<PAGE>
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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------
FORM 10-Q
<TABLE>
<S> <C>
/X/ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED JUNE 30, 1996
/ / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF
THE SECURITIES EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM TO
</TABLE>
COMMISSION FILE NO. 0-14517
------------------------
TEXAS REGIONAL BANCSHARES, INC.
(Exact name of Registrant as specified in its charter)
<TABLE>
<S> <C>
TEXAS 74-2294235
(State or other jurisdiction (I.R.S. Employer
of Identification No.)
incorporation or
organization)
</TABLE>
P.O. BOX 5910
3700 N. TENTH, SUITE 301
MCALLEN, TEXAS 78502
(Address of principal executive offices)
210/631-5400
(Registrant's telephone number, including area code)
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes _X_ No ____
INDICATE THE NUMBER OF SHARES OUTSTANDING OF EACH OF
THE ISSUER'S CLASSES OF COMMON STOCK, AS OF THE LATEST
PRACTICABLE DATE.
Class A Voting Common Stock 8,706,791 shares $1 par
value, outstanding as of July 11, 1996.
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<PAGE>
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
The information called for by Item 1. are included herein.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.
The information called for by Item 2. are included herein.
PART II. OTHER INFORMATION
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
During the annual meeting of shareholders held May 20, 1996 the following
persons were elected directors: Morris Atlas, Frank N. Boggus, Robert G. Farris,
Joe M. Kilgore, C. Kenneth Landrum, MD, G. E. Roney, Julie G. Uhlhorn, Paul G.
Veale Sr. and Jack Whetsel.
The 1995 Nonstatutory Stock Option Plan was also approved during the annual
shareholders meeting held May 20, 1996.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
(a) Exhibits.
27. Financial Data Schedule
(b) Reports on Form 8-K.
None
<PAGE>
Texas Regional Bancshares, Inc. and Subsidiary
CONSOLIDATED BALANCE SHEETS (UNAUDITED)
<TABLE>
<CAPTION>
June 30, December 31,
--------------------- -------------
(Dollars in Thousands) 1996 1995 1995
<S> <C> <C> <C>
- --------------------------------------------------------------------------------------------------
Assets
Cash and Due From Banks $ 48,452 $ 26,964 $ 30,933
Federal Funds Sold 55,265 21,100 3,600
- --------------------------------------------------------------------------------------------------
Total Cash and Cash Equivalents 103,717 48,064 34,533
Securities Available for Sale 214,212 48,384 63,150
Securities Held to Maturity (Estimated Market Value of
$133,291 and $74,018 at June 30, 1996 and 1995,
respectively, and $68,962 at December 31, 1995) 133,449 73,957 68,491
Loans, Net of Unearned Discount of $1,652 and $796 at June
30, 1996 and 1995, respectively and $1,272 at December
31, 1995 698,434 350,463 450,854
Less Allowance for Loan Losses (9,947) (3,980) (4,542)
- --------------------------------------------------------------------------------------------------
Net Loans 688,487 346,483 446,312
Premises and Equipment, Net 36,161 15,554 18,374
Accrued Interest Receivable 16,718 5,373 6,319
Other Real Estate 1,873 1,737 1,273
Intangibles 25,287 1,870 5,711
Other Assets 4,800 3,053 2,606
- --------------------------------------------------------------------------------------------------
Total Assets $1,224,704 $ 544,475 $ 646,769
- --------------------------------------------------------------------------------------------------
Liabilities
Deposits
Demand $ 175,830 $ 101,988 $ 120,414
Savings 99,531 27,346 36,133
Money Market Checking and Savings 249,361 114,636 127,687
Time Deposits 563,880 236,562 295,497
- --------------------------------------------------------------------------------------------------
Total Deposits 1,088,602 480,532 579,731
Federal Funds Purchased and Securities Sold Under
Repurchase Agreements (Note 3) -- 1,029 757
Short-Term Borrowings -- 429 --
Accounts Payable and Accrued Liabilities 16,578 3,525 3,561
- --------------------------------------------------------------------------------------------------
Total Liabilities 1,105,180 485,515 584,049
- --------------------------------------------------------------------------------------------------
Commitment and Contingencies (Note 6)
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, 20,000,000
Shares Authorized; Issued and Outstanding, 8,706,791
shares at June 30, 1996, 6,193,629 shares at June 30,
1995 and 6,196,791 shares at December 31, 1995 (Notes 2
and 5) 8,706 6,193 6,196
Paid-In Capital 78,582 29,204 29,239
Retained Earnings 31,909 23,710 27,168
Unrealized Gain (Loss) on Securities Available for Sale 327 (147) 117
- --------------------------------------------------------------------------------------------------
Total Shareholders' Equity 119,524 58,960 62,720
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Total Liabilities and Shareholders' Equity $1,224,704 $ 544,475 $ 646,769
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The accompanying notes are an integral part of the consolidated financial statements.
</TABLE>
-4-
<PAGE>
Texas Regional Bancshares, Inc. and Subsidiary
CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)
<TABLE>
<CAPTION>
Quarter Ended June Six Months Ended
30, June 30,
-------------------- --------------------
(Dollars in Thousands, Except Per Share Data) 1996 1995 1996 1995
<S> <C> <C> <C> <C>
- --------------------------------------------------------------------------------------------------------
Interest Income
Loans, Including Fees $ 14,499 $ 8,911 $ 25,510 $ 17,355
Investment Securities
Taxable 2,480 1,591 4,198 3,108
Tax-Exempt 706 71 777 145
Federal Funds Sold 534 272 704 416
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Total Interest Income 18,219 10,845 31,189 21,024
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Interest Expense
Deposits 7,634 4,273 12,909 7,980
Federal Funds Purchased and Securities Sold Under
Repurchase Agreements 6 14 12 28
Short-Term Borrowing -- 8 -- 16
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Total Interest Expense 7,640 4,295 12,921 8,024
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Net Interest Income 10,579 6,550 18,268 13,000
Provision for Loan Losses 316 322 777 688
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Net Interest Income After Provision for Loan Losses 10,263 6,228 17,491 12,312
- --------------------------------------------------------------------------------------------------------
Noninterest Income
Service Charges on Deposit Accounts 1,167 837 2,106 1,618
Other Service Charges 236 223 472 496
Trust Service Fees 385 316 751 603
Investment Securities Gains (Losses) -- -- 1 (13)
Data Processing Service Fees 226 85 446 158
Other Operating Income 131 115 315 304
- --------------------------------------------------------------------------------------------------------
Total Noninterest Income 2,145 1,576 4,091 3,166
- --------------------------------------------------------------------------------------------------------
Noninterest Expense
Salaries and Employee Benefits 3,323 2,292 6,060 4,550
Net Occupancy Expense 505 260 822 513
Equipment Expense 757 498 1,400 929
Other Real Estate Expense, Net (30) 60 (40) 92
Other Noninterest Expense 2,152 1,544 3,779 3,164
- --------------------------------------------------------------------------------------------------------
Total Noninterest Expense 6,707 4,654 12,021 9,248
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Income Before Income Tax Expense 5,701 3,150 9,561 6,230
Income Tax Expense 2,024 1,109 3,330 2,202
- --------------------------------------------------------------------------------------------------------
Net Income $ 3,677 $ 2,041 $ 6,231 $ 4,028
- --------------------------------------------------------------------------------------------------------
Primary Earnings Per Common Share (Note 2)
Net Income $ 0.49 $ 0.33 $ 0.90 $ 0.65
Weighted Average Number of Common Shares Outstanding (In
Thousands) 7,562 6,210 6,926 6,202
- --------------------------------------------------------------------------------------------------------
Fully Diluted Earnings Per Common Share (Note 2)
Net Income $ 0.49 $ 0.33 $ 0.90 $ 0.65
Weighted Average Number of Common Shares Outstanding (In
Thousands) 7,570 6,219 6,932 6,210
- --------------------------------------------------------------------------------------------------------
The accompanying notes are an integral part of the consolidated financial statements.
</TABLE>
-5-
<PAGE>
Texas Regional Bancshares, Inc. and Subsidiary
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY (UNAUDITED)
For the Year Ended December 31, 1995
And the Six Months Ended June 30, 1996
<TABLE>
<CAPTION>
Unrealized
Class A Gain (Loss)
Voting on Securities Total
Common Paid-in Retained Available Shareholders'
(Dollars in Thousands) Stock Capital Earnings for Sale Equity
<S> <C> <C> <C> <C> <C>
- ---------------------------------------------------------------------------------------------------------
Balance, December 31, 1994 $ 6,193 $ 29,204 $ 20,921 $ (587) $ 55,731
Exercise of stock options, 3,162 shares
of Class A Voting Common Stock 3 35 -- -- 38
Change in Unrealized Gain (Loss) on
Securities Available for Sale -- -- -- 704 704
Class A Voting Common Stock Cash
Dividends -- -- (2,478) -- (2,478)
Net Income for the Year Ended December
31, 1995 -- -- 8,725 -- 8,725
- ---------------------------------------------------------------------------------------------------------
Balance, December 31, 1995 6,196 29,239 27,168 117 62,720
Change in Unrealized Gain (Loss) on
Securities Available for Sale -- -- -- 210 210
Class A Voting Common Stock Cash
Dividends -- -- (1,490) -- (1,490)
Sale of 2,510,000 shares of Class A
Voting Common Stock 2,510 49,343 -- -- 51,853
Net Income for the Six Months Ended
June 30, 1996 -- -- 6,231 -- 6,231
- ---------------------------------------------------------------------------------------------------------
Balance, June 30, 1996 $ 8,706 $ 78,582 $ 31,909 $ 327 $ 119,524
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The accompanying notes are an integral part of the consolidated financial statements.
</TABLE>
-6-
<PAGE>
Texas Regional Bancshares, Inc. and Subsidiary
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
Six Months Ended June 30, 1996 and 1995
<TABLE>
<S> <C> <C>
(Dollars in Thousands) 1996 1995
- -------------------------------------------------------------------------------------------------------------
Cash Flows from Operating Activities
Net Income $ 6,231 $ 4,028
Adjustments to Reconcile Net Income to Net Cash Provided by Operating Activities
Depreciation, Amortization and Accretion, Net 1,225 956
Provision for Loan Losses 777 688
Provision for Estimated Losses on Other Real Estate and Other Assets -- 60
Net (Gain) Loss on Sale of Other Real Estate (48) 80
Net (Gain) Loss on Sale of Securities (1) 13
Gain of Sale of Fixed Assets (1) (1)
Net (Gain) Loss on Sale of Other Assets 10 (2)
Increase in Accrued Interest Receivable and Other Assets (1,784) (995)
Increase in Accounts Payable and Accrued Liabilities 4,316 758
- -------------------------------------------------------------------------------------------------------------
Net Cash Provided by Operating Activities 10,725 5,585
- -------------------------------------------------------------------------------------------------------------
Cash Flows from Investing Activities
Proceeds from Sales of Securities Available for Sale 59,330 8,957
Proceeds from Maturing Securities Available for Sale 16,464 16,000
Purchases of Securities Available for Sale (49,365) (17,828)
Proceeds from Maturing Securities Held to Maturity 28,200 260
Purchases of Securities Held to Maturity (79,905) (2,464)
Proceeds from Sale of Loans 4,424 --
Purchases of Loans (1,608) (685)
Loan Origination and Advances (10,051) (10,681)
Recoveries of Charged-Off Loans 250 433
Proceeds from Sale of Other Assets 105 8
Proceeds from Sale of Other Real Estate 846 644
Proceeds from Sale of Fixed Assets 44 1
Purchases of Premises and Equipment (3,206) (1,132)
Net Cash Used in Acquisitions (15,404) --
- -------------------------------------------------------------------------------------------------------------
Net Cash Used In Investing Activities (49,876) (6,487)
- -------------------------------------------------------------------------------------------------------------
Cash Flows from Financing Activities
Net (Increase) Decrease in Demand Deposits, Money Market Checking and Savings
Accounts 19,778 (25,112)
Net Increase in Time Deposits 38,700 33,536
Proceeds from Sale of Common Stock 51,853 --
Net Decrease in Securities Sold Under Repurchase Agreements (757) (120)
Cash Dividends Paid on Class A Voting Common Stock (Note 5) (1,239) (1,115)
- -------------------------------------------------------------------------------------------------------------
Net Cash Provided by Financing Activities 108,335 7,189
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Increase in Cash and Cash Equivalents 69,184 6,287
Cash and Cash Equivalents at Beginning of Year 34,533 41,777
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Cash and Cash Equivalents at End of Quarter $ 103,717 $ 48,064
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Supplemental Disclosures of Cash Flow Information
Interest Paid $ 11,899 $ 7,764
Income Taxes Paid 4,344 1,837
Supplemental Schedule of Noncash Investing and Financing Activities
Foreclosure and Repossession in Partial Satisfaction of Loans Receivable 1,165 190
Loan Origination to Facilitate Sale of Other Real Estate N/A N/A
The Company acquired First State Bank & Trust Co., Mission, Texas and The Border Bank,
Hidalgo, Texas on May 14, 1996. Assets Acquired After Purchase Accounting Adjustments
are as Follows:
Fair Value of Assets Acquired $ 554,240 N/A
Cash paid for the capital stock (95,500) N/A
Liabilities Assumed 458,740 N/A
- -------------------------------------------------------------------------------------------------------------
The accompanying notes are an integral part of the consolidated financial statements.
</TABLE>
-7-
<PAGE>
Texas Regional Bancshares, Inc. and Subsidiary
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 -- BASIS OF PRESENTATION
The accompanying unaudited consolidated financial statements have been prepared
in accordance with the instructions to Form 10-Q and therefore do not include
all information and footnotes necessary for a fair presentation of financial
position, results of operations and cash flows in conformity with generally
accepted accounting principles. However, the unaudited consolidated financial
statements furnished reflect all adjustments which are, in the opinion of
management, necessary for a fair presentation of the results for the interim
periods. All such adjustments were of a normal and recurring nature. The
unaudited consolidated financial statements includes Texas Regional Bancshares,
Inc. and its subsidiary (the "Company"). Intercompany balances and transactions
have been eliminated.
NOTE 2 -- EARNINGS PER SHARE COMPUTATIONS
Earnings per share computations include the effects of common stock equivalents
applicable to the stock option contracts.
NOTE 3 -- SECURITIES SOLD UNDER REPURCHASE AGREEMENTS
Securities sold under repurchase agreements 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 investment securities. These pledged securities are
segregated and maintained by a third party bank.
NOTE 4 -- INCOME TAXES
Deferred income tax assets and liabilities are computed for differences between
the financial statements and the tax basis of assets and liabilities that have
future tax consequences using the currently enacted tax laws and rates that
apply to the periods in which they are expected to effect taxable income.
Valuation allowances are established, if necessary, to reduce the deferred tax
assets to the amount that will more likely than not be realized. Income tax
expense is the current tax payable or refundable for the period plus or minus
the net change in the deferred tax assets and liabilities.
NOTE 5 -- COMMON STOCK
On May 14, 1996, Texas Regional Bancshares, Inc. completed its public offering
of 2.5 million shares of the Company's Class A Voting Common Stock (priced at
$22.25 per share). On May 14, 1996, Texas Regional Bancshares, Inc. also
completed the acquisition of First State Bank & Trust Co., Mission, Texas and
The Border Bank, Hidalgo, Texas, (the "Mergers"), through merger with Texas
State Bank, the principal operating subsidiary of Texas Regional Bancshares,
Inc. The purchase price of the Mergers was financed with a combination of
proceeds from the 2.5 million share common equity offering and cash on the
balance sheet of the Company.
On June 11, 1996, the Board of Directors approved a $0.10 per share cash
dividend for shareholders of record on July 8, 1996 and payable on July 15,
1996.
NOTE 6 -- EMPLOYEE BENEFITS
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.
-8-
<PAGE>
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 Bank owns and is the beneficiary of four life insurance policies on the
employees or former employees covered by the deferred compensation plans. The
life insurance policies face values are amounts approximately equal to the total
benefits paid under the plans.
NOTE 7 -- ACQUISITION ACTIVITY
On May 14, 1996, Texas Regional Bancshares, Inc. completed its public offering
of 2.5 million shares of the Company's Class A Voting Common Stock (priced at
$22.25 per share). On May 14, 1996, Texas Regional Bancshares, Inc. completed
the Mergers. The purchase price of the Mergers was financed with a combination
of proceeds from the 2.5 million share common equity offering and cash on the
balance sheet of the Company. The Mergers were accounted for as a purchase.
During August 1995, Texas State Bank acquired two branch bank locations, one in
Rio Grande City, Texas, and the other in Roma, Texas (the "RGC/Roma Branch
Acquisitions"). The transaction included the purchase of $43.7 million in loans
and the assumption of approximately $79.7 million in deposit liabilities of
these branches. Investment securities were not acquired. Purchase accounting
adjustments for the purchase of loans and the assumption of deposit liabilities
of the RGC/Roma Branch Acquisitions were immaterial. This transaction was
accounted for as a purchase.
The Company's Consolidated Balance Sheet at June 30, 1996 reflects the assets
and liabilities of the Mergers and the RGC/Roma Branch Acquisitions. The results
of operations of the Mergers and the RGC/Roma Branch Acquisitions were included
in the Company's Consolidated Statements of Income from each respective date of
acquisition.
The following Unaudited Pro Forma Combined Condensed Statements of Income for
the six months ended June 30, 1996 and 1995, assumes the Mergers and the
RGC/Roma Branch Acquisitions occurred January 1, 1995. Intangibles arising from
the Mergers and RGC/Roma Branch Acquisitions are approximately $20.0 million and
$4.1 million, respectively. The pro forma adjustments reflect the amortization
of the Core Deposit premium over a 10-year period and the Goodwill intangible
over a 15-year period, the reduced interest income on the $47.6 million net
purchase price ($99.5 million less $51.9 million) of the Acquisition and $4.25
million purchase price of the RGC/Roma Branch Acquisitions at the Company's
average federal funds sold rate of 5.43% and 6.07% for the six months ended June
30, 1996 and 1995, respectively and the tax effect of the prior two transactions
using an effective tax rate of 35% for 1996 and an effective tax rate of 34% for
1995. The pro forma results do not necessarily represent the actual results that
would have occurred and should not be considered indicative of future results of
operations.
-9-
<PAGE>
<TABLE>
<CAPTION>
Pro Forma Combined Condensed
Statement of Income
For the Six Months Ended
June 30, 1996 (Unaudited) First
(Dollars in Thousands, Texas State Border Pro Forma Pro Forma
Except Per Share Data) Regional Bank Bank Adjustments Balance
<S> <C> <C> <C> <C> <C>
- ------------------------------------------------------------------------------------------------------------
Interest Income $ 25,760 $ 16,347 $ 4,544 $ (1,287) A $ 45,364
Interest Expense 10,605 6,615 2,288 -- 19,508
- ------------------------------------------------------------------------------------------------------------
Net Interest Income 15,155 9,732 2,256 (1,287) 25,856
Provision for Loan Losses 777 968 397 -- 2,142
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Net Interest Income After Provision for
Loan Losses 14,378 8,764 1,859 (1,287) 23,714
- ------------------------------------------------------------------------------------------------------------
Noninterest Income
Service Charges on Deposit Accounts 1,903 511 145 -- 2,559
Other Service Charges 469 63 21 -- 553
Trust Service Fees 741 35 -- -- 776
Other Operating Income 734 44 29 -- 807
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Total Noninterest Income 3,847 653 195 -- 4,695
- ------------------------------------------------------------------------------------------------------------
Noninterest Expense
Salaries and Employee Benefits 5,529 1,426 528 -- 7,483
Net Occupancy Expense 679 423 142 79B 1,323
Equipment Expense 1,315 211 59 -- 1,585
Other Noninterest Expense 3,225 1,885 734 605C 6,449
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Total Noninterest Expense 10,748 3,945 1,463 684 16,840
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Income Before Income Tax Expense 7,477 5,472 591 (1,971) 11,569
Income Tax Expense 2,595 1,646 122 (588)D 3,775
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Net Income $ 4,882 $ 3,826 $ 469 $ (1,383) $ 7,794
- ------------------------------------------------------------------------------------------------------------
Primary Earnings Per Common Share
Net Income $ 0.70 $ 0.88
Weighted Average Number of Common Shares
Outstanding (In Thousands) 6,926 8,809
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Fully Diluted Earnings Per Common Share
Net Income $ 0.70 $ 0.88
Weighted Average Number of Common Shares
Outstanding (In Thousands) 6,932 8,815
- ------------------------------------------------------------------------------------------------------------
</TABLE>
-10-
<PAGE>
<TABLE>
<CAPTION>
Pro Forma Combined Condensed
Statements of Income
For the Six Months Ended
June 30, 1995 (Unaudited) First
(Dollars in Thousands, Texas RGC/Roma State Border Pro Forma Pro Forma
Except Per Share Data) Regional Branches Bank Bank Adjustments Balance
<S> <C> <C> <C> <C> <C> <C>
- ------------------------------------------------------------------------------------------------------------
Interest Income $ 21,024 $ 3,209 $ 16,630 $ 4,557 $ (1,562)A $ 43,858
Interest Expense 8,024 1,484 6,520 2,161 -- 18,189
- ------------------------------------------------------------------------------------------------------------
Net Interest Income 13,000 1,725 10,110 2,396 (1,562) 25,669
Provision for Loan Losses 688 -- 217 72 -- 977
- ------------------------------------------------------------------------------------------------------------
Net Interest Income After
Provision for Loan Losses 12,312 1,725 9,893 2,324 (1,562) 24,692
- ------------------------------------------------------------------------------------------------------------
Noninterest Income
Service Charges on Deposit
Accounts 1,618 253 572 113 -- 2,556
Other Service Charges 496 52 101 30 -- 679
Trust Service Fees 603 -- 2 -- -- 605
Other Operating Income 449 31 98 -- -- 578
- ------------------------------------------------------------------------------------------------------------
Total Noninterest Income 3,166 336 773 143 -- 4,418
- ------------------------------------------------------------------------------------------------------------
Noninterest Expense
Salaries and Employee Benefits 4,550 858 1,391 560 -- 7,359
Net Occupancy Expense 513 94 288 136 106B 1,137
Equipment Expense 929 112 171 45 -- 1,257
Other Noninterest Expense 3,256 676 1,252 346 942C 6,472
- ------------------------------------------------------------------------------------------------------------
Total Noninterest Expense 9,248 1,740 3,102 1,087 1,048 16,225
- ------------------------------------------------------------------------------------------------------------
Income Before Income Tax Expense 6,230 321 7,564 1,380 (2,610) 12,885
Income Tax Expense 2,202 109 2,154 269 (755)D 3,979
- ------------------------------------------------------------------------------------------------------------
Net Income $ 4,028 $ 212 $ 5,410 $ 1,111 $ (1,855) $ 8,906
- ------------------------------------------------------------------------------------------------------------
Primary Earnings Per Common Share
Net Income $ 0.65 $ 1.02
Weighted Average Number of
Common Shares Outstanding (In
Thousands) 6,202 8,712
- ------------------------------------------------------------------------------------------------------------
Fully Diluted Earnings Per Common Share
Net Income $ 0.65 $ 1.02
Weighted Average Number of
Common Shares Outstanding (In
Thousands) 6,212 8,722
- ------------------------------------------------------------------------------------------------------------
</TABLE>
The Unaudited Pro Forma Condensed Statements of Income for the six months ended
June 30, 1996 and 1995 assumes the Mergers and the RGC/Roma Acquisition occurred
January 1, 1995. In preparing the Unaudited Pro Forma Condensed Statements of
Income, the following adjustments were made:
(A) To record a reduction in interest income on the $47.6 million net purchase
price ($99.5 million less $51.9 million) of the Mergers at the Company's
average federal funds sold rate of 5.43% for the six months ended June 30,
1996.
To record a reduction in interest income on the $51.9 million net purchase
price ($99.5 million less $51.9 million) of the Mergers and $4.25 million
purchase price of the RGC/Roma Branch Acquisitions at the Company's average
federal funds sold rate of 6.07%.
(B) To record depreciation on fair market value increases of depreciable fixed
assets acquired in the Mergers.
(C) To record amortization of the goodwill and core deposit premium recorded in
connection with the Mergers and the RGC/Roma Branch Acquisitions.
(D) To record the effect of the pro forma adjustments using an effective tax
rate of 35% and 34% for the six months ended June 30, 1996 and 1995,
respectively.
-11-
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
Net income for the three months ended June 30, 1996 was $3.7 million or $0.49
per share, reflecting a net increase of $1.6 million or $0.16 per share compared
to net income of $2.0 million or $0.33 per share for the three months ended June
30, 1995. Net income for the six months ended June 30, 1996 was $6.2 million or
$0.90 per share, reflecting a net increase of $2.2 million or $0.25 per share
compared to net income of $4.0 million or $0.65 per share for the six months
ended June 30, 1995. Earnings increased for the three months ended June 30, 1996
compared to the three months ended June 30, 1995 which reflected an improvement
in net interest income, noninterest income and a reduction in the provision for
loan losses, partially offset by an increase in noninterest expense. Earnings
increased for the six months ended June 30, 1996 compared to the six months
ended June 30, 1995 which reflected an increase in net interest income and
noninterest income reduced by an increase in noninterest expense and the
provision for loan losses. A more detailed description of the results of
operations is included in the presentation that follows.
On May 14, 1996, Texas Regional Bancshares, Inc. completed its public offering
of 2.5 million shares of the Company's Class A Voting Common Stock (priced at
$22.25 per share). On May 14, 1996, Texas Regional Bancshares, Inc. also
completed the acquisition of First State Bank & Trust Co., Mission, Texas and
The Border Bank, Hidalgo, Texas, (the "Mergers"), through merger with Texas
State Bank, (the "Bank") the principal operating subsidiary of Texas Regional
Bancshares, Inc. The purchase price of the Mergers was financed with a
combination of proceeds from the 2.5 million share common equity offering and
cash on the balance sheet of the Company. The Mergers included the assumption of
$241.8 million in loans and the assumption of $450.4 million in deposit
liabilities.
During August 1995, the Bank acquired two branch bank locations, one in Rio
Grande City, Texas, and the other in Roma, Texas (the "RGC/Roma Branch
Acquisitions"). The RGC/Roma Branch Acquisitions included the purchase of $43.7
million in loans and the assumption of approximately $79.7 million in deposit
liabilities of these branches.
The Mergers and the RGC/Roma Branch Acquisitions were accounted for as a
purchase; therefore, the results of operations of the two acquired banks and the
two branches are included in the consolidated financial statements from the date
of each respective acquisition. Accordingly, certain income statement and
balance sheet comparisons may not be appropriate.
The following table presents selected financial data regarding results of
operations:
<TABLE>
<CAPTION>
Condensed Quarterly Income
Statements Taxable Equivalent 1996 1995 Six Months Ended
Basis ---------------------- ------------------------------- June 30,
(Dollars in Thousands, SECOND First Fourth Third Second --------------------
Except Per Share Data) QUARTER Quarter Quarter Quarter Quarter 1996 1995
<S> <C> <C> <C> <C> <C> <C> <C>
- ---------------------------------------------------------------------------------------------------------------
Interest Income $ 18,621 $ 13,176 $ 12,804 $ 11,904 $ 10,880 $ 31,797 $ 21,098
Interest Expense 7,640 5,281 5,171 4,857 4,295 12,921 8,024
- ---------------------------------------------------------------------------------------------------------------
Net Interest Income 10,981 7,895 7,633 7,047 6,585 18,876 13,074
Provision for Loan Losses 316 461 625 372 322 777 688
Noninterest Income 2,145 1,946 1,729 1,623 1,576 4,091 3,166
Noninterest Expense 6,707 5,314 5,035 4,694 4,654 12,021 9,248
- ---------------------------------------------------------------------------------------------------------------
Income Before Taxable-Equivalent
Adjustment and Income Tax
Expense 6,103 4,066 3,702 3,604 3,185 10,169 6,304
Taxable-Equivalent Adjustment 402 206 105 35 35 608 74
Income Tax Expense 2,024 1,306 1,177 1,292 1,109 3,330 2,202
- ---------------------------------------------------------------------------------------------------------------
Net Income $ 3,677 $ 2,554 $ 2,420 $ 2,277 $ 2,041 $ 6,231 $ 4,028
- ---------------------------------------------------------------------------------------------------------------
Net Income Per Common Share
Primary $ 0.49 $ 0.41 $ 0.39 $ 0.37 $ 0.33 $ 0.90 $ 0.65
Fully Diluted 0.49 0.41 0.39 0.36 0.33 0.90 0.65
- ---------------------------------------------------------------------------------------------------------------
</TABLE>
-12-
<PAGE>
NET INTEREST INCOME
Taxable-equivalent net interest income was $11.0 million for the three months
ended June 30, 1996, an increase of $4.4 million or 66.8% compared to the three
months ended June 30, 1995 of $6.6 million. The Net Yield on Total
Interest-Earning Assets of 5.21% for the three months ended June 30, 1996
reflects a decrease of 15 basis points compared to 5.36% for the three months
ended June 30, 1995. The decline in the Net Yield on Total Interest-Earning
Assets for the three months ended June 30, 1996 compared to the three months
ended June 30, 1995 is primarily attributable to a change in the earnings mix of
interest earning assets as a result of the Mergers. The increase in net interest
income for the three months ended June 30, 1996 compared to the three months
ended June 30, 1995 was primarily attributable to the increase in the volume of
interest-earning assets exceeding the increase in volume of interest-bearing
liabilities. The Total Interest-Earning Assets average balance for the six
months ended June 30, 1996 of $718.8 million increased $235.1 million or 48.6%
compared to the Total Interest Earning Assets average balance of $483.7 million
for the six months ended June 30, 1995. Total Interest-Bearing Liabilities
average balance of $581.4 million for the six months ended June 30, 1995
increased $201.6 million or 53.1% compared to the Total Interest-Bearing
Liabilities average balance of $378.1 million for the six months ended June 30,
1995. The net increase in Total Interest-Earning Assets average balance compared
to the net increase in Total Interest-Bearing Liabilities average balance for
the six months ended June 30, 1996 compared to the six months ended June 30,
1995 is the primary reason for the improved earnings and is a result of the
Mergers, the RGC/Roma Branch Acquisitions and an increased volume of business
conducted by the Company.
The following tables present for the three months ended and the six months ended
June 30, 1996, and June 30, 1995, the total dollar amount of interest income
from average interest-earning assets and the resultant yields, reported on a
tax-equivalent basis, as well as the 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 income tax rate for 1996 and
a 34% effective income tax rate for 1995.
-13-
<PAGE>
<TABLE>
<CAPTION>
Three Months Ended
Summary of Interest-Earning ------------------------------------------------------------------------
Assets and Interest-Bearing JUNE 30, 1996 June 30, 1995
Liabilities ----------------------------------- -----------------------------------
Taxable-Equivalent Basis AVERAGE YIELD/ Average Yield/
(Dollars in Thousands) BALANCE INTEREST RATE* Balance Interest Rate*
<S> <C> <C> <C> <C> <C> <C>
- ---------------------------------------------------------------------------------------------------------------------------
Interest-Earning Assets
Loans
Commercial $ 219,886 $ 5,353 9.79% $ 122,127 $ 3,070 10.08%
Real Estate 316,383 7,968 10.13 196,642 5,047 10.29
Consumer 54,633 1,348 9.92 32,696 794 9.74
- ---------------------------------------------------------------------------------------------------------------------------
Total Loans 590,902 14,669 9.98 351,465 8,911 10.17
- ---------------------------------------------------------------------------------------------------------------------------
Investment Securities
Taxable 188,087 2,750 5.88 118,675 1,591 5.38
Tax-Exempt 28,688 669 9.38 4,919 106 8.64
- ---------------------------------------------------------------------------------------------------------------------------
Total Investment Securities 216,775 3,419 6.34 123,594 1,697 5.51
- ---------------------------------------------------------------------------------------------------------------------------
Federal Funds Sold 39,492 534 5.44 17,821 272 6.12
- ---------------------------------------------------------------------------------------------------------------------------
Total Interest-Earning Assets $ 847,169 18,622 8.84 $ 492,880 10,880 8.85
- ---------------------------------------------------------------------------------------------------------------------------
Interest-Bearing Liabilities
Savings $ 71,487 557 3.13 $ 27,364 181 2.65
Money Market Checking and Savings 190,602 1,328 2.80 120,895 812 2.69
Time Deposits 429,714 5,749 5.38 235,609 3,280 5.58
- ---------------------------------------------------------------------------------------------------------------------------
Total Savings and Time Deposits 691,803 7,634 4.44 383,868 4,273 4.46
- ---------------------------------------------------------------------------------------------------------------------------
Federal Funds Purchased and Securities Sold
Under Repurchase Agreements 495 6 4.88 1,228 14 4.57
Short-Term Borrowings -- -- -- 429 8 7.48
- ---------------------------------------------------------------------------------------------------------------------------
Total Interest-Bearing Liabilities $ 692,298 7,640 4.44 $ 385,525 4,295 4.47
- ---------------------------------------------------------------------------------------------------------------------------
Net Interest Income $ 10,982 $ 6,585
- ---------------------------------------------------------------------------------------------------------------------------
Net Yield on Total Interest-Earning Assets 5.21% 5.36%
- ---------------------------------------------------------------------------------------------------------------------------
* Annualized
</TABLE>
-14-
<PAGE>
<TABLE>
<CAPTION>
Six Months Ended
Summary of Interest-Earning ----------------------------------------------------------------------
Assets and Interest-Bearing JUNE 30, 1996 June 30, 1995
Liabilities ----------------------------------- ---------------------------------
Taxable-Equivalent Basis AVERAGE YIELD/ Average Yield/
(Dollars in Thousands) BALANCE INTEREST RATE* Balance Interest Rate*
<S> <C> <C> <C> <C> <C> <C>
- ------------------------------------------------------------------------------------------------------------------------
Interest-Earning Assets
Loans
Commercial $ 197,088 $ 9,529 9.72% $ 121,719 $ 5,969 9.89%
Real Estate 278,005 13,897 10.05 193,965 9,845 10.24
Consumer 49,055 2,422 9.93 32,188 1,541 9.65
- ------------------------------------------------------------------------------------------------------------------------
Total Loans 524,148 25,848 9.92 347,872 17,355 10.06
- ------------------------------------------------------------------------------------------------------------------------
Investment Securities
Taxable 151,806 4,468 5.92 117,076 3,108 5.35
Tax-Exempt 16,804 777 9.30 4,971 219 8.88
- ------------------------------------------------------------------------------------------------------------------------
Total Investment Securities 168,610 5,245 6.26 122,047 3,327 5.50
- ------------------------------------------------------------------------------------------------------------------------
Federal Funds Sold 26,060 704 5.43 13,821 416 6.07
- ------------------------------------------------------------------------------------------------------------------------
Total Interest-Earning Assets $ 718,818 31,797 8.90 $ 483,740 21,098 8.80
- ------------------------------------------------------------------------------------------------------------------------
Interest-Bearing Liabilities
Savings $ 54,420 810 2.99 $ 27,691 364 2.65
Money Market Checking and Savings 163,186 2,257 2.78 126,141 1,686 2.70
Time Deposits 363,224 9,842 5.45 224,236 5,930 5.33
- ------------------------------------------------------------------------------------------------------------------------
Total Savings and Time Deposits 580,830 12,909 4.47 378,068 7,980 4.26
- ------------------------------------------------------------------------------------------------------------------------
Federal Funds Purchased and Securities Sold
Under Repurchase Agreements 590 12 4.09 1,288 28 4.38
Short-Term Borrowings -- -- -- 429 16 7.52
- ------------------------------------------------------------------------------------------------------------------------
Total Interest-Bearing Liabilities $ 581,420 12,921 4.47 $ 379,785 8,024 4.26
- ------------------------------------------------------------------------------------------------------------------------
Net Interest Income $ 18,876 $ 13,074
- ------------------------------------------------------------------------------------------------------------------------
Net Yield on Total
Interest-Earning Assets 5.28% 5.45%
- ------------------------------------------------------------------------------------------------------------------------
* Annualized
</TABLE>
-15-
<PAGE>
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 for the six month
period ended June 30, 1996 as compared to the six month period ended June 30,
1995. 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.
<TABLE>
<CAPTION>
Analysis of Changes in Net Interest Income
Taxable-Equivalent Basis
Six months ended June 30, Due to Change in
1996 Compared to 1995 ---------------------------------------
(Dollars in Thousands) Net Change Volume Rate Rate/Volume
<S> <C> <C> <C> <C>
- ---------------------------------------------------------------------------------------------------------------
Interest Income
Loans, Including Fees $ 8,493 $ 8,794 $ (194) $ (107)
Investment Securities
Taxable 1,360 921 340 99
Tax-Exempt 558 521 11 26
Federal Funds Sold 288 368 (43) (37)
- ---------------------------------------------------------------------------------------------------------------
Total Interest Income 10,699 10,604 114 (19)
- ---------------------------------------------------------------------------------------------------------------
Interest Expense
Deposits 4,929 4,283 417 229
Federal Funds Purchased and Securities Sold Under
Repurchase Agreements (16) (15) (2) 1
Short-Term Borrowings (16) (16) -- --
- ---------------------------------------------------------------------------------------------------------------
Total Interest Expense 4,897 4,252 415 230
- ---------------------------------------------------------------------------------------------------------------
Net Interest Income Before Allocation of Rate/Volume 5,802 6,352 (301) (249)
- ---------------------------------------------------------------------------------------------------------------
Allocation of Rate/Volume -- (250) 1 249
- ---------------------------------------------------------------------------------------------------------------
Changes in Net Interest Income $ 5,802 $ 6,102 $ (300) $ --
- ---------------------------------------------------------------------------------------------------------------
</TABLE>
PROVISION FOR LOAN LOSSES
Although the provision for loan losses for the three months ended June 30, 1996
of $316,000 reflects a decrease of $6,000 or 1.9% compared to $322,000 for the
three months ended June 30, 1995 it should be noted that the Allowance for Loan
Losses increased $4.6 million as a result of the Mergers. The provision for loan
losses for the six months ended June 30, 1996 of $777,000 reflects an increase
of $89,000 or 12.9% compared to $688,000 for the six months ended June 30, 1995.
See "ALLOWANCE FOR LOAN LOSSES."
NONINTEREST INCOME
Noninterest income for the three months ended June 30, 1996 of $2.1 million
increased $569,000 or 36.1% compared to $1.6 million for the three months ended
June 30, 1995. Noninterest income for the six months ended June 30, 1996 of $4.1
million increased $925,000 or 29.2% compared to $3.2 million for the six months
ended June 30, 1995. The increase in Noninterest Income for the three months
ended June 30, 1996 compared to the three months ended June 30, 1995 and for the
six months ended June 30, 1996 compared to the six months ended June 30, 1995 is
primarily attributable to the Mergers, the RGC/Roma Branch Acquisitions and
increased fee income from Total Service Charges, Trust Service Fees and Data
Processing Fees. The increase in Total Service Charges was impacted by the
Mergers, the RGC/Roma Branch Acquisitions and an increase in activity levels and
additional volume. The increase in Trust Service Fees is attributable to
increases in both the number of trust accounts and the book value of assets
managed. The increase in Data Processing Service Fees is attributable to an
increased volume of business.
-16-
<PAGE>
The following table summarizes the major noninterest income categories:
<TABLE>
<CAPTION>
1996 1995 Six Months Ended
------------------------ ------------------------------------- June 30,
Noninterest Income SECOND First Fourth Third Second --------------------
(Dollars in Thousands) QUARTER Quarter Quarter Quarter Quarter 1996 1995
<S> <C> <C> <C> <C> <C> <C> <C>
- -------------------------------------------------------------------------------------------------------------------------
Service Charges on Deposit
Accounts $ 1,167 $ 939 $ 955 $ 899 $ 837 $ 2,106 $ 1,618
Other Service Charges 236 236 171 192 223 472 496
- -------------------------------------------------------------------------------------------------------------------------
Total Service Charges 1,403 1,175 1,126 1,091 1,060 2,578 2,114
Trust Service Fees 385 366 339 314 316 751 603
Investment Securities Gains
(Losses) -- 1 (98) -- -- 1 (13)
Data Processing Service Fees 226 220 171 112 85 446 158
Other Operating Income 131 184 191 106 115 315 304
- -------------------------------------------------------------------------------------------------------------------------
Total $ 2,145 $ 1,946 $ 1,729 $ 1,623 $ 1,576 $ 4,091 $ 3,166
- -------------------------------------------------------------------------------------------------------------------------
</TABLE>
NONINTEREST EXPENSE
Noninterest expense for the three months ended June 30, 1996 of $6.7 million
increased $2.1 million or 44.1% compared to the three months ended June 30, 1995
of $4.7 million. Noninterest expense for the six months ended June 30, 1996 of
$12.0 million increased $2.8 million or 30.0% compared to the six months ended
June 30, 1995 of $9.2 million. The increase in noninterest expense for the three
months ended June 30, 1996 compared to three months ended June 30, 1995 and for
the six months ended June 30, 1996 compared to six months ended June 30, 1995
was primarily attributable to the Mergers, the RGC/Roma Branch Acquisitions and
the increased volume of business conducted by the Company.
The largest category of noninterest expense, Salaries and Employee Benefits
("Personnel"), of $3.3 million for the three months ended June 30, 1996
increased $1.0 million or 45.0% compared to the three months ended June 30,
1995. Personnel expense of $6.1 million for six months ended June 30, 1996
increased $1.5 million or 33.2% compared to the $4.6 million for the six months
ended June 30, 1995. Personnel expense increased for the three months ended June
30, 1996 compared to the three months ended June 30, 1995 and for the six months
ended June 30, 1996 compared to the six months ended June 30, 1995 primarily due
to the Mergers and staffing increases, including the staff acquired as a result
of the RGC/Roma Branch Acquisitions, staff for the Company's second banking
location in Weslaco, Texas, (the "New Weslaco Banking Location") and increases
in payroll taxes, medical insurance premiums and pension expenses for all
employees.
Net Occupancy expense of $505,000 for the three months ended June 30, 1996
increased $245,000 or 94.2% compared to $260,000 for the three months ended June
30, 1995. Net occupancy expense of $822,00 for the six months ended June 30,
1996 increased $309,000 or 60.2% compared to $513,000 for six months ended June
30, 1995. The Net Occupancy expense increased for the three months ended June
30, 1996 compared to the three months ended June 30, 1995 and for the six months
ended June 30, 1996 compared to the six months ended June 30, 1995 primarily due
to the occupancy expenses associated with the Mergers, the RGC/Roma Branch
Acquisitions and the New Weslaco Banking Location.
Equipment expense of $757,000 for the three months ended June 30, 1996 increased
$259,000 or 52.0% compared to $498,000 for the three months ended June 30, 1995.
Equipment expenses of $1.4 million for the six months ended June 30, 1996
increased $471,000 or 50.7% compared to $929,000 for the six months ended June
30, 1995. Equipment expense increased for the three months ended June 30, 1996
as compared to the three months ended June 30, 1995 and for the six months ended
June 30, 1996 compared to the six months ended June 30, 1995 primarily due to
expenses associated with the Mergers, the RGC/Roma Branch Acquisitions and the
New Weslaco Banking Location.
-17-
<PAGE>
The following table displays the major noninterest expense categories:
<TABLE>
<CAPTION>
1996 1995 Six Months Ended
------------------------ ------------------------------------- June 30,
Noninterest Expense SECOND First Fourth Third Second --------------------
(Dollars in Thousands) QUARTER Quarter Quarter Quarter Quarter 1996 1995
<S> <C> <C> <C> <C> <C> <C> <C>
- ------------------------------------------------------------------------------------------------------------------------
Salaries and Employee Benefits
Salaries and Wages $ 2,680 $ 2,163 $ 2,076 $ 1,954 $ 1,808 $ 4,843 $ 3,575
Employee Benefits 643 574 483 500 484 1,217 975
- ------------------------------------------------------------------------------------------------------------------------
Total Salaries and Employee
Benefits 3,323 2,737 2,559 2,454 2,292 6,060 4,550
- ------------------------------------------------------------------------------------------------------------------------
Net Occupancy Expense 505 317 279 277 260 822 513
- ------------------------------------------------------------------------------------------------------------------------
Equipment Expense 757 643 564 535 498 1,400 929
- ------------------------------------------------------------------------------------------------------------------------
Other Real Estate (Income)
Expense, Net
Rent Income (25) (33) (22) (27) (26) (58) (97)
(Gain) Loss Sale of Other
Real Estate (48) -- (71) (6) (1) (48) 80
Expense 43 23 48 34 27 66 49
Write-Downs -- -- -- 59 60 -- 60
- ------------------------------------------------------------------------------------------------------------------------
Total Other Real Estate
(Income) Expense, Net (30) (10) (45) 60 60 (40) 92
- ------------------------------------------------------------------------------------------------------------------------
Other Noninterest Expense
Advertising and Public
Relations 305 212 187 203 144 517 382
Amortization of Intangibles 326 123 123 88 56 449 112
Data Processing and Check
Clearing 225 151 132 147 104 376 212
Director Fees 83 74 75 74 67 157 135
Franchise Tax 60 74 49 50 49 134 99
Insurance 58 43 39 38 67 101 151
FDIC Insurance 1 1 47 (29) 261 2 522
Legal and Professional 332 258 251 221 207 590 398
Stationery and Supplies 223 194 184 182 170 417 292
Telephone 73 67 77 66 58 140 107
Other Losses 136 122 239 117 124 258 268
Miscellaneous Expenses 330 308 275 211 237 638 486
- ------------------------------------------------------------------------------------------------------------------------
Total Other Noninterest
Expense 2,152 1,627 1,678 1,368 1,544 3,779 3,164
- ------------------------------------------------------------------------------------------------------------------------
Total $ 6,707 $ 5,314 $ 5,035 $ 4,694 $ 4,654 $ 12,021 $ 9,248
- ------------------------------------------------------------------------------------------------------------------------
</TABLE>
BALANCE SHEET ANALYSIS
Total average assets for the three months ended June 30, 1996 of $945.2 million
increased $399.2 million or 73.1% compared to the three months ended June 30,
1995 of $546.0 million. Total average assets for the six months ended June 30,
1996 of $800.4 million increased $262.5 million or 48.8% compared to the six
months ended June 30, 1995 of $538.0 million. The increase in total assets was
primarily attributable to the Mergers, the RGC/Roma Branch Acquisitions, deposit
growth and new capital.
Average total deposits for the three months ended June 30, 1996 of $843.3
million increased $361.0 million or 74.9% compared to the three months ended
June 30, 1995 of $482.3 million. Average total deposits for the six months ended
June 30, 1996 of $714.9 million increased $239.7 million or 50.4% compared to
the six months ended June 30, 1995 of $475.2 million. The increase in Average
Total Deposits is primarily attributable to the Mergers, the RGC/Roma Branch
Acquisitions and growth.
-18-
<PAGE>
The following table presents the consolidated average balance sheets:
<TABLE>
<CAPTION>
1996 1995 Six Months Ended
-------------------- ------------------------------- June 30,
Average Balance Sheets SECOND First Fourth Third Second --------------------
(In Thousands) QUARTER Quarter Quarter Quarter Quarter 1996 1995
<S> <C> <C> <C> <C> <C> <C> <C>
- ---------------------------------------------------------------------------------------------------------------
Assets
Loans $ 590,902 $ 457,394 $ 412,841 $ 372,511 $ 351,465 $ 524,148 $ 347,872
Investment Securities
Taxable 188,087 115,525 139,688 130,504 118,675 151,806 117,076
Tax-Exempt 28,688 4,920 4,889 4,797 4,919 16,804 4,971
Federal Funds Sold 39,492 12,628 16,615 34,971 17,821 26,060 13,821
- ---------------------------------------------------------------------------------------------------------------
Total Interest-Earning Assets 847,169 590,467 574,033 542,783 492,880 718,818 483,740
Cash and Due from Banks 46,135 35,081 31,520 31,538 29,871 40,608 30,773
Bank Premises and Equipment, Net 27,996 18,680 17,739 16,535 15,573 23,338 15,593
Other Assets 31,507 16,215 15,967 14,419 11,845 23,861 11,821
Allowance for Loan Losses (7,614) (4,804) (4,347) (4,331) (4,211) (6,209) (3,997)
- ---------------------------------------------------------------------------------------------------------------
Total $ 945,193 $ 655,639 $ 634,912 $ 600,944 $ 545,958 $ 800,416 $ 537,950
- ---------------------------------------------------------------------------------------------------------------
Liabilities
Demand Deposits
Commercial and Individual $ 146,191 $ 111,171 $ 95,864 $ 105,812 $ 92,804 $ 128,681 $ 92,708
Public Funds 5,301 5,393 17,377 2,109 5,582 5,347 4,395
- ---------------------------------------------------------------------------------------------------------------
Total Demand Deposits 151,492 116,564 113,241 107,921 98,386 134,028 97,103
- ---------------------------------------------------------------------------------------------------------------
Savings
Commercial and Individual 70,943 36,872 36,810 32,332 27,364 53,908 27,691
Public Funds 544 481 547 369 -- 512 --
Money Market Checking and Savings
Accounts
Commercial and Individual 147,083 107,433 106,498 104,128 95,042 127,258 98,449
Public Funds 43,519 28,337 25,577 27,563 25,853 35,928 27,692
Time Deposits
Commercial and Individual 383,318 285,402 273,127 246,797 218,479 334,360 205,970
Public Funds 46,396 11,332 11,662 16,610 17,130 28,864 18,266
- ---------------------------------------------------------------------------------------------------------------
Total Interest-Bearing
Deposits 691,803 469,857 454,221 427,799 383,868 580,830 378,068
- ---------------------------------------------------------------------------------------------------------------
Total Deposits 843,295 586,421 567,462 535,720 482,254 714,858 475,171
- ---------------------------------------------------------------------------------------------------------------
Federal Funds Purchased and
Securities Sold Under Repurchase
Agreements 495 685 799 997 1,228 590 1,288
Short-Term Borrowings -- -- -- 75 429 -- 429
Other Liabilities 7,305 4,375 4,310 4,231 3,626 5,840 3,397
Shareholders' Equity 94,098 64,158 62,341 59,921 58,421 79,128 57,665
- ---------------------------------------------------------------------------------------------------------------
Total $ 945,193 $ 655,639 $ 634,912 $ 600,944 $ 545,958 $ 800,416 $ 537,950
- ---------------------------------------------------------------------------------------------------------------
</TABLE>
RISK ANALYSIS OF THE LOAN PORTFOLIO
Total loans at June 30, 1996 of $698.4 million increased $348.0 million or 99.3%
compared to June 30, 1995 levels of $350.5 million and increased $231.4 million
or 49.5% compared to March 31, 1996 levels of $467.1 million. The increase in
total loans in the three months ended June 30, 1996 is primarily attributable to
the Mergers. The Company's loans are widely diversified by borrower and industry
group.
-19-
<PAGE>
The following table presents the composition of the loan portfolio for the last
five quarters:
<TABLE>
<CAPTION>
1996 1995
-------------------- -------------------------------
Loan Portfolio Composition SECOND First Fourth Third Second
(In Thousands) QUARTER Quarter Quarter Quarter Quarter
<S> <C> <C> <C> <C> <C>
- ----------------------------------------------------------------------------------------------------
Commercial $ 184,056 $ 116,816 $ 112,042 $ 105,395 $ 99,961
Commercial Tax-Exempt 35,572 34,401 34,419 397 --
- ----------------------------------------------------------------------------------------------------
Total Commercial Loans 219,628 151,217 146,461 105,792 99,961
- ----------------------------------------------------------------------------------------------------
Agricultural 32,742 28,447 25,097 19,247 17,325
- ----------------------------------------------------------------------------------------------------
Real Estate
Construction 44,520 28,682 29,967 25,998 23,228
Commercial Mortgage 212,432 136,057 129,953 128,979 114,232
Agricultural Mortgage 27,413 17,785 17,057 15,284 12,771
1-4 Family Mortgage 96,922 61,704 59,052 54,836 49,704
- ----------------------------------------------------------------------------------------------------
Total Real Estate 381,287 244,228 236,029 225,097 199,935
- ----------------------------------------------------------------------------------------------------
Consumer 64,777 43,167 43,267 44,471 33,242
- ----------------------------------------------------------------------------------------------------
Total Loans $ 698,434 $ 467,059 $ 450,854 $ 394,607 $ 350,463
- ----------------------------------------------------------------------------------------------------
</TABLE>
NONPERFORMING ASSETS
Nonperforming assets are comprised of loans for which the accrual of interest
has been discontinued, loans for which the interest rate has been reduced to
less than normal rates due to a serious weakening in the borrower's financial
condition, and other assets which consist of real estate and other property
which have been acquired in partial or full satisfaction of loan obligations and
which are awaiting disposition. A loan is generally placed 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.
Loans which are contractually past due 90 days or more which are both well
secured or guaranteed by financially responsible third parties and in the
process of collection generally are not placed on nonaccrual status. The amount
of such loans past due 90 days or more at June 30, 1996 of $2.1 million reflects
an increase of $1.2 million or 139.7% compared to the June 30, 1995 level of
$879,000. The increase in loans past due 90 days or more at June 30, 1996, is
primarily attributable to loans acquired through the Mergers consisting of
single family residential mortgage loans to low and moderate income borrowers.
The characteristics of these loans contribute to a higher level of
delinquencies.
Nonperforming assets at June 30, 1996 of $5.7 million increased $2.5 million or
75.7% compared to the June 30, 1995 level of $3.3 million. Nonperforming assets
at June 30, 1996 represent 0.47% of total assets.
-20-
<PAGE>
An analysis of the components of nonperforming assets for the last five quarters
is presented in the following table:
<TABLE>
<CAPTION>
1996 1995
------------------------ -------------------------------------
Nonperforming Assets SECOND First Fourth Third Second
(Dollars in Thousands) QUARTER Quarter Quarter Quarter Quarter
<S> <C> <C> <C> <C> <C>
- -------------------------------------------------------------------------------------------------------------------
Nonaccrual Loans $ 3,748 $ 2,855 $ 2,092 $ 1,519 $ 1,490
Renegotiated Loans 4 5 6 8 9
- -------------------------------------------------------------------------------------------------------------------
Nonperforming Loans 3,752 2,860 2,098 1,527 1,499
Other Nonperforming Assets
(Primarily Other Real Estate) 1,976 1,463 1,489 1,502 1,762
- -------------------------------------------------------------------------------------------------------------------
Total Nonperforming Assets 5,728 4,323 3,587 3,029 3,261
Accruing Loans 90 Days or More Past Due 2,107 533 642 244 879
- -------------------------------------------------------------------------------------------------------------------
Total Nonperforming Assets and Accruing Loans
90 Days or More Past Due $ 7,835 $ 4,856 $ 4,229 $ 3,273 $ 4,140
- -------------------------------------------------------------------------------------------------------------------
Nonperforming Loans as a % of Total Loans 0.54% 0.61% 0.47% 0.39% 0.43%
Nonperforming Assets as a % of Total Loans and
Other Nonperforming Assets 0.82 0.92 0.79 0.76 0.93
Nonperforming Assets as a % of Total Assets 0.47 0.66 0.55 0.49 0.60
Nonperforming Assets Plus Accruing Loans 90 Days
or More Past Due as a % of Total Loans And Other
Nonperforming Assets 1.12 1.04 0.94 0.83 1.18
- -------------------------------------------------------------------------------------------------------------------
</TABLE>
Management continues to emphasize maintaining a low level of nonperforming
assets and returning nonperforming assets to an earning status.
ALLOWANCE FOR LOAN LOSSES
The allowance for loan losses at June 30, 1996 of $9.9 million increased $6.0
million or 149.9% compared to the June 30, 1995 balance of $4.0 million and
increased $5.1 million or 103.4% compared to the March 31, 1996 balance of $4.9
million. The allowance for loan losses at June 30, 1996 reflects an additional
reserve of $4.6 million attributable to loans acquired in the Mergers. The
allowance for loan losses was 1.42% of loans outstanding, net of unearned
discount at June 30, 1996, up from 1.14% at June 30, 1995. The allowance for
loan losses as a percentage of nonperforming assets was 173.7% at June 30, 1996
from 122.1% at June 30, 1995.
-21-
<PAGE>
The following table summarizes the transactions in the allowance for loan
losses:
<TABLE>
<CAPTION>
1996 1995 Six Months Ended
Allowance for Loan ------------------------ ------------------------------------- June 30,
Loss Activity SECOND First Fourth Third Second --------------------
(Dollars in Thousands) QUARTER Quarter Quarter Quarter Quarter 1996 1995
<S> <C> <C> <C> <C> <C> <C> <C>
- ----------------------------------------------------------------------------------------------------------------------
Balance at Beginning of Period $ 4,890 $ 4,542 $ 4,121 $ 3,980 $ 3,995 $ 4,542 $ 3,511
Balance from Acquisitions 4,647 -- -- 450 -- 4,647 --
Provision for Loan Losses 316 461 625 372 322 777 688
Charge-Offs
Commercial 14 60 93 236 420 74 484
Agricultural 8 -- -- 405 11 8 11
Real Estate 24 4 50 -- 12 28 61
Consumer 53 106 119 85 66 159 96
- ----------------------------------------------------------------------------------------------------------------------
Total Charge-Offs 99 170 262 726 509 269 652
- ----------------------------------------------------------------------------------------------------------------------
Recoveries
Commercial 84 33 42 30 81 117 329
Agricultural -- -- 1 -- 64 -- 65
Real Estate 59 7 -- 2 2 66 2
Consumer 50 17 15 13 25 67 37
- ----------------------------------------------------------------------------------------------------------------------
Total Recoveries 193 57 58 45 172 250 433
- ----------------------------------------------------------------------------------------------------------------------
Net Charge-Offs (Recoveries) (94) 113 204 681 337 19 219
- ----------------------------------------------------------------------------------------------------------------------
Balance at End of Period $ 9,947 $ 4,890 $ 4,542 $ 4,121 $ 3,980 $ 9,947 $ 3,980
- ----------------------------------------------------------------------------------------------------------------------
Ratio of Allowance for Loan
Losses to Loans Outstanding,
Net of Unearned Discount 1.42% 1.05% 1.01% 1.04% 1.14%
Ratio of Allowance For Loan
Losses to Nonperforming Assets 173.66 113.12 126.62 136.05 122.05
Ratio of Net Charge-Offs
(Recoveries) to Average Total
Loans Outstanding, Net of
Unearned Discount * 0.10 0.30 0.18 0.09
- ----------------------------------------------------------------------------------------------------------------------
</TABLE>
* Not meaningful.
DEPOSITS
Total deposits at June 30, 1996 of $1.1 billion increased $608.1 million or
126.5% compared to the June 30, 1995 balance of $480.5 million and increased
$502.6 million or 85.8% compared to March 31, 1996 of $586.0 million. The
increase in total deposits from June 30, 1995 to June 30, 1996 is primarily
attributable to the Mergers and the RGC/Roma Branch Acquisitions. The increase
in total deposits from March 31, 1996 to June 30, 1996 is primarily attributable
to the Mergers. Total public funds deposits at June 30, 1996 of $170.5 million
increased $130.1 million or 322.0% compared to the June 30, 1995 level of $40.4
million and increased $130.7 million or 328.2% compared to the March 31, 1996
level of $39.8 million.
-22-
<PAGE>
The following table presents the composition of total deposits for the last five
quarters:
<TABLE>
<CAPTION>
1996 1995
-------------------- -------------------------------
Total Deposits SECOND First Fourth Third Second
(In Thousands) QUARTER Quarter Quarter Quarter Quarter
<S> <C> <C> <C> <C> <C>
- ---------------------------------------------------------------------------------------------------
Demand Deposits
Commercial and Individual $ 169,838 $ 113,072 $ 113,345 $ 102,733 $ 97,593
Public Funds 5,992 7,015 7,069 5,407 4,395
- ---------------------------------------------------------------------------------------------------
Total Demand Deposits 175,830 120,087 120,414 108,140 101,988
- ---------------------------------------------------------------------------------------------------
Interest-Bearing Deposits
Savings
Commercial and Individual 98,584 38,427 35,521 36,428 27,346
Public Funds 947 423 612 496 --
Money Market Checking and Savings
Commercial and Individual 182,527 106,861 105,409 103,704 94,096
Public Funds 66,834 20,361 22,278 24,078 20,540
Time Deposits
Commercial and Individual 467,194 287,827 285,545 265,728 221,100
Public Funds 96,686 12,008 9,952 15,128 15,462
- ---------------------------------------------------------------------------------------------------
Total Interest-Bearing Deposits 912,772 465,907 459,317 445,562 378,544
- ---------------------------------------------------------------------------------------------------
Total Deposits $1,088,602 $ 585,994 $ 579,731 $ 553,702 $ 480,532
- ---------------------------------------------------------------------------------------------------
</TABLE>
CAPITAL AND LIQUIDITY
Shareholders' equity at June 30, 1996 of $119.5 million increased $60.6 million
or 102.7% compared to the June 30, 1995 level of $59.0 million and increased
$56.8 million or 90.6% compared to the December 31, 1995 level of $62.7 million.
The increase in shareholders' equity at June 30, 1996 compared to June 30, 1995
and December 31, 1995 was primarily attributable to a public offering of 2.5
million shares of the Company's Class A Voting Common stock, (priced at $22.25
per share), and net income.
The Company is dependent on dividend and interest income from the Bank and the
sale of stock for its liquidity. Applicable Federal Reserve Board regulations
provide that bank holding companies are permitted by regulatory authorities to
pay cash dividends on their common or preferred stock if consolidated earnings
and consolidated capital are within regulatory guidelines.
The risk-based capital standards as established by the Federal Reserve Board of
Governors apply to Texas Regional and Texas State Bank. The numerator of the
risk-based capital ratio for bank holding companies includes Tier I capital,
consisting of common shareholders' equity and qualifying cumulative and
noncumulative perpetual preferred stock; and Tier II capital, consisting of
other preferred stock, reserve for possible loan losses and certain subordinated
and term-debt securities. Goodwill is deducted from Tier I capital. At no time
is Tier II capital allowed to exceed Tier I capital in the calculation of total
capital. The denominator or asset portion of the risk-based ratio aggregates
generic classes of balance sheet and off-balance sheet exposures, each weighted
by one of four factors, ranging from 0% to 100%, based on the relative risk of
the exposure class.
Ratio targets are set for both Tier I and Total Capital (Tier I plus Tier II
capital). The minimum level of Tier I capital to total assets is 4.0% and the
minimum total capital ratio is 8.0%. The Federal Reserve Board has guidelines
for a leverage ratio that is designed as an additional evaluation of capital
adequacy of banks and bank holding companies. The leverage ratio is defined to
be the company's Tier I capital divided by its quarterly average total assets
less goodwill and other intangible assets. An insured depository institution is
"well capitalized" for purposes of FDICIA if its Total Risk-Based Capital Ratio
is equal to or greater than 10%, and Tier I Risk-Based Capital Ratio is equal to
or greater than 6%, and Tier I Leverage Capital Ratio is equal to or greater
than 5%. The Company's Tier I Risk-Based Capital Ratio was approximately 11.76%
and 14.81% as of June 30, 1996 and 1995, respectively. The Company's Total
Risk-Based Capital Ratio was approximately 13.00% and 15.84% as of June 30, 1996
and 1995, respectively. The Company's Tier I Leverage Capital Ratio was 10.21%
and 10.52% at June 30, 1996 and 1995, respectively. Based on capital ratios, the
Company is within the definition of "well capitalized" for Federal Reserve
purposes as of June 30, 1996.
-23-
<PAGE>
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 or solicit brokered
deposits. Federal funds purchased and short-term borrowings are additional
sources of liquidity. These sources of liquidity are short-term in nature, and
are not used to fund asset growth.
For the six months ended June 30, 1996, liquidity was enhanced by net cash
provided by operating activities of $6.2 million and net cash provided by
financing activities of $108.3 million. The increase in net cash provided by
financing activities was primarily attributable to the proceeds from sale of
Class A Voting Common Stock of $51.9 million and the $58.5 million net increase
in deposits. The increase in cash and cash equivalents was offset by $49.9
million net cash used in investing activities. The investing activities
consisted primarily of funding $11.7 million of purchases, originations and
advances of loans, $25.3 million of net purchases (ie. net of sales proceeds and
maturing bond proceeds) of securities available for sale and securities held to
maturity and purchasing $3.2 million of premises and equipment. As a result, net
cash and cash equivalents at June 30, 1996 of $103.7 million increased $69.2
million or 200.6% compared to net cash and cash equivalents at December 31, 1995
of $34.5 million.
SELECTED FINANCIAL DATA
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30, June 30,
---------------------- ----------------------
Ratio Analysis (Annualized) 1996 1995 1996 1995
<S> <C> <C> <C> <C>
- --------------------------------------------------------------------------------------------------------------
Return on Average Assets 1.56% 1.50% 1.57% 1.51%
Return on Average Shareholders' Equity 15.72 14.01 15.84 14.09
Dividend Payout Ratio 20.41 30.30 22.22 30.77
Net Interest Income to Total Average Earning Assets* 5.21 5.36 5.28 5.45
Efficiency Ratio* 51.33 56.29 52.52 56.33
Total Average Loans to Total Average Deposits 70.07 73.71 73.32 73.21
Average Equity to Average Assets 9.96 10.70 9.89 10.72
- --------------------------------------------------------------------------------------------------------------
</TABLE>
* Taxable-Equivalent Basis Assuming a 35% Effective Tax Rate for 1996 and a 34%
Effective Tax Rate for 1995.
<TABLE>
<CAPTION>
COMMON STOCK TRADING DATA (NASDAQ National Market System)
<S> <C> <C> <C> <C> <C> <C> <C>
- -------------------------------------------------------------------------------------------------
Trading Volume (1996)
Price
June 30, 1996 $25.00* Book Value $13.73 April 262,309 shares
1996 price range $17.00-$26.00 Price/Book Value 182.1% May 1,965,614 shares
December 31, 1995 $17.25* June 256,224 shares
- -------------------------------------------------------------------------------------------------
</TABLE>
*Closing price.
-24-
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Texas Regional Bancshares, Inc.
<TABLE>
<S> <C>
July 24, 1996 /s/ G. E. Roney
- ------------------------ -------------------------------------------
Date G. E. Roney
CHAIRMAN OF THE BOARD,
PRESIDENT & CHIEF
EXECUTIVE OFFICER
July 24, 1996 /s/ George R. Carruthers
- ------------------------ -------------------------------------------
Date George R. Carruthers
EXECUTIVE VICE PRESIDENT
& CHIEF FINANCIAL OFFICER
</TABLE>
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 9
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
CONSOLIDATED BALANCE SHEETS AND THE CONSOLIDATED STATEMENTS OF INCOME FOUND ON
PAGES 4 AND 5, FORM 10-Q FILED JULY 24, 1996 AND IS QUALIFIED IN ITS ENTIRETY BY
REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1995
<PERIOD-START> JAN-01-1996
<PERIOD-END> JUN-30-1996
<CASH> 48,452
<INT-BEARING-DEPOSITS> 0
<FED-FUNDS-SOLD> 55,265
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 214,212
<INVESTMENTS-CARRYING> 133,449
<INVESTMENTS-MARKET> 133,291
<LOANS> 698,434
<ALLOWANCE> 9,947
<TOTAL-ASSETS> 1,224,704
<DEPOSITS> 1,088,602
<SHORT-TERM> 0
<LIABILITIES-OTHER> 16,578
<LONG-TERM> 0
0
0
<COMMON> 8,706
<OTHER-SE> 110,818
<TOTAL-LIABILITIES-AND-EQUITY> 1,224,704
<INTEREST-LOAN> 25,510
<INTEREST-INVEST> 4,975
<INTEREST-OTHER> 704
<INTEREST-TOTAL> 31,189
<INTEREST-DEPOSIT> 12,909
<INTEREST-EXPENSE> 12,921
<INTEREST-INCOME-NET> 18,268
<LOAN-LOSSES> 777
<SECURITIES-GAINS> 1
<EXPENSE-OTHER> 12,021
<INCOME-PRETAX> 9,561
<INCOME-PRE-EXTRAORDINARY> 9,561
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 6,231
<EPS-PRIMARY> 0.90
<EPS-DILUTED> 0.90
<YIELD-ACTUAL> 5.28
<LOANS-NON> 3,748
<LOANS-PAST> 2,107
<LOANS-TROUBLED> 4
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 4,542
<CHARGE-OFFS> 269
<RECOVERIES> 250
<ALLOWANCE-CLOSE> 9,947
<ALLOWANCE-DOMESTIC> 8,389
<ALLOWANCE-FOREIGN> 961
<ALLOWANCE-UNALLOCATED> 597
</TABLE>
