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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, 2001
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 February 25,
2002: $586,990,358
Number of shares outstanding of the registrant's Class A Voting Common Stock,
$1.00 par value, as of February 14, 2002: 17,526,883
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Registrant's definitive Proxy Statement for its 2002 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 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 active
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.
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. On February 19,
1998, the Company acquired Brownsville National Bank, Brownsville, Texas, Texas
Bank and Trust, Brownsville, Texas and Bank of Texas, Raymondville, Texas. On
October 1, 1999, the Company acquired Harlingen National Bank, Harlingen, Texas.
At December 31, 2001, the Bank operated 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, 2001,
the Company had consolidated total assets of $2.6 billion, loans outstanding
(net of unearned discount) of $1.7 billion, deposits of $2.2 billion, and
shareholders' equity of $265.3 million.
On February 22, 2002, the Company made its first acquisition outside of the
Rio Grande Valley through the acquisition of Riverway Bank of Houston, Texas. On
that date, the banking office of Riverway Bank became the Bank's twenty-seventh
banking location.
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
economy in its market areas. 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 the Rio Grande Valley in addition to providing data
processing services for all of the Bank's banking locations. On January 31,
2002, the Bank acquired assets and data processing service contracts related to
Frost National Bank's data operations center in Grapevine, Texas. As a result of
that acquisition the Bank now provides data processing services for 17 banks in
North Texas.
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
other 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.
COMPETITION
At December 31, 2001, all of the Company's operations were located in the
Rio Grande Valley, which consists of Cameron, Hidalgo, Starr and Willacy
Counties. Cameron, Hidalgo and Starr Counties are adjacent to the Rio Grande
River,
PAGE 2
which forms part of the border between the United States and Mexico.
Effective with the acquisition of Riverway Bank in Houston, Texas in February
2002, the Company made its first acquisition outside of the Rio Grande Valley.
The Bank encounters intense competition in its commercial banking business,
primarily from other banks located in its market areas. The Bank also competes
with insurance, finance and mortgage companies, savings and loan institutions,
credit unions, money market funds and other financial institutions. Competition
is based upon interest rates offered on deposit accounts, interest rates charged
on loans and other credit and service charges, the quality and scope of the
services rendered, the convenience of banking facilities, and, in the case of
loans to commercial borrowers, the banks' lending limits. A substantial number
of the commercial banks in the market areas served by the Bank 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
Texas, 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.
PAGE 3
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.
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
PAGE 4
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.
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 the 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, 2001. The Bank's capital
ratios exceeded the minimum requirements for "well capitalized" institutions
under the regulatory framework for prompt corrective action at December 31,
2001. As a result, the Company does not believe that FDICIA's prompt
PAGE 5
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 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 1.82 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 Banking and 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 950 full-time equivalent employees at December 31,
2001. 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 consolidated 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, 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
March 31, 2001 37.73 27.94 0.150 2,223,671
June 30, 2001 41.10 30.83 0.150 3,009,173
September 30, 2001 40.28 32.36 0.150 2,537,820
December 31, 2001 37.98 32.70 0.150 2,282,412
==============================================================================
On December 31, 2001, there were 815 holders of record of the Company's
Class A Common Stock.
During the two years ended December 31, 2001, an aggregate of 57,900 shares
purchased by the Texas Regional Bancshares, Inc. Amended and Restated 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, 2001, an aggregate of $46.1 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, 2001. 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 2001 2000 1999 1998 1997
- -----------------------------------------------------------------------------------------------------------------
(AMOUNTS IN THOUSANDS, EXCEPT PER SHARE DATA)
Income Statement Data
Interest Income $ 183,302 $ 181,537 $ 143,841 $ 125,649 $ 112,745
Interest Expense 83,776 86,513 62,221 58,384 50,618
- -----------------------------------------------------------------------------------------------------------------
Net Interest Income 99,526 95,024 81,620 67,265 62,127
- -----------------------------------------------------------------------------------------------------------------
Provision for Loan Losses 8,667 8,927 5,432 9,729 2,947
Noninterest Income 29,213 21,574 17,399 17,663 12,972
Noninterest Expense 59,344 53,544 45,888 41,102 37,170
- -----------------------------------------------------------------------------------------------------------------
Income Before Income Tax Expense 60,728 54,127 47,699 34,097 34,982
Income Tax Expense 21,306 18,825 16,849 11,623 11,860
- -----------------------------------------------------------------------------------------------------------------
Net Income $ 39,422 $ 35,302 $ 30,850 $ 22,474 $ 23,122
=================================================================================================================
Per Common Share Data
Basic Earnings Per Share (2) $ 2.44 $ 2.20 $ 1.95 $ 1.42 $ 1.46
Diluted Earnings Per Share (2) 2.43 2.19 1.92 1.40 1.44
Book Value at End of Period (2) 16.34 14.15 11.78 11.19 10.19
Cash Dividends Declared (2) 0.600 0.532 0.468 0.427 0.367
Dividend Payout Ratio 24.69% 24.19% 24.64% 30.52% 25.32%
Weighted Average Shares Outstanding (2)
Basic 16,139 16,050 15,851 15,842 15,807
Diluted 16,254 16,148 16,087 16,092 16,062
Shares Outstanding at End of Period (2) 16,236 16,091 15,977 15,845 15,836
=================================================================================================================
Balance Sheet Data
Total Assets $ 2,590,812 $ 2,426,097 $ 2,120,690 $ 1,762,332 $ 1,538,769
Loans 1,710,001 1,587,827 1,374,759 1,089,505 951,316
Securities 655,635 621,945 533,948 470,267 416,921
Interest-Earning Assets 2,366,227 2,216,877 1,913,784 1,592,325 1,387,322
Deposits 2,235,877 2,109,748 1,885,346 1,562,942 1,362,783
Shareholders' Equity 265,259 227,704 188,188 177,274 161,358
=================================================================================================================
Average Balance Sheet Data
Total Assets $ 2,489,149 $ 2,257,193 $ 1,896,880 $ 1,654,135 $ 1,439,956
Loans 1,627,901 1,482,628 1,209,609 1,023,527 875,839
Securities 636,257 560,116 488,506 432,767 386,221
Interest-Earning Assets 2,281,508 2,052,573 1,720,083 1,491,211 1,301,959
Deposits 2,166,106 1,999,028 1,684,730 1,462,215 1,274,442
Shareholders' Equity 250,231 202,498 183,390 171,427 152,635
=================================================================================================================
Performance Ratios
Return on Average Assets 1.58% 1.56% 1.63% 1.36% 1.61%
Return on Average Equity 15.75 17.43 16.82 13.11 15.15
Net Interest Margin(1) 4.44 4.71 4.84 4.61 4.89
Efficiency Ratio 45.14 44.71 45.29 48.86 48.82
=================================================================================================================
Asset Quality Ratios
Nonperforming Assets to Total Loans and
Repossessed Assets 1.27% 1.08% 1.04% 1.44% 1.22%
Net Loan Charge-Offs to Average Total
Loans 0.43 0.42 0.29 0.79 0.28
Allowance for Loan Losses to Total Loans 1.23 1.23 1.22 1.21 1.19
Allowance for Loans Losses to
Nonperforming Loans 149.99 155.90 200.35 127.10 135.14
=================================================================================================================
Capital Ratios
Total Risk-Based Capital Ratio 13.54% 12.35% 11.94% 14.04% 14.73%
Tier 1 Risk-Based Capital Ratio 12.39 11.20 10.79 12.90 13.60
Leverage Capital Ratio 9.05 8.14 7.58 8.84 9.21
Equity to Assets Ratio 10.24 9.39 8.87 10.06 10.49
=================================================================================================================
(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 Company 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. Acquisition Charges 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
On February 22, 2002, the Company completed the acquisition of Riverway
Holdings, Inc. and its subsidiary, Riverway Bank located at Five Riverway Drive,
Houston, Texas. The shareholders of Riverway Holdings, Inc. ("Riverway")
received 1,276,226 shares of Texas Regional common stock in exchange for their
shares of Riverway common stock, of which 1,176,226 shares were distributed
directly to the shareholders immediately following closing and 100,000 shares
was held in escrow pursuant to a holdback escrow agreement pending the outcome
of certain contingencies. As of December 31, 2001, Riverway had total assets of
approximately $693.0 million, loans of $451.0 million, deposits of $511.0
million and equity of $31.9 million. The Company accounted for the acquisition
under the purchase method of accounting; therefore, the results of operations
will be included in the consolidated financial statements subsequent to the date
of acquisition.
OVERVIEW
Total assets at December 31, 2001, 2000 and 1999 were $2.6 billion, $2.4
billion and $2.1 billion, respectively. Total deposits at December 31, 2001,
2000 and 1999 were $2.2 billion, $2.1 billion, and $1.9 billion, respectively,
with deposit growth in each period resulting from internal growth and
acquisitions. Loans were $1.7 billion at December 31, 2001, an increase of
$122.2 million or 7.7% from $1.6 billion at the end of 2000. Loans were $1.4
billion at year end 1999. Shareholders' equity was $265.3 million, $227.7
million, and $188.2 million at December 31, 2001, 2000 and 1999, respectively.
Net income was $39.4 million, $35.3 million and $30.9 million for the years
ended December 31, 2001, 2000 and 1999, respectively, and diluted earnings per
share were $2.43, $2.19, and $1.92 for these same periods. Earnings growth from
2000 to 2001 resulted principally from loan growth and increased service charge
income. The Company posted returns on average assets of 1.58%, 1.56% and 1.63%
and returns on average equity of 15.75%, 17.43% and 16.82% for the years ended
2001, 2000 and 1999, respectively. The Company's efficiency ratio was 45.14% in
2001, 44.71% in 2000 and 45.29% in 1999. The efficiency ratio is defined as
Noninterest Expense (excluding other real estate income and expense) divided by
the total of taxable-equivalent Net Interest Income and Noninterest Income
(excluding any gains and losses on sale of securities).
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 $95.7 million at
December 31, 2001. Comparatively, the Company had $80.7 million in cash and cash
equivalents at December 31, 2000, an increase of $15.0 million or 18.6%.
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 (loss), net of applicable income taxes,
until realized.
At December 31, 2001 and December 31, 2000, no securities were classified
as trading. The Company does not currently engage in trading activities or use
derivative instruments to control interest rate risk. Even though such
activities may be permitted with the approval of the Board of Directors, the
Company does not intend to engage in such activities in the immediate future.
PAGE 11
The following table displays the carrying amount (fair value) of securities
available for sale:
DECEMBER 31,
-------------------------------------------
SECURITIES AVAILABLE FOR SALE 2001 2000 1999
- -------------------------------------------------------------------------------------
(DOLLARS IN THOUSANDS)
U.S. Treasury $ 403 $ 400 $ 3,004
U.S. Government Agency 419,673 445,598 344,601
Mortgage-Backed 165,614 119,878 127,631
States and Political Subdivisions 59,800 45,390 46,370
Other 9,231 9,036 4,332
- -------------------------------------------------------------------------------------
Total $654,721 $620,302 $525,938
=====================================================================================
The following table presents the maturities, amortized cost, estimated
market value and weighted average yields of securities available for sale at
December 31, 2001. Mortgage backed securities were allocated based on weighted
average life.
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 $ 401 $ - $ - $ - $ 401 $ 403
U.S. Government Agency 5,000 320,765 89,522 - 415,287 419,673
Mortgage-Backed 28,125 134,025 779 2,555 165,484 165,614
States and Political Subdivisions 1,598 11,778 31,791 15,065 60,232 59,800
Other 25 275 125 8,806 9,231 9,231
- --------------------------------------------------------------------------------------------------------------------
Total $35,149 $466,843 $122,217 $26,426 $650,635 $654,721
====================================================================================================================
Weighted Average Yields
(Taxable-Equivalent Basis)
- --------------------------------------------------------------------------------------------------------------------
U.S. Treasury 4.49% -% -% -% 4.49%
U.S. Government Agency 6.10 5.27 5.71 - 5.37
Mortgage-Backed 5.07 5.48 6.27 5.78 5.42
States and Political Subdivisions 6.91 6.40 6.28 6.66 6.41
Other 7.50 6.95 6.65 4.46 4.57
- --------------------------------------------------------------------------------------------------------------------
Total 5.30% 5.36% 5.86% 5.84% 5.47%
====================================================================================================================
Net unrealized holding gains (losses), net of related tax effect, of $2.6
million and ($2.2 million) at December 31, 2001 and December 31, 2000,
respectively, on securities available for sale are reported as a separate
component of shareholders' equity as accumulated other comprehensive income
(loss).
The following table displays the carrying amount (amortized cost) of
securities held to maturity:
DECEMBER 31,
-------------------------------------------
SECURITIES HELD TO MATURITY 2001 2000 1999
- -------------------------------------------------------------------------------------
(DOLLARS IN THOUSANDS)
U.S. Treasury $ - $ - $5,001
States and Political Subdivisions 914 1,643 3,009
- -------------------------------------------------------------------------------------
Total $914 $1,643 $8,010
=====================================================================================
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, 2001:
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 $ 220 $ 694 $ - $ - $ 914 $ 950
- --------------------------------------------------------------------------------------------------------------------
Total $ 220 $ 694 $ - $ - $ 914 $ 950
====================================================================================================================
Weighted Average Yields
(Taxable-Equivalent Basis)
- --------------------------------------------------------------------------------------------------------------------
States and Political Subdivisions 8.07% 9.25% -% -% 8.97%
- --------------------------------------------------------------------------------------------------------------------
Total 8.07% 9.25% -% -% 8.97%
====================================================================================================================
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, 2001. Of the obligations of
states and political subdivisions held by the Company at December 31, 2001,
79.8% were rated A or better by Moody's Investor Services, Inc. and 41.5% of the
non-rated issues or $4.6 million are local issues purchased in private placement
transactions.
LOANS
The Company manages its credit risk by establishing and implementing
strategies and guidelines appropriate to the characteristics of borrowers,
industries, geographic locations and risk products. Diversification of risk
within each of these areas is a primary objective. Policies and procedures are
developed to ensure that loan commitments conform to current strategies and
guidelines. Management continually refines the Company's credit policies and
procedures to address the risks in the current and prospective environment and
to reflect management's current strategic focus. The credit process is
controlled with continuous credit review and analysis, and review by internal
and external auditors and regulatory authorities. The Company's loans are widely
diversified by borrower and industry group.
The Company has collateral management policies in place so that collateral
lending of all types is approached on a basis consistent with safe and sound
standards. Valuation analysis is utilized to take into consideration the
potentially adverse economic conditions under which liquidation could occur.
Collateral accepted against the commercial loan portfolio includes accounts
receivable and inventory, marketable securities, equipment and agricultural
products. Autos, deeds of trust, life insurance and marketable securities are
accepted as collateral for the installment loan portfolio.
Management of the Company believes that the Company has benefited from
increased loan demand due to passage of the North American Free Trade Agreement
("NAFTA") and the strong population growth in the Rio Grande Valley. More
recently, the continued devaluation of the Mexican peso relative to the U.S.
dollar has reduced retail sales to residents of Mexico. However, the effects of
NAFTA and the devaluation have also increased cross-border trade and industrial
development including activity at twin manufacturing plants located on each side
of the border (referred to as maquiladoras) which benefit the Rio Grande Valley
economy. Management believes the on-going Mexican financial problems will not
have a material adverse effect on the Company's growth and earnings prospects,
in part because the Company presently has a low percentage of loans secured by
Mexican assets or that otherwise rely on collateral located in Mexico.
The extension of credits denominated in a currency other than that of the
country in which a borrower is located are called "cross-border" credits. The
Company has some dollar-denominated cross-border credits to individuals or
companies that are residents of, or domiciled in Mexico. The Company's total
cross-border credits at December 31, 2001 of $5.3 million represented 0.3% of
total loans. See "Nonperforming Assets" for additional information on
cross-border credits.
Total loans of $1.7 billion for the year ended December 31, 2001 increased
$122.2 million or 7.7% compared to the year ended December 31, 2000 levels of
$1.6 billion. Loans increased $213.1 million or 15.5% for the year ended
December 31, 2000 compared to levels of $1.4 billion at December 31, 1999. The
increase in total loans for the year ended December 31, 2001 is primarily
attributable to an increased volume of business conducted by the Company. The
increase in total loans for the year ended December 31, 2001 reflects growth in
all loan categories except Agricultural, 1-4 Family Mortgage 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 2001 2000 1999 1998 1997
- --------------------------------------------------------------------------------------------------------------
(DOLLARS IN THOUSANDS)
Commercial $ 540,812 $ 481,277 $ 391,855 $ 311,966 $249,819
Commercial Tax-Exempt 13,832 13,213 22,160 22,155 29,024
- --------------------------------------------------------------------------------------------------------------
Total Commercial Loans 554,644 494,490 414,015 334,121 278,843
- --------------------------------------------------------------------------------------------------------------
Agricultural 57,995 71,482 59,437 52,302 51,346
- --------------------------------------------------------------------------------------------------------------
Real Estate
Construction 151,935 143,023 101,376 66,018 69,477
Commercial Mortgage 621,699 536,856 456,507 354,134 304,215
Agricultural Mortgage 49,888 43,725 38,256 34,440 31,949
1-4 Family Mortgage 162,413 173,860 160,786 128,945 122,043
- --------------------------------------------------------------------------------------------------------------
Total Real Estate 985,935 897,464 756,925 583,537 527,684
- --------------------------------------------------------------------------------------------------------------
Consumer 111,427 124,391 144,382 119,545 93,443
- --------------------------------------------------------------------------------------------------------------
Total Loans $1,710,001 $1,587,827 $1,374,759 $1,089,505 $951,316
==============================================================================================================
The contractual maturity schedule of the loan portfolio at December 31,
2001 follows:
ONE AFTER ONE YEAR AFTER
YEAR THROUGH FIVE
LOAN MATURITIES OR LESS FIVE YEARS YEARS TOTAL
- -----------------------------------------------------------------------------------------------------
(DOLLARS IN THOUSANDS)
Commercial $315,139 $171,881 $ 53,792 $ 540,812
Commercial Tax-Exempt 3,542 4,030 6,260 13,832
- -----------------------------------------------------------------------------------------------------
Total Commercial Loans 318,681 175,911 60,052 554,644
- -----------------------------------------------------------------------------------------------------
Agricultural 47,594 8,440 1,961 57,995
- -----------------------------------------------------------------------------------------------------
Real Estate
Construction 109,212 41,865 858 151,935
Commercial Mortgage 99,934 427,782 93,983 621,699
Agricultural Mortgage 7,382 37,251 5,255 49,888
1-4 Family Mortgage 25,800 112,066 24,547 162,413
- -----------------------------------------------------------------------------------------------------
Total Real Estate 242,328 618,964 124,643 985,935
- -----------------------------------------------------------------------------------------------------
Consumer 42,199 68,408 820 111,427
- -----------------------------------------------------------------------------------------------------
Total Loans $650,802 $871,723 $187,476 $1,710,001
- -----------------------------------------------------------------------------------------------------
Variable-Rate Loans $322,635 $365,210 $140,756 $ 828,601
Fixed-Rate Loans 328,167 506,513 46,720 881,400
- -----------------------------------------------------------------------------------------------------
Total Loans $650,802 $871,723 $187,476 $1,710,001
=====================================================================================================
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 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 $21.8 million at December 31, 2001 increased $4.6
million, 26.8% compared to December 31, 2000 levels of $17.2 million. During
2000, nonperforming assets increased $2.9 million or 20.4% compared with
December 31, 1999 levels of $14.3 million.
Nonperforming loans of $14.0 million at December 31, 2001 increased $1.6
million or 12.4% compared to $12.5 million at December 31, 2000. Nonaccrual
loans of $14.0 million at December 31, 2001 increased $5.0 million or 56.0%
compared with December 31, 2000 levels of $9.0 million. The increase in
nonaccrual loans at December 31, 2001 compared to December 31, 2000 resulted
primarily from the addition of $8.2 million in loans previously on accrual
status and the addition of $2.8 million previously in restructured loans. Two
loan relationships totaling $5.5 million accounted for the majority of the
amount transferred from accrual status. This was partially offset by $2.6
million of loans on nonaccrual status at December 31, 2000 transferred to
foreclosed assets, $2.1 million in payment reductions and $1.0 million in
nonaccrual loans charged off. Nonaccrual loans at December 31, 2000 increased
$658,000 or 7.9% compared with December 31, 1999 levels of $8.3 million.
Cross-border nonaccrual loans at December 31, 2001 of $1.7 million decreased by
$2.3 million or 58.3% compared to $4.0 million at December 31, 2000. The
decrease in cross-border nonaccrual loans was primarily attributable to the
foreclosure of a $1.7 million cross-border credit. Nonperforming loans at
December 31, 2000 increased $4.1 million or 49.6% compared with December 31,
1999 levels of $8.3 million.
Restructured loans decreased from $3.5 million at December 31, 2000 to $0
at December 31, 2001. The decrease resulted primarily from the transfer of $2.8
million to nonaccrual status and $825,000 charged off during 2001. Restructured
loans increased to $3.5 million at December 31, 2000 from $0 at December 31,
1999 resulting from the addition of certain commercial loans during second
quarter 2000 when the Company reduced interest rates on these loans to the
national prime rate.
Foreclosed and other assets increased by $3.1 million or 64.7% to $7.8
million at December 31, 2001 compared to $4.7 million at December 31, 2000. The
increase in foreclosed assets during 2001 was primarily attributable to the
foreclosure of the property securing the $1.7 million cross-border credit. The
property was sold in December 2001 but the sale terms did not meet sales
recognition criteria for financial accounting purposes. 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, 2001, 2000 and 1999 that
are not classified as nonaccrual totaled $12.2 million, $4.0 million and $2.7
million, respectively. The increase in accruing loans past due 90 days or more
at December 31, 2001 as compared to the year ended December 31, 2000 is partly
attributable to the addition of four credits totaling $8.3 million. 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, 2001 increased to 1.98%
from 1.33% at December 31, 2000 primarily as a result of the increase in loans
90 days and still accruing and nonaccrual loans.
PAGE 15
An analysis of the components of nonperforming assets for each of the last
five years follows:
DECEMBER 31,
----------------------------------------------------
NONPERFORMING ASSETS 2001 2000 1999 1998 1997
- -------------------------------------------------------------------------------------------------------------
(DOLLARS IN THOUSANDS)
Nonaccrual Loans $14,034 $ 8,999 $ 8,341 $10,414 $ 8,355
Restructured Loans - 3,482 - - -
- -------------------------------------------------------------------------------------------------------------
Nonperforming Loans 14,034 12,481 8,341 10,414 8,355
Foreclosed and Other Assets 7,796 4,733 5,958 5,368 3,331
- -------------------------------------------------------------------------------------------------------------
Total Nonperforming Assets 21,830 17,214 14,299 15,782 11,686
Accruing Loans 90 Days or More Past Due 12,164 4,022 2,697 3,099 3,287
- -------------------------------------------------------------------------------------------------------------
Total Nonperforming Assets and Accruing Loans 90 Days
or More Past Due $33,994 $21,236 $16,996 $18,881 $14,973
=============================================================================================================
Nonperforming Loans as a % of Total Loans 0.82% 0.79% 0.61% 0.96% 0.88%
Nonperforming Assets as a % of Total Loans and
Foreclosed Assets 1.27 1.08 1.04 1.44 1.22
Nonperforming Assets as a % of Total Assets 0.84 0.71 0.67 0.90 0.76
Nonperforming Assets Plus Accruing Loans 90 Days or More
Past Due as a % of Total Loans and Foreclosed Assets 1.98 1.33 1.23 1.72 1.57
=============================================================================================================
Management regularly reviews and monitors the loan portfolio to identify
borrowers experiencing financial difficulties. Management believes that, at
December 31, 2001, 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 - CRITICAL ACCOUNTING POLICY
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. Estimating the allowance is a critical accounting policy. It
is subjective in nature and requires material estimates that may be subject to
revision as facts and circumstances warrant. 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 on a quarterly basis. Based on total allocations, the provision
is recorded to maintain the allowance at a level deemed appropriate by
management based on probable losses in the loan portfolio. 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, 2001 totaled $21.1 million,
representing a net increase of $1.6 million or 8.2% compared to $19.5 million at
December 31, 2000. The increase in the allowance is primarily due to an increase
in the loan portfolio by 7.7% in 2001 compared to 2000. Management believes that
the allowance for loan losses at December 31, 2001 adequately reflects the
probable losses 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.
PAGE 16
The following table summarizes the activity in the allowance for loan
losses:
YEARS ENDED DECEMBER 31,
------------------------------------------------------------------
ALLOWANCE FOR LOAN LOSS ACTIVITY 2001 2000 1999 1998 1997
- ----------------------------------------------------------------------------------------------------------------
(DOLLARS IN THOUSANDS)
Balance at Beginning of Period $19,458 $16,711 $13,236 $11,291 $10,806
Balance from Acquisitions - - 1,576 308 -
Provision for Loan Losses 8,667 8,927 5,432 9,729 2,947
Charge-Offs
Commercial 5,105 4,722 2,279 1,600 1,778
Agricultural 341 48 106 5,453 477
Real Estate 122 247 192 875 59
Consumer 1,979 1,992 1,561 1,230 907
- ---------------------------------------------------------------------------------------------------------------
Total Charge-Offs 7,547 7,009 4,138 9,158 3,221
- ---------------------------------------------------------------------------------------------------------------
Recoveries
Commercial 112 84 268 370 136
Agricultural 4 441 5 72 48
Real Estate 4 10 48 376 350
Consumer 352 294 284 248 225
- ---------------------------------------------------------------------------------------------------------------
Total Recoveries 472 829 605 1,066 759
- ---------------------------------------------------------------------------------------------------------------
Net Charge-Offs 7,075 6,180 3,533 8,092 2,462
- ---------------------------------------------------------------------------------------------------------------
Balance at End of Period $21,050 $19,458 $16,711 $13,236 $11,291
================================================================================================================
Ratio of Allowance for Loan Losses to
Loans Outstanding, Net of Unearned Discount 1.23% 1.23% 1.22% 1.21% 1.19%
Ratio of Allowance for Loan Losses to
Nonperforming Loans 149.99 155.90 200.35 127.10 135.14
Ratio of Net Charge-Offs to Average Total
Loans Outstanding, Net of Unearned Discount 0.43 0.42 0.29 0.79 0.28
================================================================================================================
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,
---------------------------------------------------------------------------------------------------
2001 2000 1999 1998 1997
-------------------- ------------------- ------------------- ------------------- -----------------
ALLOCATION LOANS AS LOANS AS LOANS AS LOANS AS LOANS AS
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 $ 8,797 32.4% $ 6,377 31.1% $ 6,493 30.1% $ 4,301 30.7% $ 2,672 29.3%
Agricultural 462 3.4 1,036 4.5 648 4.3 589 4.8 1,427 5.4
Real Estate 9,851 57.7 8,444 56.5 7,238 55.1 5,247 53.5 5,627 55.5
Consumer 617 6.5 730 7.9 950 10.5 738 11.0 527 9.8
Unallocated 1,323 - 2,871 - 1,382 - 2,361 - 1,038 -
- -------------------------------------------------------------------------------------------------------------------
Total $21,050 100.0% $19,458 100.0% $16,711 100.0% $13,236 100.0% $ 11,291 100.0%
===================================================================================================================
PREMISES AND EQUIPMENT, NET
Premises and equipment of $75.6 million at December 31, 2001 was comparable
to the December 31, 2000 balance of $76.5 million, decreasing by $880,000 or
1.2%. Premises and equipment increased $873,000 or 1.2% for December 31, 2000
compared to $75.6 million at December 31, 1999.
PAGE 17
GOODWILL AND IDENTIFIABLE INTANGIBLES
Intangibles of $36.0 million at December 31, 2001 decreased $4.4 million or
10.9% compared to $40.4 million at December 31, 2000 and decreased $4.4 million
or 9.8% compared to $44.8 million at December 31, 1999. The decrease in both
years is due to amortization of existing intangibles.
DEPOSITS
Total deposits of $2.2 billion at December 31, 2001 increased $126.1
million or 6.0% compared to December 31, 2000 levels of $2.1 billion, which
increased $224.4 million or 11.9% compared to December 31, 1999 levels of $1.9
billion. The increase in total deposits for 2000 and 2001 is attributable in
part to the vitality of the Rio Grande Valley economy. Total non-interest
bearing deposits of $330.9 million for the year ended December 31, 2001
represented an increase of $29.6 million or 9.8% compared to the year ended
December 31, 2000 and increased $15.4 million or 5.4% compared to the year ended
December 31, 1999. Total public funds deposits (consisting of Public Funds
Demand Deposits, Savings, Money Market Checking and Savings and Time Deposits)
of $448.0 million for the year ended December 31, 2001 increased $14.4 million
or 3.3% compared to $433.6 million for the year ended December 31, 2000. The
Bank actively seeks consumer and commercial deposits, including deposits from
correspondent banks and public funds deposits.
The following table presents the composition of total deposits at the
end of the last three years:
DECEMBER 31,
-----------------------------------------
DEPOSIT COMPOSITION 2001 2000 1999
- --------------------------------------------------------------------------------
(DOLLARS IN THOUSANDS)
Demand Deposits
Commercial and Individual $ 326,733 $ 294,046 $ 277,729
Public Funds 4,131 7,240 8,137
- --------------------------------------------------------------------------------
Total Demand Deposits 330,864 301,286 285,866
- --------------------------------------------------------------------------------
Interest-Bearing Deposits
Savings
Commercial and Individual 117,732 110,947 118,512
Public Funds 310 365 246
Money Market Checking and Savings
Commercial and Individual 436,846 370,645 298,667
Public Funds 124,241 100,977 78,791
Time Deposits
Commercial and Individual 906,535 900,478 800,935
Public Funds 319,349 325,050 302,329
- --------------------------------------------------------------------------------
Total Interest-Bearing Deposits 1,905,013 1,808,462 1,599,480
- --------------------------------------------------------------------------------
Total Deposits $2,235,877 $2,109,748 $1,885,346
================================================================================
Weighted Average Rate on
Interest-Bearing Deposits 3.13% 5.29% 4.41%
================================================================================
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, 2001 (dollars in thousands):
MATURITIES OF TIME DEPOSITS
OF $100,000 OR MORE
- -------------------------------------------------------------------------
Three Months or Less $386,547
After Three through Six Months 153,776
After Six through Twelve Months 184,100
After Twelve Months 60,866
- -------------------------------------------------------------------------
Total $785,289
=========================================================================
Weighted Average Rate on Time Deposits of $100,000 or More 4.09%
=========================================================================
PAGE 18
Mexico is a part of the trade territory of the Company and foreign deposits
from Mexican sources have traditionally been a source of funding. The increase
in foreign deposits by 6.8% is comparable to 6.0% growth in total deposits.
The following table presents foreign deposits, primarily from Mexican
sources:
DECEMBER 31,
--------------------------
FOREIGN DEPOSITS 2001 2000
- ---------------------------------------------------------------------------------------
(DOLLARS IN THOUSANDS)
Demand Deposits $ 12,694 $ 13,028
- ---------------------------------------------------------------------------------------
Interest-Bearing Deposits
Savings 19,260 20,009
Money Market Checking and Savings 43,976 35,465
Time Deposits Under $100,000 75,692 79,737
Time Deposits of $100,000 or more 192,209 173,652
- ---------------------------------------------------------------------------------------
Total Interest-Bearing Deposits 331,137 308,863
- ---------------------------------------------------------------------------------------
Total Foreign Deposits $343,831 $321,891
=======================================================================================
Percent of Total Deposits 15.38% 15.26%
=======================================================================================
Weighted Average Rate on Foreign Deposits 3.11% 5.19%
=======================================================================================
SHAREHOLDERS' EQUITY AND CAPITAL RESOURCES
Shareholders' equity increased by $37.6 million or 16.5% during the year
ended December 31, 2001 primarily due to comprehensive income of $44.2 million
less cash dividends of $9.7 million. Comprehensive income for the period
included net income of $39.4 million and unrealized gain on securities available
for sale, net of tax, of $4.7 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, 2001 DECEMBER 31, 2000
-----------------------------------------------
RISK-BASED CAPITAL AMOUNT RATIO AMOUNT RATIO
- -----------------------------------------------------------------------------------------------
(DOLLARS IN THOUSANDS)
Total Shareholders' Equity before unrealized
gains or losses on Securities Available for $262,675 $ 229,866
Sale
Less Goodwill and Other Deductions (35,998) (40,397)
- -----------------------------------------------------------------------------------------------
Total Tier I Capital 226,677 189,469
Total Tier II Capital 21,050 19,458
- -----------------------------------------------------------------------------------------------
Total Qualifying Capital $247,727 $ 208,927
- -----------------------------------------------------------------------------------------------
Total Risk-Based Capital $247,727 13.54% $ 208,927 12.35%
Total Risk-Based Capital Minimum 146,401 8.00 135,379 8.00
- -----------------------------------------------------------------------------------------------
Tier I Risk-Based Capital 226,677 12.39 189,469 11.20
Tier I Risk-Based Capital Minimum 73,200 4.00 67,689 4.00
- -----------------------------------------------------------------------------------------------
Tier I Leverage Capital 226,677 9.05 189,469 8.14
Tier I Leverage Capital Minimum 100,161 4.00 93,115 4.00
===============================================================================================
At December 31, 2001, 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 $39.4 million in 2001,
compared to $35.3 million in 2000 and $30.9 million in 1999. The increase in net
income in 2001 from 2000 by $4.1 million or 11.7% was primarily due to an
increase in interest-earning assets and service charge income. Earnings per
diluted common share were $2.43, $2.19 and $1.92 for the
PAGE 19
years ended December 31, 2001, 2000, and 1999, respectively. Return on assets
averaged 1.58%, 1.56% and 1.63%, respectively, while return on shareholders'
equity averaged 15.75%, 17.43%, and 16.82%, respectively, for the years ended
December 31, 2001, 2000, and 1999, respectively.
NET INTEREST INCOME
The following table presents for the periods indicated the total dollar
amount of interest income from average interest-earning assets and the resultant
yields, reported on a tax-equivalent basis, and the interest expense on average
interest-bearing liabilities, expressed both in dollars and rates. Average
balances are derived from average daily balances and the yields and costs are
established by dividing income or expense by the average balance of the asset or
liability. Income and yield on interest-earning assets include amounts to
convert tax-exempt income to a taxable-equivalent basis, assuming a 35%
effective tax rate for 2001, 2000, and 1999 (dollars in thousands):
YEARS ENDED DECEMBER 31,
---------------------------------------------------------------------------------------
2001 2000 1999
----------------------------- ----------------------------- ---------------------------
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 $ 581,152 $ 48,657 8.37% $ 507,103 $ 49,400 9.74% $ 427,828 $ 38,560 9.01%
Real Estate 929,310 84,656 9.11 841,084 82,831 9.85 650,168 61,578 9.47
Consumer 117,439 13,173 11.22 134,441 14,407 10.72 131,613 13,745 10.44
- ------------------------------------------------------------------------------------------------------------------
Total Loans 1,627,901 146,486 9.00 1,482,628 146,638 9.89 1,209,609 113,883 9.41
- ------------------------------------------------------------------------------------------------------------------
Securities
Taxable 585,266 34,369 5.87 511,414 32,432 6.34 444,021 27,244 6.14
Tax-Exempt 50,991 3,582 7.02 48,702 3,587 7.37 44,485 3,170 7.13
- ------------------------------------------------------------------------------------------------------------------
Total Securities 636,257 37,951 5.96 560,116 36,019 6.43 488,506 30,414 6.23
- ------------------------------------------------------------------------------------------------------------------
Interest-Bearing and
Time Deposits 1,622 85 5.24 3,920 238 6.07 1,621 114 7.03
Federal Funds Sold 15,728 539 3.43 5,909 367 6.21 20,347 1,000 4.91
- ------------------------------------------------------------------------------------------------------------------
Total Interest-Earning
Assets 2,281,508 $185,061 8.11% 2,052,573 $183,262 8.93% 1,720,083 $145,411 8.45%
- ------------------------------------------------------------------------------------------------------------------
Cash and Due from Banks 74,054 64,354 57,653
Premises and Equipment, 75,669 76,613 71,001
Net
Other Assets 78,469 82,291 63,071
Allowance for Loan Losses (20,551) (18,638) (14,928)
- ------------------------------------------------------------------------------------------------------------------
Total Assets $2,489,149 $2,257,193 $1,896,880
==================================================================================================================
Liabilities
Interest-Bearing Liabilities
Savings $ 114,498 $ 2,089 1.82% $ 118,887 $ 2,624 2.21% $ 112,948 $ 2,517 2.23%
Money Market Checking
and Savings 514,456 14,202 2.76 413,863 14,051 3.40 316,929 9,018 2.85
Time Deposits 1,231,729 65,001 5.28 1,175,406 67,455 5.74 1,001,399 49,960 4.99
- ------------------------------------------------------------------------------------------------------------------
Total Savings and
Time Deposits 1,860,683 81,292 4.37 1,708,156 84,130 4.93 1,431,276 61,495 4.30
- ------------------------------------------------------------------------------------------------------------------
Other Borrowed Money 50,972 2,484 4.87 40,369 2,383 5.90 15,377 726 4.72
- ------------------------------------------------------------------------------------------------------------------
Total Interest-Bearing
Liabilities 1,911,655 $ 83,776 4.38% 1,748,525 $ 86,513 4.95% 1,446,653 $ 62,221 4.30%
- ------------------------------------------------------------------------------------------------------------------
Demand Deposits 305,423 290,872 253,454
Other Liabilities 21,840 15,298 13,383
- ------------------------------------------------------------------------------------------------------------------
Total Liabilities 2,238,918 2,054,695 1,713,490
- ------------------------------------------------------------------------------------------------------------------
Shareholders' Equity 250,231 202,498 183,390
- ------------------------------------------------------------------------------------------------------------------
Total Liabilities and
Shareholders' Equity $2,489,149 $2,257,193 $1,896,880
- ------------------------------------------------------------------------------------------------------------------
Net Interest Income $101,285 $ 96,749 $ 83,190
- ------------------------------------------------------------------------------------------------------------------
Net Yield on Total
Interest- Earning Assets 4.44% 4.71% 4.84%
==================================================================================================================
(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 $4.5
million or 4.7% to $101.3 million in 2001, compared to $96.7 million in 2000.
The increase in net interest income was largely due to growth of 11.2% in
average interest-earning assets, which rose to $2.3 billion in 2001 compared to
$2.1 billion in 2000. However, the increase was partially offset by lower yields
on interest-earning assets resulting from decreases in market rates. Loan yield
for 2001 decreased as a result of a
PAGE 20
decrease in the average prime rate from 9.24% in 2000 to 6.91% in 2001. In
addition, the decrease in securities yield in 2001 compared to 2000 resulted
from higher yielding securities maturing and the reinvesting of the proceeds
into lower yielding securities. The decrease in the rate paid on interest-
bearing liabilities during 2001 was primarily attributable to the general
decrease in average short-term interest rates and increased competition from
local financial institutions. The net interest margin decreased to 4.44% in
2001, compared to 4.71% in 2000.
Tax-equivalent net interest income was $96.7 million for 2000, an increase
of $13.6 million or 16.3% compared to 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 decrease 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 general increase in average short-term interest rates and increased
competition from local financial institutions. The net interest margin for 2000
was 4.71% compared to 4.84% in 1999.
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 $2.6 million, $1.3 million and $1.9 million for the years ended
December 31, 2001, 2000 and 1999, respectively. The amount of interest income on
impaired loans included in net income for cash payments received was $241,000 in
2001, $490,000 in 2000 and $156,000 in 1999.
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,
2001 COMPARED TO 2000 2000 COMPARED TO 1999
------------------------------------------- --------------------------------------
DUE TO CHANGE IN DUE TO CHANGE IN
NET ------------------- RATE/ NET ------------------- RATE/
TAXABLE-EQUIVALENT BASIS (1) CHANGE VOLUME RATE VOLUME CHANGE VOLUME RATE VOLUME
- ----------------------------------------------------------------------------------------------------------------
Interest Income
Loans $ (152) $14,368 $(13,224) $(1,296) $ 32,755 $25,705 $ 5,752 $1,298
Securities
Taxable 1,937 4,684 (2,400) (347) 5,188 4,135 914 139
Tax-Exempt (5) 169 (166) (8) 417 301 106 10
Interest-Bearing and Time
Deposits (153) (139) (33) 19 124 162 (16) (22)
Federal Funds Sold 172 609 (164) (273) (633) (710) 264 (187)
- ----------------------------------------------------------------------------------------------------------------
Total Interest Income 1,799 19,691 (15,987) (1,905) 37,851 29,593 7,020 1,238
- ----------------------------------------------------------------------------------------------------------------
Interest Expense
Deposits (2,838) 7,512 (9,502) (848) 22,635 11,896 8,998 1,741
Other Borrowed Money 101 626 (416) (109) 1,657 1,180 182 295
- ----------------------------------------------------------------------------------------------------------------
Total Interest Expense (2,737) 8,138 (9,918) (957) 24,292 13,076 9,180 2,036
- ----------------------------------------------------------------------------------------------------------------
Net Interest Income Before
Allocation of Rate/Volume 4,536 11,553 (6,069) (948) 13,559 16,517 (2,160) (798)
Allocation of Rate/Volume - (620) (328) 948 - (196) (602) 798
- ----------------------------------------------------------------------------------------------------------------
Changes in Net Interest
Income $4,536 $10,933 $ (6,397) $ - $ 13,559 $16,321 $(2,762) $ -
================================================================================================================
(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 2001 and 2000).
PROVISION FOR LOAN LOSSES
The Company recorded a provision for loan losses of $8.7 million for 2001,
compared to $8.9 million for 2000 and $5.4 million for 1999. The provision for
2001 of $8.7 million is comparable to the $8.9 million recorded in 2000.
Although the Company had increases in loans and nonperforming assets, the
provision remained consistent with 2000 as a result of a decrease in excess
charge-offs over specific reserves from $3.0 million in 2000 to $874,000 in
2001. The increase in the provision in 2000 was primarily attributable to
charge-offs in excess of specific reserves by approximately $3.0 million for
2000. The majority or $2.0 million of the excess charge-offs over specific
reserves related to excess charge-offs taken on the loans restructured during
PAGE 21
second quarter 2000. Net charge-offs totaled $7.1 million and $6.2 million
for 2001 and 2000, respectively, and increased to 0.43% of average loans in
2001 compared to 0.42% of average loans in 2000. The increase in net
charge-offs in 2001 by $900,000 is primarily attributable to a $410,000
recovery received in 2000 on an agricultural loan charged off in 1998. Net
charge-offs were $3.5 million or 0.29% of average loans in 1999. The increase
in net charge-offs in 2000 is primarily attributable to $2.6 million charged
off on the restructured relationship.
Management charges provisions for loan losses to earnings to bring the
total allowance for loan losses to a level deemed appropriate based on estimated
probable losses in the loan portfolio. 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 $29.2 million for 2001 compared to $21.6 million
for 2000 and $17.4 million for 1999. Excluding Net Realized Gains on Sales of
Securities Available for Sale, Noninterest Income increased $6.2 million or
28.5% in 2001 compared to 2000 and $4.2 million or 23.9% in 2000 compared to
1999. The Noninterest Income growth in 2001 resulted primarily from the
increased volume of business conducted by the Company and the introduction of
new products.
Total Service Charges were $20.5 million for 2001 compared to $14.8 million
for 2000 and $12.1 million for 1999. The increase in Total Service Charges in
2001 by $5.7 million or 38.4% compared to 2000 is primarily due to an increase
of $4.9 million in non-sufficient check and return item charges. The increase in
non-sufficient check and return item charges was a result of deposit growth and
the introduction of two new products in 2001. In June 2001, the Company launched
its Free Checking program which allows credit worthy depositors a $400 overdraft
privilege after satisfying certain conditions and its Overdraft Privilege
program which allows credit worthy account holders, except Free Checking account
holders, a $700 overdraft privilege. Although the account holders are still
subject to non-sufficient check charges, they avoid additional charges from the
retailer. The increase in Total Service Charges during 2000 by $2.7 million or
22.4% is attributable to a $1.6 million increase in non-sufficient check and
return item charges. Furthermore, Total Service Charges increased in 2000 as a
result of increased account transaction fees generated by deposit growth and a
full year of charges assessed on deposits acquired through the Harlingen
Bancshares, Inc. acquisition in October 1999.
Trust Service Fees were $2.5 million for 2001 compared to $2.3 million for
2000 and $2.0 million for 1999. The increase in Trust Service Fees during 2001
by $193,000 or 8.4% is attributable to an increase in the average market value
of trust accounts managed by 9.5%. The fair market value of assets managed was
$441.0 million at December 31, 2001 compared to $384.6 million at December 31,
2000. In addition, the Trust Service Fees increased by $336,000 or 17.1% in 2000
compared to 1999 primarily due 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 at December 31, 1999 was $357.6
million. Assets held by the trust department of the Bank in fiduciary or agency
capacities are not assets of the Company and are not included in the
consolidated balance sheets.
Net Realized Gains on Sales of Securities Available for Sale were $1.5
million for 2001 compared to $12,000 for 2000 and $1,000 for 1999. During 2001,
the Company sold various securities that had unrealized gains and were likely to
be called during the latter half of 2001 and the first half of 2002. During 2000
and 1999, market opportunities to realize bond profits were limited as bond
prices generally fell.
Data Processing Service Fees of $3.2 million for 2001 increased $518,000 or
19.4% compared to $2.7 million for 2000. This increase primarily arose from the
recognition of a full year's income on a banking client obtained during May 2000
and increased utilization of services offered to existing clients. Data
Processing Service Fees of $2.7 million in 2000 increased by $572,000 or 27.2%
compared to $2.1 million in 1999 primarily due to the acquisition of a banking
client during May 2000, the recognition of a full year's income on a banking
client obtained during 1999 and increased utilization of services offered to
existing clients. The number of data processing clients as of December 31, 2001,
2000 and 1999 was 8, 8, and 7, respectively.
Other Noninterest Income of $1.6 million for 2001 decreased $232,000 or
13.0% compared to $1.8 million reported for 2000. The decrease in Other
Noninterest Income during 2001 was primarily due to a decrease in income from
the Rabbi Trust by $250,000 compared to 2000. 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. Other Noninterest Income in 2000
of $1.8 million increased $545,000 or 43.8% compared to $1.2 million reported
for 1999. The increase in Other Noninterest 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. In addition,
Check Order Charges increased by $159,000 compared to 1999. The increase in
Check Order Charges resulted from an increase in the volume of deposit accounts,
as well as $25,000 quarterly incentive rebates received from the check printing
company beginning first quarter 2000.
PAGE 22
NONINTEREST EXPENSE
Noninterest Expense of $59.3 million for 2001 increased $5.8 million or
10.8% compared to $53.5 million for 2000. Noninterest Expense of $53.5 million
for 2000 increased $7.7 million or 16.7% compared to $45.9 million for 1999. The
increase in 2001 results primarily from higher personnel costs. In addition, in
2001 the Company had higher franchise taxes as a result of higher franchise tax
refunds collected in 2000 than in 2001, and higher other losses resulting from
the collection of a $1.8 million judgement in the previous year. The efficiency
ratio of expense to total revenue was 45.14% compared to 44.71% for 2000 and
45.29% for 1999. The efficiency ratio is defined as Noninterest Expense
(excluding other real estate income and expense) divided by the total of
taxable-equivalent Net Interest Income and Noninterest Income (excluding any
gains and losses on sale of securities).
Salaries and Employee Benefits, the largest category of Noninterest
Expense, were $27.9 million in 2001, $26.6 million in 2000 and $22.4 million in
1999. The increase in 2001 over 2000 by $1.3 million or 4.9% reflects increases
in base salaries and higher levels of staff. In addition, premiums on medical
insurance increased by $459,000 or 23.6% compared to the previous year. The
increase in 2000 over 1999 by $4.3 million or 19.0% was primarily due to the
recognition of 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 $693,000 in 2000 compared to 1999. At the end of 2001,
the Company had approximately 950 full-time equivalent employees, compared to
935 at year end 2000 and 888 at year end 1999. Salaries and Employee Benefits
averaged 1.12% of average assets in 2001 compared to 1.18% in 2000 and 1999.
Net Occupancy Expense of $4.4 million for 2001 increased $392,000 or 9.9%
compared to $4.0 million in 2000. The increase was primarily attributable to
increases in real estate property taxes and utility expenses. The increase in
real estate property taxes is largely due to increases in appraised values on
the corporate building and one branch location. Net Occupancy Expense of $4.0
million for 2000 was comparable to $3.8 million for 1999, increasing by only
$199,000 or 5.3%. Although expenses in this category generally increased in
2000, the increase was offset by an additional $601,000 in rental income
generated from leasing space in the corporate building.
Equipment Expense of $6.6 million for 2001 increased $438,000 or 7.1%
compared to $6.1 million for 2000. The increase in 2001 compared to 2000 was
primarily due to an increase of $391,000 in equipment service contract expenses.
During 2000, Equipment Expense increased $1.0 million or 19.5% compared to $5.1
million for 1999.
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 was $1.1 million in 2001,
increasing by $463,000 or 71.2% compared to $650,000 for 2000. The increase was
primarily attributable to a $559,000 increase in expenses on a foreclosed
property compared to the previous year. This was partially offset by a $326,000
writedown on a foreclosed property recorded in 2000. No large writedowns were
recorded in 2001. Other Real Estate Expense, Net of $650,000 for 2000 increased
$318,000 or 95.8% comparable to $332,000 reported for 1999. The net increase in
the 2000 was primarily attributable to the $326,000 write-down on a foreclosed
property. Management is actively seeking buyers for all Other Real Estate.
Amortization of Goodwill and Identifiable Intangibles of $4.4 million for
2001 was comparable to $4.5 million recorded for 2000, decreasing by $41,000 or
0.9%. Amortization of Goodwill and Identifiable Intangibles increased to $4.5
million in 2000 compared to $3.2 million in 1999, an increase of $1.3 million or
40.5%. The increase in Amortization of Goodwill and Identifiable Intangibles in
2000 compared to 1999 was attributable to the amortization of $21.0 million of
goodwill and other intangibles added in fourth quarter 1999 with the Harlingen
Bancshares, Inc. acquisition.
Other Noninterest Expense of $14.9 million for 2001 increased by $3.3
million or 27.8% compared to $11.7 million for 2000. The increase is primarily
due to a $1.8 million judgement collected during 2000. In addition, Franchise
Tax for 2001 increased $674,000 or 129.9% to $155,000 compared to ($519,000) for
2000. The increase was attributable to $221,000 in franchise tax refunds
recorded during 2001 for overpayments made in previous years compared to
$872,000 in 2000. Other Noninterest Expense of $11.7 million for 2000 increased
by $592,000 or 5.3% compared to $11.1 million reported for 1999. The increase
for 2000 was attributable to an increased volume of business, primarily due to
the 1999 acquisition. In addition, $872,000 was received in franchise tax
refunds during 2000 compared to none in 1999. These increases in Other
Noninterest Expense during 2000 were partially offset by the $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):
2001 2000 1999
- ---------------------------------------------------------------------------------------------------
Salaries and Wages $ 22,105 $ 21,168 $ 17,841
Employee Benefits 5,828 5,468 4,537
- ---------------------------------------------------------------------------------------------------
Total Salaries and Employee Benefits 27,933 26,636 22,378
- ---------------------------------------------------------------------------------------------------
Net Occupancy Expense 4,358 3,966 3,767
- ---------------------------------------------------------------------------------------------------
Equipment Expense 6,565 6,127 5,127
- ---------------------------------------------------------------------------------------------------
Other Real Estate Expense, Net
Rental Income (737) (620) (389)
(Gain) Loss on Sale 188 (103) (171)
Expenses 1,641 920 875
Write-Downs 21 453 17
- ---------------------------------------------------------------------------------------------------
Total Other Real Estate Expense, Net 1,113 650 332
- ---------------------------------------------------------------------------------------------------
Amortization of Goodwill and Identifiable Intangibles 4,428 4,469 3,180
- ---------------------------------------------------------------------------------------------------
Other Noninterest Expense
Advertising and Public Relations 2,297 1,971 1,495
Data Processing and Check Clearing 2,016 1,766 1,480
Director Fees 405 356 344
Franchise Tax 155 (519) 334
Insurance 350 387 400
FDIC Insurance 400 405 191
Legal 1,148 817 663
Professional Fees 1,825 1,338 1,136
Postage, Delivery and Freight 1,064 1,009 916
Printing, Stationery and Supplies 1,700 1,779 1,447
Telephone 716 716 628
Other Losses 983 4 759
Miscellaneous Expense 1,888 1,667 1,311
- ---------------------------------------------------------------------------------------------------
Total Other Noninterest Expense 14,947 11,696 11,104
===================================================================================================
Total Noninterest Expense $ 59,344 $ 53,544 $ 45,888
===================================================================================================
INCOME TAX EXPENSE
The Company recorded income tax expense of $21.3 million for 2001 compared
to $18.8 million for 2000 and $16.8 million for 1999. The changes in income tax
expense are due primarily to changes in the level of pretax income. Furthermore,
during 2001 the Company recorded state income tax refunds totaling $211,000
compared to $613,000 in 2000.
CAPITAL AND LIQUIDITY
Bank holding companies are required to maintain capital ratios in
accordance with guidelines adopted by the Federal Reserve Board ("FRB"). The
guidelines are commonly known as Risk-Based Capital Guidelines. On December 31,
2001, the Company exceeded all applicable capital requirements, having a total
risk-based capital ratio of 13.54%, a Tier I risk-based capital ratio of 12.39%
and a leverage ratio of 9.05%.
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, 2001, the Company's liquidity
ratio, defined as cash, U.S. Treasury, U.S. Government Agency, mortgage-backed
securities, time deposits and federal funds sold as a percentage of deposits,
was 30.3% compared to 30.9% at December 31, 2000 and 30.3% at December 31, 1999.
Liability liquidity is provided by access to core funding sources,
principally various customers' interest-bearing and noninterest-bearing deposit
accounts in the Company's trade area. The Company does not have nor does it
solicit brokered
PAGE 24
deposits. Federal funds purchased and short-term borrowings are additional
sources of liquidity. At December 31, 2001, the Company had lines of credit
totaling $40.0 million with correspondent banks for short-term liquidity needs
and approximately $159.7 million available at the Federal Home Loan Bank. These
sources of liquidity are short-term in nature, and are used, as necessary, to
fund asset growth and meet short-term liquidity needs.
At December 31, 2001, the Company had outstanding commitments to extend
credit of approximately $244.5 million and standby letters of credit of
approximately $16.3 million.
During 2001, funds for $530.4 million of securities purchases and $134.1
million of net loan growth came from various sources, including $503.2 million
in proceeds from maturing and sold securities, a net increase in deposits of
$126.1 million and $53.0 million from operating activities.
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.
CONTRACTUAL OBLIGATIONS AND COMMERCIAL COMMITMENTS
The following table presents contractual cash obligations of the Company as
of December 31, 2001 (dollars in thousands):
PAYMENTS DUE BY PERIOD
------------------------------------------------------------------------
LESS THAN ONE TO FOUR TO AFTER
CONTRACTUAL CASH OBLIGATIONS TOTAL ONE YEAR THREE YEARS FIVE YEARS FIVE YEARS
- ------------------------------------------------------------------------------------------------------------
Federal Funds Sold and Securities
Sold Under Repurchase Agreements $ 70,709 $ 51,909 $ 18,800 $ - $ -
Operating Leases 112 83 11 8 10
- ------------------------------------------------------------------------------------------------------------
Total Contractual Cash Obligations $ 70,821 $ 51,992 $ 18,811 $ 8 $ 10
============================================================================================================
The following table presents contractual commercial commitments of the
Company as of December 31, 2001 (dollars in thousands):
AMOUNT OF COMMITMENT EXPIRATION PER PERIOD
---------------------------------------------------------
UNFUNDED LESS THAN ONE TO FOUR TO AFTER
COMMERCIAL COMMITMENTS COMMITMENTS ONE YEAR THREE YEARS FIVE YEARS FIVE YEARS
- ------------------------------------------------------------------------------------------------------------
Lines of Credit $ 207,530 $ 162,524 $ 25,360 $ 7,107 $ 12,539
Standby Letters of Credit 16,346 13,708 1,481 825 332
Other Commercial Commitments 36,921 35,959 881 81 -
- ------------------------------------------------------------------------------------------------------------
Total Commercial Commitments $ 260,797 $ 212,191 $ 27,722 $ 8,013 $ 12,871
============================================================================================================
CRITICAL ACCOUNTING POLICIES
The Company considers its Allowance for Loan Losses policy as a policy
critical to the sound operations of the Bank. The Company provides for loan
losses each period by an amount resulting from both (a) an estimate by
management of loan losses that occurred during the period and (b) the ongoing
adjustment of prior estimates of losses occurring in prior periods. The
provision for loan losses increases the allowance for loan losses which is
netted again loans on the consolidated balance sheet. As losses are confirmed,
the loan is written down, reducing the allowance for loan losses. See "Allowance
for Loan Losses - Critical Accounting Policy" and "Provision for Loan Losses"
contained herein and "Allowance for Loan Losses" included in Note 1 of the Notes
to Consolidated Financial Statements for further information regarding the
Company's provision and allowance for loan losses policy.
PAGE 25
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISKS
Market risk is the exposure to loss resulting from changes in interest
rates, foreign currency exchange rates, commodity prices and equity prices. The
primary market risk to which the Company is exposed is interest rate risk.
Interest rate risk occurs when assets and liabilities reprice at different times
as interest rates change. For example, if fixed-rate loans are funded with
floating-rate deposits, the spread between loan and deposit rates will decline
or turn negative if rates increase. Other types of market risk, such as foreign
currency exchange rate risk and commodity price risk, do not arise in the normal
course of the Company's business activities. The Company's interest rate risk
arises from transactions entered into for purposes other than trading. The
Company does not currently engage in trading activities or use derivative
instruments to control interest rate risk. Even though such activities may be
permitted with the approval of the Board of Directors, the Company does not
intend to engage in such activities in the immediate future.
Interest rate risk is managed within the funds management policy of the
Company. The principal objectives of the funds management policy is to avoid
fluctuating net interest margins and to maintain consistent growth of net
interest income through periods of changing interest rates. The Board of
Directors oversees implementation of strategies to control interest rate risk.
The Company may take steps to alter its net sensitivity position by offering
deposit and/or loan structures that tend to counter the natural rate risk
profile of the Company. Funding positions are kept within predetermined limits
designed to ensure that risk-taking is not excessive and that liquidity is
properly managed. Because of the volatility of market rates and uncertainties,
there can be no assurance of the effectiveness of management programs to achieve
a targeted moderation of risk.
In order to measure earnings and fair value sensitivity to changing rates,
the Company utilizes three different measurement tools including static gap
analysis, simulation earnings, and market value sensitivity (fair value at
risk). The primary analytical tool used by the Company to quantify interest rate
risk is a simulation model to project changes in net interest income that result
from forecast changes in interest rates. This analysis estimates a percentage of
change in net interest income from the stable rate scenario under scenarios of
rising and falling market interest rates over a twelve month time horizon. The
prime rate serves as a "driver" and is made to rise (or fall) evenly in 100
basis point increments over the 12-month forecast interval. These simulations
incorporate assumptions regarding balance sheet growth and mix, pricing and the
repricing and maturity characteristics of the existing and projected balance
sheet.
The following table summarizes the simulated change in net interest income
over a 12-month period as of December 31, 2001 and December 31, 2000:
INCREASE (DECREASE) IN
CHANGES IN INTEREST ESTIMATED NET NET INTEREST INCOME
----------------------------------
RATES (BASIS POINTS) INTEREST INCOME AMOUNT PERCENT
- -------------------------------------------------------------------------------------------------
(DOLLARS IN THOUSANDS)
December 31, 2001
+100 $ 117,533 $ 1,188 1.0%
- 116,345 - -
-100 114,879 (1,466) (1.3)
December 31, 2000
+100 96,684 1,822 1.9
- 94,862 - -
-100 91,521 (3,341) (3.5)
=================================================================================================
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.
PAGE 26
The following table summarizes interest rate sensitive assets and
liabilities by their repricing dates at December 31, 2001:
0-3 4-6 7-12 1-5 OVER
INTEREST RATE SENSITIVITY ANALYSIS MONTHS MONTHS MONTHS YEARS 5 YEARS TOTAL
- ----------------------------------------------------------------------------------------------------------------------
(DOLLARS IN THOUSANDS)
Loans $ 959,413 $ 74,453 $ 122,902 $ 506,513 $ 46,720 $ 1,710,001
Securities
Available for Sale 17,583 2,903 25,611 459,630 148,994 654,721
Held to Maturity 120 - 100 694 - 914
Interest-Bearing and Time Deposits 96 - 396 99 - 591
- ----------------------------------------------------------------------------------------------------------------------
Total Interest-Bearing Assets 977,212 77,356 149,009 966,936 195,714 2,366,227
- ----------------------------------------------------------------------------------------------------------------------
Savings 118,042 - - - - 118,042
Money Market Checking and Savings
Accounts 561,087 - - - - 561,087
Time Deposits 570,943 262,040 282,541 109,987 373 1,225,884
Other Borrowed Money 70,709 - - - - 70,709
- ----------------------------------------------------------------------------------------------------------------------
Total Interest-Bearing 1,320,781 262,040 282,541 109,987 373 1,975,722
Liabilities
- --------------------------------------------------------------------------------------------- ------------------------
Rate Sensitivity GAP (1) $(343,569) $(184,684) $(133,532) $ 856,949 $195,341 $ 390,505
- ----------------------------------------------------------------------------------------------------------------------
Cumulative Rate Sensitivity GAP $(343,569) $(528,253) $(661,785) $ 195,164 $390,505
- ----------------------------------------------------------------------------------------------------------------------
Ratio of Cumulative Rate Sensitivity
GAP to Total Assets (13.26)% (20.39)% (25.54)%
Ratio of Cumulative Rate Sensitive
Interest-Earning Assets to
Cumulative Rate Sensitive
Interest-Bearing Liabilities 0.74:1 0.67:1 0.65:1
======================================================================================================================
(1) Rate sensitive interest-earning assets less rate sensitive interest-bearing
liabilities.
CURRENT ACCOUNTING ISSUES
The Financial Accounting Standards Board's Statement No. 133 ("Statement
133"), "Accounting for Derivative Instruments and for Hedging Activities," was
issued in June 1998 and subsequently amended by Financial Accounting Standards
Board's Statement No. 138, "Accounting for Certain Derivative Instruments and
Certain Hedging Activities". Statement 133 requires companies to recognize all
derivatives as either assets or liabilities in the balance sheet 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, "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.
Statement 138 amended a limited number of Statement 133 requirements that caused
implementation issues. As the Company had not previously adopted Statement 133,
the effective date of Statement 138 was concurrent with the adoption of
Statement 133. The Company adopted Statement 133 and 138 on January 1, 2001. The
Company currently does not hold any derivative instruments and does not hedge or
plan to hedge in the immediate future. The implementation of Statements 133 and
138 did not have an impact on the Company's 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. Statement 140 is effective for transfers and servicing of
financial assets and extinguishments of liabilities 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 implementation of Statement 140 had no impact on the Company's consolidated
financial statements.
In June 2001, the Financial Accounting Standards Board issued Statement
No. 141 ("Statement 141"), "Business Combinations", and Statement No. 142
("Statement 142"), "Goodwill and Other Intangible Assets". Statement 141
requires that the purchase method of accounting be used for all business
combinations initiated after June 30, 2001 as well as all purchase method
business combinations completed after June 30, 2001. Statement 141 also
specifies criteria that intangible assets acquired in a purchase method business
combination must meet to be recognized and reported apart from goodwill.
Statement 142 requires that goodwill and intangible assets with indefinite
useful lives no longer be amortized, but instead tested for impairment at least
annually in accordance with the provisions of Statement 142. Statement 142
requires that intangible assets with definite useful lives be amortized over
their respective estimated useful lives to their estimated residual values, and
reviewed for impairment in
PAGE 27
accordance with the Financial Accounting Standards Board's Statement No. 121
("Statement 121"), "Accounting for the Impairment of Long-Lived Assets and for
Long-Lived Assets to Be Disposed Of". Financial Accounting Standards Board's
Statement No. 144, "Accounting for the Impairment or Disposal of Long-Lived
Assets" supercedes Statement 121 and is effective for fiscal years beginning
after December 15, 2001.
The Company adopted the provisions of Statement 141 and Statement 142 is
required to be adopted effective January 1, 2002. The adoption of Statement 141
did not have any impact on the Company's consolidated financial statements.
Statement 141 requires upon adoption of Statement 142, that the Company
evaluate its existing intangible assets and goodwill that were acquired in a
prior purchase business combination, and to make any necessary reclassifications
in order to conform with the new criteria in Statement 141 for recognition apart
from goodwill. Upon adoption of Statement 142, the Company is required to
reassess the useful lives and residual values of all intangible assets acquired
in purchase business combinations, and make any necessary amortization period
adjustments by the end of the first interim period after adoption. In addition,
to the extent an intangible asset is identified as having an indefinite useful
life, the Company is required to test the intangible asset for impairment in
accordance with the provisions of Statement 142 within the first interim period.
Any impairment loss will be measured as of the date of adoption and recognized
as the cumulative effect of a change in accounting principle in the first
interim period.
In connection with the transitional goodwill impairment evaluation,
Statement 142 requires the Company to perform an assessment of whether there is
an indication that goodwill is impaired as of the date of adoption. To
accomplish this the Company must identify its reporting units and determine the
carrying value of each reporting unit by assigning the assets and liabilities,
including the existing goodwill and intangible assets, to those reporting units
as of the date of adoption. The Company will have up to six months from the date
of adoption to determine the fair value of each reporting unit and compare it to
the reporting unit's carrying amount. To the extent a reporting unit's carrying
amount exceeds its fair value, an indication exists that the reporting unit's
goodwill may be impaired and the Company must perform the second step of the
transitional impairment test. In the second step, the Company must compare the
implied fair value of the reporting unit's goodwill, determined by allocating
the reporting unit's fair value to all of it assets (recognized and
unrecognized) and liabilities in a manner similar to a purchase price allocation
in accordance with Statement 141, to its carrying amount, both of which would be
measured as of the date of adoption. This second step is required to be
completed as soon as possible, but no later than the end of the year of
adoption. Any transitional impairment loss will be recognized as the cumulative
effect of a change in accounting principle in the Company's Consolidated
Statements of Income and Comprehensive Income.
The Company adopted Statement 142 as of January 1, 2002 and will no longer
amortize goodwill. As of the date of the adoption, the Company had unamortized
goodwill in the amount of $24.3 million and unamortized identifiable intangible
assets in the amount of $11.7 million, all of which are subject to the
transition provisions of Statements 141 and 142. Amortization expense related to
goodwill was $2.3 million for the years ended December 31, 2001 and 2000 and
$1.7 million for the year ended December 31, 1999. The Company is in the process
of determining the fair value of its reporting unit to determine if there is an
indication that goodwill may be impaired. In addition, the Company has evaluated
its existing intangible assets and determined that no reclassifications were
necessary to conform to the new criteria in Statement 141 for recognition apart
from goodwill. The Company is in the process of reassessing the useful lives and
residual values of all intangible assets acquired in purchase business
combinations and will make any necessary amortization period adjustments by the
end of the first interim period after adoption.
In August 2001, the Financial Accounting Standards Board issued Statement
No. 144 ("Statement 144"), "Accounting for the Impairment or Disposal of
Long-Lived Assets", which addresses financial accounting and reporting for the
impairment or disposal of long-lived assets. While Statement 144 supercedes
Financial Accounting Standards Board's Statement No. 121 ("Statement 121"),
"Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to
be Disposed Of", it retains many of the fundamental provisions of Statement 121,
establishes a single accounting model for long-lived assets to be disposed of by
sale, and resolves certain implementation issues not previously addressed by
Statement 121. Statement 144 also supersedes the accounting and reporting
provisions of Financial Accounting Standards Board Opinion No. 30, ("Opinion No.
30") "Reporting the Results of Operation - Reporting the Effects of Disposal of
a Segment of a Business, and Extraordinary, Unusual and Infrequently Occurring
Events and Transactions", for the disposal of a segment of a business. However,
it retains the requirement in Opinion No. 30 to report separately discontinued
operations and extends the reporting to a component of an entity, rather than a
segment of a business, that either has been disposed of or is classified as held
for sale. Statement 144 is effective for fiscal years beginning after December
15, 2001. The Company adopted Statement 144 on January 1, 2002. The adoption of
Statement 144 did not have an impact on the Company's consolidated financial
statements.
PAGE 28
FOURTH QUARTER RESULTS
The fourth quarter net income for 2001 of $10.3 million or $0.63 per
diluted common share reflected an increase of $794,000 or 8.4% compared to $9.5
million or $0.59 per share for fourth quarter 2000.
Net interest income, on a tax-equivalent basis, of $26.0 million for fourth
quarter 2001 increased $1.4 million or 5.7% compared to $24.6 million for fourth
quarter 2000. The increase resulted from an increase in average interest-earning
assets, primarily driven by an increase in average loans of 7.2%. The funding of
the loan growth was facilitated primarily through growth in money market
accounts propelled by continued growth in Freedom Investment accounts introduced
in the summer of 2000, as well as growth in time deposits. Average earning
assets of $2.3 billion for fourth quarter 2001 increased by $187.6 million or
8.7% compared to $2.2 billion for fourth quarter 2000. Net interest margin for
fourth quarter 2001 was 4.41% compared to 4.55% for fourth quarter 2000.
The provision for loan losses charged against earnings in fourth quarter
2001 totaled $3.0 million compared to $1.9 million for fourth quarter 2000,
reflecting an increase of $1.1 million or 57.8%. The increase in the provision
is primarily attributable to charge-offs in excess of specific reserves of
approximately $1.9 million during fourth quarter 2001 compared to $645,000
during fourth quarter 2000. Net charge-offs of $2.2 million for fourth quarter
2001 increased $1.2 million or 115.4% compared to $1.0 million for fourth
quarter 2000.
Noninterest income of $8.2 million for fourth quarter 2001 increased $2.5
million or 43.6% compared to $5.7 million for fourth quarter 2000. The increase
is primarily due to an increase in service charges on deposit accounts and
realized gains on sales of securities available for sale.
Noninterest expense of $14.8 million for fourth quarter 2001 increased $1.5
million or 10.9% compared to $13.4 million for fourth quarter 2000. 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 41.95% for fourth quarter
2001 compared to 43.61% for fourth quarter 2000.
The fourth quarter net income for 2001 of $10.3 million or $0.63 per
diluted common share was comparable to $10.1 million or $0.62 per diluted common
share for third quarter 2001, reflecting an increase of $190,000 or 1.9%. Net
interest income, on a tax-equivalent basis, of $26.0 million for fourth quarter
2001 increased $383,000 or 1.5% compared to $25.6 million for third quarter
2001, reflecting a continued increase in volume of earning assets. Average
earning assets of $2.3 billion for fourth quarter 2001 increased $50,000 or 2.2%
compared to $2.3 billion for third quarter 2001. The fourth quarter 2001 net
interest margin of 4.41% compared to 4.44% in third quarter 2001.
The provision for loan losses charged against earnings in fourth quarter
2001 of $3.0 million was comparable to $2.8 million reported for third quarter
2001, reflecting an increase of $175,000 or 6.3%. Net charge-offs of $2.2
million for fourth quarter 2001 decreased $289,000 or 11.6% compared to net
charge-offs of $2.5 million for third quarter 2001.
Noninterest income of $8.2 million for fourth quarter 2001 increased
$182,000 or 2.3% compared to $8.0 million for third quarter 2001. The increase
was primarily due to an increase in service charges due to deposit growth.
Noninterest expense of $14.8 million for fourth quarter 2001 was comparable
to $15.0 million for third quarter 2001, decreasing by $175,000 or 1.2%. The
efficiency ratio of expense to total revenue averaged 41.95% for fourth quarter
2001 compared to 45.06% for third quarter 2001.
The nonperforming loans at December 31, 2001 of $14.0 million increased
$2.9 million or 25.7% compared to $11.2 million at September 30, 2001 primarily
due to the addition of one relationship totaling $3.6 million.
PAGE 29
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
INDEPENDENT AUDITORS' REPORT
The Board of Directors and Shareholders
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,
2001 and 2000, 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, 2001. 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 as of December 31, 2001 and 2000, and
the results of their operations and their cash flows for each of the years in
the three-year period ended December 31, 2001, in conformity with accounting
principles generally accepted in the United States of America.
KPMG LLP
Austin, Texas
January 16, 2002
PAGE 30
CONSOLIDATED FINANCIAL STATEMENTS
TEXAS REGIONAL BANCSHARES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS DECEMBER 31,
-----------------------------
(DOLLARS IN THOUSANDS, EXCEPT SHARE DATA) 2001 2000
- -----------------------------------------------------------------------------------------------------------
Assets
Cash and Due From Banks $ 95,606 $ 75,636
Interest-Bearing Deposits at Other Banks 96 229
Federal Funds Sold - 4,800
- -----------------------------------------------------------------------------------------------------------
Total Cash and Cash Equivalents 95,702 80,665
Time Deposits 495 2,076
Securities Available for Sale, at Fair Value 654,721 620,302
Securities Held to Maturity, at Amortized Cost (Fair Value of
$950 in 2001 and $1,682 in 2000) 914 1,643
Loans, Net of Unearned Discount of $2,116 in 2001 and $3,624 in 2000 1,710,001 1,587,827
Less: Allowance for Loan Losses (21,050) (19,458)
- -----------------------------------------------------------------------------------------------------------
Net Loans 1,688,951 1,568,369
Premises and Equipment, Net 75,576 76,456
Accrued Interest Receivable 22,728 24,939
Other Real Estate 7,085 3,906
Goodwill and Identifiable Intangibles 35,998 40,397
Other Assets 8,642 7,344
- -----------------------------------------------------------------------------------------------------------
Total Assets $2,590,812 $2,426,097
- -----------------------------------------------------------------------------------------------------------
Liabilities
Deposits
Demand $ 330,864 $ 301,286
Savings 118,042 111,312
Money Market Checking and Savings 561,087 471,622
Time Deposits 1,225,884 1,225,528
- -----------------------------------------------------------------------------------------------------------
Total Deposits 2,235,877 2,109,748
Other Borrowed Money 70,709 64,229
Accounts Payable and Accrued Liabilities 18,967 24,416
- -----------------------------------------------------------------------------------------------------------
Total Liabilities 2,325,553 2,198,393
- -----------------------------------------------------------------------------------------------------------
Commitments and Contingencies (Notes 6, 10, 11, 17, 18 and 19)
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 16,236,481 Shares in 2001 and 16,090,546 Shares
in 2000 16,236 16,091
Paid-In Capital 137,027 134,084
Retained Earnings 109,412 79,691
Accumulated Other Comprehensive Income (Loss) 2,584 (2,162)
- -----------------------------------------------------------------------------------------------------------
Total Shareholders' Equity 265,259 227,704
- -----------------------------------------------------------------------------------------------------------
Total Liabilities and Shareholders' Equity $2,590,812 $2,426,097
- -----------------------------------------------------------------------------------------------------------
The accompanying notes are an integral part of the consolidated financial
statements.
PAGE 31
TEXAS REGIONAL BANCSHARES, INC. AND SUBSIDIARIES YEARS ENDED DECEMBER 31,
CONSOLIDATED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME --------------------------------------
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA) 2001 2000 1999
- ---------------------------------------------------------------------------------------------------------
Interest Income
Loans, Including Fees $ 146,017 $ 146,145 $ 113,382
Securities
Taxable 34,369 32,432 27,244
Tax-Exempt 2,292 2,355 2,101
Interest-Bearing and Time Deposits 85 238 114
Federal Funds Sold 539 367 1,000
- ---------------------------------------------------------------------------------------------------------
Total Interest Income 183,302 181,537 143,841
- ---------------------------------------------------------------------------------------------------------
Interest Expense
Deposits 81,292 84,130 61,495
Federal Funds Purchased and Securities
Sold Under Repurchase Agreements 2,248 1,339 726
Federal Home Loan Bank Advances 236 1,044 -
- ---------------------------------------------------------------------------------------------------------
Total Interest Expense 83,776 86,513 62,221
- ---------------------------------------------------------------------------------------------------------
Net Interest Income Before Provision for Loan Losses 99,526 95,024 81,620
Provision for Loan Losses 8,667 8,927 5,432
- ---------------------------------------------------------------------------------------------------------
Net Interest Income After Provision for Loan Losses 90,859 86,097 76,188
- ---------------------------------------------------------------------------------------------------------
Noninterest Income
Service Charges on Deposit Accounts 16,965 11,863 9,799
Other Service Charges 3,507 2,933 2,286
Trust Service Fees 2,494 2,301 1,965
Net Realized Gains on Sales of Securities Available for Sale 1,496 12 1
Data Processing Service Fees 3,194 2,676 2,104
Other Noninterest Income 1,557 1,789 1,244
- ---------------------------------------------------------------------------------------------------------
Total Noninterest Income 29,213 21,574 17,399
- ---------------------------------------------------------------------------------------------------------
Noninterest Expense
Salaries and Employee Benefits 27,933 26,636 22,378
Net Occupancy Expense 4,358 3,966 3,767
Equipment Expense 6,565 6,127 5,127
Other Real Estate Expense, Net 1,113 650 332
Amortization of Goodwill and Identifiable Intangibles 4,428 4,469 3,180
Other Noninterest Expense, Net 14,947 11,696 11,104
- ---------------------------------------------------------------------------------------------------------
Total Noninterest Expense 59,344 53,544 45,888
- ---------------------------------------------------------------------------------------------------------
Income Before Income Tax Expense 60,728 54,127 47,699
Income Tax Expense 21,306 18,825 16,849
- ---------------------------------------------------------------------------------------------------------
Net Income 39,422 35,302 30,850
Other Comprehensive Income (Loss), Net of Tax
Net Unrealized Gains (Losses) on Securities Available for Sale
Net Unrealized Holding Gains (Losses) Arising During Period 5,718 11,294 (14,056)
Less: Reclassification Adjustment for Net Realized Gains
Included in Net Income 972 8 1
- ---------------------------------------------------------------------------------------------------------
Total Other Comprehensive Income (Loss) 4,746 11,286 (14,057)
- ---------------------------------------------------------------------------------------------------------
Comprehensive Income $ 44,168 $ 46,588 $ 16,793
=========================================================================================================
Net Income Per Common Share
Basic $ 2.44 $ 2.20 $ 1.95
Diluted 2.43 2.19 1.92
=========================================================================================================
The accompanying notes are an integral part of the consolidated financial
statements.
PAGE 32
ACCUMULATED
TEXAS REGIONAL BANCSHARES, INC. AND SUBSIDIARIES OTHER
CONSOLIDATED STATEMENTS OF CHANGES COMMON COMPREHENSIVE TOTAL
IN SHAREHOLDERS' EQUITY STOCK - PAID-IN RETAINED INCOME SHAREHOLDERS'
(DOLLARS IN THOUSANDS) CLASS A CAPITAL EARNINGS (LOSS) EQUITY
- ----------------------------------------------------------------------------------------------------------------
Balance, December 31, 1998 $ 14,405 $ 87,396 $ 74,864 $ 609 $ 177,274
Net Income - - 30,850 - 30,850
Net Change in Unrealized Gains and 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 and 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
Net Income - - 39,422 - 39,422
Net Change in Unrealized Gains and Losses on
Securities Available for Sale, Net of tax
and Reclassification Adjustment - - - 4,746 4,746
- ----------------------------------------------------------------------------------------------------------------
Total Comprehensive Income - - 39,422 4,746 44,168
- ----------------------------------------------------------------------------------------------------------------
Exercise of Stock Options, 145,935 Shares
of Class A Common Stock 145 2,129 - - 2,274
Tax Effect of Nonqualified Stock Options
Exercised - 814 - - 814
Class A Common Stock Cash Dividends -
$0.600 per share - - (9,701) - (9,701)
- ----------------------------------------------------------------------------------------------------------------
Balance, December 31, 2001 $ 16,236 $ 137,027 $ 109,412 $ 2,584 $ 265,259
- ----------------------------------------------------------------------------------------------------------------
The accompanying notes are an integral part of the consolidated financial
statements.
PAGE 33
TEXAS REGIONAL BANCSHARES, INC. AND SUBSIDIARIES YEARS ENDED DECEMBER 31,
CONSOLIDATED STATEMENTS OF CASH FLOWS -------------------------------------
(DOLLARS IN THOUSANDS) 2001 2000 1999
- ----------------------------------------------------------------------------------------------------------------
Cash Flows from Operating Activities
Net Income $ 39,422 $ 35,302 $ 30,850
Adjustments to Reconcile Net Income to
Net Cash Provided by Operating Activities
Depreciation, Amortization and Accretion, Net 10,081 10,056 8,917
Provision for Loan Losses 8,667 8,927 5,432
Provision for Estimated Losses on Other Real Estate and Other Assets 30 522 549
Gain on Sale of Securities Available for Sale (1,496) (12) (1)
(Gain) Loss on Sale of Other Assets 34 (20) 76
(Gain) Loss on Sale of Other Real Estate 188 (109) (171)
(Gain) Loss on Sale of Premises and Equipment 85 (175) (41)
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 (1,511) 3,162 (4,487)
(Increase) Decrease in Accrued Interest Receivable and Other 781 (4,800) (2,782)
Assets
Increase (Decrease) in Accounts Payable and Accrued Liabilities (3,294) 5,046 1,596
- ----------------------------------------------------------------------------------------------------------------
Net Cash Provided by Operating Activities 52,987 52,708 42,304
- ----------------------------------------------------------------------------------------------------------------
Cash Flows from Investing Activities
Net (Increase) Decrease in Time Deposits at Other Banks 1,581 2,874 (4,554)
Proceeds from Sales of Securities Available for Sale 145,601 46,971 27,040
Proceeds from Maturing Securities Available for Sale 356,888 54,268 119,638
Purchases of Securities Available for Sale (530,406) (172,872) (188,575)
Proceeds from Maturing Securities Held to Maturity 732 6,340 6,300
Proceeds from Sale of Loans 252 1,379 1,431
Purchases of Loans (2,374) (8,606) (4,020)
Loan Originations and Advances, Net (134,058) (214,493) (178,951)
Recoveries of Charged-Off Loans 472 829 605
Proceeds from Sale of Premises and Equipment 89 184 221
Purchases of Premises and Equipment (5,057) (6,475) (5,875)
Proceeds from Sale of Other Real Estate 2,161 1,079 1,212
Proceeds from Sale of Other Assets 982 1,318 675
Net Cash Used in Mergers - - (133)
- ----------------------------------------------------------------------------------------------------------------
Net Cash Used in Investing Activities (163,137) (287,204) (224,986)
- ----------------------------------------------------------------------------------------------------------------
Cash Flows from Financing Activities
Net Increase in Demand Deposits, Savings, Money Market
Checking and Savings Accounts 125,773 102,138 16,479
Net Increase in Time Deposits 356 122,264 122,274
Net Increase in Other Borrowed Money 6,480 29,621 27,201
Cash Dividends Paid on Class A Common Stock (9,696) (8,161) (7,205)
Proceeds from the Exercise of Stock Options 2,274 862 966
- ----------------------------------------------------------------------------------------------------------------
Net Cash Provided by Financing Activities 125,187 246,724 159,715
- ----------------------------------------------------------------------------------------------------------------
Increase (Decrease) in Cash and Cash Equivalents 15,037 12,228 (22,967)
Cash and Cash Equivalents at Beginning of Period 80,665 68,437 91,404
- ----------------------------------------------------------------------------------------------------------------
Cash and Cash Equivalents at End of Period $ 95,702 $ 80,665 $ 68,437
================================================================================================================
PAGE 34
TEXAS REGIONAL BANCSHARES, INC. AND SUBSIDIARIES YEARS ENDED DECEMBER 31,
CONSOLIDATED STATEMENTS OF CASH FLOWS -------------------------------------
(DOLLARS IN THOUSANDS) 2001 2000 1999
- ----------------------------------------------------------------------------------------------------------------
Supplemental Disclosures of Cash Flow Information
Interest Paid $ 85,769 $ 84,461 $ 61,321
Income Taxes Paid 21,694 19,575 18,270
Supplemental Schedule of Noncash Investing and Financing Activities
Foreclosure and Repossession in Partial Satisfaction of Loans Receivable 7,753 2,766 5,354
Financing Provided For Sales of Other Real Estate 1,294 1,115 2,577
Net Increase (Decrease) in Securities Trades Not Settled (2,452) 5,007 -
Net Increase in Dividends Payable 5 397 232
The Company acquired Harlingen Bancshares, Inc. and its subsidiary,
Harlingen National Bank, on October 1, 1999. Assets acquired and
liabilities assumed were as follows:
Fair Value of Assets Acquired - - 204,627
Cash Paid - - 32,248
Liabilities Assumed - - 185,076
================================================================================================================
The accompanying notes are an integral part of the consolidated financial
statements.
PAGE 35
TEXAS REGIONAL BANCSHARES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2001, 2000 AND 1999
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,
2001. The accounting and reporting policies followed by the Company conform to
accounting principles generally accepted in the United States of America 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 accounting
principles generally accepted in the United States of America 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 36
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, 2001
and 2000 adequately reflects the estimated probable losses 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.
Through 2001, 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. In addition, the Company reviews its
PAGE 37
intangible assets periodically for other-than-temporary impairment. If such
impairment was indicated, recoverability of the asset was assessed based on
expected undiscounted net cash flows.
In June 2001, the Financial Accounting Standards Board issued Statement
No. 141 ("Statement 141"), "Business Combinations", and Statement No. 142
("Statement 142"), "Goodwill and Other Intangible Assets". Statement 141
requires that the purchase method of accounting be used for all business
combinations initiated after June 30, 2001 as well as all purchase method
business combinations completed after June 30, 2001. Statement 141 also
specifies criteria that intangible assets acquired in a purchase method business
combination must meet to be recognized and reported apart from goodwill.
Statement 142 requires that goodwill and intangible assets with indefinite
useful lives no longer be amortized, but instead tested for impairment at least
annually in accordance with the provisions of Statement 142. Statement 142
requires that intangible assets with definite useful lives be amortized over
their respective estimated useful lives to their estimated residual values, and
reviewed for impairment in accordance with the Financial Accounting Standards
Board's Statement No. 121 ("Statement 121"), "Accounting for the Impairment of
Long-Lived Assets and for Long-Lived Assets to Be Disposed Of". Financial
Accounting Standards Board's Statement No. 144, "Accounting for the Impairment
or Disposal of Long-Lived Assets" supercedes Statement 121 and is effective for
fiscal years beginning after December 15, 2001.
The Company adopted the provisions of Statement 141 in 2001 and Statement
142 is required to be adopted effective January 1, 2002. The adoption of
Statement 141 did not have a material impact on the Company's consolidated
financial statements.
Statement 141 requires upon adoption of Statement 142, that the Company
evaluate its existing intangible assets and goodwill that were acquired in a
prior purchase business combination, and to make any necessary reclassifications
in order to conform with the new criteria in Statement 141 for recognition apart
from goodwill. Upon adoption of Statement 142, the Company is required to
reassess the useful lives and residual values of all intangible assets acquired
in purchase business combinations, and make any necessary amortization period
adjustments by the end of the first interim period after adoption. In addition,
to the extent an intangible asset is identified as having an indefinite useful
life, the Company is required to test the intangible asset for impairment in
accordance with the provisions of Statement 142 within the first interim period.
Any impairment loss will be measured as of the date of adoption and recognized
as the cumulative effect of a change in accounting principle in the first
interim period.
In connection with the transitional goodwill impairment evaluation,
Statement 142 requires the Company to perform an assessment of whether there is
an indication that goodwill is impaired as of the date of adoption. To
accomplish this the Company must identify its reporting units and determine the
carrying value of each reporting unit by assigning the assets and liabilities,
including the existing goodwill and intangible assets, to those reporting units
as of the date of adoption. The Company will have up to six months from the date
of adoption to determine the fair value of each reporting unit and compare it to
the reporting unit's carrying amount. To the extent a reporting unit's carrying
amount exceeds its fair value, an indication exists that the reporting unit's
goodwill may be impaired and the Company must perform the second step of the
transitional impairment test. In the second step, the Company must compare the
implied fair value of the reporting unit's goodwill, determined by allocating
the reporting unit's fair value to all of it assets (recognized and
unrecognized) and liabilities in a manner similar to a purchase price allocation
in accordance with Statement 141, to its carrying amount, both of which would be
measured as of the date of adoption. This second step is required to be
completed as soon as possible, but no later than the end of the year of
adoption. Any transitional impairment loss will be recognized as the cumulative
effect of a change in accounting principle in the Company's Consolidated
Statements of Income and Comprehensive Income.
The Company adopted Statement 142 as of January 1, 2002 and will no longer
amortize goodwill. As of the date of the adoption, the Company had unamortized
goodwill in the amount of $24.3 million and unamortized identifiable intangible
assets in the amount of $11.7 million, all of which are subject to the
transition provisions of Statements 141 and 142. None of the unamortized
goodwill relates to Financial Accounting Standards Board's Statement No. 72,
"Accounting for Certain Acquisitions of Banking or Thrift Institutions - an
amendment of APB Opinion No. 17, an interpretation of APB Opinions 16 and 17,
and an amendment of FASB Interpretation No. 9". Amortization expense related to
goodwill was $2.3 million for the years ended December 31, 2001 and 2000 and
$1.7 million for the year ended December 31, 1999. The Company is in the process
of determining the fair value of its reporting unit to determine if there is an
indication that goodwill may be impaired. In addition, the Company has evaluated
its existing intangible assets and determined that no reclassifications were in
order to conform to the new criteria in Statement 141 for recognition apart from
goodwill. The Company is in the process of reassessing the useful lives and
residual values of all intangible assets acquired in purchase business
combinations and will make any necessary amortization period adjustments by the
end of the first interim period after adoption.
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
PAGE 38
Statement of Financial Accounting Standards No. 123, ("Statement 123")
"Accounting for Stock-Based Compensation," which requires 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.
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 implementation of
Statement 140 did not have an impact on the Company's consolidated financial
statements.
ACCOUNTING FOR IMPAIRMENT OR DISPOSAL OF LONG-LIVED ASSETS
In August 2001, the Financial Accounting Standards Board issued Statement
No. 144 ("Statement 144"), "Accounting for the Impairment or Disposal of
Long-Lived Assets", which addresses financial accounting and reporting for the
impairment or disposal of long-lived assets. While Statement 144 supercedes
Financial Accounting Standards Board's Statement No. 121 ("Statement 121"),
"Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to
be Disposed Of", it retains many of the fundamental provisions of Statement 121,
establishes a single accounting model for long-lived assets to be disposed of by
sale, and resolves certain implementation issues not previously addressed by
Statement 121. Statement 144 also supersedes the accounting and reporting
provisions of Financial Accounting Standards Board Opinion No. 30, ("Opinion
No. 30") "Reporting the Results of Operation - Reporting the Effects of Disposal
of a Segment of a Business, and Extraordinary, Unusual and Infrequently
Occurring Events and Transactions", for the disposal of a segment of a business.
However, it retains the requirement in Opinion No. 30 to report separately
discontinued operations and extends the reporting to a component of an entity,
rather than a segment of a business, that either has been disposed of or is
classified as held for sale. Statement 144 is effective for fiscal years
beginning after December 15, 2001. The Company adopted Statement 144 on
January 1, 2002.
RECLASSIFICATIONS
Certain amounts in the prior year's presentation have been reclassified to
conform to the current presentation. These reclassifications have no effect on
previously reported net income.
PAGE 39
NOTE 2: SECURITIES
An analysis of securities available for sale as of December 31, 2001
follows:
GROSS GROSS ESTIMATED
AMORTIZED UNREALIZED UNREALIZED FAIR
(DOLLARS IN THOUSANDS) COST GAINS LOSSES VALUE
- -----------------------------------------------------------------------------------------
U.S. Treasury $ 401 $ 2 $ - $ 403
U.S. Government Agency 415,287 5,902 (1,516) 419,673
Mortgage-Backed 165,484 1,134 (1,004) 165,614
States and Political Subdivisions 60,232 446 (878) 59,800
Other 9,231 - - 9,231
- -----------------------------------------------------------------------------------------
Total $ 650,635 $ 7,484 $ (3,398) $ 654,721
=========================================================================================
The carrying amount and estimated fair value of securities held to maturity
as of December 31, 2001 follow:
GROSS GROSS ESTIMATED
AMORTIZED UNREALIZED UNREALIZED FAIR
(DOLLARS IN THOUSANDS) COST GAINS LOSSES VALUE
- -----------------------------------------------------------------------------------------
States and Political Subdivisions $ 914 $ 36 $ - $ 950
- -----------------------------------------------------------------------------------------
Total $ 914 $ 36 $ - $ 950
=========================================================================================
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
=========================================================================================
The net change in unrealized holding gains (losses) on securities available
for sale, net of related tax effect, of $4.7 million and $11.3 million for 2001
and 2000, 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
$145.6 million, $47.0 million and $27.0 million in 2001, 2000, and 1999,
respectively. Gross realized gains and gross realized losses on sales of
securities available for sale were $1.5 million and $11,000, respectively, in
2001, $102,000 and $90,000, respectively, in 2000 and $3,000 and $2,000,
respectively, in 1999. There were no sales of securities held to maturity in
2001, 2000 or 1999.
PAGE 40
The scheduled maturities of securities available for sale and securities
held to maturity at December 31, 2001 follow. 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 $ 7,025 $ 7,048 $ 220 $ 222
After 1 Year through 5 Years 332,818 336,363 694 728
After 5 Years through 10 Years 121,437 122,193 - -
After 10 Years 23,871 23,503 - -
- -----------------------------------------------------------------------------------------
Subtotal 485,151 489,107 914 950
Mortgage-backed securities 165,484 165,614 - -
- -----------------------------------------------------------------------------------------
Total $ 650,635 $ 654,721 $ 914 $ 950
=========================================================================================
Securities available for sale and securities held to maturity with carrying
values of $618.5 million and $794,000, respectively, at December 31, 2001 and
$582.8 million and $1.2 million, respectively, at December 31, 2000 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) 2001 2000
- ---------------------------------------------------------------
Commercial $ 540,812 $ 481,277
Commercial Tax-Exempt 13,832 13,213
- ---------------------------------------------------------------
Total Commercial Loans 554,644 494,490
Agricultural 57,995 71,482
- ---------------------------------------------------------------
Real Estate
Construction 151,935 143,023
Commercial Mortgage 621,699 536,856
Agricultural Mortgage 49,888 43,725
1-4 Family Mortgage 162,413 173,860
- ---------------------------------------------------------------
Total Real Estate 985,935 897,464
Consumer 111,427 124,391
- ---------------------------------------------------------------
Total Loans $ 1,710,001 $ 1,587,827
===============================================================
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, 2001 and 2000, loans outstanding to
directors, officers and their affiliates were approximately $9.9 million and
$12.9 million, respectively.
The activity in the allowance for loan losses follows:
YEARS ENDED DECEMBER 31,
----------------------------------------
(DOLLARS IN THOUSANDS) 2001 2000 1999
- -----------------------------------------------------------------------------------
Balance at Beginning of Year $ 19,458 $ 16,711 $ 13,236
Balance from Acquisitions - - 1,576
Provision for Loan Losses 8,667 8,927 5,432
Loans Charged Off (7,547) (7,009) (4,138)
Recoveries of Loans Previously Charged Off 472 829 605
- -----------------------------------------------------------------------------------
Balance at End of Year $ 21,050 $ 19,458 $ 16,711
===================================================================================
PAGE 41
The Company identifies loans to be reported as impaired when such loans are
on nonaccrual status or are considered troubled debt restructurings due to the
granting of a below-market rate of interest or a partial forgiveness of
indebtedness on an existing loan. The balance of impaired loans was $14.0
million at December 31, 2001 and $12.5 million at December 31, 2000. The total
allowance for loan losses related to these loans was $3.1 million and $2.4
million on December 31, 2001 and 2000, respectively. In addition to the total
impaired loan balance, the Company was committed to lend an additional $1.8
million and $1.5 million to borrowers with impaired loans at December 31, 2001
and 2000, respectively. At December 31, 2001 and 2000, the Company had $226,000
and $1.8 million, respectively, in impaired loans for which there was no related
allowance for loan losses. The average recorded investment in impaired loans
during 2001 and 2000 was $13.3 million and $13.1 million, respectively. Interest
income on impaired loans of $241,000, $490,000 and $156,000 was recognized for
cash payments received during 2001, 2000 and 1999, respectively. If interest on
these impaired loans had been accrued at the original contractual rates,
interest income would have been increased by approximately $2.6 million, $1.3
million and $1.9 million for the years ended December 31, 2001, 2000 and 1999,
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 2001 2000
- ----------------------------------------------------------------------------------------
Land $ 13,521 $ 12,001
Buildings and Leasehold Improvements 2-40 Years 64,518 64,702
Construction in Progress 47 160
Furniture and Equipment 3-10 Years 24,888 27,177
- ----------------------------------------------------------------------------------------
Subtotal 102,974 104,040
Less: Accumulated Depreciation and Amortization (27,398) (27,584)
- ----------------------------------------------------------------------------------------
Total $ 75,576 $ 76,456
========================================================================================
Depreciation and amortization expense for the years ended December 31,
2001, 2000 and 1999 was approximately $5.8 million, $5.7 million and $5.3
million, respectively.
NOTE 5: TIME DEPOSITS
Time deposits of $100,000 or more totaled $785.3 million and $752.4 million
at December 31, 2001 and 2000, respectively. Interest expense for the years
ended December 31, 2001, 2000 and 1999 on time deposits of $100,000 or more was
approximately $40.8 million, $43.3 million and $32.4 million, respectively.
The maturities of time deposits as of December 31, 2001 follows:
(DOLLARS IN THOUSANDS)
- --------------------------------------------------------------
1 Year or Less $ 1,115,524
1 to 2 Years 90,119
2 to 3 Years 10,659
3 to 4 Years 8,067
4 to 5 Years 1,142
After 5 Years 373
- --------------------------------------------------------------
Total $ 1,225,884
==============================================================
NOTE 6: OTHER BORROWED MONEY
The components of other borrowed money are as follows (dollars in
thousands):
DECEMBER 31,
---------------------------
2001 2000
- ---------------------------------------------------------------------------
Federal Funds Purchased and Securities Sold
Under Repurchase Agreements $ 70,709 $ 39,229
Federal Home Loan Bank Advances - 25,000
- ---------------------------------------------------------------------------
Total Borrowed Money $ 70,709 $ 64,229
===========================================================================
PAGE 42
The following table summarizes selected information regarding other
borrowed money:
DECEMBER 31,
------------------------------------------
(DOLLARS IN THOUSANDS) 2001 2000 1999
- ----------------------------------------------------------------------------------------------
Federal Funds Purchased and Securities Sold Under
Repurchase Agreements
Balance at End of Year $ 70,709 $ 39,229 $ 34,608
Rate on Balance at End of Year 3.37% 5.74% 5.45%
Average Daily Balance $ 46,599 $ 24,706 $ 15,377
Average Interest Rate 4.83% 5.42% 4.72%
Maximum Month-End Balance $ 70,709 $ 53,572 $ 46,162
Federal Home Loan Bank Advances
Balance at End of Year - $ 25,000 -
Rate on Balance at End of Year - 6.46% -
Average Daily Balance $ 4,373 $ 15,663 -
Average Interest Rate 5.40% 6.66% -
Maximum Month-End Balance $ 23,000 $ 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, 2001, the Company had lines of credit totaling $40.0
million with correspondent banks for short-term liquidity needs and
approximately $159.7 million available at the Federal Home Loan Bank.
NOTE 7: INCOME TAX
The components of income tax expense consisted of the following:
YEARS ENDED DECEMBER 31,
----------------------------------------
(DOLLARS IN THOUSANDS) 2001 2000 1999
- ----------------------------------------------------------------------------------------
Current Income Tax Expense
Federal $ 22,672 $ 20,811 $ 18,314
State 135 58 656
- ----------------------------------------------------------------------------------------
Total Current Income Tax Expense 22,807 20,869 18,970
- ----------------------------------------------------------------------------------------
Deferred Income Tax Benefit
Federal (1,446) (1,987) (2,047)
State (55) (57) (74)
- ----------------------------------------------------------------------------------------
Total Deferred Income Tax Expense (Benefit) (1,501) (2,044) (2,121)
- ----------------------------------------------------------------------------------------
Total Income Tax Expense $ 21,306 $ 18,825 $ 16,849
========================================================================================
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:
YEARS ENDED DECEMBER 31,
------------------------------------------------------
2001 2000 1999
----------------- ----------------- -----------------
(DOLLARS IN THOUSANDS) AMOUNT RATE AMOUNT RATE AMOUNT RATE
- ------------------------------------------------------------------------------------------------------
Tax at Statutory Rate $ 21,255 35% $ 18,944 35% $ 16,695 35%
Additions (Reductions)
Tax-Exempt Interest (825) (1) (861) (1) (898) (2)
State Earned Surplus Tax, Net of
Federal Income Tax Effect 51 - 1 - 378 1
Goodwill Amortization 708 1 708 1 486 1
Change in Anticipated State Income Tax Rate - - - - 135 -
Other, Net 117 - 33 - 53 -
- ------------------------------------------------------------------------------------------------------
Total Income Tax Expense $ 21,306 35% $ 18,825 35% $ 16,849 35%
======================================================================================================
PAGE 43
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) 2001 2000
- ----------------------------------------------------------------------------------
Deferred Tax Liability
Premises and Equipment $ 5,576 $ 5,628
Identifiable Intangibles 4,028 4,756
Unrealized Gain on Securities Available for Sale 1,423 -
Loan Origination Costs 619 623
Other Real Estate 742 194
Other 126 152
- ----------------------------------------------------------------------------------
Total Deferred Tax Liability 12,514 11,353
- ----------------------------------------------------------------------------------
Deferred Tax Asset
Unrealized Loss on Securities Available for Sale - 1,152
Allowance for Loan Losses 7,528 6,688
Deferred Compensation 568 573
State Income Taxes 141 264
Loans 963 429
Other 141 148
- ----------------------------------------------------------------------------------
Total Deferred Tax Asset Before Valuation Allowance 9,341 9,254
Valuation Allowance - -
- ----------------------------------------------------------------------------------
Net Deferred Tax Asset (Liability) $ (3,173) $(2,099)
==================================================================================
For the years ended 2001 and 2000, 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. In addition, the 2001 deferred tax liability amount included net
unrealized gain on securities available for sale. 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, 2001 and
2000. For 2000, the deferred tax asset also included 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, 2001, 2000
and 1999 and therefore has provided no valuation allowance as of those dates.
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 $107.9 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, 2001, 2000 and 1999, the number of common shares
outstanding are 16,236,481, 16,090,546 and 14,524,739, 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 previous years presented has been restated to retroactively
give effect to the stock dividend.
NOTE 10: EMPLOYEE BENEFITS
The Company had an Employee Stock Ownership Plan (with section 401(k)
provisions) covering substantially all of its employees. Effective December 1,
2001, the Company adopted the Amended and Restated Employee Stock Ownership Plan
(with section 401(k) provisions) (the "KSOP") primarily to add additional
investment options. 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 and 1,000 hours of credited service, as defined in the plan,
PAGE 44
except for the 401(k) and matching provisions which require three consecutive
months and 250 hours of credited service. The Company's discretionary optional
contribution is fully vested after six years of credited service. The Company's
discretionary matching contribution is fully vested when made. Contribution
expense, which includes employer matching for the years ended December 31, 2001,
2000 and 1999 was $509,000, $736,000 and $962,000, respectively.
The Company acquired existing 401(k) plans in connection with its
acquisitions of the Bank of Texas and Harlingen Bancshares, Inc. The plans are
restricted to pre-acquisition participation by qualified employees.
The Company has granted stock options providing for the purchase of Class A
Common Shares by certain key employees under six 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. 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. 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 12,625 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, 2001.
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 129,410 shares at a weighted
average exercise price of $30.49 per share were outstanding, with 127,747 shares
exercisable, under the 1997 NSO Plan expiring on July 1, 2003 at December 31,
2001.
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 77,094 shares at a weighted
average exercise price of $30.55 per share were outstanding, with 76,283 shares
exercisable, under the 1997 ISO Plan expiring on July 1, 2003 at December 31,
2001.
The 2000 Incentive Stock Option Plan ("the 2000 ISO Plan") authorized the
award of options up to an aggregate maximum of 275,000 shares at an exercise
price of fair market value on the grant date. The Company granted options in
2001 with contractual terms of approximately 10 years and a vesting period of
approximately three years. Options to acquire 234,555 shares at a weighted
average exercise price of $33.13 per share were outstanding, with 54,383 shares
exercisable, under the 2000 ISO Plan expiring on April 15, 2011 at December 31,
2001.
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:
YEARS ENDED DECEMBER 31,
---------------------------------
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA) 2001 2000 1999
- ----------------------------------------------------------------------------------------------
Net Income As Reported $ 39,422 $ 35,302 $ 30,850
Pro Forma 38,206 34,972 30,490
- ----------------------------------------------------------------------------------------------
Basic Earnings Per Share As Reported 2.44 2.20 1.95
Pro Forma 2.37 2.18 1.92
- ----------------------------------------------------------------------------------------------
Diluted Earnings Per Share As Reported 2.43 2.19 1.92
Pro Forma 2.35 2.17 1.90
==============================================================================================
PAGE 45
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,
---------------------------------
2001 2000 1999
- ----------------------------------------------------------------------------
Expected Life in Years 8.29 - -
Interest Rate 5.35% - -
Volatility 30.00 - -
Dividend Yield 1.81 - -
============================================================================
No options were granted during the years ended December 31, 2000 and 1999.
Pro forma net income reflects options granted in 2001 and 1998.
A summary of the status of the Company's six fixed option plans as of
December 31, 2001, 2000 and 1999, and changes during the years ending on those
dates is presented below:
YEARS ENDED DECEMBER 31,
-------------------------------------------------------------------------
2001 2000 1999
------------------------ ----------------------- ------------------------
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 359,379 $ 23.71 475,893 $ 19.89 613,259 $ 17.34
Granted 242,220 33.13 - - - -
Exercised (145,935) 15.59 (113,874) 7.57 (131,717) 7.34
Forfeited (1,980) 33.13 (2,640) 30.80 (5,649) 30.80
- -------------------------------------------------------------------------------------------------------------------
Outstanding at End of Year 453,684 $ 31.31 359,379 $ 23.71 475,893 $ 19.89
- -------------------------------------------------------------------------------------------------------------------
Options Exercisable at End of Year 271,038 $ 30.15 297,651 $ 22.33 353,600 $ 16.24
Options Available for Grant at End of 46,692 11,932 9,292
Year
Weighted Average Fair Value of Options
Granted During the Year $ 12.33 - -
===================================================================================================================
The following table summarizes information about fixed stock options
outstanding at December 31, 2001:
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 12,625 0.5 $ 10.4545 12,625 $ 10.4545
24.8864 9,899 1.5 24.8864 7,425 24.8864
30.7954 196,605 1.5 30.7954 196,605 30.7954
33.1300 234,555 9.3 33.1300 54,383 33.1300
- ------------------------------------------------------------------------------------------
$ 10.4545 to $33.1300 453,684 5.5 $ 31.3074 271,038 $ 30.1545
==========================================================================================
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.
PAGE 46
With the consummation of the mergers the Company acquired four existing
separate deferred compensation plans for the benefit of certain Texas State Bank
employees. The plans provide for retirement benefits to be paid to the specific
employee (or a designated beneficiary or estate if death occurs prior to payment
of the full amount of deferred compensation) on reaching age 65. One plan
entered into on December 10, 1963, commenced payments of approximately $13,000
each year on January 4, 1988, continuing annually thereafter through June 2003.
A second plan, entered into on September 1, 1979, provides for payments of
approximately $13,000 each year which was scheduled to commence on April 1,
1990, continuing annually thereafter through June 2005; however, the employee
elected to receive an amount less than that provided for in the plan over a
longer period of time. The third plan provides for a retirement benefit payable
of $50,000 per year commencing in March 1999 and continuing annually thereafter
for 20 years. The fourth plan provides for a retirement benefit payable of
$13,350 each year beginning March 15, 1995 and continuing annually thereafter
for fourteen years.
The Company has incurred deferred compensation expense of $71,000, $267,000
and $152,000 for the years ended December 31, 2001, 2000 and 1999, 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 accounting principles generally accepted
in the United States of America, 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, 2001, the Company had outstanding commitments to extend
credit of approximately $244.5 million and standby letters of credit of
approximately $16.3 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, 2001 are as follows:
OFFICE
(DOLLARS IN THOUSANDS) SPACE EQUIPMENT TOTAL
- -----------------------------------------------------------------------------
2002 $ 27 $ 56 $ 83
2003 - 7 7
2004 - 4 4
2005 - 4 4
2006 - 4 4
Thereafter - 10 10
- -----------------------------------------------------------------------------
Total Minimum Lease Payments $ 27 $ 85 $ 112
=============================================================================
PAGE 47
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, 2001 are as follows:
(DOLLARS IN THOUSANDS) TOTAL
======================================================
2002 $ 1,221
2003 1,046
2004 689
2005 40
2006 18
Thereafter 38
- ------------------------------------------------------
Total Minimum Future Rentals $ 3,052
======================================================
The Company is a defendant in various legal proceedings arising in
connection with its ordinary course of business. In the opinion of management,
the consolidated financial position and results of operations of the Company
will not be materially affected by the final outcome of these legal proceedings.
NOTE 12: OTHER NONINTEREST EXPENSE
Other noninterest expense consisted of the following:
YEARS ENDED DECEMBER 31,
----------------------------------------
(DOLLARS IN THOUSANDS) 2001 2000 1999
- -----------------------------------------------------------------------------------
Advertising and Public Relations $ 2,297 $ 1,971 $ 1,495
Data Processing and Check Clearing 2,016 1,766 1,480
Directors Fees 405 356 344
Franchise Tax 155 (519) 334
Insurance 350 387 400
FDIC Insurance 400 405 191
Legal 1,148 817 663
Professional 1,825 1,338 1,136
Postage, Delivery and Freight 1,064 1,009 916
Printing, Stationery and Supplies 1,700 1,779 1,447
Telephone 716 716 628
Other Losses, Net 983 4 759
Miscellaneous Expense 1,888 1,667 1,311
- -----------------------------------------------------------------------------------
Total $ 14,947 $ 11,696 $ 11,104
===================================================================================
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
for 2000 and 1999 have been restated to retroactively give effect to the 10%
stock dividend declared during December 2000 and distributed during first
quarter 2001.
PAGE 48
The table below presents a reconciliation of basic and diluted earnings per
share computations.
YEARS ENDED DECEMBER 31,
------------------------------------------
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA) 2001 2000 1999
- -----------------------------------------------------------------------------------------------------
Net Income Available to Common Shareholders $ 39,422 $ 35,302 $ 30,850
- -----------------------------------------------------------------------------------------------------
Weighted Average Number of Common Shares Outstanding
Used in Basic EPS Calculation 16,138,536 16,050,261 15,850,640
Add Assumed Exercise of Outstanding Stock Options as
Adjustments for Dilutive Securities 115,864 97,117 235,929
- -----------------------------------------------------------------------------------------------------
Weighted Average Number of Common Shares
Outstanding Used in Diluted EPS Calculations 16,254,400 16,147,378 16,086,569
- -----------------------------------------------------------------------------------------------------
Basic EPS $ 2.44 $ 2.20 $ 1.95
Diluted EPS 2.43 2.19 1.92
=====================================================================================================
NOTE 14: TEXAS REGIONAL BANCSHARES, INC. (PARENT ONLY) CONDENSED FINANCIAL
STATEMENTS
CONDENSED BALANCE SHEETS DECEMBER 31,
-----------------------------
(DOLLARS IN THOUSANDS) 2001 2000
- -----------------------------------------------------------------------------------------------------------
Assets
Cash in Subsidiary Bank $ 14,351 $ 11,425
- -----------------------------------------------------------------------------------------------------------
Total Cash and Cash Equivalents 14,351 11,425
Investments in Consolidated Subsidiaries 253,637 218,751
Furniture and Equipment 64 77
Other Assets 843 677
- -----------------------------------------------------------------------------------------------------------
Total Assets $ 268,895 $ 230,930
===========================================================================================================
Liabilities
Accounts Payable and Accrued Liabilities $ 1,200 $ 796
Dividends Payable 2,436 2,430
- -----------------------------------------------------------------------------------------------------------
Total Liabilities 3,636 3,226
Shareholders' Equity 265,259 227,704
- -----------------------------------------------------------------------------------------------------------
Total Liabilities and Shareholders' Equity $ 268,895 $ 203,930
===========================================================================================================
CONDENSED STATEMENTS OF INCOME YEARS ENDED DECEMBER 31,
--------------------------------------
(DOLLARS IN THOUSANDS) 2001 2000 1999
- -----------------------------------------------------------------------------------------------------------
Income
Dividends Received $ 9,625 $ 8,730 $ 10,206
- -----------------------------------------------------------------------------------------------------------
Total Income 9,625 8,730 10,206
- -----------------------------------------------------------------------------------------------------------
Expense
Occupancy Expense 12 10 12
Equipment Expense 17 25 17
Directors Fees 136 115 118
Legal and Professional 157 86 106
Printing, Stationery and Supplies 107 131 133
Other 79 55 29
- -----------------------------------------------------------------------------------------------------------
Total Expense 508 422 415
- -----------------------------------------------------------------------------------------------------------
Income Before Income Tax Expense and Equity
in Undistributed Net Income of Subsidiaries 9,117 8,308 9,791
Income Tax Benefit (165) (150) (147)
- -----------------------------------------------------------------------------------------------------------
Income Before Equity in Undistributed Net
Income of Subsidiaries 9,282 8,458 9,938
Equity in Undistributed Net Income of Subsidiaries 30,140 26,844 20,912
- -----------------------------------------------------------------------------------------------------------
Net Income $ 39,422 $ 35,302 $ 30,850
===========================================================================================================
PAGE 49
CONDENSED STATEMENTS OF CASH FLOWS YEARS ENDED DECEMBER 31,
--------------------------------------
(DOLLARS IN THOUSANDS) 2001 2000 1999
- -----------------------------------------------------------------------------------------------------------
Cash Flows from Operating Activities
Net Income $ 39,422 $ 35,302 $ 30,850
Adjustment to Reconcile Net Income to Net Cash
Provided by Operating Activities
Depreciation and Amortization 13 13 14
Undistributed Net Income of Subsidiaries (30,140) (26,844) (20,912)
(Increase) Decrease in Other Assets 12 (1) 21
Increase in Income Taxes Payable 1,209 1,300 592
Increase in Deferred Income Taxes (178) (185) (479)
Increase (Decrease) in Accounts Payable and Accrued 9 55 (177)
Liabilities
- -----------------------------------------------------------------------------------------------------------
Net Cash Provided by Operating Activities 10,347 9,640 9,909
- -----------------------------------------------------------------------------------------------------------
Cash Flows from Investing Activities
Purchase of Fixed Assets - - (59)
- -----------------------------------------------------------------------------------------------------------
Net Cash Used in Investing Activities - - (59)
- -----------------------------------------------------------------------------------------------------------
Cash Flows from Financing Activities
Cash Dividends Paid on Common Stock (9,695) (8,162) (7,204)
Proceeds from Exercise of Stock Options 2,274 862 966
- -----------------------------------------------------------------------------------------------------------
Net Cash Used in Financing Activities (7,421) (7,300) (6,238)
- -----------------------------------------------------------------------------------------------------------
Net Increase in Cash and Cash Equivalents 2,926 2,340 3,612
Cash and Cash Equivalents at Beginning of Year 11,425 9,085 5,473
- -----------------------------------------------------------------------------------------------------------
Cash and Cash Equivalents at End of Year $ 14,351 $ 11,425 $ 9,085
===========================================================================================================
Supplemental Disclosures of Cash Flow Information
Income Taxes Paid $ 21,694 $ 19,575 $ 18,271
===========================================================================================================
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, 2001 was $80.7 million. On December 31,
2001, the aggregate amount of dividends, which legally could be paid to the
Corporation without prior approval of various regulatory agencies, totaled $46.1
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, 2001.
At December 31, 2001, 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 Company's
category. The Company's actual capital amounts and ratios are also presented in
the table.
PAGE 50
TO BE WELL CAPITALIZED
FOR CAPITAL UNDER PROMPT
ACTUAL ADEQUACY PURPOSES ACTION PROVISIONS
----------------------- ----------------------- -----------------------
(DOLLARS IN THOUSANDS) AMOUNT RATIO AMOUNT RATIO AMOUNT RATIO
- ---------------------------------------------------------------------------------------------------------------
December 31, 2001
Total Capital (to risk weighted
assets) $ 247,727 13.54% $ 146,401 8.00% $ 183,001 10.00%
Tier 1 Capital (to risk weighted
assets) 226,677 12.39 73,200 4.00 109,801 6.00
Tier 1 Capital (to average assets)
December 31, 2000 226,677 9.05 100,161 4.00 125,201 5.00
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
===============================================================================================================
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,
------------------------------------------------------
2001 2000
-------------------------- --------------------------
AMORTIZED ESTIMATED AMORTIZED ESTIMATED
(DOLLARS IN THOUSANDS) COST FAIR VALUE COST FAIR VALUE
- ---------------------------------------------------------------------------------------
U.S. Treasury $ 401 $ 403 $ 400 $ 400
U.S. Government Agency 415,287 419,673 447,524 445,598
Mortgage-Backed 165,484 165,614 120,669 119,878
States and Political
Subdivisions 60,232 59,800 45,919 45,390
Other 9,231 9,231 9,036 9,036
- ---------------------------------------------------------------------------------------
Total $ 650,635 $ 654,721 $ 623,548 $ 620,302
=======================================================================================
The following table presents the carrying value and estimated fair value
of securities classified as held to maturity:
` DECEMBER 31,
------------------------------------------------------
2001 2000
-------------------------- --------------------------
AMORTIZED ESTIMATED AMORTIZED ESTIMATED
(DOLLARS IN THOUSANDS) COST FAIR VALUE COST FAIR VALUE
- ---------------------------------------------------------------------------------------
States and Political
Subdivisions $ 914 $ 950 $ 1,643 $ 1,682
- ---------------------------------------------------------------------------------------
Total $ 914 $ 950 $ 1,643 $ 1,682
=======================================================================================
PAGE 51
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,
---------------------------------------------------------------------------
2001 2000
------------------------------------- -------------------------------------
CARRYING AVERAGE ESTIMATED CARRYING AVERAGE ESTIMATED
(DOLLARS IN THOUSANDS) AMOUNT YIELD FAIR VALUE AMOUNT YIELD FAIR VALUE
- --------------------------------------------------------------------------------------------------------
Commercial and Agricultural
Adjustable $ 367,045 6.46% $ 371,696 $ 348,748 10.40% $ 345,880
Fixed 245,594 9.07 252,676 217,224 10.23 215,070
Real Estate
Adjustable 457,970 7.07 476,459 392,597 10.28 386,282
Fixed 527,965 9.42 566,091 504,867 9.74 495,234
Consumer 111,427 10.86 118,454 124,391 11.56 122,659
- --------------------------------------------------------------------------------------------------------
Total Loans, Net of
Unearned Discount $ 1,710,001 8.20% $ 1,785,376 $ 1,587,827 10.23% $ 1,565,125
========================================================================================================
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,
2001 and December 31, 2000:
DECEMBER 31,
-------------------------------------------------------
2001 2000
--------------------------- ---------------------------
CARRYING ESTIMATED CARRYING ESTIMATED
(DOLLARS IN THOUSANDS) AMOUNT FAIR VALUE AMOUNT FAIR VALUE
- --------------------------------------------------------------------------------------------
Demand $ 330,864 $ 330,864 $ 301,286 $ 301,286
Savings 118,042 118,042 111,312 111,312
Money Market Checking and Savings 561,087 561,087 471,622 471,622
Time Deposits 1,225,884 1,236,027 1,225,528 1,225,934
- --------------------------------------------------------------------------------------------
Total Deposits $ 2,235,877 $ 2,246,020 $ 2,109,748 $ 2,110,154
============================================================================================
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.
OTHER BORROWED MONEY
The fair value is estimated based on the discounted value of contractual
cash flows using currently available to the Company for borrowings with similar
terms and remaining maturities. The following table presents the carrying value
and estimated fair value of other borrowed money at December 31, 2001 and
December 31, 2000:
DECEMBER 31,
-------------------------------------------------------
2001 2000
--------------------------- ---------------------------
CARRYING ESTIMATED CARRYING ESTIMATED
(DOLLARS IN THOUSANDS) AMOUNT FAIR VALUE AMOUNT FAIR VALUE
- --------------------------------------------------------------------------------------------
Federal Funds Purchased and
Securities Sold Under Repurchase
Agreements $ 70,709 $ 71,532 $ 39,229 $ 38,089
Federal Home Loan Bank Advances - - 25,000 24,996
- --------------------------------------------------------------------------------------------
Total Borrowed Money $ 70,709 $ 71,532 $ 64,229 $ 63,085
============================================================================================
PAGE 52
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, 2001 and 2000:
DECEMBER 31,
-----------------------------------------------------------------------------
2001 2000
--------------------------------------- -------------------------------------
CONTRACT CARRYING ESTIMATED CONTRACT CARRYING ESTIMATED
(DOLLARS IN THOUSANDS) AMOUNT AMOUNT FAIR VALUE AMOUNT AMOUNT FAIR VALUE
- ------------------------------------------------------------------------------------------------------------
Commitments to Extend Credit $ 242,919 $ (2,467) $ (2,467) $ 235,866 $ (2,543) $ (2,543)
Standby Letters of Credit 16,346 10 10 10,815 1 1
Financial Guarantees Written 1,532 - - 1,699 - -
============================================================================================================
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 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 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.
NOTE 19: SUBSEQUENT ACQUISITION (UNAUDITED)
On September 17, 2001, the Company and Riverway Holdings, Inc. jointly
executed a definitive agreement for the Company to acquire through merger
Riverway Holdings, Inc. ("Riverway"). Riverway is the privately held bank
holding company for Riverway Bank, located at Five Riverway Drive, Houston,
Texas. As of December 31, 2001, Riverway had total assets of $693.0 million. The
definitive agreement calls for the exchange of 1,276,226 shares of Texas
Regional, subject to adjustment under specified conditions, for all of the
outstanding shares of Riverway. The transaction closed on February 22, 2002.
The following unaudited pro forma combined financial information is
presented to show the impact on the Company's historical financial position and
results of operations pursuant to the merger. The merger is reflected in the pro
forma financial information using the purchase method of accounting. The
Unaudited Pro Forma Combined Balance Sheet reflects the historical financial
position of the Company and Riverway at December 31, 2001 based on the
assumption that the merger was effective
PAGE 53
December 31, 2001. The Unaudited Pro Forma Combined Statement of Income assumes
that the merger was consummated on January 1, 2001. The adjustments are based on
information available and certain assumptions that we believe are reasonable.
TEXAS REGIONAL BANCSHARES, INC. AND SUBSIDIARIES
UNAUDITED PRO FORMA COMBINED BALANCE SHEET DECEMBER 31,
(DOLLARS IN THOUSANDS) 2001
- --------------------------------------------------------------------------------------------
(Unaudited)
Assets
Cash and Cash Equivalents $ 105,381
Investments 846,380
Net Loans 2,134,247
Other Assets 204,181
- --------------------------------------------------------------------------------------------
Total Assets $ 3,290,189
============================================================================================
Liabilities
Deposits $ 2,746,918
Other Liabilities 237,109
- --------------------------------------------------------------------------------------------
Total Liabilities 2,984,027
- --------------------------------------------------------------------------------------------
Shareholders' Equity 306,162
- --------------------------------------------------------------------------------------------
Total Liabilities and Shareholders' Equity $ 3,290,189
============================================================================================
TEXAS REGIONAL BANCSHARES, INC. AND SUBSIDIARIES YEAR ENDED
UNAUDITED PRO FORMA COMBINED STATEMENT OF INCOME DECEMBER 31,
(DOLLARS IN THOUSANDS) 2001
- --------------------------------------------------------------------------------------------
(Unaudited)
Interest Income $ 226,711
Interest Expense 109,763
- --------------------------------------------------------------------------------------------
Net Interest Income Before Provision for Loan Losses 116,948
Provision for Loan Losses 9,777
- --------------------------------------------------------------------------------------------
Net Interest Income After Provision for Loan Losses 107,171
- --------------------------------------------------------------------------------------------
Noninterest Income 31,783
Noninterest Expense 76,653
- --------------------------------------------------------------------------------------------
Income Before Income Tax Expense 62,301
Income Tax Expense 22,101
- --------------------------------------------------------------------------------------------
Net Income $ 40,200
============================================================================================
PAGE 54
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
- --------------------------------------------------------------------------------------------------------------
2001
- --------------------------------------------------------------------------------------------------------------
Interest Income (1) $ 43,073 $ 46,020 $ 47,042 $ 48,926
Interest Expense 17,056 20,386 22,261 24,073
- --------------------------------------------------------------------------------------------------------------
Net Interest Income 26,017 25,634 24,781 24,853
Provision for Loan Losses 2,958 2,783 1,188 1,738
Noninterest Income 8,185 8,003 6,721 6,304
Noninterest Expense 14,843 15,018 15,069 14,414
- --------------------------------------------------------------------------------------------------------------
Income Before Taxable-Equivalent
Adjustment and Income Tax Expense 16,401 15,836 15,245 15,005
Tax-Equivalent Adjustment 462 412 424 461
Applicable Income Tax Expense 5,653 5,328 5,079 5,246
- --------------------------------------------------------------------------------------------------------------
Net Income $ 10,286 $ 10,096 $ 9,742 $ 9,298
==============================================================================================================
Net Income Per Common Share
Basic $ 0.63 $ 0.63 $ 0.61 $ 0.58
Diluted 0.63 0.62 0.60 0.57
==============================================================================================================
2000
- --------------------------------------------------------------------------------------------------------------
Interest Income (1) $ 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
==============================================================================================================
(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).
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 22, 2002. The Proxy Statement
will be filed with the Securities and Exchange Commission within 120 days
following the end of the Company's fiscal year.
ITEM 11. EXECUTIVE COMPENSATION
The information regarding executive compensation called for by Item 11 is
incorporated herein by reference to the section entitled "Executive Officers" in
the Company's Proxy Statement for its Annual Meeting of Shareholders to be held
April 22, 2002. 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 55
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 22, 2002. 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 22,
2002. 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, 2001 and 2000
(iii) Consolidated Statements of Income and Comprehensive Income -
Years Ended December 31, 2001, 2000 and 1999
(iv) Consolidated Statements of Changes in Shareholders' Equity -
Years Ended December 31, 2001, 2000 and 1999
(v) Consolidated Statements of Cash Flows - Years Ended December
31, 2001, 2000 and 1999
(vi) Notes to Consolidated Financial Statements - Years Ended
December 31, 2001, 2000 and 1999
(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 September 17,
2001, by and between Texas Regional Bancshares, Inc., Texas
Regional Delaware, Inc. and Riverway Holdings, Inc., as
amended by the First Amendment to Agreement and Plan of
Reorganization and the Second Amendment to Agreement and Plan
of Reorganization (incorporated by reference from Form S-4,
Commission File No. 333-76484).
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 Form 10-K, Commission File No. 000-14517).
PAGE 56
3.8 Amendment to Articles of Incorporation of Texas Regional
Bancshares, Inc., filed June 3, 1998 (incorporated by
reference from Form 10-K, Commission File No. 000-14517).
3.9 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
Exhibits 3.1 through 3.9).
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 Texas Regional Bancshares, Inc., 1995 Nonstatutory 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. 333-41959).
10.5 Texas Regional Bancshares, Inc., 1997 Nonstatutory Stock
Option Plan (incorporated by reference from Form S-4,
Commission File No. 333-41959).
10.6 Texas Regional Bancshares, Inc. 2000 Incentive Stock Option
Plan (incorporated by reference from Form S-8, Commission File
No. 333-62834).
10.7 Texas Regional Bancshares, Inc., 2002 Incentive Stock Option
Plan (filed herewith).
10.8 Texas Regional Bancshares, Inc., 2002 Nonstatutory Stock
Option Plan (filed herewith).
10.9 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).
10.10 Texas Regional Bancshares, Inc. Amended and Restated Employee
Stock Ownership Plan (with 401(k) Provisions), effective
December 31, 2001 (incorporated by reference from Form S-8,
Commission File No. 333-75680).
10.11 Amendment Number 1 to Texas Regional Bancshares, Inc. Amended
and Restated Employee Stock Ownership Plan (with 401(k)
Provisions) (incorporated by reference from Form S-8,
Commission File No. 333-75680).
10.12 Amendment Number 2 to Texas Regional Bancshares, Inc. Amended
and Restated Employee Stock Ownership Plan (with 401(k)
provisions) (filed herewith).
10.13 Amendment Number 3 to Texas Regional Bancshares, Inc. Amended
and Restated Employee Stock Ownership Plan (with 401(k)
provisions) (filed herewith).
10.14 Amendment Number 4 to Texas Regional Bancshares, Inc. Amended
and Restated Employee Stock Ownership Plan (with 401(k)
provisions) (filed herewith).
21 Subsidiaries of the Registrant (filed herewith)
23 Consent of KPMG LLP (filed herewith)
99 Agreement to Furnish Copies (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, 2001.
PAGE 57
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 18, 2002 /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 18, 2002
- -------------------------------------- -------------------------------------
Glen E. Roney Executive Officer (principal executive officer)
/s/ Morris Atlas Director March 18, 2002
- -------------------------------------- -------------------------------------
Morris Atlas
/s/ Frank N. Boggus Director March 18, 2002
- -------------------------------------- -------------------------------------
Frank N. Boggus
/s/ Robert G. Farris Director March 18, 2002
- -------------------------------------- -------------------------------------
Robert G. Farris
/s/ C. Kenneth Landrum, M.D. Director March 18, 2002
- -------------------------------------- -------------------------------------
C. Kenneth Landrum, M.D.
/s/ Julie G. Uhlhorn Director March 18, 2002
- -------------------------------------- -------------------------------------
Julie G. Uhlhorn
/s/ Jack Whetsel Director March 18, 2002
- -------------------------------------- -------------------------------------
Jack Whetsel
/s/ M. M. Yzaguirre Director March 18, 2002
- -------------------------------------- -------------------------------------
Mario Max Yzaguirre
/s/ Paul S. Moxley Senior Executive Vice President March 18, 2002
- -------------------------------------- -------------------------------------
Paul S. Moxley
/s/ R. T. Pigott, Jr. Executive Vice President and Chief Financial March 18, 2002
- -------------------------------------- Officer (principal financial officer) -------------------------------------
R. T. Pigott, Jr.
/s/ Ann M. Sefcik Controller/Assistant Secretary (principal March 18, 2002
- -------------------------------------- accounting officer) -------------------------------------
Ann M. Sefcik
PAGE 58
INDEX TO EXHIBITS FILED HEREWITH
Exhibit
Number SEQUENTIALLY NUMBERED EXHIBIT
- --------
10.7 Texas Regional Bancshares, Inc., 2002 Incentive Stock Option Plan
10.8 Texas Regional Bancshares, Inc., 2002 Nonstatutory Stock Option Plan
10.12 Amendment Number 2 to Texas Regional Bancshares, Inc. Amended and
Restated Employee Stock Ownership Plan (with 401(k) provisions)
10.13 Amendment Number 3 to Texas Regional Bancshares, Inc. Amended and
Restated Employee Stock Ownership Plan (with 401(k) provisions)
10.14 Amendment Number 4 to Texas Regional Bancshares, Inc. Amended and
Restated Employee Stock Ownership Plan (with 401(k) provisions)
21 Subsidiaries of the Registrant
23 Consent of KPMG LLP
99 Agreement to Furnish Copies
PAGE 59