k) provisions) (incorporated by reference from Form S-8,
Commission File No. 33-39386).
10.7 Amendment No. 1 to Texas Regional Bancshares, Inc. Employees Stock
Ownership Plan, adopted July 9, 1991 (incorporated by reference from
1991 Form 10-K, Commission File No. 000-14517).
10.8 Amendment No. 2 to Texas Regional Bancshares, Inc. Employees Stock
Ownership Plan, adopted May 12, 1992 (incorporated by reference from
1992 Form 10-K, Commission File No. 000-14517).
10.9 Amendment No. 3 to Texas Regional Bancshares, Inc. Employees Stock
Ownership Plan, adopted September 8, 1992, effective January 1, 1992
(incorporated by reference from Form S-1, Commission File No.
33-74992).
10.10 Amendment No. 4 to Texas Regional Bancshares, Inc. Employees Stock
Ownership Plan (with 401(k) provisions), adopted August 10, 1993
(incorporated by reference from Form S-1, Commission File No.
33-74992).
10.11 Amendment No. 5 to Texas Regional Bancshares, Inc. Employees Stock
Ownership Plan (with 401(k) provisions), adopted August 10, 1993
(incorporated by reference from 1994 Form 10-K, Commission File No.
000-14517).
10.12 Amendment No. 6 to Texas Regional Bancshares, Inc. Employee Stock
Ownership Plan (with 401(k) provisions), adopted as of August 8,
1995 (incorporated by reference from Form S-1, Commission File No.
333-1467).
Page 54
10.13 Amendment No. 7 to Texas Regional Bancshares, Inc. Employees Stock
Ownership Plan (with 401(k) provisions), adopted May 21, 1996
(incorporated by reference from 1996 Form 10-K, Commission File No.
000-14517).
10.14 Amendment No. 8 to Texas Regional Bancshares, Inc. Employee Stock
Ownership Plan (with 401(k) provisions), adopted March 10, 1998
(incorporated by reference from 1998 Form 10-K, Commission File No.
000-14517).
10.15 Glen E. Roney Amended and Restated Deferred Compensation Plan dated
as of March 11, 1997 (incorporated by reference from Form S-4,
Commission File No. 333-41959).
10.16 Amendment No. 9 to Texas Regional Bancshares, Inc. Employee Stock
Ownership Plan (with 401(k) provisions), adopted June 9, 1998
(incorporated by reference from Form 10-Q for quarter ended June 30,
1998, Commission File No. 000-14517).
10.17 Amendment No. 3 to Texas Regional Bancshares, Inc. Employee Stock
Ownership Trust Agreement, adopted July 13, 1999 (incorporated by
reference from Form 10-Q for quarter ended September 30, 1999,
Commission File No. 000-14517).
10.18 Amendment No. 10 to Texas Regional Bancshares, Inc. Employee Stock
Ownership Plan (with 401(k) provisions), adopted July 13, 1999
(incorporated by reference from Form 10-Q for quarter ended
September 30, 1999, Commission File No. 000-14517).
10.19 Second Amendment to Bank of Texas Profit Sharing Plan, adopted
August 27, 1999 (incorporated by reference from Form 10-Q for
quarter ended September 30, 1999, Commission File No. 000-14517).
10.20 Amendment No. 11 to the Texas Regional Bancshares, Inc. Employee
Stock Ownership Plan (with 401(k) provisions), adopted October 1,
1999 (incorporated by reference from 1999 Form 10-K, Commission File
No. 000-14517).
10.21 Amendment No. 12 to Texas Regional Bancshares, Inc. Employee Stock
Ownership Plan (with 401(k) Provisions), adopted December 22, 1999
(incorporated by reference from Form 10-Q for quarter ended March
31, 2000).
10.22 Amendment No. 13 to Texas Regional Bancshares, Inc. Employee Stock
Ownership Plan (with 401(k) Provisions), effective April 1, 2000
(incorporated by reference from Form 10-Q for quarter ended March
31, 2000).
10.23 Third Amendment to the Harlingen National Bank 401(k) Plan
(incorporated by reference from 10-Q for quarter ended September 30,
2000).
10.24 Amendment No. 14 to Texas Regional Bancshares, Inc. Employee Stock
Ownership Plan (with 401(k) Provisions), effective October 25, 2000
(filed herewith).
21 Subsidiaries of the Registrant (filed herewith)
(b) Reports of Form 8-K
No report on Form 8-K was filed by Texas Regional Bancshares, Inc. during the
three months ended December 31, 2000.
Page 55
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
TEXAS REGIONAL BANCSHARES, INC.
(Registrant)
March 5, 2001 /s/ G.E. RONEY
- -------------------- ---------------------------------
Glen E. Roney
Chairman of the Board, President
& Chief Executive Officer
Pursuant to the requirement of the Securities Exchange Act of 1934, this
report has signed below by the following persons on behalf of the Registrant and
in the capacities and on the date indicated.
Signature Title Date
- -------------------------------------- ------------------------------------------------------------ ------------------
/s/ G.E. RONEY Chairman of the Board, President and Chief March 5, 2001
- -------------------------------------- Executive Officer (principal executive officer) -------------
Glen E. Roney
/s/ MORRIS ATLAS Director March 5, 2001
- -------------------------------------- -------------
Morris Atlas
/s/ FRANK N. BOGGUS Director March 5, 2001
- -------------------------------------- -------------
Frank N. Boggus
/s/ ROBERT G. FARRIS Director March 5, 2001
- -------------------------------------- -------------
Robert G. Farris
/s/ C. KENNETH LANDRUM, M.D. Director March 5, 2001
- -------------------------------------- -------------
C. Kenneth Landrum, M.D.
/s/ JULIE G. UHLHORN Director March 5, 2001
- -------------------------------------- -------------
Julie G. Uhlhorn
/s/ JACK WHETSEL Director March 5, 2001
- -------------------------------------- -------------
Jack Whetsel
/s/ M.M. YZAGUIRRE Director March 5, 2001
- -------------------------------------- -------------
Mario Max Yzaguirre
/s/ PAUL S. MOXLEY Senior Executive Vice President March 5, 2001
- -------------------------------------- -------------
Paul S. Moxley
/s/ R.T. PIGOTT, JR. Executive Vice President and Chief Financial March 5, 2001
- -------------------------------------- Officer (principal financial officer) -------------
R. T. Pigott, Jr.
/s/ ANN M. SEFCIK Controller/Assistant Secretary (principal March 5, 2001
- -------------------------------------- accounting officer) -------------
Ann M. Sefcik
INDEX TO EXHIBITS FILED HEREWITH
EXHIBIT
NUMBER SEQUENTIALLY NUMBERED EXHIBIT
- ------ -----------------------------
10.24 Amendment Number 14 to the Texas Regional Bancshares, Inc. Employee
Stock Ownership Plan (with 401(k) provisions) effective October 25,
2000
21 Subsidiaries of the Registrant
Page 56