<PAGE>
PROSPECTUS
2,200,000 SHARES
[TEXAS REGIONAL BANCSHARES LOGO]
TEXAS REGIONAL BANCSHARES, INC.
CLASS A VOTING COMMON STOCK
-----------
Of the shares of Class A Voting Common Stock, par value $1.00 per share (the
"Common Stock"), of Texas Regional Bancshares, Inc. ("Texas Regional" or the
"Company") being offered hereby, 2,180,000 shares are being sold by Texas
Regional and 20,000 shares are being sold by a Texas Regional shareholder (the
"Selling Shareholder"). The Company will not receive any proceeds from the sale
of shares by the Selling Shareholder. The Company is selling the Common Stock to
finance a portion of the cost of the acquisition by the Company of First State
Bank & Trust Co., Mission, Texas, and The Border Bank, Hidalgo, Texas, which
will occur contemporaneously with the closing of the offering. See "Proposed
Mergers." The Common Stock, which is the only class of common stock of the
Company, is traded in the over-the-counter market and quoted on the Nasdaq
National Market System under the symbol "TRBS." On May 8, 1996, the last
reported sale price of the Common Stock on the Nasdaq National Market System was
$24.25 per share.
--------------
SEE "RISK FACTORS" ON PAGE 8 OF THIS PROSPECTUS FOR INFORMATION THAT SHOULD
BE CONSIDERED BY PROSPECTIVE INVESTORS.
-------------
THE SECURITIES OFFERED HEREBY ARE NOT SAVINGS OR DEPOSIT ACCOUNTS AND ARE
NOT INSURED BY THE FEDERAL DEPOSIT INSURANCE CORPORATION, THE BANK INSURANCE
FUND OR ANY OTHER GOVERNMENTAL AGENCY.
--------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION
PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY
REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
PRICE UNDERWRITING PROCEEDS PROCEEDS TO
TO DISCOUNTS AND TO SELLING
PUBLIC COMMISSIONS(1) COMPANY(2) SHAREHOLDER
Per Share............... $22.25 $1.28 $20.97 $20.97
Total(3)................ $48,950,000 $2,816,000 $45,714,600 $419,400
(1) See "Underwriting" for information relating to indemnification of the
Underwriters.
(2) Before deducting expenses of the offering payable by the Company estimated
at $500,000.
(3) The Company has granted the Underwriters a 30-day option to purchase up to
330,000 additional shares of Common Stock solely to cover over-allotments,
if any. To the extent that the option is exercised, the Underwriters will
offer the additional shares at the Price to Public shown above. If the
option is exercised in full, the total Price to Public, Underwriting
Discounts and Commissions and Proceeds to Company will be $56,292,500,
$3,238,400 and $52,634,700, respectively. See "Underwriting."
--------------
The shares of Common Stock are offered by the several Underwriters, subject
to prior sale, when, as and if delivered to and accepted by them, and subject to
the right of the Underwriters to reject any order in whole or in part. It is
expected that delivery of the shares of Common Stock will be made at the offices
of Alex. Brown & Sons Incorporated, Baltimore, Maryland, on or about May 14,
1996.
<TABLE>
<S> <C> <C>
ALEX. BROWN & SONS FIRST SOUTHWEST COMPANY
INCORPORATED
</TABLE>
THE DATE OF THIS PROSPECTUS IS MAY 9, 1996
<PAGE>
TEXAS REGIONAL BANCSHARES, INC.
[TEXAS REGIONAL BANCSHARES LOGO]
- -----------------------------------------
MAP OF BANKING LOCATIONS:
RIO GRANDE VALLEY OF TEXAS
[INSERT MAP]
This graphic contains an enlargement of the Rio Grande Valley of
Texas and shows the locations of the Company's corporate
headquarters, its existing banking locations, banking locations to
be acquired by the Company in the Mergers described in the
Prospectus and other surrounding cities in Texas and Mexico.
<PAGE>
[INSERT MAP]
This graphic contains a map of the State of Texas and a
portion of Mexico and shows the locations of certain cities
in Texas and Mexico and highlighting the Rio Grande Valley
of Texas.
THE MARKET AREA SERVED BY TEXAS STATE BANK HAS BEEN RECOGNIZED AS AMONG THE
FASTEST GROWING AREAS IN THE NATION. THE MCALLEN-EDINBURG-MISSION AREA HAS
A PROJECTED POPULATION GROWTH RATE OF 23.8% BETWEEN 1994 AND 2000, AND THE
BROWNSVILLE-HARLINGEN AREA HAS A PROJECTED POPULATION GROWTH RATE OF 16.0%
DURING THAT SAME PERIOD.
<PAGE>
IN CONNECTION WITH THIS OFFERING, THE UNDERWRITERS MAY OVERALLOT OR EFFECT
TRANSACTIONS WHICH STABILIZE OR MAINTAIN THE MARKET PRICE OF THE COMMON STOCK
OFFERED HEREBY AT A LEVEL ABOVE THAT WHICH MIGHT OTHERWISE PREVAIL IN THE OPEN
MARKET. SUCH STABILIZING, IF COMMENCED, MAY BE DISCONTINUED AT ANY TIME.
AVAILABLE INFORMATION
The Company is subject to the informational requirements of the Securities
Exchange Act of 1934, as amended (the "Exchange Act"), and in accordance
therewith files reports and other information with the Securities and Exchange
Commission (the "Commission"). Reports, proxy statements and other information
concerning the Company may be inspected and copied at the Public Reference
facilities maintained by the Commission at its office at 450 Fifth Street, N.W.,
Room 1024, Washington, D.C. 20549, and at the following Regional Offices of the
Commission: Seven World Trade Center, 13th Floor, New York, New York 10048 and
500 West Madison Street, 14th Floor, Chicago, Illinois 60661. Copies of such
material can also be obtained at prescribed rates from the Public Reference
Section of the Commission at 450 Fifth Street, N.W., Washington, D.C. 20549.
The Company has filed with the Commission in Washington, D.C., a
registration statement on Form S-1 (herein together with all amendments thereto
called the "Registration Statement") under the Securities Act of 1933, as
amended (the "Securities Act"), with respect to the securities covered by this
Prospectus. This Prospectus does not contain all of the information set forth in
the Registration Statement, certain items of which are contained in or
incorporated by reference as exhibits to the Registration Statement as permitted
by the rules and regulations of the Commission. For further information with
respect to the Company and the securities offered hereby, reference is made to
the Registration Statement, including the exhibits filed or incorporated by
reference as a part thereof. The statements contained herein concerning the
provisions of documents filed with, or incorporated by reference in, the
Registration Statement as exhibits are necessarily summaries of such documents
and each such statement is qualified in its entirety by reference to the copy of
the applicable document filed with the Commission. All of these documents may be
inspected without charge at the offices of the Commission as described above,
and copies may be obtained therefrom at prescribed rates.
--------------
SAFE HARBOR STATEMENT UNDER THE PRIVATE SECURITIES LITIGATION REFORM ACT OF
1995: THE INFORMATION PROVIDED UNDER "TEXAS REGIONAL BANCSHARES, INC. PRO FORMA
COMBINED CONDENSED FINANCIAL INFORMATION" AND "PROSPECTUS SUMMARY -- TEXAS
REGIONAL BANCSHARES, INC. SUMMARY PRO FORMA COMBINED FINANCIAL INFORMATION" AND
OTHER STATEMENTS WHICH ARE NOT HISTORICAL FACTS CONTAINED IN THIS PROSPECTUS ARE
FORWARD-LOOKING STATEMENTS THAT INVOLVE RISKS AND UNCERTAINTIES, INCLUDING,
WITHOUT LIMITATION, THE FOLLOWING: THE EFFECT OF CHANGING ECONOMIC CONDITIONS
AND INTEREST RATES, ACTUAL RESULTS OF OPERATIONS FOLLOWING THE MERGERS, THE
PRESENCE IN THE COMPANY'S MARKET AREA OF COMPETITORS WITH GREATER FINANCIAL
RESOURCES, AND OTHER RISKS DETAILED UNDER "RISK FACTORS" AND IN OTHER SECTIONS
HEREOF AND OTHER DOCUMENTS FILED BY THE COMPANY WITH THE COMMISSION.
2
<PAGE>
PROSPECTUS SUMMARY
THE FOLLOWING SUMMARY IS QUALIFIED IN ITS ENTIRETY BY THE MORE DETAILED
INFORMATION AND FINANCIAL STATEMENTS AND NOTES THERETO APPEARING ELSEWHERE IN
THIS PROSPECTUS. CONTEMPORANEOUSLY WITH THE CLOSING OF THE OFFERING MADE BY THIS
PROSPECTUS, THE COMPANY WILL ACQUIRE BY MERGER TWO BANKS USING A PORTION OF THE
PROCEEDS OF THE OFFERING. SEE "PROPOSED MERGERS" AND "TEXAS REGIONAL BANCSHARES,
INC. PRO FORMA COMBINED CONDENSED FINANCIAL INFORMATION" REGARDING THE EFFECTS
ON THE COMPANY OF THE CONSUMMATION OF SUCH MERGERS.
THE COMPANY
Texas Regional Bancshares, Inc. ("Texas Regional" or the "Company") is a
registered bank holding company whose wholly-owned subsidiary bank, Texas State
Bank ("Texas State Bank" or the "Bank"), conducts a commercial banking business
in the Rio Grande Valley of Texas. At March 31, 1996, Texas Regional had
consolidated assets of $655.9 million, loans outstanding (net of unearned
discount) of $467.1 million, total deposits of $586.0 million, and total
shareholders' equity of $64.6 million. For the three months ended March 31, 1996
and 1995, the Company earned net income of $2.6 million and $2.0 million,
respectively, for a return on average assets for these periods of 1.57% and
1.52%, respectively. At March 31, 1996, the Company had nonperforming assets
(including loans 90 days or more past due and still accruing) of $4.9 million,
representing 1.0% of period-end loans and other nonperforming assets (primarily
other real estate). At December 31, 1995, Texas Regional had consolidated assets
of $646.8 million, loans outstanding (net of unearned discount) of $450.9
million, total deposits of $579.7 million, and total shareholders' equity of
$62.7 million. For the years ended December 31, 1995 and 1994, the Company
earned net income of $8.7 million and $7.2 million, respectively, for a return
on average assets for these periods of 1.51% and 1.43%, respectively. At
December 31, 1995, the Company had nonperforming assets (including loans 90 days
or more past due and still accruing) of $4.2 million, representing 0.9% of
period-end loans and other nonperforming assets (primarily other real estate).
Texas State Bank operates a total of nine full service banking locations in
the Rio Grande Valley. The market area served by Texas State Bank has been
recognized as among the fastest growing areas in the nation. The
McAllen-Edinburg-Mission area has a projected population growth rate of 23.8%
between 1994 and 2000, and the Brownsville-Harlingen area has a projected
population growth rate of 16.0% during that same period. The business strategy
of Texas Regional is for the Bank to provide its customers with the financial
sophistication and breadth of products of a regional bank, while retaining the
local appeal and service level of a community bank. Management believes that the
Company is well positioned in its market due to its responsive customer service,
the strong community involvement of Texas State Bank management and employees,
recent trends in the Texas banking environment and the economy of the Rio Grande
Valley. 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. Management believes
that individualized customer service will allow the Company to increase its
market share in lending volume and deposits. As part of its operating and growth
strategies, the Company is working to attract business from, and provide service
to, small to medium sized businesses, and expand its operations in McAllen,
Harlingen and other strategic areas in the Rio Grande Valley.
Consistent with this strategy, during 1995, Texas State Bank acquired
banking locations in Rio Grande City and Roma, Texas, and in January 1996 it
entered into definitive agreements to acquire two banks headquartered in Mission
and Hidalgo, Texas. See "The Company" and "Proposed Mergers."
At March 31, 1996, Texas Regional employed 351 full time equivalent
employees. The address of Texas Regional's principal executive office is Kerria
Plaza, Suite 301, 3700 North 10th Street, McAllen, Texas 78501, and its
telephone number is (210) 631-5400.
3
<PAGE>
THE MERGERS
Texas State Bank has for some time sought appropriate acquisitions to permit
the Bank to expand within the market areas served by Texas State Bank and into
adjacent market areas in the Rio Grande Valley. In January 1996, the Company
entered into definitive agreements to acquire through merger First State Bank &
Trust Co., Mission, Texas ("First State Bank") and The Border Bank, Hidalgo,
Texas ("Border Bank") (the "Mergers"). First State Bank and Border Bank had
combined total assets of approximately $545.5 million at March 31, 1996.
Assuming consummation of the Mergers, on a pro forma basis at March 31, 1996,
Texas Regional would have had total assets of $1.172 billion, which would have
made Texas Regional the largest bank holding company headquartered in the Rio
Grande Valley. At March 31, 1996, First State Bank had total assets of $426.1
million, loans outstanding (net of unearned discount) of $192.8 million and
stockholders' equity of $61.6 million. At March 31, 1996, Border Bank had total
assets of $119.9 million, loans outstanding (net of unearned discount) of $51.0
million and stockholders' equity of $17.2 million. First State Bank and Border
Bank had combined total assets of approximately $524.0 million at December 31,
1995. Assuming consummation of the Mergers, on a pro forma basis at December 31,
1995, Texas Regional would have had total assets of $1.144 billion. At December
31, 1995, First State Bank had total assets of $404.5 million, loans outstanding
(net of unearned discount) of $188.4 million and stockholders' equity of $59.4
million. At December 31, 1995, Border Bank had total assets of $119.5 million,
loans outstanding (net of unearned discount) of $47.3 million and stockholders'
equity of $17.1 million. Elliot B. Bottom is the Chairman of the Board of both
First State Bank and Border Bank, and the banks have substantial common
ownership. The purpose of the Mergers is to further strengthen Texas State
Bank's branch network and banking business in the Rio Grande Valley by adding
six new banking locations in Mission, Penitas, McAllen and Hidalgo, Texas. The
purchase price for the Mergers is estimated to be $99.5 million, approximately
$40.0 million of which will be paid from the proceeds of the offering made
hereby. The Company intends to fund the balance of the purchase price
principally from liquidation of cash equivalents and, to the extent necessary,
selected investment securities on a consolidated basis. See "Proposed Mergers"
and "Use of Proceeds."
Management of Texas State Bank believes that the Mergers will expand the
Company's community banking network into contiguous markets, substantially
increasing its market share and enabling the Bank to compete more effectively
with other financial institutions in the Rio Grande Valley. Because of the
proximity of Mission to McAllen, there is a substantial overlap in the markets
served by Texas State Bank and First State Bank. For this reason and because the
banks serve a similar customer base, First State Bank is considered by Texas
State Bank management to be a direct competitor of Texas State Bank, particular
as to loan customers. The new or expanded services to be offered to First State
Bank and Border Bank customers include enhanced data processing services,
additional automated teller facilities and other services now offered to Texas
State Bank customers. Texas State Bank management believes that First State
Bank, Border Bank and Texas State Bank customers will benefit from the expansion
of Texas State Bank's branch network from nine to 15 banking locations. Texas
State Bank expects to realize certain operating and administrative efficiencies
as a result of the Mergers; however, because of the relatively low
employee-to-asset ratio at First State Bank and Border Bank, cost savings is not
a principal motivating factor for the Mergers. The operating efficiencies which
are expected include the use by all banking locations of the existing Texas
State Bank data processing facility, operation of a single human resources
department, and economies of a combined advertising program.
4
<PAGE>
THE OFFERING
<TABLE>
<S> <C>
Common Stock offered hereby................. 2,200,000 shares(1)(2)
by the Company.......................... 2,180,000 shares(1)
by the Selling Shareholder.............. 20,000 shares
Common Stock to be outstanding after the
offering.................................. 8,376,791 shares(1)(2)
Use of proceeds............................. Approximately $40.0 million of the net
proceeds to be received by the Company from
the sale of Common Stock will be used to fund
part of the consideration payable by Texas
State Bank upon consummation of the Mergers.
The remainder of the net proceeds, if any,
will be used for general corporate purposes.
See "Proposed Mergers" and "Use of Proceeds."
Nasdaq National Market symbol............... TRBS
</TABLE>
- ------------
(1) An additional 330,000 shares may be sold pursuant to an over-allotment
option granted by the Company to the Underwriters. See "Underwriting."
(2) The shares of Common Stock offered hereby will be sold contemporaneously
with the consummation of the Mergers.
5
<PAGE>
TEXAS REGIONAL BANCSHARES, INC.
SUMMARY CONSOLIDATED FINANCIAL INFORMATION
The summary consolidated financial information under the captions "Summary
of Operations" and "Period-End Balance Sheet Data" below for, and as of, each of
the years in the five-year period ended December 31, 1995 has been derived from
the consolidated financial statements of the Company, which financial statements
have been audited by KPMG Peat Marwick LLP, independent auditors. The
consolidated financial statements of the Company at December 31, 1995 and 1994
and for each of the years in the three-year period ended December 31, 1995 are
included elsewhere in this Prospectus. The data presented at March 31, 1996 and
1995 and for each of the three-month periods then ended are derived from
unaudited consolidated interim financial statements of the Company and include,
in the opinion of management, all adjustments necessary to present fairly the
data for such periods.
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31, YEARS ENDED DECEMBER 31,
----------------------- -----------------------------------------------------
1996 1995 1995 1994 1993 1992 1991
------------ --------- --------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C> <C> <C>
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
SUMMARY OF OPERATIONS:
Net Interest Income......... $ 7,689 $ 6,450 $ 27,540 $ 22,941 $ 19,197 $ 16,861 $ 11,773
Net Income.................. 2,554 1,987 8,725 7,185 6,011 4,519 2,824
PER SHARE DATA:
Net Income.................. $ 0.41 $ 0.32 $ 1.40 $ 1.16 $ 1.16 $ 0.92 $ 0.79
Book Value.................. 10.42 9.26 10.12 9.00 7.73 6.42 5.22
Cash Dividends Declared on
Common Stock.............. 0.10 0.10 0.40 0.24 -- -- --
Average Shares Outstanding
(in thousands)............ 6,295 6,201 6,227 6,035 5,170 4,890 3,578
PERIOD-END BALANCE SHEET DATA:
Total Assets................ $ 655,886 $ 539,005 $ 646,769 $ 531,834 $ 473,263 $ 414,331 $ 297,256
Loans....................... 467,059 354,410 450,854 339,939 290,500 252,118 179,853
Deposits.................... 585,994 475,985 579,731 472,108 429,521 375,016 271,540
Shareholders' Equity........ 64,563 57,341 62,720 55,731 39,983 34,318 19,366
PERFORMANCE RATIOS:
Return on Average Assets.... 1.57% 1.52% 1.51% 1.43% 1.34% 1.23% 1.00%
Return on Average
Shareholders' Equity...... 16.01 14.16 14.69 14.11 16.15 15.23 15.85
ASSET QUALITY RATIOS:
Nonperforming Assets to
Loans and Other
Nonperforming Assets...... 0.92% 0.97% 0.79% 1.41% 1.69% 2.31% 4.27%
Allowance for Loan Losses as
a Percentage of:
Loans................... 1.05 1.13 1.01 1.03 1.18 1.16 1.42
Nonperforming Assets.... 113.12 115.33 126.62 72.96 69.39 49.43 32.44
</TABLE>
SEE "PROPOSED MERGERS" AND "TEXAS REGIONAL BANCSHARES, INC. PRO FORMA
COMBINED CONDENSED FINANCIAL INFORMATION" REGARDING THE PRO FORMA COMBINED
EFFECT ON THE COMPANY ASSUMING CONSUMMATION OF THE MERGERS AT MARCH 31, 1996 AND
DECEMBER 31, 1995. EXCEPT AS OTHERWISE SPECIFIED, ALL INFORMATION IN THIS
PROSPECTUS ASSUMES NO EXERCISE OF THE UNDERWRITERS' OVER-ALLOTMENT OPTION. SEE
"UNDERWRITING."
6
<PAGE>
TEXAS REGIONAL BANCSHARES, INC.
SUMMARY PRO FORMA COMBINED FINANCIAL INFORMATION
The following unaudited summary pro forma combined financial information has
been derived from the historical consolidated financial information of the
Company, adjusted to give effect to the proposed acquisition of assets and
assumption of liabilities in connection with the Mergers, the estimated purchase
accounting adjustments resulting from the Mergers, and the proposed issuance of
Common Stock in the offering herein described (assuming no exercise of the
Underwriters' over-allotment option), as though such transactions had occurred
on March 31, 1996 and December 31, 1995, respectively. The pro forma combined
financial information is not necessarily indicative of the financial position or
results of operations that would have been achieved had the transactions
reflected therein occurred on such date or that may occur in the future. The pro
forma adjustments with respect to the Mergers reflect March 31, 1996 and
December 31, 1995 balances and are subject to change prior to the closing date
of the Mergers. The summary pro forma combined financial information does not
purport to project the consolidated financial information of the Company for any
future period. The information should be read in conjunction with (i) the pro
forma financial information, including the notes thereto, which appears
elsewhere in this Prospectus, and (ii) the historical consolidated financial
statements of Texas Regional, First State Bank and Border Bank, including the
respective notes thereto, which appear elsewhere in this Prospectus. See
"Proposed Mergers," "Texas Regional Bancshares, Inc. Selected Consolidated
Financial Information" and "Index to Financial Statements."
<TABLE>
<CAPTION>
THREE MONTHS ENDED YEAR ENDED
MARCH 31, 1996 DECEMBER 31, 1995
--------------------- -----------------------
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C>
SUMMARY OF OPERATIONS:
Net Interest Income........................................... $ 13,189 $ 49,923
Net Income.................................................... 4,662 15,596
PER SHARE DATA:
Net Income.................................................... $ 0.55 $ 1.86
Book Value.................................................... 13.11 12.89
Average Shares Outstanding (in thousands)..................... 8,475 8,407
PERIOD-END BALANCE SHEET DATA:
Total Assets.................................................. $ 1,172,364 $ 1,144,148
Loans......................................................... 709,564 685,286
Deposits...................................................... 1,048,724 1,024,227
Shareholders' Equity.......................................... 109,779 107,936
PERFORMANCE RATIOS:
Return on Average Assets...................................... 1.65% 1.49%
Return on Average Shareholders' Equity........................ 17.14 14.91
ASSET QUALITY RATIOS:
Nonperforming Assets to Loans and Other Nonperforming
Assets...................................................... 1.03% 1.04%
Allowance for Loan Losses as a Percentage of:
Loans....................................................... 1.41 1.44
Nonperforming Assets........................................ 136.65 137.11
</TABLE>
7
<PAGE>
RISK FACTORS
IN ADDITION TO THE OTHER INFORMATION IN THIS PROSPECTUS, THE FOLLOWING
FACTORS SHOULD BE CONSIDERED CAREFULLY IN EVALUATING AN INVESTMENT IN THE SHARES
OF COMMON STOCK OFFERED BY THIS PROSPECTUS.
RISKS OF THE MERGER -- GENERAL. Upon completion of the Mergers, Texas State
Bank's size will be substantially increased in terms of assets and deposit
liabilities. The increases in assets and deposits will be in addition to the
substantial increases in assets and deposits already experienced by Texas State
Bank over the last two years. In addition, the Company has not historically made
acquisitions on the same scale as the Mergers, and the future prospects of the
Company will depend, in significant part, on a number of factors, including
Texas State Bank's ability to compete effectively in the Mission and Hidalgo,
Texas market areas; its ability to limit the outflow of deposits in the acquired
banking locations formerly part of First State Bank and Border Bank; its success
in retaining earning assets, particularly loans, acquired in the Mergers, and
its ability to generate new earning assets; its ability to control noninterest
expense in order to maintain a favorable overall efficiency ratio; its ability
to attract and retain qualified management and other appropriate personnel to
staff the newly acquired banking locations; and its ability to earn acceptable
levels of noninterest income from the banking locations. No assurance can be
given as to any of the foregoing or that the Company's existing profitability
will not be adversely affected by the operations of First State Bank or Border
Bank, that the Company will be able to achieve results in the future similar to
those achieved in the past, or that the Company will be able to manage
effectively the growth resulting from the Mergers. In addition, the Mergers will
restrict the Company's ability to consummate other possible beneficial
transactions which require further leverage or would result in the creation of
additional intangibles. See "Proposed Mergers."
RISKS OF THE MERGER -- CREDIT QUALITY. In connection with the Mergers, the
Company or its representatives reviewed the First State Bank and Border Bank
loan portfolios. This review included all loans on the First State Bank and
Border Bank watch lists, a substantial proportion of the loans to borrowers with
other large lines of credit and selected other loans in each bank's portfolio.
The Company's examinations were made using criteria, analyses and collateral
evaluations that the Company has traditionally used in the ordinary course of
its business. Nonperforming assets (including accruing loans 90 days or more
past due) at March 31, 1996 totaled $5.2 million at First State Bank and Border
Bank compared to $4.9 million at Texas State Bank. Nonperforming assets
(including accruing loans 90 days or more past due) at December 31, 1995 totaled
$9.6 million at First State Bank and Border Bank compared to $4.2 million at
Texas State Bank. See "First State Bank & Trust Co. Management's Discussion and
Analysis of Financial Condition and Results of Operations" and "The Border Bank
Management's Discussion and Analysis of Financial Condition and Results of
Operations." Management of Texas Regional believes that the credit quality of
the loan portfolio of First State Bank and Border Bank is nonetheless acceptable
in terms of risk and that the increased risk is expected to be offset by
increased reserves and higher interest rates on certain classifications of
loans. In addition, as a result of the Mergers, the allowance for loan loss
reserves will increase. At March 31, 1996, the Company's allowance for loan
losses was 1.05% of total loans, while on a pro forma basis at March 31, 1996,
the Company's allowance for loan losses would have been 1.41% of total loans. At
December 31, 1995, the Company's allowance for loan losses was 1.01% of total
loans, while on a pro forma basis at December 31, 1995, the Company's allowance
for loan losses would have been 1.44% of total loans. However, there can be no
assurance as to the future performance of the loan portfolio acquired in the
Mergers.
RISKS OF THE MERGER -- COMPLIANCE AND MANAGEMENT. On October 8, 1993,
Border Bank entered into a Memorandum of Understanding with the Texas Department
of Banking (the "Banking Department"), and on December 14, 1993, First State
Bank entered into a Memorandum of Understanding with the Banking Department. The
Memorandum of Understanding applicable to each bank requires each bank to, among
other things, (i) develop and follow policies related to loan documentation and
review, (ii) increase (and continue monitoring the adequacy of) each bank's loan
valuation reserve, and (iii) review each bank's investment and funds management
policies. Texas State Bank has reviewed deficiency letters received from
applicable regulatory authorities related to each Memorandum of Understanding,
which, among other things, indicate that in the judgment of certain regulatory
authorities First
8
<PAGE>
State Bank and Border Bank had not yet adequately addressed the deficiencies
identified in the Memoranda of Understanding. See "Proposed Mergers." Prior to
entering into the agreements relating to the Mergers, First State Bank and
Border Bank began to implement additional corrective efforts, including
retaining an outside consultant to assist in documentation and policy reviews
for First State Bank and Border Bank. Texas State Bank management believes that
the implementation of Texas State Bank's policies and procedures, and the
application of Texas State Bank's internal controls, make it unlikely that the
deficiencies identified in the Memoranda of Understanding will be repeated,
although there can be no certainty that all deficiencies will be adequately
addressed to the satisfaction of applicable regulatory authorities. If the
problems addressed in the Memoranda of Understanding persist, they could
adversely affect the future operations of the Company.
Following consummation of the Mergers, (i) all lending at the facilities
formerly operated by First State Bank and Border Bank will be conducted pursuant
to Texas State Bank's policies and under the supervision of Texas State Bank's
Chief Lending Officer, Frank A. Kavanagh, (ii) investments in securities will be
managed by the investment division of Texas State Bank in accordance with Texas
State Bank's investment policies and (iii) following conversion (which is
expected by Texas Regional management to occur in fall 1996) all data processing
will be performed by Texas State Bank's data processing center. In general, the
policies and procedures for all banking locations, including the banking
locations formerly operated as First State Bank and Border Bank facilities, will
be Texas State Bank's policies and procedures. Nonperforming assets and loans
presently past due on the books of First State Bank and Border Bank have been
reviewed by or on behalf of Texas State Bank and those loans which, in the
judgment of Texas State Bank, represent probable losses will be recorded at zero
at the time of consummation of the Mergers, although Texas State Bank will
nonetheless pursue collection in appropriate circumstances.
GEOGRAPHIC CONCENTRATION. Texas Regional's profitability is dependent on
the profitability of its subsidiary bank, Texas State Bank, which operates only
in the Rio Grande Valley of Texas. In addition to adverse changes in general
conditions in the United States, unfavorable changes in economic conditions
affecting the Rio Grande Valley, such as adverse effects of weather on
agricultural production, adverse changes in United States-Mexico relations, and
substantial Mexican peso devaluations, may have a significant adverse impact on
operations of the Company.
COMPETITION. The banking industry in the Rio Grande Valley is highly
competitive. Texas State Bank, First State Bank and Border Bank compete as
financial intermediaries with other commercial banks, savings and loan
associations, credit unions, mortgage banking companies, securities brokerage
companies, consumer and commercial finance companies, insurance companies and
money market mutual funds operating in Texas and elsewhere. Many of these
competitors have substantially greater resources and lending limits than Texas
State Bank has or will have following the Mergers, and many of these competitors
offer services that Texas State Bank does not currently provide. In addition,
non-depository institution competitors are generally not subject to the
extensive regulation applicable to Texas State Bank.
RELIANCE ON CHIEF EXECUTIVE OFFICER. Texas Regional has experienced
substantial growth in assets and deposits during the recent past, particularly
since Glen E. Roney became Chairman of the Board and Chief Executive Officer of
the Company in 1985. Although Mr. Roney is the largest individual shareholder of
the Company and is the beneficiary of a deferred compensation arrangement with
the Company that generally requires continued service for vesting, the Company
does not have an employment agreement with Mr. Roney and the loss of the
services of Mr. Roney could have a material adverse effect on the Company's
business and prospects. See "Management -- Executive Compensation."
REGULATORY RESTRICTIONS AND REQUIREMENTS. Texas Regional and Texas State
Bank are subject to extensive government regulation and supervision under
various state and federal laws, rules and regulations, including rules and
regulations promulgated by the Federal Reserve Board ("FRB") and the Banking
Department. These laws and regulations are designed primarily to protect the
Bank Insurance Fund of the Federal Deposit Insurance Corporation ("FDIC"),
depositors and borrowers, and to further certain social policies and,
consequently, may impose limitations on the Company that may not be in the
9
<PAGE>
best interests of the Company and holders of Common Stock. See "Business --
Regulation and Supervision" and "Business -- Capital Resources." The Company and
the Bank are subject to changes in federal and state laws, as well as changes in
rules and regulations, governmental policies and changes in accounting
principles. The effects of any such potential changes cannot be predicted, but
they could have an adverse effect on the business and operations of the Company
and the Bank.
DILUTION. At March 31, 1996, the net tangible book value of the Common
Stock was $9.52 per share. "Net tangible book value per share" represents the
tangible net worth of the Company (total assets less intangible assets
(including goodwill) and total liabilities), divided by the number of shares of
Common Stock outstanding. Without taking into account any changes in net
tangible book value after March 31, 1996, after giving effect to the sale by the
Company of 2,180,000 shares of Common Stock offered hereby and after deducting
underwriting discounts, commissions and estimated offering expenses, and after
giving effect to the Mergers (assumed to have been consummated effective March
31, 1996), the pro forma net tangible book value at March 31, 1996 would have
been $10.09 per share, representing an increase of $0.57 per share to current
shareholders and a dilution of $12.16 per share to persons purchasing the shares
offered hereby.
CONCENTRATION OF OWNERSHIP. After issuance of the 2,180,000 shares offered
by the Company pursuant to this Prospectus, officers and directors of the
Company, and affiliates of those persons, will beneficially own 17.83% of the
Company's outstanding Common Stock (or 17.17% assuming the Underwriters'
overallotment option is exercised in full). See "Principal Holders of Common
Stock." Accordingly, such persons have the ability to act together as a group to
direct the Company's affairs and business, which may include taking actions that
may not be in the interests of the other shareholders.
SHARES AVAILABLE FOR FUTURE SALE. The future sale of a substantial number
of shares of Common Stock by existing shareholders, or the sale of shares of
Common Stock by shareholders purchasing shares of Common Stock in this offering,
could have a material adverse effect on the market price of the Common Stock.
The Company, its directors and executive officers, and the Selling Shareholder
have agreed that for a period of 120 days after the date of this Prospectus,
they will not, directly or indirectly, sell or otherwise dispose of any shares
of Common Stock (except for shares of Common Stock offered hereby and other than
shares offered pursuant to the Texas Regional Bancshares, Inc. Employee Stock
Ownership Plan (with 401(k) provisions) (the "KSOP") or other employee benefit
plans) without the prior written consent of the Underwriters. See "Underwriting"
and "Shares Eligible for Future Sale."
LIMITED MARKET FOR COMMON STOCK. The Common Stock is held by approximately
636 shareholders of record. The total trading volume for the Common Stock for
the three months ended March 31, 1996, as reported on the Summary of Activity
for March 1996, prepared by The Nasdaq Stock Market for the Company, indicates
that total share volume was 396,700 shares during the three months ended March
31, 1996, representing an aggregate of 57 trades. The total trading volume for
the Common Stock for 1995, as reported on the Summary of Activity for December
1995, prepared by The Nasdaq Stock Market for the Company, indicates that total
share volume was 752,910 shares during 1995, representing an aggregate of 337
trades. Alex. Brown & Sons Incorporated and First Southwest Company have made a
market in the Common Stock since March 1994 (when the Common Stock was first
qualified for trading through the Nasdaq National Market System), and each has
advised the Company that they intend to make a market in the Common Stock as
long as the volume of trading activity in the Common Stock and certain other
market-making considerations justify doing so. However, there can be no
assurance that a liquid trading market for the Common Stock will develop, that
it will continue if it does develop, or that after the completion of this
offering the Common Stock will trade at or above the offering price set forth on
the cover of this Prospectus. Making a market involves maintaining bid and asked
quotations for the Common Stock and being available as a principal to effect
transactions in reasonable quantities at those quoted prices, subject to various
securities laws and other regulatory requirements. A public trading market
having the desired characteristics of depth, liquidity and orderliness depends
upon the presence in the marketplace of willing buyers and sellers of the Common
Stock at any given time, which presence is dependent upon the individual
decisions of investors and general economic and market conditions, over which
neither the Company nor any market-maker has control.
10
<PAGE>
USE OF PROCEEDS
The net proceeds to Texas Regional from this offering, after deducting
estimated expenses of the offering, are estimated to be $45.2 million. The
Company intends to use $40.0 million of the proceeds from this offering to
finance a portion of the consideration to the shareholders of First State Bank
and Border Bank in the Mergers. The remainder of the net proceeds, if any, will
be used for general corporate purposes. The total consideration to be paid to
both First State Bank and Border Bank shareholders in the Mergers is estimated
to be $99.5 million. The Company intends to fund the balance of the
consideration principally from liquidation of cash equivalents and, to the
extent necessary, selected investment securities on a consolidated basis. See
"Texas Regional Bancshares, Inc. Pro Forma Combined Condensed Financial
Information."
Consummation of the offering herein described is subject to certain
conditions, including the contemporaneous consummation of the Mergers. See
"Proposed Mergers" and "Underwriting."
11
<PAGE>
THE COMPANY
Texas Regional is a registered bank holding company whose wholly-owned
subsidiary bank, Texas State Bank, conducts a commercial banking business in the
Rio Grande Valley of Texas. At March 31, 1996 Texas Regional had consolidated
assets of $655.9 million, loans outstanding (net of unearned discount) of $467.1
million, total deposits of $586.0 million, and total shareholders' equity of
$64.6 million. For the three months ended March 31, 1996 and 1995, the Company
earned net income of $2.6 million and $2.0 million, respectively, for a return
on average assets for these periods of 1.57% and 1.52%, respectively. At March
31, 1996, the Company had nonperforming assets (including loans 90 days or more
past due and still accruing) of $4.9 million, representing 1.0% of period-end
loans and other nonperforming assets (primarily other real estate). At December
31, 1995, Texas Regional had consolidated assets of $646.8 million, loans
outstanding (net of unearned discount) of $450.9 million, total deposits of
$579.7 million, and total shareholders' equity of $62.7 million. For the years
ended December 31, 1995, and 1994, the Company earned net income of $8.7 million
and $7.2 million, respectively, for a return on average assets for these periods
of 1.51% and 1.43%, respectively. At December 31, 1995, the Company had
nonperforming assets (including accruing loans 90 days or more past due) of $4.2
million, representing 0.9% of period-end loans and other nonperforming assets
(primarily other real estate).
Assuming consummation of the Mergers, on a pro forma basis at March 31,
1996, Texas Regional would have had consolidated assets of $1.172 billion, loans
outstanding (net of unearned discount) of $709.6 million, total deposits of
$1.049 billion, and total shareholders' equity of $109.8 million. Assuming
consummation of the Mergers, on a pro forma basis at March 31, 1996, Texas
Regional would have had non-performing assets (including accruing loans 90 days
or more past due) of $10.1 million, representing 1.0% of period-end loans and
other nonperforming assets (primarily other real estate). Assuming consummation
of the Mergers, on a pro forma basis at December 31, 1995, Texas Regional would
have had consolidated assets of $1.144 billion, loans outstanding (net of
unearned discount) of $685.3 million, total deposits of $1.024 billion, and
total shareholders' equity of $107.9 million. Assuming consummation of the
Mergers, on a pro forma basis at December 31, 1995 Texas State Bank would have
had non-performing assets (including accruing loans 90 days or more past due) of
$13.8 million, representing 2.0% of period-end loans and other nonperforming
assets (primarily other real estate).
All of Texas Regional's operations are located in the Rio Grande Valley, and
therefore the ability of Texas Regional to continue its rate of growth and
profitability is closely linked to the economy of the Rio Grande Valley. The Rio
Grande Valley is composed of the following Texas counties: Hidalgo, Cameron,
Willacy and Starr (the "Rio Grande Valley"). The economy of the Rio Grande
Valley is based principally on retailing (including trade with Mexico),
government, agriculture, tourism, manufacturing, health care and education. A
large number of retirees spend all or part of the year in the Rio Grande Valley.
Many twin manufacturing and assembly plants, or "maquiladoras," are located in
the Rio Grande Valley or in communities located across the border in Mexico
(such as Reynosa and Matamoros). The market area served by Texas State Bank has
been recognized as among the fastest growing areas in the nation. The
McAllen-Edinburg-Mission area has a projected population growth rate of 23.8%
between 1994 and 2000, and the Brownsville-Harlingen area has a projected
population growth rate of 16.0% during that same period.
Texas State Bank has a total of nine full service banking locations in the
Rio Grande Valley through which the Bank offers a broad range of commercial
banking services. The Bank intends to operate all of the banking locations of
First State Bank and Border Bank and, after consummation of the Mergers, will
have 15 full service banking locations. The Bank serves as a community bank,
providing for the banking needs of retailers, manufacturers, food producers and
processors, real estate developers and builders, and other businesses in the Rio
Grande Valley. For commercial customers, Texas State Bank offers checking
facilities, certificates of deposit, short-term loans for working capital
purposes, construction financing, mortgage loans, loans for fixed assets and
expansion needs and other commercial loans. The services provided for
individuals by Texas State Bank include checking accounts, savings accounts,
certificates of deposit, individual retirement accounts and consumer loan
programs, including installment loans for home repairs and for purchases of
consumer goods, including automobiles, trucks and
12
<PAGE>
boats, mortgage loans, travelers checks, money orders and safe deposit
facilities. Where the borrowing needs of a customer exceed the lending limits of
the Bank, the Bank may participate with other banks in the making of such loan.
The Bank also offers trust services to commercial and individual customers. At
March 31, 1996, total trust assets under management by Texas State Bank were
$257.2 million and on a pro forma basis at March 31, 1996, total trust assets
under management by Texas State Bank would have been $269.8 million. At December
31, 1995 and 1994, total trust assets under management by Texas State Bank were
$237.4 million and $192.4 million, respectively. On a pro forma basis at
December 31, 1995, total trust assets under management by Texas State Bank would
have been $248.9 million.
Due to its close proximity to Mexico, Texas State Bank has developed banking
relations with depositors who are Mexican residents. At March 31, 1996,
approximately 10.1% of the total demand and time deposits in Texas State Bank
were deposited by or on behalf of residents of Mexico. Many of the Company's
Mexican customers are long-term customers of Texas State Bank or have
long-standing relationships with senior management. On a pro forma basis at
March 31, 1996, approximately 14.0% of the combined total demand and time
deposits in Texas State Bank, First State Bank and Border Bank were deposited by
or on behalf of residents of Mexico, and approximately 2.3% of the combined
total loans of Texas State Bank, First State Bank and Border Bank were secured
by non-U.S. collateral, primarily real estate and other assets located in
Mexico. Management does not believe that the Bank's profitability is dependent
on business from Mexican depositors and loan customers.
Texas State Bank is a member of the Federal Reserve System, and acts as a
correspondent to a number of banks in its service area, providing check
clearing, wire transfer, federal fund transactions, loan participations, data
processing and other correspondent services.
Texas State Bank'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. Management
believes that the Bank is well positioned in its market due to its responsive
customer service, the strong community involvement of Texas State Bank
management and employees, recent trends in the Texas banking environment and
recent trends in the economy of the Rio Grande Valley. 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 Bank's
operations. Management believes that individualized customer service will allow
the Bank to increase its market share in lending volume and deposits. As part of
its operating and growth strategies, the Bank intends to attract business from,
and provide service to, small to medium sized businesses, and expand its
operations in the Rio Grande Valley.
Consistent with the Company's growth strategy, in August 1995 Texas State
Bank acquired the Rio Grande City and Roma branches of First National Bank of
South Texas (the "RGC/Roma Branch Acquisitions"). In the acquisition, Texas
State Bank assumed deposit liabilities amounting to an aggregate of $79.7
million, and acquired loans (net of unearned discount) of $43.7 million, fixed
assets (after giving effect to purchase accounting adjustments) of $1.6 million,
and other assets, including foreclosed properties, of $100,000. Texas State Bank
paid a net premium (after purchase accounting adjustments) of $4.1 million for
the business, and the difference of approximately $30.6 million was funded in
cash by First National Bank of South Texas. The RGC/Roma Branch Acquisitions
provided Texas State Bank with two banking locations in Starr County, Texas.
Texas State Bank has for some time sought appropriate acquisitions to permit
the Bank to expand within the market areas served by Texas State Bank and into
adjacent market areas. In January 1996, the Company entered into definitive
agreements to acquire through merger First State Bank and Border Bank. First
State Bank and Border Bank had combined total assets of approximately $545.5
million at March 31, 1996, which, on a pro forma basis at March 31, 1996, would
have resulted in Texas Regional increasing its total assets to $1.172 billion,
making Texas Regional the largest bank holding company headquartered in the Rio
Grande Valley. First State Bank and Border Bank had combined total assets of
approximately $524.0 million at December 31, 1995, which, on a pro forma basis
at December 31, 1995, would have resulted in Texas Regional increasing its total
assets to $1.144 billion. The purpose of the
13
<PAGE>
Mergers is to further strengthen Texas State Bank's branch network and banking
business in the Rio Grande Valley by adding six new banking locations in
Mission, Penitas, McAllen and Hidalgo, Texas. The purchase price for the Mergers
is estimated to be $99.5 million, approximately $40.0 million of which will be
paid from the proceeds of the offering made hereby. The Company intends to fund
the balance principally from liquidation of cash equivalents and, to the extent
necessary, selected investment securities on a consolidated basis. See "Proposed
Mergers" and "Use of Proceeds."
The banking industry in the market area served by Texas State Bank is highly
competitive, with competition from other commercial banks, savings and loan
associations, credit unions, mortgage banking companies, commercial and consumer
finance companies, securities broker-dealers, mutual fund companies, insurance
agents and companies and other financial institutions, located both within and
outside of the Rio Grande Valley.
Texas Regional is subject to regulation by the FRB, and Texas State Bank is
subject to regulation by both the Banking Department and its primary federal
regulator, the FRB. Such regulations are primarily designed for protection of
depositors and not for the benefit of the shareholders of financial
institutions. See "Business -- Regulation and Supervision" and "Risk Factors --
Regulatory Restrictions and Requirements."
At March 31, 1996, Texas Regional employed 351 full time equivalent
employees. On a pro forma basis at March 31, 1996, after giving consideration to
the Mergers, the Company would have employed 494 full time equivalent employees.
Substantially all of the present First State Bank and Border Bank officers and
employees are expected to be employed by Texas State Bank. The address of Texas
Regional's principal executive office is Kerria Plaza, Suite 301, 3700 North
10th Street, McAllen, Texas 78501, and its telephone number is (210) 631-5400.
PROPOSED MERGERS
GENERAL
The Company, through its subsidiary Texas State Bank, has agreed to acquire,
through the Mergers, First State Bank and Border Bank. Management of Texas State
Bank believes that the Mergers will expand the Company's community banking
network into contiguous markets, substantially increasing its market share and
enabling the Bank to compete more effectively with other financial institutions
in the Rio Grande Valley. The new or expanded services to be offered to First
State Bank and Border Bank customers include enhanced data processing services,
additional automated teller facilities and other services now offered to Texas
State Bank customers. Texas State Bank management believes that First State
Bank, Border Bank and Texas State Bank customers will benefit from the expansion
of Texas State Bank's branch network from nine to 15 banking locations. Texas
State Bank expects to realize certain operating and administrative efficiencies
as a result of the Mergers; however, because of the relatively low
employee-to-asset ratio at First State Bank and Border Bank, cost savings is not
a principal motivating factor for the Mergers. The operating efficiencies which
are expected include the use by all banking locations of the existing Texas
State Bank data processing facility, operation of a single human resources
department, and economies of a combined advertising program.
The terms of the merger of First State Bank are set forth in the Agreement
and Plan of Reorganization dated January 9, 1996, as amended on March 29, 1996,
by and between the Company, Texas State Bank and First State Bank ("First State
Bank Agreement"), and the terms of the merger of Border Bank are set forth in
the Agreement and Plan of Reorganization dated January 9, 1996, as amended on
March 29, 1996, between the Company, Texas State Bank and Border Bank ("Border
Bank Agreement") (the First State Bank Agreement and the Border Bank Agreement
are collectively called the "Merger Agreements," copies of which are filed as
exhibits to the Registration Statement). Subject to the terms and conditions of
the Merger Agreements, certain shareholders of First State Bank and Border Bank
have joined into the Merger Agreements to evidence their consent to the Mergers
and their agreement to vote their shares in favor of the Mergers at their
respective shareholders meetings. The Merger Agreements provide that, at the
time of the closing of the Mergers (the "Closing"), the net worth of First State
Bank will not be less
14
<PAGE>
than $62.0 million and the net worth of Border Bank will not be less than $17.3
million. Elliot B. Bottom is the Chairman of the Board of both First State Bank
and Border Bank, and the banks have substantial common ownership.
First State Bank, the principal office of which is located in Mission,
Texas, was chartered in 1909, and Border Bank, located in Hidalgo, Texas, was
chartered in 1968. Because of the proximity of Mission to McAllen, there is a
substantial overlap in the markets served by Texas State Bank and First State
Bank. For this reason and because the banks serve a similar customer base, First
State Bank is considered by Texas State Bank management to be a direct
competitor of Texas State Bank, particular as to loan customers.
All of the offices of First State Bank and Border Bank are located in
Hidalgo County, Texas, and all such locations are expected to continue to be
operated by Texas State Bank, under the Texas State Bank name, following the
Mergers. Both First State Bank and Border Bank are full service community banks.
The products and services offered at these locations will be expanded to include
all products and services offered by Texas State Bank.
Substantially all of the current officers and employees of First State Bank
and Border Bank are expected to be employed by Texas State Bank following the
Mergers. Elliott Bottom, the President and Chief Executive Officer of First
State Bank, will become President of Texas State Bank's Mission banking
locations, with principal operating responsibility for the Mission banking
locations, and Brent Bottom, the President of Border Bank, will become the Chief
Executive Officer of Texas State Bank's Hidalgo banking location. Texas State
Bank management believes that this continuity of management will provide for an
orderly transition and will minimize the loss of customer relationships.
The Mergers are subject to a number of conditions, including receipt of
approval from applicable regulatory authorities. Both the FRB and the Banking
Department have approved the Mergers, subject to certain conditions, including
the successful completion of the offering of Common Stock made hereby to
partially fund the Mergers. FRB approval was received on March 13, 1996.
Applicable regulations require a waiting period following receipt of FRB
approval prior to consummation of the Mergers, which period has expired. The
Mergers were approved by the shareholders of First State Bank and Border Bank,
as required by law, at meetings held on April 23, 1996.
Members of senior management of Texas State Bank, and Texas State Bank's
representatives, reviewed certain information concerning First State Bank and
Border Bank. This review included all loans on the First State Bank and Border
Bank watch lists, a substantial proportion of the loans to borrowers with other
large lines of credit and selected other loans in each bank's portfolio. The
Company's examinations were made using criteria, analyses and collateral
evaluations that the Company has traditionally used in the ordinary course of
its business.
First State Bank and Border Bank have each entered into a Memorandum of
Understanding with the Banking Department, pursuant to which each bank among
other things, agrees to (i) develop and follow policies related to loan
documentation and review, (ii) increase (and continue monitoring the adequacy
of) each bank's loan valuation reserve, and (iii) review of each bank's
investment and funds management policies. The Banking Department reviewed
compliance with the First State Bank Memorandum of Understanding as part of an
examination of First State Bank, and the FDIC reviewed compliance with the
Border Bank Memorandum of Understanding as part of an examination of Border
Bank. The regulatory authorities in each case concluded that there were
deficiencies in compliance with the Memorandum applicable to each Bank, and
required that First State Bank and Border Bank management further address the
deficiencies identified in the Memoranda. Prior to entering into the Merger
Agreements, First State Bank and Border Bank began to implement additional
correction efforts, including retaining an outside consultant to assist in
documentation and policy reviews for First State Bank and Border Bank. Texas
State Bank management believes that the implementation of Texas State Bank's
policies and procedures, and the application of Texas State Bank's internal
controls, make it unlikely that the deficiencies identified in the Memoranda of
Understanding will be repeated, although there can be no certainty that all
deficiencies will be adequately addressed to the satisfaction of applicable
regulatory
15
<PAGE>
authorities. If the problems addressed in the Memoranda of Understanding
persist, they could adversely affect the future operations of the Company. See
"Risk Factors -- Risks of the Mergers -- Compliance and Management."
Following the Mergers, (i) all lending at the facilities formerly operated
by First State Bank and Border Bank will be conducted pursuant to Texas State
Bank's policies and under the supervision of Texas State Bank's Chief Lending
Officer, Frank A. Kavanagh, (ii) investments in securities will be managed by
the investment division of Texas State Bank in accordance with Texas State
Bank's investment policies and (iii) following conversion (which is expected by
Texas Regional management to occur in fall 1996) all data processing will be
performed by Texas State Bank's data processing center. In general, the policies
and procedures for all banking locations, including the banking locations
formerly operated as First State Bank and Border Bank facilities, will be Texas
State Bank's policies and procedures. Nonperforming assets and loans presently
past due on the books of First State Bank and Border Bank have been reviewed by
or on behalf of Texas State Bank and those loans which, in the judgment of Texas
State Bank, represent probable losses will be recorded at zero at the time of
consummation of the Mergers, although Texas State Bank will nonetheless pursue
collection in appropriate circumstances. At March 31, 1996, the allowance for
loan losses at First State Bank was $4.0 million or 91.7% of nonperforming
assets plus accruing loans 90 days or more past due. At March 31, 1996, the
allowance for loan losses at Border Bank was $1.1 million or 132.2% of
nonperforming assets plus accruing loans 90 days or more past due. At December
31, 1995, the allowance for loan losses at First State Bank was $4.2 million or
52.4% of nonperforming assets plus accruing loans 90 days or more past due. At
December 31, 1995, the allowance for loan losses at Border Bank was $1.1 million
or 72.5% of nonperforming assets plus accruing loans 90 days or more past due.
THE MERGER AGREEMENTS
The information contained in this Prospectus with respect to the Merger
Agreements is a summary of the material provisions of the Merger Agreements,
and, as such, is qualified in its entirety by reference to the Merger
Agreements, which are exhibits to the Registration Statement.
The Merger Agreements provide for the merger of First State Bank and Border
Bank with and into Texas State Bank. Each of the Mergers is conditioned upon the
closing of the other. The total consideration payable pursuant to the First
State Bank Agreement is $79.0 million, and the total consideration payable
pursuant to the Border Bank Agreement is $20.5 million, in each case payable in
cash. None of the shareholders of First State Bank or Border Bank have exercised
dissenter's rights. Each of the Merger Agreements provides that the Mergers will
terminate at the election of either party in the event that the Mergers have not
been consummated prior to June 30, 1996.
Pending the Closing, First State Bank and Border Bank have agreed to certain
operating limitations and requirements, including an obligation to operate their
businesses in accordance with reasonably prudent banking practices and in
substantially the same manner as conducted prior to the date of the Merger
Agreements. If either of the Mergers is not consummated as a result of either a
default by Texas State Bank or the failure of certain conditions precedent to
Texas State Bank's obligation to close the Mergers, Texas State Bank has agreed
to pay a $65,000 termination fee to each of First State Bank and Border Bank.
The consummation of the Mergers is subject to a number of conditions
precedent, including that regulatory approvals shall have been obtained and not
contested in a formal proceeding, that there shall not be litigation pending or
threatened which might result in action to restrain, enjoin, or prohibit
consummation of the Mergers, and that each party shall have received certain
fairness opinions in form and content acceptable to that party. Texas State
Bank's obligations are further conditioned on there being no shareholder
exercising dissenter's rights and there having been no material adverse change
in the condition, financial position or business prospects of First State Bank
or Border Bank and that each will have terminated its existing data processing
services contract on terms and conditions reasonably acceptable to Texas State
Bank. Texas State Bank has reserved the right to waive any applicable condition
to Closing in circumstances deemed appropriate by Texas State Bank management.
16
<PAGE>
One of the conditions to Texas State Bank's obligation to consummate the
First State Bank Agreement is that First State Bank have a net worth as of the
date of Closing (without regard to the effects of consummation of the Mergers)
of not less than $62.0 million. Similarly, one of the conditions to Texas State
Bank's obligation to consummate the Border Bank Agreement is that Border Bank
have a net worth as of the date of Closing of (without regard to the effects of
consummation of the Mergers and without regard to certain penalties paid in
connection with the termination of a data processing services contract) not less
than $17.3 million. Other than a dividend of $500,000 paid by Border Bank in
January 1996, each of the Merger Agreements prohibits payment of dividends to
shareholders of First State Bank and Border Bank pending Closing.
Pursuant to each of the Merger Agreements, Elliott Bottom, the Chairman of
the Board and Chief Executive Officer of First State Bank and the Chairman of
the Board of Border Bank, has agreed not to engage (except as an employee of
Texas State Bank) in the commercial banking business in Hidalgo, Cameron, Starr
or Willacy Counties, Texas, for a period of three years following the date of
Closing, except that such obligation shall terminate in the event of a change of
control of a majority of the outstanding capital stock of either Texas State
Bank or the Company. As of the date of Closing, Elliott Bottom will become
President of Texas State Bank's Mission banking locations. His son, Brent
Bottom, the President of Border Bank, will become the Chief Executive Officer of
Texas State Bank's Hidalgo banking location.
The terms of the Mergers were established in arms' length negotiations
conducted by representatives of Texas State Bank, and First State Bank and
Border Bank. In approving the Mergers and the amounts of the purchase price to
be paid, the Board of Directors of Texas State Bank considered a number of
factors, including: (i) First State Bank's and Border Bank's historical
financial condition, including shareholders' equity and results of operations;
(ii) First State Bank's and Border Bank's business, prospects, management and
employees; (iii) current economic and market conditions; (iv) the likelihood of
completing a transaction with one or more other banking institutions on
comparable or more favorable terms (although no specific alternative
transactions were identified); and (v) the prospects for growth of Texas State
Bank assuming the Mergers are completed. The Board of Directors attached no
specific relative weights to these factors in reaching its determination. In
addition, the Company has received an opinion of First Southwest Company as to
the fairness of the transaction, from a financial point of view, to the
shareholders of the Company. Given the historically strong growth rate for Texas
State Bank and the increasing population in its market area, management believes
that Texas State Bank's prospects for growth in the future are strong,
notwithstanding whether or not the Mergers are consummated.
It is anticipated that the Mergers, which are effective upon filing and
acceptance of a Certificate of Merger with the Banking Department, will be
consummated contemporaneously with the closing and funding of the net proceeds
of the offering herein described.
17
<PAGE>
PRICE RANGE OF COMMON STOCK AND DIVIDEND POLICY
Since the public offering of the Common Stock in March 1994, the Common
Stock has traded in the Nasdaq National Market System under the symbol "TRBS."
The following table shows (i) high and low prices of the Common Stock as
reported in the Summary of Activity provided to the Company by The Nasdaq Stock
Market for transactions occurring on the Nasdaq National Market System during
the past two years, and (ii) the total number of shares involved in such
transactions. In addition, with respect to periods prior to March 16, 1994, the
information is based upon transactions with respect to which the management of
Texas Regional had knowledge of the transaction price, since during those
periods transactions were reported on an informal basis, and no independent
verification of the transaction prices was made. Therefore, during periods prior
to March 16, 1994, the prices reported may not be indicative of the actual or
market value of the Common Stock.
<TABLE>
<CAPTION>
PRICE PER SHARE CASH
-------------------- DIVIDENDS NUMBER OF
HIGH LOW DECLARED SHARES
--------- --------- ----------- -----------
<S> <C> <C> <C> <C>
1994
First Quarter.......................................... $ 12.75 $ 11.75 $ -- 854,845
Second Quarter......................................... 14.50 11.00 0.08 1,182,385
Third Quarter.......................................... 15.50 13.25 0.08 582,094
Fourth Quarter......................................... 13.50 11.50 0.08 173,796
1995
First Quarter.......................................... 12.75 11.25 0.10 78,931
Second Quarter......................................... 14.50 11.75 0.10 335,504
Third Quarter.......................................... 16.50 13.50 0.10 248,456
Fourth Quarter......................................... 18.25 15.50 0.10 90,019
1996
First Quarter.......................................... 23.50 17.00 0.10 396,700
</TABLE>
During the two years ended December 31, 1995, an aggregate of 58,500 shares
purchased by the KSOP are included in the foregoing table. See "Management --
Employee Stock Ownership Plan."
On May 8, 1996, the last trading day prior to the date of this Prospectus,
the last reported sale price of the Common Stock as reported on the Nasdaq
National Market System was $24.25 per share. On January 9, 1996, the day prior
to the public announcement of the execution of the Merger Agreements, the last
reported sale price of the Common Stock as reported on the Nasdaq National
Market System was $17.00 per share.
The Company paid no dividends on its Common Stock prior to June 1994.
Beginning in June 1994, the Company paid a quarterly dividend of $0.08 per share
of its Common Stock. During 1995, the Company increased its quarterly dividend
to $0.10 per share, and currently intends to continue to pay such dividend in
the foreseeable future. On March 12, 1996, the Company's Board of Directors
declared a dividend of $0.10 per share of Common Stock payable to shareholders
of record as of April 8, 1996.
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 and
will depend on conditions then existing, including Texas Regional's
profitability, liquidity, financial condition, capital requirements and other
relevant factors, including regulatory restrictions applicable to the Company.
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 Texas State Bank
is subject to certain restrictions imposed by federal and state banking laws,
regulations and authorities. At March 31, 1996, an aggregate of $14.6 million
was available for payment of dividends by the Bank to the Company under the
applicable limitations and without regulatory approval. See "Business --
Regulation and Supervision."
18
<PAGE>
CAPITALIZATION
The following table sets forth the consolidated capitalization of the
Company at March 31, 1996 and December 31, 1995, adjusted to give effect to the
issuance and sale of the Common Stock offered by the Company hereby and
consummation of the Mergers (in each case, assuming no exercise of the
Underwriters' over-allotment option and after deduction for estimated
underwriting discounts and other expenses of the offering).
<TABLE>
<CAPTION>
MARCH 31, 1996 DECEMBER 31, 1995
------------------------- -------------------------
ACTUAL AS ADJUSTED(1) ACTUAL AS ADJUSTED(1)
--------- -------------- --------- --------------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
LONG-TERM DEBT
Note Payable......................................... $ -- $ -- $ -- $ --
SHAREHOLDERS' EQUITY
Preferred Stock: $1.00 par value; 10,000,000 shares
authorized......................................... -- -- -- --
Common Stock: $1.00 par value; 20,000,000 shares
authorized; issued and outstanding 6,196,791 shares
at March 31, 1996, and December 31, 1995, and
8,376,791 shares at March 31, 1996, and December
31, 1995, on an "As Adjusted" basis................ 6,196 8,376 6,196 8,376
Paid-In Capital...................................... 29,239 72,275 29,239 72,275
Retained Earnings.................................... 29,102 29,102 27,168 27,168
Unrealized Gains on Securities
Available for Sale................................. 26 26 117 117
--------- -------------- --------- --------------
TOTAL SHAREHOLDERS' EQUITY........................... 64,563 109,779 62,720 107,936
--------- -------------- --------- --------------
TOTAL CAPITALIZATION..................................... $ 64,563 $ 109,779 $ 62,720 $ 107,936
--------- -------------- --------- --------------
--------- -------------- --------- --------------
</TABLE>
- ---------
(1) Reflects the receipt by Texas Regional of net proceeds of this offering
of approximately $45.2 million, assuming sale by Texas Regional of
2,180,000 shares at a price of $22.25 per share, net of underwriting
discounts and commissions and other estimated offering expenses.
At March 31, 1996, Texas Regional had outstanding 6,196,791 shares of Common
Stock held by approximately 636 shareholders of record.
19
<PAGE>
TEXAS REGIONAL BANCSHARES, INC.
SELECTED CONSOLIDATED FINANCIAL INFORMATION
The selected consolidated financial information under the captions "Summary
of Operations" and "Period-End Balance Sheet Data" below for, and as of, each of
the years in the five-year period ended December 31, 1995 has been derived from
the consolidated financial statements of the Company, which financial statements
have been audited by KPMG Peat Marwick LLP, independent auditors. The
consolidated financial statements at December 31, 1995 and 1994 and for each of
the years in the three-year period ended December 31, 1995 are included
elsewhere in this Prospectus. The data presented at March 31, 1996 and 1995 and
for each of the three-month periods then ended are derived from unaudited
consolidated interim financial statements of the Company and include, in the
opinion of management, all adjustments necessary to present fairly the data for
such periods.
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31, YEARS ENDED DECEMBER 31,
----------------------- -----------------------------------------------------
1996 1995 1995 1994 1993 1992 1991
------------ --------- --------- --------- --------- --------- ---------
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C> <C> <C>
SUMMARY OF OPERATIONS
Interest Income.............................. $ 12,970 $ 10,179 $ 45,592 $ 34,631 $ 29,691 $ 27,737 $ 24,484
Interest Expense............................. 5,281 3,729 18,052 11,690 10,494 10,876 12,711
------------ --------- --------- --------- --------- --------- ---------
Net Interest Income.......................... 7,689 6,450 27,540 22,941 19,197 16,861 11,773
Provision for Loan Losses.................... 461 366 1,685 1,085 392 220 310
Noninterest Income........................... 1,946 1,590 6,518 5,772 5,032 3,817 2,775
Noninterest Expense.......................... 5,314 4,594 18,977 16,507 14,513 13,910 9,864
------------ --------- --------- --------- --------- --------- ---------
Income Before Income Tax Expense............. 3,860 3,080 13,396 11,121 9,324 6,548 4,374
Income Tax Expense........................... 1,306 1,093 4,671 3,936 3,345 2,029 1,550
Cumulative Effect of Change in Accounting
Principle.................................. -- -- -- -- 32 -- --
------------ --------- --------- --------- --------- --------- ---------
Net Income................................... $ 2,554 $ 1,987 $ 8,725 $ 7,185 $ 6,011 $ 4,519 $ 2,824
------------ --------- --------- --------- --------- --------- ---------
------------ --------- --------- --------- --------- --------- ---------
PER SHARE DATA
Net Income................................... $ 0.41 $ 0.32 $ 1.40 $ 1.16 $ 1.16 $ 0.92 $ 0.79
Book Value................................... 10.42 9.26 10.12 9.00 7.73 6.42 5.22
Cash Dividends Paid on Common Stock.......... 0.10 0.10 0.40 0.24 -- -- --
Average Shares Outstanding (in thousands).... 6,295 6,201 6,227 6,035 5,170 4,890 3,578
PERIOD-END BALANCE SHEET DATA
Total Assets................................. $ 655,886 $ 539,005 $ 646,769 $ 531,834 $ 473,263 $ 414,331 $ 297,256
Loans........................................ 467,059 354,410 450,854 339,939 290,500 252,118 179,853
Investment Securities........................ 113,366 117,190 131,641 126,828 127,540 100,353 69,735
Interest-Earning Assets...................... 593,625 489,600 586,095 468,067 422,965 374,671 263,958
Deposits..................................... 585,994 475,985 579,731 472,108 429,521 375,016 271,540
Shareholders' Equity......................... 64,563 57,341 62,720 55,731 39,983 34,318 19,366
PERFORMANCE RATIOS
Return on Average Assets..................... 1.57% 1.52% 1.51% 1.43% 1.34% 1.23% 1.00%
Return on Average Shareholders' Equity....... 16.01 14.16 14.69 14.11 16.15 15.23 15.85
Net Interest Margin.......................... 5.38 5.54 5.33 5.12 4.84 5.21 4.67
Loan to Deposit Ratio........................ 79.70 74.46 77.77 72.00 67.63 67.23 66.23
Demand Deposit to Total Deposit Ratio........ 20.49 20.46 20.77 21.11 20.81 21.61 20.86
ASSET QUALITY RATIOS
Nonperforming Assets to Loans and Other
Nonperforming Assets....................... 0.92% 0.97% 0.79% 1.41% 1.69% 2.31% 4.27%
Net Charge-Offs to Average Loans............. 0.10 (0.03) 0.30 0.33 (0.04) 0.21 0.45
Allowance for Loan Losses as a Percentage of:
Loans.................................... 1.05 1.13 1.01 1.03 1.18 1.16 1.42
Nonperforming Loans...................... 170.98 226.47 216.49 143.42 146.05 257.83 67.10
Nonperforming Assets..................... 113.12 115.33 126.62 72.96 69.39 49.43 32.44
CAPITAL RATIOS
Period-End Shareholders' Equity to Total
Assets..................................... 9.84% 10.64% 9.70% 10.48% 8.45% 8.28% 6.51%
Tier I Risk-Based Capital.................... 11.66 14.59 11.70 14.71 12.05 11.85 9.81
Total Risk-Based Capital..................... 12.63 15.63 12.64 15.67 13.21 12.91 11.06
Leverage Capital Ratio....................... 9.07 10.56 8.96 10.37 7.88 8.15 6.54
------------ --------- --------- --------- --------- --------- ---------
------------ --------- --------- --------- --------- --------- ---------
</TABLE>
20
<PAGE>
TEXAS REGIONAL BANCSHARES, INC.
PRO FORMA COMBINED CONDENSED FINANCIAL INFORMATION
The following unaudited pro forma combined condensed balance sheet at March
31, 1996, and pro forma combined condensed statement of income for the three
months ended March 31, 1996, combine the historical consolidated balance sheet
of the Company and the historical balance sheets of First State Bank and Border
Bank at March 31, 1996, as if the Mergers had been effective on March 31, 1996.
Similarly, the following unaudited pro forma combined condensed balance sheet at
December 31, 1995, and pro forma combined condensed statement of income for the
year ended December 31, 1995, combine the historical consolidated balance sheet
of the Company and the historical balance sheets of First State Bank and Border
Bank at December 31, 1995, as if the Mergers had been effective on December 31,
1995. The Mergers are accounted for under the purchase method of accounting,
after giving effect to the pro forma adjustments and assumptions described in
the accompanying notes. Under this method of accounting, which is required by
generally accepted accounting principles, assets and liabilities of First State
Bank and Border Bank are adjusted to their fair values (as estimated by
management of the Company) and combined with the recorded values of the assets
and liabilities of the Company. This pro forma combined condensed financial
information should be read in conjunction with the financial information
appearing under "Texas Regional Bancshares, Inc. Selected Consolidated Financial
Information" and the consolidated financial statements of the Company, First
State Bank and Border Bank, including the notes thereto, included elsewhere in
this Prospectus. See "Index to Financial Statements."
The following unaudited pro forma combined condensed statement of income for
the three months ended March 31, 1996 assumes the Mergers and the RGC/Roma
Branch Acquisitions occurred January 1, 1995. The unaudited pro forma combined
condensed statement of income for the year ended December 31, 1995 also assumes
the Mergers and the RGC/Roma Branch Acquisitions occurred January 1, 1995.
Intangibles arising from the Mergers and the RGC/Roma Branch Acquisitions are
approximately $19.7 million and $4.1 million, respectively. The pro forma
adjustments reflect the amortization of the core deposit premium over a 10-year
period, the fixed maturity deposit premium over a 3-year period and the goodwill
intangible over a 15-year period.
The pro forma combined condensed financial information is not intended to
present the results that would have actually occurred if the Mergers had been in
effect on the assumed dates and for the assumed periods. These results are not
necessarily indicative of the results which may be obtained in the future.
21
<PAGE>
TEXAS REGIONAL BANCSHARES, INC.
PRO FORMA COMBINED CONDENSED BALANCE SHEET
MARCH 31, 1996
(UNAUDITED)
<TABLE>
<CAPTION>
FIRST BORDER PRO FORMA PRO FORMA
TEXAS REGIONAL STATE BANK BANK ADJUSTMENTS BALANCE
--------------- ----------- ----------- -------------- -------------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
ASSETS
Cash and Due from Banks................... $ 31,547 $ 14,335 $ 6,088 $ 45,216A $ 56,684
(502)B
(40,000)E
Federal Funds Sold........................ 13,200 60,550 10,500 (59,500)E 24,750
--------------- ----------- ----------- -------------- -------------
Total Cash and Cash Equivalents......... 44,747 74,885 16,588 (54,786) 81,434
Securities Available for Sale............. 57,453 20,920 5,281 -- 83,654
Securities Held to Maturity............... 55,913 128,782 42,329 -- 227,024
Loans, Net of Unearned Discount........... 467,059 192,825 51,017 (1,337)F 709,564
Less: Allowance for Loan Losses........... (4,890) (4,009) (1,100) -- (9,999)
--------------- ----------- ----------- -------------- -------------
Net Loans............................... 462,169 188,816 49,917 (1,337) 699,565
Premises and Equipment, Net............... 18,964 5,411 3,075 7,000C 34,450
Accrued Interest Receivable............... 6,724 6,563 1,979 -- 15,266
Other Real Estate......................... 1,353 275 238 -- 1,866
Goodwill.................................. 4,559 -- -- 11,336E 15,895
Core Deposit.............................. 960 -- -- 8,351G 9,311
Organization Cost......................... 69 -- -- -- 69
Other Assets.............................. 2,975 429 538 (112)I 3,830
--------------- ----------- ----------- -------------- -------------
Total Assets............................ $ 655,886 $ 426,081 $ 119,945 $ (29,548) $ 1,172,364
--------------- ----------- ----------- -------------- -------------
--------------- ----------- ----------- -------------- -------------
LIABILITIES
Deposits
Noninterest-Bearing..................... $ 120,087 $ 39,793 $ 6,543 $ (502)B $ 165,921
Interest-Bearing........................ 465,907 321,621 95,669 (394)H 882,803
--------------- ----------- ----------- -------------- -------------
Total Deposits........................ 585,994 361,414 102,212 (896) 1,048,724
--------------- ----------- ----------- -------------- -------------
Federal Funds Purchased and Securities
Sold Under Repurchase Agreements........ 600 -- -- -- 600
Other Borrowings.......................... -- 1,139 -- -- 1,139
Accounts Payable and Accrued
Liabilities............................. 4,729 1,894 568 5,043D 12,122
(112)I
--------------- ----------- ----------- -------------- -------------
Total Liabilities..................... 591,323 364,447 102,780 4,035 1,062,585
--------------- ----------- ----------- -------------- -------------
SHAREHOLDERS' EQUITY
Preferred Stock........................... -- -- -- -- --
Common Stock.............................. 6,196 4,000 2,000 2,180A 8,376
(6,000)E
Paid-In Capital........................... 29,239 21,000 9,000 43,036A 72,275
(30,000)E
Retained Earnings......................... 29,102 36,682 6,170 (42,852)E 29,102
Unrealized Gain (Loss) on Securities
Available for Sale...................... 26 (48) (5) 53E 26
--------------- ----------- ----------- -------------- -------------
Total Shareholders' Equity............ 64,563 61,634 17,165 (33,583) 109,779
--------------- ----------- ----------- -------------- -------------
Total Liabilities and Shareholders'
Equity.............................. $ 655,886 $ 426,081 $ 119,945 $ (29,548) $ 1,172,364
--------------- ----------- ----------- -------------- -------------
--------------- ----------- ----------- -------------- -------------
</TABLE>
- ---------
See Notes to Pro Forma Combined Condensed Balance Sheet (Unaudited).
22
<PAGE>
TEXAS REGIONAL BANCSHARES, INC.
PRO FORMA COMBINED CONDENSED STATEMENT OF INCOME
THREE MONTHS ENDED MARCH 31, 1996
(UNAUDITED)
<TABLE>
<CAPTION>
TEXAS FIRST BORDER PRO FORMA PRO FORMA
REGIONAL STATE BANK BANK ADJUSTMENTS BALANCE
--------- ----------- --------- ------------- -----------
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C>
Interest Income............................................ $ 12,970 $ 8,192 $ 2,341 $ (579)J $ 22,924
Interest Expense........................................... 5,281 3,283 1,138 33K 9,735
--------- ----------- --------- ------------- -----------
Net Interest Income........................................ 7,689 4,909 1,203 (612) 13,189
Provision for Loan Losses.................................. 461 290 71 -- 822
--------- ----------- --------- ------------- -----------
Net Interest Income After Provision for Loan Losses...... 7,228 4,619 1,132 (612) 12,367
--------- ----------- --------- ------------- -----------
Noninterest Income
Service Charges on Deposit Accounts...................... 939 246 67 -- 1,252
Other Service Charges.................................... 236 54 16 -- 306
Trust Service Fees....................................... 366 21 -- -- 387
Other Operating Income................................... 405 17 11 -- 433
--------- ----------- --------- ------------- -----------
Total Noninterest Income............................... 1,946 338 94 -- 2,378
--------- ----------- --------- ------------- -----------
Noninterest Expense
Salaries and Employee Benefits........................... 2,737 682 248 -- 3,667
Net Occupancy Expense.................................... 317 134 55 59L 565
Equipment Expense........................................ 643 85 28 -- 756
Other Noninterest Expense................................ 1,617 865 131 398M 3,011
--------- ----------- --------- ------------- -----------
Total Noninterest Expense.............................. 5,314 1,766 462 457 7,999
--------- ----------- --------- ------------- -----------
Income Before Income Tax Expense........................... 3,860 3,191 764 (1,069) 6,746
Income Tax Expense......................................... 1,306 914 172 (308)N 2,084
--------- ----------- --------- ------------- -----------
Net Income............................................... $ 2,554 $ 2,277 $ 592 $ (761) $ 4,662
--------- ----------- --------- ------------- -----------
--------- ----------- --------- ------------- -----------
Primary Earnings Per Common Share
Net Income............................................... $ 0.41 $ 0.55
Weighted Average Number of Common Shares Outstanding
(In Thousands)......................................... 6,290 8,470
--------- -----------
Fully Diluted Earnings Per Common Share
Net Income............................................... $ 0.41 $ 0.55
Weighted Average Number of Common Shares Outstanding
(In Thousands)......................................... 6,295 8,475
--------- -----------
--------- -----------
</TABLE>
- ----------
See Notes to Pro Forma Combined Condensed Statement of Income (Unaudited).
23
<PAGE>
TEXAS REGIONAL BANCSHARES, INC.
NOTES TO PRO FORMA COMBINED CONDENSED BALANCE SHEET
MARCH 31, 1996
(UNAUDITED)
The unaudited pro forma combined condensed balance sheet combines the three
entities at March 31, 1996. In combining the entities, the following adjustments
were made:
(A) To record the estimated proceeds of the $45.2 million net capital raised
through the offering based on an assumed sale by Texas Regional of 2,180,000
shares of Common Stock at the offering price of $22.25 per share, net of
underwriting discounts, commissions and other estimated offering expenses.
(B) To record the elimination of intercompany demand deposit accounts.
(C) To record estimated $7.0 million increase in fair value of fixed assets.
(D) To record estimated deferred federal income tax on the net fair value
increases.
(E) To record the payment of $99.5 million to the First State Bank and Border
Bank shareholders for 100% of their outstanding stock, elimination of all
First State Bank and Border Bank equity accounts and the recording of
goodwill.
(F) To adjust loan carrying value to estimated fair value.
(G) To record estimated fair value of core deposits.
(H) To record estimated fair value of fixed maturity deposit premium.
(I) To reclassify deferred federal income taxes.
TEXAS REGIONAL BANCSHARES, INC.
NOTES TO PRO FORMA COMBINED CONDENSED STATEMENT OF INCOME
THREE MONTHS ENDED MARCH 31, 1996
(UNAUDITED)
The unaudited pro forma combined condensed statement of income combines the
three entities for the quarter ended March 31, 1996. In combining the entities,
the following adjustments were made:
(J) To record a reduction in interest income on the $54.3 million net purchase
price ($99.5 million less $45.2 million) of the Mergers at an average
federal funds sold rate of 5.11% for the three months ended March 31, 1996.
(K) To amortize the fixed maturity deposit premium.
(L) To record depreciation on fair market value increases of depreciable fixed
assets acquired in the Mergers.
(M) To record amortization of the goodwill and core deposit premium recorded in
connection with the Mergers and the RGC/Roma Branch Acquisitions.
(N) To record the effect of the pro forma adjustments using an effective tax
rate of 35% for the three months ended March 31, 1996.
24
<PAGE>
TEXAS REGIONAL BANCSHARES, INC.
PRO FORMA COMBINED CONDENSED BALANCE SHEET
DECEMBER 31, 1995
(UNAUDITED)
<TABLE>
<CAPTION>
FIRST BORDER PRO FORMA PRO FORMA
TEXAS REGIONAL STATE BANK BANK ADJUSTMENTS BALANCE
--------------- ----------- ----------- -------------- -------------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
ASSETS
Cash and Due from Banks................... $ 30,933 $ 16,270 $ 3,982 $ 45,216A $ 54,514
(41,172)F
(715)B
Federal Funds Sold........................ 3,600 23,350 8,750 (30,850)F 4,850
--------------- ----------- ----------- -------------- -------------
Total Cash and Cash Equivalents......... 34,533 39,620 12,732 (27,521) 59,364
Securities Available for Sale............. 63,150 23,478 6,779 (27,478)F 65,929
Securities Held to Maturity............... 68,491 143,283 47,457 2,937C 262,168
Loans, Net of Unearned Discount........... 450,854 188,424 47,345 (1,337)G 685,286
Less: Allowance for Loan Losses........... (4,542) (4,196) (1,100) -- (9,838)
--------------- ----------- ----------- -------------- -------------
Net Loans............................... 446,312 184,228 46,245 (1,337) 675,448
Premises and Equipment, Net............... 18,374 5,487 3,297 7,000D 34,158
Accrued Interest Receivable............... 6,319 7,172 2,242 -- 15,733
Other Real Estate......................... 1,273 431 237 -- 1,941
Goodwill.................................. 4,641 -- -- 11,590F 16,231
Core Deposit.............................. 1,000 -- -- 8,351H 9,351
Organization Cost......................... 70 -- -- -- 70
Other Assets.............................. 2,606 771 515 (137)J 3,755
--------------- ----------- ----------- -------------- -------------
Total Assets............................ $ 646,769 $ 404,470 $ 119,504 $ (26,595) $ 1,144,148
--------------- ----------- ----------- -------------- -------------
--------------- ----------- ----------- -------------- -------------
LIABILITIES
Deposits
Noninterest-Bearing..................... $ 120,414 $ 39,810 $ 7,137 $ (715)B $ 166,646
Interest-Bearing........................ 459,317 303,800 94,858 (394)I 857,581
--------------- ----------- ----------- -------------- -------------
Total Deposits........................ 579,731 343,610 101,995 (1,109) 1,024,227
--------------- ----------- ----------- -------------- -------------
Federal Funds Purchased and Securities
Sold Under Repurchase Agreements........ 757 -- -- -- 757
Other Borrowings.......................... -- 157 -- -- 157
Accounts Payable and Accrued
Liabilities............................. 3,561 1,316 434 5,897E 11,071
(137) J
--------------- ----------- ----------- -------------- -------------
Total Liabilities..................... 584,049 345,083 102,429 4,651 1,036,212
--------------- ----------- ----------- -------------- -------------
SHAREHOLDERS' EQUITY
Preferred Stock........................... -- -- -- -- --
Common Stock.............................. 6,196 4,000 2,000 2,180A 8,376
(6,000)F
Paid-In Capital........................... 29,239 21,000 9,000 43,036A 72,275
(30,000)F
Retained Earnings......................... 27,168 34,405 6,078 (40,483)F 27,168
Unrealized Gain (Loss) on Securities
Available for Sale...................... 117 (18) (3) 21F 117
--------------- ----------- ----------- -------------- -------------
Total Shareholders' Equity............ 62,720 59,387 17,075 (31,246) 107,936
--------------- ----------- ----------- -------------- -------------
Total Liabilities and Shareholders'
Equity.............................. $ 646,769 $ 404,470 $ 119,504 $ (26,595) $ 1,144,148
--------------- ----------- ----------- -------------- -------------
--------------- ----------- ----------- -------------- -------------
</TABLE>
- ---------
See Notes to Pro Forma Combined Condensed Balance Sheet (Unaudited).
25
<PAGE>
TEXAS REGIONAL BANCSHARES, INC.
PRO FORMA COMBINED CONDENSED STATEMENT OF INCOME
YEAR ENDED DECEMBER 31, 1995
(UNAUDITED)
<TABLE>
<CAPTION>
TEXAS RGC/ROMA FIRST BORDER PRO FORMA PRO FORMA
REGIONAL BRANCHES STATE BANK BANK ADJUSTMENTS BALANCE
--------- ------------- ----------- --------- ------------- -----------
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C> <C>
Interest Income............................... $ 43,505 $ 6,337 $ 32,472 $ 9,016 $ (3,900)K $ 87,430
Interest Expense.............................. 17,041 2,817 13,103 4,415 131L 37,507
--------- ------------- ----------- --------- ------------- -----------
Net Interest Income........................... 26,464 3,520 19,369 4,601 (4,031) 49,923
Provision for Loan Losses..................... 1,666 19 2,425 485 -- 4,595
--------- ------------- ----------- --------- ------------- -----------
Net Interest Income After Provision for Loan
Losses.................................... 24,798 3,501 16,944 4,116 (4,031) 45,328
--------- ------------- ----------- --------- ------------- -----------
Noninterest Income
Service Charges on Deposit Accounts......... 3,312 469 1,146 255 -- 5,182
Other Service Charges....................... 825 97 151 33 -- 1,106
Trust Service Fees.......................... 1,256 -- 24 -- -- 1,280
Other Operating Income...................... 926 24 81 28 -- 1,059
--------- ------------- ----------- --------- ------------- -----------
Total Noninterest Income.................. 6,319 590 1,402 316 -- 8,627
--------- ------------- ----------- --------- ------------- -----------
Noninterest Expense
Salaries and Employee Benefits.............. 9,247 1,334 2,824 1,056 -- 14,461
Net Occupancy Expense....................... 1,010 176 568 234 294M 2,282
Equipment Expense........................... 1,959 217 341 148 -- 2,665
Other Noninterest Expense................... 5,631 1,281 2,531 729 1,777N 11,949
--------- ------------- ----------- --------- ------------- -----------
Total Noninterest Expense................. 17,847 3,008 6,264 2,167 2,071 31,357
--------- ------------- ----------- --------- ------------- -----------
Income Before Income Tax Expense.............. 13,270 1,083 12,082 2,265 (6,102) 22,598
Income Tax Expense............................ 4,630 367 3,436 381 (1,812)O 7,002
--------- ------------- ----------- --------- ------------- -----------
Net Income.................................. $ 8,640 $ 716 $ 8,646 $ 1,884 $ (4,290) $ 15,596
--------- ------------- ----------- --------- ------------- -----------
--------- ------------- ----------- --------- ------------- -----------
Primary Earnings Per Common Share
Net Income.................................. $ 1.39 $ 1.86
Weighted Average Number of Common Shares
Outstanding
(In Thousands)............................ 6,218 8,398
--------- -----------
Fully Diluted Earnings Per Common Share
Net Income.................................. $ 1.39 $ 1.86
Weighted Average Number of Common Shares
Outstanding
(In Thousands)............................ 6,227 8,407
--------- -----------
--------- -----------
</TABLE>
- ----------
See Notes to Pro Forma Combined Condensed Statement of Income (Unaudited).
26
<PAGE>
TEXAS REGIONAL BANCSHARES, INC.
NOTES TO PRO FORMA COMBINED CONDENSED BALANCE SHEET
DECEMBER 31, 1995
(UNAUDITED)
The unaudited pro forma combined condensed balance sheet combines the three
entities at December 31, 1995. In combining the entities, the following
adjustments were made:
(A) To record the estimated proceeds of the $45.2 million net capital raised
through the offering based on an assumed sale by Texas Regional of 2,180,000
shares of Common Stock at the offering price of $22.25 per share, net of
underwriting discounts, commissions and other estimated offering expenses.
(B) To record the elimination of intercompany demand deposit accounts.
(C) To adjust securities purchased to fair value at December 31, 1995.
(D) To record estimated $7.0 million increase in fair value of fixed assets.
(E) To record estimated deferred federal income tax on the net fair value
increases.
(F) To record the payment of $99.5 million to the First State Bank and Border
Bank shareholders for 100% of their outstanding stock, elimination of all
First State Bank and Border Bank equity accounts and the recording of
goodwill.
(G) To adjust loan carrying value to estimated fair value.
(H) To record estimated fair value of core deposits.
(I) To record estimated fair value of fixed maturity deposit premium.
(J) To reclassify deferred federal income taxes.
TEXAS REGIONAL BANCSHARES, INC.
NOTES TO PRO FORMA COMBINED CONDENSED STATEMENT OF INCOME
YEAR ENDED DECEMBER 31, 1995
(UNAUDITED)
The unaudited pro forma combined condensed statement of income combines the
three entities for the year ended December 31, 1995. In combining the entities,
the following adjustments were made:
(K) To record a reduction in interest income on the $54.3 million net purchase
price ($99.5 million less $45.2 million) of the Mergers and $4.25 million
purchase price of the RGC/Roma Branch Acquisitions at an average federal
funds sold rate of 5.92% for the year ended December 31, 1995.
(L) To amortize the fixed maturity deposit premium.
(M) To record depreciation on fair market value increases of depreciable fixed
assets acquired in the Mergers.
(N) To record amortization of the goodwill and core deposit premium recorded in
connection with the Mergers and the RGC/Roma Branch Acquisitions.
(O) To record the effect of the pro forma adjustments using an effective tax
rate of 34% for year ended December 31, 1995.
27
<PAGE>
TEXAS REGIONAL BANCSHARES, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
The following discussion provides additional information regarding the
financial condition and the results of operations for the Company for each of
the three months ended March 31, 1996 and 1995, and for each of the years ended
December 31, 1995, 1994 and 1993. This discussion should be read in conjunction
with the consolidated financial statements of the Company and the notes thereto
appearing elsewhere in this Prospectus. See "Texas Regional Bancshares, Inc. Pro
Forma Combined Condensed Financial Information" for additional information
regarding the effects on the Company of consummation of the Mergers. The data
presented for the three-month periods ended March 31, 1996 and March 31, 1995
are derived from unaudited consolidated interim financial statements of the
Company and include, in the opinion of management, all adjustments necessary to
present fairly the data for such periods.
SELECTED CONSOLIDATED FINANCIAL INFORMATION
Net income for the three months ended March 31, 1996 was $2.6 million or
$0.41 per share, reflecting a net increase of $567,000 or $0.09 per share,
compared to net income of $2.0 million or $0.32 per share for the three months
ended March 31, 1995 and reflects a net increase of $134,000 or $0.02 per share
compared to net income of $2.4 million or $0.39 per share for the three months
ended December 31, 1995. Earnings performance for the three months ended March
31, 1996 compared to the three months ended March 31, 1995 reflected gains in
net interest income and an increase in noninterest income, partially offset by
an increase in noninterest expense. Earnings performance for the three months
ended March 31, 1996 compared to three months ended December 31, 1995 reflected
gains in net interest income and an increase in noninterest income partially
offset by an increase in noninterest expense. Net income for the year ended
December 31, 1995 was $8.7 million, reflecting a net increase of $1.5 million or
a 21.4% increase compared to net income of $7.2 million for the year ended
December 31, 1994. The earnings per share of $1.40 for the year ended December
31, 1995 increased $0.24 or 20.7% compared to the earnings per share of $1.16
for the year ended December 31, 1994. Earnings performance for the year ended
December 31, 1995 reflected gains in net interest income and an increase in
noninterest income. These positive factors were partially offset by an increase
in provision for loan losses and noninterest expenses. A more detailed
description of the results of operations is included in the material that
follows.
During August 1995, Texas State Bank completed the RGC/Roma Branch
Acquisitions which included the purchase of $43.7 million in loans and the
assumption of approximately $79.7 million in deposit liabilities of these
banking locations. This transaction was accounted for as a purchase; therefore,
the results of operations of the two banking locations are included in the
consolidated financial statements of the Company from the date of acquisition.
Purchase accounting adjustments for the purchase of loans and the assumption of
deposit liabilities of these banking locations were immaterial.
On March 31, 1992, the Company acquired, through merger, Mid Valley Bank,
Weslaco, Texas. Simultaneously with the acquisition of Mid Valley Bank, both the
surviving bank in that merger transaction and Harlingen State Bank, Harlingen,
Texas, a subsidiary of the Company, merged with and into Texas State Bank and
the former Weslaco and Harlingen banks became banking locations of Texas State
Bank. The Mid Valley Bank merger was accounted for under the purchase method of
accounting. Accordingly, certain income statement and balance sheet comparisons
during calendar 1991 and 1992 and at year-end 1991 and 1992, respectively, may
not be appropriate.
ANALYSIS OF RESULTS OF OPERATIONS
NET INTEREST INCOME
Net interest income is the difference between interest earned on assets and
interest expense incurred for the funds supporting those assets. The largest
category of earning assets consists of loans. The second largest category of
earning assets is investment securities, followed by federal funds sold. For
28
<PAGE>
analytical purposes, income from tax-exempt assets, primarily securities issued
by state and local governments or authorities, is adjusted by an increment which
equates tax-exempt income to interest from taxable assets.
Earning assets are financed by consumer and commercial deposits and
short-term borrowings. In addition to these interest-bearing funds, assets also
are supported by interest-free funds, primarily demand deposits and
shareholders' equity. Variations in the volume and mix of assets and
liabilities, and their relative sensitivity to interest rate movements,
determine changes in net interest income.
Taxable-equivalent net interest income was $7.9 million for the three months
ended March 31, 1996, an increase of $1.4 million or 21.7% compared to the three
months ended March 31, 1995 of $6.5 million. The interest rate margin of 5.38%
for the three months ended March 31, 1996 reflects a decrease of 16 basis points
compared to 5.54% for the three months ended March 31, 1995. The increase in net
interest income for the three months ended March 31, 1996 compared to the three
months ended March 31, 1995 was primarily attributable to the increase in the
volume of interest-earning assets exceeding the increase in volume of
interest-bearing liabilities and the change in the mix of earnings assets. The
increase in net interest income for the three months ended March 31, 1996
compared to three months ended December 31, 1995 was primarily attributable to
the change in the mix of interest-earning assets. The average loan balance for
the three months ended March 31, 1996 of $457.4 million increased $44.6 million
or 10.8% compared to the average loan balance for the three months ended
December 31, 1995. The increase in the average balance of loans outstanding
improved earnings. Average total interest-earning assets for the three months
ended March 31, 1996 of $590.5 million increased $16.4 million or 2.9% compared
to the average total interest-earning assets balance for the three months ended
December 31, 1995.
Taxable-equivalent net interest income was $27.8 million for the year ended
December 31, 1995, an increase of $4.7 million or 20.3% compared to the year
ended December 31, 1994, and taxable-equivalent net interest income of $23.1
million for the year ended December 31, 1994, increased $3.7 million or 19.3%
compared to the year ended December 31, 1993. Both net interest income and the
yield on earning assets were reduced by interest foregone on nonaccrual and
renegotiated loans. If interest on those loans had been accrued at the original
contractual rates, additional interest income would have approximated $247,000,
$476,000, and $149,000 for the years ended December 31, 1995, 1994 and 1993,
respectively.
The net yield on total interest-earning assets, also referred to as interest
rate margin, represents net interest income divided by average interest-earning
assets. Since a significant portion of the Company's funding is derived from
interest-free sources, primarily demand deposits and shareholders' equity, the
effective rate paid for all funds is lower than the rate paid on
interest-bearing liabilities alone. As the following table illustrates, the
interest rate margin of 5.38% for the three months ended March 31, 1996
decreased 16 basis points compared to 5.54% for the three months ended March 31,
1995 and increased 10 basis points compared to 5.28% for the three months ended
December 31, 1995. As the following table illustrates, the interest rate margin
of 5.33% for the year ended December 31, 1995 increased 21 basis points compared
to 5.12% for the year ended December 31, 1994 while the interest rate margin of
5.12% for the year ended December 31, 1994 increased 28 basis points compared to
4.84% for the year ended December 31, 1993.
The decrease in the interest rate margin for the three months ended March
31, 1996 is reflective of the shift in the mix of interest-bearing deposits.
Average time deposits of $296.7 million for the three months ended March 31,
1996 increased $83.9 million or 39.4% compared to $212.9 million for the three
months ended March 31, 1995. The rate on average time deposits for the three
months ended March 31, 1996 of 5.55% increased 50 basis points or 9.9% compared
to the 5.05% rate for the three months ended March 31, 1995.
The increase in the interest rate margin for the year ended December 31,
1995 is reflective of the shift in the mix of interest-earning assets to loans
from lower yielding investment securities, including federal funds sold, which
contributed to an increase in yield on interest-earning assets during the year.
29
<PAGE>
The mix of interest-earning assets was changed by total average loans of $370.3
million increasing $61.2 million or 19.8%, total average investment securities
of $131.0 million increasing $967,000 or 0.7% and average federal funds sold of
$19.8 million increasing $8.3 million or 72.4%. The increase in loan yield
reflects the general increase in average interest rates in 1995 compared to
1994. The increase in investment securities yield resulted from lower yielding
investment securities maturing and the reinvesting of the proceeds into higher
yields. The increase in interest on deposits during the year ended December 31,
1995 resulted primarily from increased volume and the higher average rate paid
compared to the previous year.
The following tables present for the three months ended March 31, 1996,
December 31, 1995 and March 31, 1995, and for the last three calendar years 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.
30
<PAGE>
QUARTERLY FINANCIAL SUMMARY
<TABLE>
<CAPTION>
THREE MONTHS ENDED
-----------------------------------------------------------------------------------------
MARCH 31, 1996 DECEMBER 31, 1995 MARCH 31, 1995
--------------------------- ---------------------------- ----------------------------
AVERAGE YIELD/ AVERAGE YIELD/ AVERAGE YIELD/
TAXABLE-EQUIVALENT BASIS(1) BALANCE INTEREST RATE BALANCE INTEREST RATE BALANCE INTEREST RATE
- ---------------------------------------- -------- -------- ------ -------- -------- ------- -------- -------- -------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
ASSETS
Interest-Earning Assets
Loans
Commercial.......................... $174,290 $ 4,176 9.64% $140,468 $ 3,436 9.70% $121,311 $ 2,899 9.69%
Real Estate......................... 239,627 5,929 9.95 229,158 5,847 10.12 191,288 4,798 10.17
Consumer............................ 43,477 1,074 9.94 43,215 1,109 10.18 31,680 747 9.56
-------- -------- -------- -------- -------- --------
Total Loans....................... 457,394 11,179 9.83 412,841 10,392 9.99 344,279 8,444 9.95
-------- -------- -------- -------- -------- --------
Investment Securities
Taxable............................. 115,525 1,718 5.98 139,688 2,059 5.85 115,477 1,517 5.33
Tax-Exempt.......................... 4,920 109 8.83 4,889 107 8.68 5,023 113 9.12
-------- -------- -------- -------- -------- --------
Total Investment Securities....... 120,445 1,827 6.10 144,577 2,166 5.94 120,500 1,630 5.49
-------- -------- -------- -------- -------- --------
Federal Funds Sold...................... 12,628 170 5.41 16,615 246 5.87 9,821 144 5.95
-------- -------- -------- -------- -------- --------
Total Interest-Earning Assets..... 590,467 13,176 8.97 574,033 12,804 8.85 474,600 10,218 8.73
-------- -------- -------- -------- -------- --------
Cash and Due from Banks................. 35,081 31,520 31,675
Premises and Equipment, Net............. 18,680 17,739 15,613
Other Assets............................ 16,215 15,967 11,797
Less Allowance for Loan Losses........ (4,804) (4,347) (3,743)
-------- -------- --------
Total Assets...................... $655,639 $634,912 $529,942
-------- -------- --------
-------- -------- --------
LIABILITIES
Interest-Bearing Liabilities
Savings............................. $ 37,353 253 2.72 $ 37,357 255 2.71 $ 28,018 183 2.65
Money Market Checking and Savings... 135,770 929 2.75 132,075 899 2.70 131,387 874 2.70
Time Deposits....................... 296,734 4,093 5.55 284,789 4,009 5.58 212,863 2,650 5.05
-------- -------- -------- -------- -------- --------
Total Savings and Time
Deposits........................ 469,857 5,275 4.52 454,221 5,163 4.51 372,268 3,707 4.04
-------- -------- -------- -------- -------- --------
Federal Funds Purchased and
Securities Sold Under Repurchase
Agreements........................ 685 6 3.52 799 8 3.97 1,348 14 4.21
Short-Term Borrowings............... -- -- -- -- -- -- 429 8 7.56
-------- -------- -------- -------- -------- --------
Total Interest-Bearing
Liabilities..................... 470,542 5,281 4.51 455,020 5,171 4.51 374,045 3,729 4.04
-------- -------- -------- -------- -------- --------
Demand Deposits......................... 116,564 113,241 95,820
Other Liabilities....................... 4,375 4,310 3,168
-------- -------- --------
Total Liabilities................. 591,481 572,571 473,033
-------- -------- --------
SHAREHOLDERS' EQUITY 64,158 62,341 56,909
-------- -------- --------
Total Liabilities and
Shareholders' Equity............ $655,639 $634,912 $529,942
-------- -------- --------
-------- -------- --------
Net Interest Income..................... $ 7,895 $ 7,633 $ 6,489
-------- -------- --------
-------- -------- --------
Net Yield on Total Interest-Earning
Assets................................. 5.38% 5.28% 5.54%
------ ------- -------
------ ------- -------
</TABLE>
- ------------
(1) For analytical purposes, income from tax-exempt assets, primarily
securities issued by state and local governments or authorities, is
adjusted by an increment which equates tax-exempt income to interest
from taxable assets (assuming a 35% effective federal income tax rate
for 1996 and a 34% effective federal income tax rate for 1995).
31
<PAGE>
THREE-YEAR FINANCIAL SUMMARY
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
-----------------------------------------------------------------------------------------
1995 1994 1993
--------------------------- ---------------------------- ----------------------------
AVERAGE YIELD/ AVERAGE YIELD/ AVERAGE YIELD/
TAXABLE-EQUIVALENT BASIS(1) BALANCE INTEREST RATE BALANCE INTEREST RATE BALANCE INTEREST RATE
- ---------------------------------------- -------- -------- ------ -------- -------- ------- -------- -------- -------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
ASSETS
Interest-Earning Assets
Loans
Commercial.......................... $125,321 $12,355 9.86% $107,459 $ 8,959 8.34% $100,028 $ 7,891 7.89%
Real Estate......................... 208,035 21,197 10.19 172,925 16,415 9.49 139,432 13,420 9.62
Consumer............................ 36,918 3,647 9.88 28,654 2,631 9.18 24,503 2,363 9.64
-------- -------- -------- -------- -------- --------
Total Loans....................... 370,274 37,199 10.05 309,038 28,005 9.06 263,963 23,674 8.97
-------- -------- -------- -------- -------- --------
Investment Securities
Taxable............................. 126,086 7,004 5.55 125,912 5,863 4.66 110,098 5,119 4.65
Tax-Exempt.......................... 4,907 431 8.78 4,114 368 8.95 4,579 415 9.06
-------- -------- -------- -------- -------- --------
Total Investment Securities....... 130,993 7,435 5.68 130,026 6,231 4.79 114,677 5,534 4.83
-------- -------- -------- -------- -------- --------
Federal Funds Sold...................... 19,807 1,172 5.92 11,490 519 4.52 20,655 623 3.02
-------- -------- -------- -------- -------- --------
Total Interest-Earning Assets..... 521,074 45,806 8.79 450,554 34,755 7.71 399,295 29,831 7.47
-------- -------- -------- -------- -------- --------
Cash and Due from Banks................. 31,151 30,392 26,999
Premises and Equipment, Net............. 16,365 15,358 13,430
Other Assets............................ 13,507 11,562 11,573
Less Allowance for Loan Losses........ (4,158) (3,663) (3,206)
-------- -------- --------
Total Assets...................... $577,939 $504,203 $448,091
-------- -------- --------
-------- -------- --------
LIABILITIES
Interest-Bearing Liabilities
Savings............................. $ 31,360 840 2.68 $ 29,791 763 2.56 $ 27,978 780 2.79
Money Market Checking and Savings... 129,012 3,484 2.70 133,565 3,232 2.42 115,122 2,894 2.51
Time Deposits....................... 249,167 13,666 5.48 191,885 7,624 3.97 178,808 6,647 3.72
-------- -------- -------- -------- -------- --------
Total Savings and Time
Deposits........................ 409,539 17,990 4.39 355,241 11,619 3.27 321,908 10,321 3.21
-------- -------- -------- -------- -------- --------
Federal Funds Purchased and
Securities Sold Under Repurchase
Agreements........................ 1,093 46 4.21 651 23 3.53 20 1 5.00
Short-Term Borrowings............... 232 16 6.90 436 32 7.34 804 60 7.46
Note Payable........................ -- -- -- 265 16 6.04 1,873 112 5.98
-------- -------- -------- -------- -------- --------
Total Interest-Bearing
Liabilities..................... 410,864 18,052 4.39 356,593 11,690 3.28 324,605 10,494 3.23
-------- -------- -------- -------- -------- --------
Demand Deposits......................... 103,842 93,807 83,710
Other Liabilities....................... 3,835 2,896 2,552
-------- -------- --------
Total Liabilities................. 518,541 453,296 410,867
-------- -------- --------
SHAREHOLDERS' EQUITY 59,398 50,907 37,224
-------- -------- --------
Total Liabilities and
Shareholders' Equity............ $577,939 $504,203 $448,091
-------- -------- --------
-------- -------- --------
Net Interest Income..................... $27,754 $23,065 $19,337
-------- -------- --------
-------- -------- --------
Net Yield on Total Interest-Earning
Assets................................. 5.33% 5.12% 4.84%
------ ------- -------
------ ------- -------
</TABLE>
- ------------
(1) For analytical purposes, income from tax-exempt assets, primarily
securities issued by state and local governments or authorities, is
adjusted by an increment which equates tax-exempt income to interest
from taxable assets (assuming a 34% effective federal income tax rate).
32
<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. 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>
TAXABLE-EQUIVALENT BASIS(1) DUE TO CHANGE IN
THREE MONTHS ENDED MARCH 31, NET ---------------------------
1996 COMPARED TO 1995 CHANGE VOLUME RATE RATE/VOLUME
- -------------------------------------------------------------------------------- ------- ------ ------ -----------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
Interest Income
Loans, Including Fees......................................................... $ 2,735 $2,775 $ (32) $ (8)
Investment Securities
Taxable..................................................................... 201 1 199 1
Tax-Exempt.................................................................. (4) (2) (3) 1
Federal Funds Sold............................................................ 26 41 (12) (3)
------- ------ ------ -----------
Total Interest Income....................................................... 2,958 2,815 152 (9)
------- ------ ------ -----------
Interest Expense
Deposits...................................................................... 1,568 972 475 121
Federal Funds Purchased and Securities Sold Under Repurchase Agreements....... (8) (7) (2) 1
Short-Term Borrowings......................................................... (8) (8) -- --
------- ------ ------ -----------
Total Interest Expense...................................................... 1,552 957 473 122
------- ------ ------ -----------
Net Interest Income Before Allocation of Rate/Volume............................ 1,406 1,858 (321) (131)
------- ------ ------ -----------
Allocation of Rate/Volume....................................................... -- (92) (39) 131
------- ------ ------ -----------
Changes in Net Interest Income.................................................. $ 1,406 $1,766 $ (360) $--
------- ------ ------ -----------
------- ------ ------ -----------
<CAPTION>
TAXABLE-EQUIVALENT BASIS(1) DUE TO CHANGE IN
THREE MONTHS ENDED MARCH 31, NET ---------------------------
1995 COMPARED TO 1994 CHANGE VOLUME RATE RATE/VOLUME
- -------------------------------------------------------------------------------- ------- ------ ------ -----------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
Interest Income
Loans, Including Fees......................................................... $ 2,082 $ 974 $ 964 $ 144
Investment Securities
Taxable..................................................................... 213 (63) 290 (14)
Tax-Exempt.................................................................. 14 21 (6) (1)
Federal Funds Sold............................................................ 111 41 31 39
------- ------ ------ -----------
Total Interest Income....................................................... 2,420 973 1,279 168
------- ------ ------ -----------
Interest Expense
Deposits...................................................................... 1,149 216 863 70
Federal Funds Purchased and Securities Sold Under Repurchase Agreements....... 8 3 3 2
Short-Term Borrowings......................................................... (2) -- (2) --
Note Payable.................................................................. (16) (16) -- --
------- ------ ------ -----------
Total Interest Expense...................................................... 1,139 203 864 72
------- ------ ------ -----------
Net Interest Income Before Allocation of Rate/Volume............................ 1,281 770 415 96
------- ------ ------ -----------
Allocation of Rate/Volume....................................................... -- 76 20 (96)
------- ------ ------ -----------
Changes in Net Interest Income.................................................. $ 1,281 $ 846 $ 435 $--
------- ------ ------ -----------
------- ------ ------ -----------
</TABLE>
- ---------
(1) For analytical purposes, income from tax-exempt assets, primarily
securities issued by state and local governments or authorities, is
adjusted by an increment which equates tax-exempt income to interest
from taxable assets (assuming a 35% effective federal income tax rate
for 1996 and a 34% effective federal income tax rate for 1995 and 1994).
33
<PAGE>
<TABLE>
<CAPTION>
TAXABLE-EQUIVALENT BASIS(1) DUE TO CHANGE IN
YEAR ENDED DECEMBER 31, NET ---------------------------
1995 COMPARED TO 1994 CHANGE VOLUME RATE RATE/VOLUME
- -------------------------------------------------------------------------------- ------- ------ ------ -----------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
Interest Income
Loans, Including Fees......................................................... $ 9,194 $5,548 $3,059 $ 587
Investment Securities
Taxable..................................................................... 1,141 8 1,121 12
Tax-Exempt.................................................................. 63 71 (7) (1)
Federal Funds Sold............................................................ 653 376 161 116
------- ------ ------ -----------
Total Interest Income....................................................... 11,051 6,003 4,334 714
------- ------ ------ -----------
Interest Expense
Deposits...................................................................... 6,371 1,776 3,979 616
Federal Funds Purchased and Securities Sold Under Repurchase Agreements....... 23 16 4 3
Short-Term Borrowings......................................................... (16) (15) (2) 1
Note Payable.................................................................. (16) (16) -- --
------- ------ ------ -----------
Total Interest Expense...................................................... 6,362 1,761 3,981 620
------- ------ ------ -----------
Net Interest Income Before Allocation of Rate/Volume............................ 4,689 4,242 353 94
------- ------ ------ -----------
Allocation of Rate/Volume....................................................... -- 265 (171) (94)
------- ------ ------ -----------
Changes in Net Interest Income.................................................. $ 4,689 $4,507 $ 182 $--
------- ------ ------ -----------
------- ------ ------ -----------
</TABLE>
<TABLE>
<CAPTION>
TAXABLE-EQUIVALENT BASIS(1) DUE TO CHANGE IN
YEAR ENDED DECEMBER 31, NET ---------------------------
1994 COMPARED TO 1993 CHANGE VOLUME RATE RATE/VOLUME
- -------------------------------------------------------------------------------- ------- ------ ------ -----------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
Interest Income
Loans, Including Fees......................................................... $ 4,331 $4,043 $ 238 $ 50
Investment Securities
Taxable..................................................................... 744 735 11 (2)
Tax-Exempt.................................................................. (47) (42) (5) --
Federal Funds Sold............................................................ (104) (277) 310 (137)
------- ------ ------ -----------
Total Interest Income....................................................... 4,924 4,459 554 (89)
------- ------ ------ -----------
Interest Expense
Deposits...................................................................... 1,298 1,070 193 35
Federal Funds Purchased and Securities Sold Under Repurchase Agreements....... 22 32 -- (10)
Short-Term Borrowings......................................................... (28) (27) (1) --
Note Payable.................................................................. (96) (96) 1 (1)
------- ------ ------ -----------
Total Interest Expense...................................................... 1,196 979 193 24
------- ------ ------ -----------
Net Interest Income Before Allocation of Rate/Volume............................ 3,728 3,480 361 (113)
------- ------ ------ -----------
Allocation of Rate/Volume....................................................... -- (38) (75) 113
------- ------ ------ -----------
Changes in Net Interest Income.................................................. $ 3,728 $3,442 $ 286 $--
------- ------ ------ -----------
------- ------ ------ -----------
</TABLE>
- ---------
(1) For analytical purposes, income from tax-exempt assets, primarily
securities issued by state and local governments or authorities, is
adjusted by an increment which equates tax-exempt income to interest
from taxable assets (assuming a 34% effective federal income tax rate).
NET YIELD ON EARNING ASSETS
The following table presents net interest income, average earning assets and
the net yield by quarter for the three months ended March 31, 1996, and for each
of the past three years. Income and yield on
34
<PAGE>
earning assets include amounts to convert tax-exempt income to a
taxable-equivalent basis, assuming a 35% effective federal income tax rate for
1996 and a 34% effective federal income tax rate for prior periods.
<TABLE>
<CAPTION>
NET YIELD ON % CHANGE QUARTER
EARNING ASSETS FROM PRIOR --------------------------------------------------
TAXABLE-EQUIVALENT BASIS YEAR YEAR FOURTH THIRD SECOND FIRST
- ----------------------------------- ----------- ----------- ----------- ----------- ----------- -----------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
1996
Net Interest Income................ 14.4%* $ 7,895 $ 7,895
Average Earning Assets............. 13.3 590,467 590,467
Net Yield.......................... 5.38% 5.38%
1995
Net Interest Income................ 20.3% $ 27,754 $ 7,633 $ 7,047 $ 6,585 $ 6,489
Average Earning Assets............. 15.7 521,074 574,033 542,783 492,880 474,600
Net Yield.......................... 5.33% 5.28% 5.15% 5.36% 5.54%
1994
Net Interest Income................ 19.3% $ 23,065 $ 6,289 $ 5,891 $ 5,677 $ 5,208
Average Earning Assets............. 12.8 450,554 469,604 455,802 448,356 428,454
Net Yield.......................... 5.12% 5.31% 5.13% 5.08% 4.93%
1993
Net Interest Income................ 13.7% $ 19,337 $ 4,999 $ 4,853 $ 4,738 $ 4,747
Average Earning Assets............. 22.4 99,295 426,691 407,217 393,264 370,008
Net Yield.......................... 4.84% 4.65% 4.73% 4.83% 5.20%
----------- ----------- ----------- ----------- ----------- -----------
----------- ----------- ----------- ----------- ----------- -----------
</TABLE>
- ------------------------------
*Annualized.
PROVISION FOR LOAN LOSSES
The provision for loan losses for the three months ended March 31, 1996 of
$461,000 reflects an increase of $95,000 or 26.0% compared to $366,000 for the
three months ended March 31, 1995 and was primarily attributable to loan growth.
The provision for loan losses for the year ended December 31, 1995 was $1.7
million, an increase of $600,000 or 55.3% from the $1.1 million for the year
ended December 31, 1994. The provision for loan losses for the year ended
December 31, 1994 of $1.1 million reflects an increase of $693,000 or 176.8%
from the $392,000 provision for loan losses for the year ended December 31,
1993. Provisions for loan losses are charged to earnings to bring the total
allowance for loan losses to a level deemed appropriate by management based on
such factors as historical experience, the volume and type of lending conducted
by the Company, the amount of nonperforming assets, regulatory policies,
generally accepted accounting principles, general economic conditions,
particularly as they relate to the Company's lending area, and other factors
related to the collectibility of the Company's loan portfolio. The increase in
the provision for the year ended December 31, 1995, compared to the provision
for the year ended December 31, 1994, was primarily attributable to loan growth
of $110.9 million and net charge-offs of $1.1 million. See "Allowance for Loan
Losses."
In January 1995, the Company adopted Statement of Financial Accounting
Standards No. 114 ("Statement 114"), "Accounting by Creditors for Impairment of
a Loan", and the amendment thereof, Statement of Financial Accounting Standards
No. 118 ("Statement 118"), "Accounting by Creditors for Impairment of a
Loan-Income Recognition and Disclosures". In management's opinion, the adoption
of Statement 114 and Statement 118 did not have a material effect on the
Company's financial position or results of operations.
35
<PAGE>
NONINTEREST INCOME
Noninterest income for the three months ended March 31, 1996 of $1.9 million
increased $356,000 or 22.4% compared to $1.6 million for the three months ended
March 31, 1995 and increased $217,000 or 12.6% compared to $1.7 million for the
three months ended December 31, 1995. The increase in Noninterest income for the
three months ended March 31, 1996 compared to the three months ended March 31,
1995 is primarily attributable to the increased fee income from Total Service
Charges, Trust Service Fees and Data Processing Service Fees. The increase in
Total Service Charges was impacted by an increase in activity levels and
additional volume. The increase in Trust Service Fees for the three months ended
March 31, 1996 compared to three months ended March 31, 1995 is attributable to
increases in both the number of trust accounts and the book value of assets
managed. The book value of assets managed at March 31, 1996 and 1995 was $257.2
million and $205.0 million, respectively. 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. The increase in Data Processing
Service Fees for the three months ended March 31, 1996 compared to three months
ended March 31, 1995 is attributable to an increased volume of business.
Noninterest income of $6.5 million for the year ended December 31, 1995
increased $746,000 or 12.9% compared to $5.8 million for the year ended December
31, 1994, and noninterest income of $5.8 million for the year ended December 31,
1994 increased $740,000 or 14.7% compared to $5.0 million for the year ended
December 31, 1993. All categories of noninterest income, except Other Service
Charges and Net Investment Securities Gains (Losses), for the year ended
December 31, 1995, increased when compared to the year ended December 31, 1994.
Total Service Charges of $4.3 million for the year ended December 31, 1995
increased $392,000 or 10.0% compared to the year ended December 31, 1994, and
Total Service Charges of $3.9 million for the year ended December 31, 1994,
increased $646,000 or 19.6% compared to the year ended December 31, 1993. The
increase in Total Service Charges for the years ended December 31, 1995, 1994
and 1993 is attributable to increased account transaction fees as a result of
the deposit growth experienced by the Company. The decline in Other Service
Charges for the year ended December 31, 1995 compared to the year ended December
31, 1994 was primarily attributable to a decrease in foreign currency exchange
fees. The recent events in Mexico, primarily the peso devaluation, have resulted
in a decrease in volume and spread on peso exchange fee activity.
Trust Service Fees of $1.3 million for the year ended December 31, 1995
increased $95,000 or 8.2% compared to $1.2 million for the year ended December
31, 1994, and Trust Service Fees of $1.2 million for the year ended December 31,
1994 increased $74,000 or 6.8% compared to $1.1 million for the year ended
December 31, 1993. The increase in Trust Service Fees in each of years 1995 and
1994 is attributable to increases in both the number of trust accounts and the
book value of assets managed. The book value of assets managed at December 31,
1995 and 1994 was $237.4 million and $192.4 million, respectively. 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 Investment Securities Gains (Losses) was ($111,000) for the year ended
December 31, 1995, compared to an $8,000 gain for the year ended December 31,
1994. The decrease was primarily attributable to a $99,000 loss recorded on the
sale of two bonds.
Other operating income of $601,000 for the year ended December 31, 1995
increased $192,000 or 46.9% compared to $409,000 for the year ended December 31,
1994 and other operating income of $409,000 for the year ended December 31, 1994
increased $27,000 or 7.1% compared to year ended December 31, 1993.
36
<PAGE>
A detailed summary of noninterest income for the three months ended March
31, 1996 and 1995, and for the three years ended December 31, 1995 is presented
in the following table:
<TABLE>
<CAPTION>
THREE MONTHS
ENDED MARCH 31, YEARS ENDED DECEMBER 31,
------------------------------- -------------------------------
% CHANGE % CHANGE
FROM FROM
NONINTEREST INCOME 1996 PRIOR YEAR 1995 1995 PRIOR YEAR 1994
- ------------------------------------------------------------ ------ -------------- ------ ------ -------------- ------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
Service Charges on Deposit Accounts......................... $ 939 20.2% $ 781 $3,472 14.4% $3,035
Other Service Charges....................................... 236 (13.6) 273 859 (5.0) 904
------ ----- ------ ------ --- ------
Total Service Charges..................................... 1,175 11.5 1,054 4,331 10.0 3,939
Trust Service Fees.......................................... 366 27.5 287 1,256 8.2 1,161
Net Investment Securities Gains (Losses).................... 1 * (13) (111) * 8
Data Processing Service
Fees....................................................... 220 201.4 73 441 72.9 255
Other Operating Income...................................... 184 (2.6) 189 601 46.9 409
------ ----- ------ ------ --- ------
Total..................................................... $1,946 22.4% $1,590 $6,518 12.9% $5,772
------ ----- ------ ------ --- ------
------ ----- ------ ------ --- ------
<CAPTION>
% CHANGE
FROM
NONINTEREST INCOME PRIOR YEAR 1993
- ------------------------------------------------------------ ------------- ------
<S> <C> <C>
Service Charges on Deposit Accounts......................... 11.7% $2,718
Other Service Charges....................................... 57.2 575
----- ------
Total Service Charges..................................... 19.6 3,293
Trust Service Fees.......................................... 6.8 1,087
Net Investment Securities Gains (Losses).................... (75.8) 33
Data Processing Service
Fees....................................................... 7.6 237
Other Operating Income...................................... 7.1 382
----- ------
Total..................................................... 14.7% $5,032
----- ------
----- ------
</TABLE>
- ---------
*Not meaningful.
NONINTEREST EXPENSE
Noninterest expense for the three months ended March 31, 1996 of $5.3
million increased $720,000 or 15.7% compared to the three months ended March 31,
1995 of $4.6 million and increased $279,000 or 5.5% compared to the three months
ended December 31, 1995 of $5.0 million. The increase for the three months ended
March 31, 1996 compared to the three months ended March 31, 1995 and the three
months ended December 31, 1995 were primarily attributable to the increased
volume of business conducted by the Company.
The largest category of noninterest expense, Salaries and Employee Benefits
("Personnel"), of $2.7 million for the three months ended March 31, 1996
increased $479,000 or 21.2% compared to the three months ended March 31, 1995
and $178,000 or 7.0% compared to the three months ended December 31, 1995.
Personnel expense increased for the three months ended March 31, 1996 compared
to the three months ended March 31, 1995 primarily due to 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. Personnel expense increased for
the three months ended March 31, 1996 compared to the three months ended
December 31, 1995, primarily due to staffing increases, including staffing
increases associated with the Company's New Weslaco Banking Location. The New
Weslaco Banking Location opened in February 1996.
Net Occupancy expense of $317,000 for the three months ended March 31, 1996
increased $64,000 or 25.3% compared to $253,000 for the three months ended March
31, 1995 and $38,000 or 13.6% compared to $279,000 for the three months ended
December 31, 1995. The Net Occupancy expense increase for the three months ended
March 31, 1996 compared to the three months ended March 31, 1995 is primarily
due to the occupancy expenses associated with the RGC/Roma Branch Acquisitions.
Equipment expense of $643,000 for the three months ended March 31, 1996
increased $212,000 or 49.2% compared to $431,000 for the three months ended
March 31, 1995 and $79,000 or 14.0% compared to the three months ended December
31, 1995. Equipment expense increased for the three months ended March 31, 1996
as compared to the three months ended March 31, 1995 primarily due to expenses
associated with the RGC/Roma Branch Acquisitions and the New Weslaco Banking
Location.
Noninterest expense of $19.0 million for the year ended December 31, 1995
increased $2.5 million or 15.0% compared to $16.5 million for the year ended
December 31, 1994, and noninterest expense of $16.5 million for the year ended
December 31, 1994 increased $2.0 million or 13.7% compared with
37
<PAGE>
$14.5 million for the year ended December 31, 1993. These increases for the
years ended December 31, 1995 and 1994 were primarily attributable to the
increased volume of business conducted by the Company.
Personnel expense of $9.6 million for the year ended December 31, 1995,
increased $1.5 million or 19.3% compared to year ended December 31, 1994 levels
of $8.0 million. Personnel expense of $8.0 million for the year ended December
31, 1994 increased $217,000 or 2.8% compared to year ended December 31, 1993
levels of $7.8 million. Personnel expense increased for the year ended December
31, 1995 primarily due to staffing increases, including the additional staff
acquired as a result of the RGC/ Roma Branch Acquisitions, and increases in
payroll taxes, medical insurance premiums and pension expenses for all
employees.
Net Occupancy expense of $1.1 million for the year ended December 31, 1995
increased $108,000 or 11.2% compared to $961,000 for the year ended December 31,
1994, and net occupancy expense of $961,000 for the year ended December 31, 1994
increased $141,000 or 17.2% when compared to a net occupancy expense of $820,000
for the year ended December 31, 1993. The increase for the year ended December
31, 1995 is primarily attributable to the occupancy expenses associated with the
RGC/Roma Branch Acquisitions.
Equipment expense of $2.0 million for the year ended December 31, 1995
increased $380,000 or 23.1% compared to $1.6 million for the year ended December
31, 1994 and equipment expense of $1.6 million for the year ended December 31,
1994 increased $282,000 or 20.6% when compared with $1.4 million for the year
ended December 31, 1993. The equipment expense increase noted during the year
ended December 31, 1995 is primarily attributable to equipment obtained in the
RGC/Roma Branch Acquisitions and equipment acquired to service the Company's
increasing customer base.
Other Real Estate (Income) Expense, Net includes rent income from foreclosed
properties, gain or loss on sale of other real estate properties and direct
expenses of foreclosed real estate including property taxes, maintenance costs
and write-downs. Write-downs of other real estate are required if the fair value
of an asset acquired in a loan foreclosure subsequently declines below its
carrying value. Other Real Estate (Income) Expense, Net of $107,000 for the year
ended December 31, 1995 increased $32,000 or 42.7% when compared to $75,000 net
expense for the year ended December 31, 1994. Other Real Estate (Income)
Expense, Net of $75,000 net expense for the year ended December 31, 1994
decreased $403,000 or 122.9% compared to $328,000 net income for the year ended
December 31, 1993. The increased expense during the year ended December 31, 1995
is primarily attributable to commissions paid on new lease agreements on rental
property included in Other Real Estate. Management is actively seeking buyers
for all Other Real Estate and is of the opinion that the carrying value of Other
Real Estate approximates its estimated fair value less estimated closing costs.
Advertising and Public Relations expense of $772,000 for the year ended
December 31, 1995 increased $79,000 or 11.4% compared to $693,000 for the year
ended December 31, 1994. The increase in advertising and public relations
expense is primarily attributable to a new marketing program and additional
advertising in the service area acquired in the RGC/Roma Branch Acquisitions.
FDIC insurance of $540,000 for the year ended December 31, 1995, decreased
$433,000 or 44.5% compared to $973,000 for the year ended December 31, 1994 due
to a rebate and a premium rate reduction. On August 8, 1995, the FDIC Board of
Directors voted to reduce the deposit insurance premiums paid by most members of
the Bank Insurance Fund, effective as of June 1, 1995. As a result, the overpaid
assessments for the period June 1 to September 30, 1995 and interest (totaling
$297,000) were refunded on September 15, 1995. The Company continues to receive
the most favorable risk classification for purposes of determining the annual
deposit insurance assessment rate, although there can be no assurance that the
Company will continue in the most favorable risk classification in the future.
The increase in Other Losses represents additional losses sustained on
overdraft accounts and the costs of settlement during the period ending December
31, 1995 of certain litigation.
38
<PAGE>
A detailed summary of noninterest expense for the three months ended March
31, 1996 and 1995, and during the last three years is presented in the following
table:
<TABLE>
<CAPTION>
THREE MONTHS YEARS ENDED DECEMBER 31,
ENDED MARCH 31, ------------------------------------------------
----------------------------------- % CHANGE
% CHANGE FROM % CHANGE FROM FROM PRIOR
NONINTEREST EXPENSE 1996 PRIOR YEAR 1995 1995 PRIOR YEAR 1994 YEAR
- ----------------------------------------- --------- ------------- --------- --------- ------------- --------- -----------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C>
Salaries and Wages....................... $ 2,163 22.4% $ 1,767 $ 7,605 20.1% $ 6,334 4.5%
Employee Benefits........................ 574 16.9 491 1,958 16.5 1,681 (3.3)
--------- ----- --------- --------- ----- --------- -----------
Total Salaries and Employee Benefits... 2,737 21.2 2,258 9,563 19.3 8,015 2.8
Net Occupancy Expense.................... 317 25.3 253 1,069 11.2 961 17.2
Equipment Expense........................ 643 49.2 431 2,028 23.1 1,648 20.6
Other Real Estate (Income) Expense,
Net Rent Income......................... (33) (53.5) (71) (146) 6.6 (137) (77.6)
(Gain) Loss on Sale.................... -- * 81 3 50.0 2 (100.4)
Expenses............................... 23 4.5 22 131 33.7 98 (78.2)
Write-Downs............................ -- * -- 119 6.3 112 (67.3)
--------- ----- --------- --------- ----- --------- -----------
Total Other Real Estate (Income)
Expense, Net....................... (10) * 32 107 42.7 75 (122.9)
--------- ----- --------- --------- ----- --------- -----------
Other Noninterest Expense
Advertising and Public Relations....... 212 (10.9) 238 772 11.4 693 75.9
Amortization of Intangibles............ 123 119.6 56 323 44.2 224 (4.7)
Data Processing and Check Clearing..... 151 39.8 108 491 36.4 360 18.4
Director Fees.......................... 74 8.8 68 284 6.4 267 (8.2)
Franchise Tax.......................... 74 48.0 50 198 24.5 159 9.7
Insurance.............................. 43 (48.8) 84 228 (27.3) 314 (1.9)
FDIC Insurance......................... 1 (99.6) 261 540 (44.5) 973 17.1
Legal and Professional................. 258 35.1 191 870 (13.5) 1,006 42.9
Stationery and Supplies................ 194 59.0 122 658 22.3 538 12.8
Telephone.............................. 67 36.7 49 250 23.8 202 3.6
Other Losses........................... 122 (15.3) 144 624 252.5 177 51.3
Miscellaneous Expenses................. 308 23.7 249 972 8.6 895 6.0
--------- ----- --------- --------- ----- --------- -----------
Total Other Noninterest Expense...... 1,627 0.4 1,620 6,210 6.9 5,808 19.6
--------- ----- --------- --------- ----- --------- -----------
Total.............................. $ 5,314 15.7% $ 4,594 $ 18,977 15.0% $ 16,507 13.7%
--------- ----- --------- --------- ----- --------- -----------
--------- ----- --------- --------- ----- --------- -----------
<CAPTION>
NONINTEREST EXPENSE 1993
- ----------------------------------------- ---------
<S> <C>
Salaries and Wages....................... $ 6,059
Employee Benefits........................ 1,739
---------
Total Salaries and Employee Benefits... 7,798
Net Occupancy Expense.................... 820
Equipment Expense........................ 1,366
Other Real Estate (Income) Expense,
Net Rent Income......................... (612)
(Gain) Loss on Sale.................... (507)
Expenses............................... 449
Write-Downs............................ 342
---------
Total Other Real Estate (Income)
Expense, Net....................... (328)
---------
Other Noninterest Expense
Advertising and Public Relations....... 394
Amortization of Intangibles............ 235
Data Processing and Check Clearing..... 304
Director Fees.......................... 291
Franchise Tax.......................... 145
Insurance.............................. 320
FDIC Insurance......................... 831
Legal and Professional................. 704
Stationery and Supplies................ 477
Telephone.............................. 195
Other Losses........................... 117
Miscellaneous Expenses................. 844
---------
Total Other Noninterest Expense...... 4,857
---------
Total.............................. $ 14,513
---------
---------
</TABLE>
POSTRETIREMENT BENEFITS OTHER THAN PENSIONS
In December 1990, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards No. 106 ("Statement 106"),
"Employers' Accounting for Postretirement Benefits Other Than Pensions", which
is effective for fiscal years beginning after December 15, 1992. Statement 106
requires companies that have postretirement benefit plans to accrue the
estimated cost of providing those benefits to an employee and the employee's
beneficiaries and covered dependents. The Company does not presently provide
postretirement benefits other than the KSOP Plan, which is available to all
eligible employees, and a nonqualified deferred compensation plan for the
benefit of Glen E. Roney, Chairman of the Board, President and Chief Executive
Officer.
INCOME TAX
The Company recorded income tax expense of $1.3 million for the three months
ended March 31, 1996 compared to $1.1 million for three months ended March 31,
1995. The increase in income tax expense for the three months ended March 31,
1996 is due primarily to an increased level of pretax income during the three
months ended March 31, 1996.
The Company recorded income tax expense of $4.7 million for the year ended
December 31, 1995 compared to $3.9 million for the year ended December 31, 1994.
The increase in income tax expense for the year ended December 31, 1995 is due
primarily to an increased level of pretax income during the year ended December
31, 1995.
39
<PAGE>
The Texas franchise tax is based in part on capital and in part on federal
taxable income with certain modifications. A portion of the tax is accrued in
the year in which the income to which it relates is earned, even though the tax
constitutes a fee for the privilege of doing business in a succeeding period and
is payable in that period. The Company recorded Texas franchise tax expense of
$217,000, $207,000 and $149,000 for the years ended December 31, 1995, 1994 and
1993, respectively.
NET INCOME
Net income was $2.6 million and $2.0 million for the three months ended
March 31, 1996 and 1995, respectively, and $8.7 million, $7.2 million and $6.0
million for the years ended December 31, 1995, 1994 and 1993, respectively.
ANALYSIS OF FINANCIAL CONDITION
BALANCE SHEET COMPOSITION
The Company continues to experience growth in total assets, deposits and
loans attributable in the opinion of management, in part to the vitality of the
Rio Grande Valley economy and in part to the RGC/ Roma Branch Acquisitions. The
recent devaluation of the Mexican peso relative to the U.S. dollar has reduced
retail sales to Mexican nationals. 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 does not believe that the recent Mexican financial problems
will materially adversely affect the Company's growth and earnings prospects.
Average interest-earning assets of $590.5 for the three months ended March
31, 1996 increased $115.9 million or 24.4% compared to $474.6 million for the
three months ended March 31, 1995 and $16.4 million or 2.9% compared to $574.0
million for the three months ended December 31, 1995. Management's continued
focus on lending has resulted in average loans increasing $113.1 million or
32.9% to $457.4 million for the three months ended March 31, 1996 compared to
the three months ended March 31, 1995 level of $344.3 million and increased
$44.6 million or 10.8% compared to the three months ended December 31, 1995
level of $412.8 million. Total average investments decreased $55,000 to $120.4
million for the three months ended March 31, 1996 compared to three months ended
March 31, 1995 level of $120.5 million and decreased $24.1 million or 16.7%
compared to the three months ended December 31, 1995 level of $144.6 million.
Total average assets increased $125.7 million or 23.7% to $655.6 million for the
three months ended March 31, 1996 compared to three months ended March 31, 1995
level of $529.9 million and $20.7 million or 3.3% compared to the three months
ended December 31, 1995 level of $634.9 million.
Average interest-earning assets of $521.1 million increased $70.5 million or
15.7% for the year ended December 31, 1995 compared to $450.6 million for the
year ended December 31, 1994 and $51.3 million or 12.8% for the year ended
December 31, 1994 compared to $399.3 million for the year ended December 31,
1993. Management's continued focus on lending has resulted in average loans
increasing $61.2 million or 19.8% to $370.3 million for the year ended December
31, 1995 compared to December 31, 1994 levels of $309.0 million, while average
investment securities of $131.0 million increased $967,000 or 0.7% for the year
ended December 31, 1995 compared to December 31, 1994 levels of $130.0 million.
Total average assets increased $73.7 million or 14.6% to $577.9 million for the
year ended December 31, 1995 compared to December 31, 1994 levels and $56.1
million or 12.5% to $504.2 million for the year ended December 31, 1994 compared
to December 31, 1993 levels of $448.1 million.
Average interest-bearing deposits increased $97.6 million or 26.2% to $469.9
million for the three months ended March 31, 1996 compared to the three months
ended March 31, 1995 level of $372.3 million and $15.6 million or 3.4% compared
to the three months ended December 31, 1995 level of $454.2 million. Average
total demand deposits increased $20.7 million or 21.6% to $116.6 million for the
three months ended March 31, 1996 compared to the three months ended March 31,
1995 level of $95.8 million and increased $3.3 million or 2.9% compared to
$113.2 million for the three months ended December 31, 1995.
40
<PAGE>
Average interest-bearing deposits increased $54.3 million or 15.3% to $409.5
million for the year ended December 31, 1995 compared to the year ended December
31, 1994 level of $355.2 million. Average total demand deposits also increased
$10.0 million or 10.7% for the year ended December 31, 1995 to $103.8 million
compared to the year ended December 31, 1994 level of $93.8 million partially as
a result of the increase in public funds from several local municipalities and
independent school districts. The Company has a stable noninterest-bearing
source of funds as reflected in the ratio of average demand deposits to average
total deposits for years ended December 31, 1995, 1994 and 1993 of 20.2%, 20.9%,
and 20.6%, respectively.
The following table presents the Company's average balance sheets for the
three months ended March 31, 1996 and 1995, and during the last three years:
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31, YEARS ENDED DECEMBER 31,
-------------------- -------------------------------
AVERAGE BALANCE SHEETS 1996 1995 1995 1994 1993
- ----------------------------------------------------------- --------- --------- --------- --------- ---------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
ASSETS
Loans...................................................... $ 457,394 $ 344,279 $ 370,274 $ 309,038 $ 263,963
Investment Securities
Taxable.................................................. 115,525 115,477 126,086 125,912 110,098
Tax-Exempt............................................... 4,920 5,023 4,907 4,114 4,579
Federal Funds Sold......................................... 12,628 9,821 19,807 11,490 20,655
--------- --------- --------- --------- ---------
Total Interest-Earning Assets............................ 590,467 474,600 521,074 450,554 399,295
Cash and Due From Banks.................................... 35,081 31,675 31,151 30,392 26,999
Bank Premises and Equipment, Net........................... 18,680 15,613 16,365 15,358 13,430
Other Assets............................................... 16,215 11,797 13,507 11,562 11,573
Allowance for Loan Losses.................................. (4,804) (3,743) (4,158) (3,663) (3,206)
--------- --------- --------- --------- ---------
Total.................................................... $ 655,639 $ 529,942 $ 577,939 $ 504,203 $ 448,091
--------- --------- --------- --------- ---------
--------- --------- --------- --------- ---------
LIABILITIES
Demand Deposits
Commercial and Individual................................ $ 111,171 $ 92,612 $ 96,773 $ 91,039 $ 81,021
Public Funds............................................. 5,393 3,208 7,069 2,768 2,689
--------- --------- --------- --------- ---------
Total Demand Deposits.................................. 116,564 95,820 103,842 93,807 83,710
--------- --------- --------- --------- ---------
Savings
Commercial and Individual................................ 36,872 28,018 30,748 29,791 27,978
Public Funds............................................. 481 -- 612 -- --
Money Market Checking and Savings
Commercial and Individual................................ 107,433 101,856 101,881 109,689 105,646
Public Funds............................................. 28,337 29,531 27,131 23,876 9,476
Time Deposits
Commercial and Individual................................ 285,402 193,461 232,966 172,175 163,896
Public Funds............................................. 11,332 19,402 16,201 19,710 14,912
--------- --------- --------- --------- ---------
Total Interest-Bearing Deposits........................ 469,857 372,268 409,539 355,241 321,908
--------- --------- --------- --------- ---------
Total Deposits............................................. 586,421 468,088 513,381 449,048 405,618
Federal Funds Purchased and Securities Sold Under
Repurchase Agreements..................................... 685 1,348 1,093 651 20
Short-Term Borrowings...................................... -- 429 232 436 804
Note Payable............................................... -- -- -- 265 1,873
Other Liabilities.......................................... 4,375 3,168 3,835 2,896 2,552
SHAREHOLDERS' EQUITY....................................... 64,158 56,909 59,398 50,907 37,224
--------- --------- --------- --------- ---------
Total.................................................. $ 655,639 $ 529,942 $ 577,939 $ 504,203 $ 448,091
--------- --------- --------- --------- ---------
--------- --------- --------- --------- ---------
</TABLE>
CASH AND DUE FROM BANKS
Texas State Bank, through its nine banking locations, offers a broad range
of commercial banking services to individuals and businesses in its service
area. Texas State Bank also acts as a correspondent to a number of banks in its
service area, providing check clearing, wire transfer, federal funds
transactions, loan participations, data processing and other correspondent
services. The amount of cash and due from
41
<PAGE>
banks held on any one day is significantly influenced by temporary changes in
cash items in process of collection. At March 31, 1996, cash and due from banks
was $31.5 million, $5.8 million more than at March 31, 1995. At December 31,
1995, cash and due from banks was $30.9 million, $9.5 million less than at
December 31, 1994.
INVESTMENT SECURITIES
In May 1993, the FASB issued Statement of Financial Accounting Standards No.
115 ("Statement 115"), "Accounting for Certain Investments in Debt and Equity
Securities". Statement 115 established standards of financial accounting and
reporting for investments in equity securities that have a readily determinable
fair value and for all investments in debt securities. At acquisition, the Bank
is required to classify debt and equity securities into one of three categories:
Held to Maturity, Trading or Available for Sale. At each reporting date, the
appropriateness of the classification is reassessed. 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. Investments not
classified as either Held to Maturity or Trading are classified as Available for
Sale and measured at fair value in the consolidated balance sheet with
unrealized holding gains and losses reported in a separate component of
shareholders' equity until realized.
Effective December 31, 1993, the Company adopted Statement 115, which caused
various investment securities to be reclassified from Held to Maturity to
Available for Sale. All treasury and agency bonds with a maturity of two years
or less from December 31, 1993, all floating rate bonds and two small equity
securities were reclassified to Available for Sale. During 1994, management
continued classifying bonds purchased with a final maturity of two years or less
as Available for Sale. During 1995, management has classified bonds purchased
with a final maturity of three years or less as Available for Sale. All other
bonds have been classified as Held to Maturity. Future purchases of investment
securities will be classified as Available for Sale or Held to Maturity at time
of purchase as determined by the investment committee.
On October 18, 1995, the FASB decided to grant to all entities a one-time
opportunity during the period from approximately the middle of November to
December 31, 1995, to reconsider their intent and ability to hold securities
accounted for as Held to Maturity under Statement 115. This opportunity allowed
entities to transfer securities from the Held to Maturity category to Available
for Sale or Trading without calling into question their intent to hold other
debt securities to maturity. On December 31, 1995, the Bank transferred
approximately $1.5 million in Held to Maturity securities to the Available for
Sale category resulting in no change to shareholders' equity per share. As a
result of this transfer, all Other Securities are classified as Available for
Sale.
At March 31, 1996 and 1995 and at December 31, 1995, 1994 and 1993, no
securities were classified as Trading.
The following table presents estimated market value of Securities Available
for Sale at March 31, 1996 and 1995:
<TABLE>
<CAPTION>
% CHANGE FROM
SECURITIES AVAILABLE FOR SALE 1996 PRIOR YEAR 1995
- ------------------------------------------------------------------------- --------- ----------------- ---------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
U.S. Treasury Securities................................................. $ 3,958 (82.3)% $ 22,363
U.S. Government Agency Securities........................................ 52,027 132.8 22,350
Mortgage-Backed Security................................................. -- (100.0) 498
Other Securities......................................................... 1,468 * 17
--------- ------ ---------
Total.................................................................. $ 57,453 27.0% $ 45,228
--------- ------ ---------
--------- ------ ---------
</TABLE>
- ------------------------------
* Not meaningful.
42
<PAGE>
The following table presents estimated market value of Securities Available
for Sale at December 31, 1995, 1994 and 1993:
<TABLE>
<CAPTION>
% CHANGE FROM % CHANGE FROM
SECURITIES AVAILABLE FOR SALE 1995 PRIOR YEAR 1994 PRIOR YEAR 1993
- ------------------------------------------- --------- ---------------- --------- ----------------- ---------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
U.S. Treasury Securities................... $ 6,012 (77.8)% $ 27,132 (55.3)% $ 60,654
U.S. Government Agency Securities.......... 55,668 104.9 27,167 11.9 24,277
Mortgage-Backed Security................... -- (100.0) 498 (2.4) 510
Other Securities........................... 1,470 * 17 54.5 11
--------- ------- --------- ----- ---------
Total.................................... $ 63,150 15.2% $ 54,814 (35.9)% $ 85,452
--------- ------- --------- ----- ---------
--------- ------- --------- ----- ---------
</TABLE>
- ------------------------------
* Not meaningful.
The following table presents the maturities, amortized cost, estimated
market value and weighted average yields of the Securities Available for Sale at
March 31, 1996:
<TABLE>
<CAPTION>
AMORTIZED COST(1) MATURING
------------------------------------------------
AFTER ONE AFTER FIVE ESTIMATED
ONE YEAR THROUGH THROUGH TEN AFTER TEN AMORTIZED MARKET
SECURITIES AVAILABLE FOR SALE OR LESS FIVE YEARS YEARS YEARS COST(1) VALUE
- ---------------------------------------- --------- ----------- ----------- ----------- ----------- -----------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
U.S. Treasury Securities................ $ -- $ 3,957 $ -- $ -- $ 3,957 $ 3,958
U.S. Government Agency
Securities............................. 20,659 31,326 -- -- 51,985 52,027
Other Securities........................ -- -- 75 1,396 1,471 1,468
--------- ----------- ----- ----------- ----------- -----------
Total................................. $ 20,659 $ 35,283 $ 75 $ 1,396 $ 57,413 $ 57,453
--------- ----------- ----- ----------- ----------- -----------
--------- ----------- ----- ----------- ----------- -----------
<CAPTION>
WEIGHTED AVERAGE YIELDS
(TAXABLE-EQUIVALENT BASIS)
- ----------------------------------------
<S> <C> <C> <C> <C> <C> <C>
U.S. Treasury Securities................ -- % 5.62% -- % -- % 5.62%
U.S. Government Agency Securities....... 6.13 6.33 -- -- 6.25
Other Securities........................ -- -- 6.00 5.93 5.93
Total................................. 6.13 6.25 6.00 5.93 6.20
--------- ----------- ----- ----------- -----------
--------- ----------- ----- ----------- -----------
</TABLE>
The following table presents the maturities, amortized cost, estimated
market value and weighted average yields of the Securities Available for Sale at
December 31, 1995:
<TABLE>
<CAPTION>
AMORTIZED COST(1) MATURING
------------------------------------------------
AFTER ONE AFTER FIVE ESTIMATED
ONE YEAR THROUGH THROUGH TEN AFTER TEN AMORTIZED MARKET
SECURITIES AVAILABLE FOR SALE OR LESS FIVE YEARS YEARS YEARS COST(1) VALUE
- ---------------------------------------- --------- ----------- ----------- ----------- ----------- -----------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
U.S. Treasury Securities................ $ 4,001 $ 1,999 $ -- $ -- $ 6,000 $ 6,012
U.S. Government Agency
Securities............................. 20,182 35,320 -- -- 55,502 55,668
Other Securities........................ -- -- 75 1,396 1,471 1,470
--------- ----------- ----------- ----------- ----------- -----------
Total................................. $ 24,183 $ 37,319 $ 75 $ 1,396 $ 62,973 $ 63,150
--------- ----------- ----------- ----------- ----------- -----------
--------- ----------- ----------- ----------- ----------- -----------
<CAPTION>
WEIGHTED AVERAGE YIELDS
(TAXABLE-EQUIVALENT BASIS)
- ----------------------------------------
<S> <C> <C> <C> <C> <C> <C>
U.S. Treasury Securities................ 5.13% 6.07% -- % -- % 5.45%
U.S. Government Agency Securities....... 6.32 6.15 -- -- 6.21
Other Securities........................ -- -- 6.10 5.93 5.94
Total................................. 6.13 6.15 6.10 5.93 6.13
--------- ----------- ----------- ----------- -----------
--------- ----------- ----------- ----------- -----------
</TABLE>
- ---------
(1) Amortized cost for Securities Available for Sale is stated at par plus
any remaining unamortized premium paid or less any remaining unamortized
discount received.
43
<PAGE>
The following table presents amortized cost of Securities Held to Maturity
at March 31, 1996 and 1995:
<TABLE>
<CAPTION>
% CHANGE FROM
SECURITIES HELD TO MATURITY 1996 PRIOR YEAR 1995
- ------------------------------------------------------------------------- --------- ----------------- ---------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
U.S. Treasury Securities................................................. $ 24,427 (16.2)% $ 29,151
U.S. Government Agency Securities........................................ 26,194 (27.2) 35,966
States and Political Subdivisions Securities............................. 5,292 (5.0) 5,570
Other Securities......................................................... -- (100.0) 1,275
--------- ------ ---------
Total.................................................................. $ 55,913 (22.3)% $ 71,962
--------- ------ ---------
--------- ------ ---------
</TABLE>
The following table presents amortized cost of Securities Held to Maturity
at December 31, 1995, 1994 and 1993:
<TABLE>
<CAPTION>
% CHANGE FROM % CHANGE FROM
SECURITIES HELD TO MATURITY 1995 PRIOR YEAR 1994 PRIOR YEAR 1993
- ------------------------------------------- --------- ----------------- --------- ----------------- ---------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
U.S. Treasury Securities................... $ 28,787 (1.7)% $ 29,270 9.4% $ 26,757
U.S. Government Agency Securities.......... 34,230 (4.8) 35,973 299.2 9,011
States and Political Subdivisions
Securities................................ 5,474 (4.6) 5,736 10.1 5,208
Mortgage-Backed Security................... -- -- -- (100.0) 77
Other Securities........................... -- (100.0) 1,035 -- 1,035
--------- ------ --------- ------ ---------
Total.................................... $ 68,491 (4.9)% $ 72,014 71.1% $ 42,088
--------- ------ --------- ------ ---------
--------- ------ --------- ------ ---------
</TABLE>
Total investments in states and political subdivisions represent 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, 1995. Of the obligations of
states and political subdivisions held by the Company at December 31, 1995,
88.1% were rated A or better by Moody's Investor Services, Inc.
The following table presents the maturities, amortized cost, estimated
market value and weighted average yields of Securities Held to Maturity at March
31, 1996:
<TABLE>
<CAPTION>
AMORTIZED COST(1) MATURING
------------------------------------------------
AFTER ONE AFTER FIVE ESTIMATED
ONE YEAR THROUGH THROUGH AFTER TEN AMORTIZED MARKET
SECURITIES HELD TO MATURITY OR LESS FIVE YEARS TEN YEARS YEARS COST(1) VALUE
- -------------------------------------------------- -------- ----------- ----------- --------- --------- ---------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
U.S. Treasury Securities.......................... $ 18,403 $ 6,024 $-- $-- $24,427 $24,412
U.S. Government Agency
Securities....................................... 4,999 19,978 1,217 -- 26,194 26,192
States and Political Subdivisions Securities...... 425 2,880 1,887 100 5,292 5,537
-------- ----------- ----------- --------- --------- ---------
Total........................................... $ 23,827 $28,882 $3,104 $ 100 $55,913 $56,141
-------- ----------- ----------- --------- --------- ---------
-------- ----------- ----------- --------- --------- ---------
<CAPTION>
WEIGHTED AVERAGE YIELDS
(TAXABLE-EQUIVALENT BASIS)
- --------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
U.S. Treasury Securities.......................... 6.43% 6.47% -- % -- % 6.44%
U.S. Government Agency
Securities....................................... 5.17 6.47 8.22 -- 6.30
States and Political Subdivisions Securities...... 9.03 9.14 8.07 9.57 8.76
Total........................................... 6.21 6.74 8.13 9.57 6.60
-------- ----------- ----------- --------- ---------
-------- ----------- ----------- --------- ---------
</TABLE>
- ---------
(1) Amortized cost for Securities Available for Sale is stated at par plus
any remaining unamortized premium paid or less any remaining unamortized
discount received.
44
<PAGE>
The following table presents the maturities, amortized cost, estimated
market value and weighted average yields of Securities Held to Maturity at
December 31, 1995:
<TABLE>
<CAPTION>
AMORTIZED COST(1) MATURING
------------------------------------------------
AFTER ONE AFTER FIVE ESTIMATED
ONE YEAR THROUGH THROUGH AFTER TEN AMORTIZED MARKET
SECURITIES HELD TO MATURITY OR LESS FIVE YEARS TEN YEARS YEARS COST(1) VALUE
- -------------------------------------------------- -------- ----------- ----------- --------- --------- ---------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
U.S. Treasury Securities.......................... $ 18,412 $10,375 $-- $-- $28,787 $28,776
U.S. Government Agency
Securities....................................... 6,995 26,016 1,219 -- 34,230 34,425
States and Political Subdivisions Securities...... 425 2,818 2,034 197 5,474 5,761
-------- ----------- ----------- --------- --------- ---------
Total........................................... $ 25,832 $39,209 $3,253 $ 197 $68,491 $68,962
-------- ----------- ----------- --------- --------- ---------
-------- ----------- ----------- --------- --------- ---------
<CAPTION>
WEIGHTED AVERAGE YIELDS
(TAXABLE-EQUIVALENT BASIS)
- --------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
U.S. Treasury Securities.......................... 4.34% 5.62% -- % -- % 4.80%
U.S. Government Agency
Securities....................................... 5.37 6.45 7.57 -- 6.27
States and Political Subdivisions Securities...... 9.57 8.63 8.32 9.98 8.63
Total........................................... 4.70 6.38 8.04 9.98 5.84
-------- ----------- ----------- --------- ---------
-------- ----------- ----------- --------- ---------
</TABLE>
- ---------
(1) Amortized cost for Securities Held to Maturity is stated at par plus any
remaining unamortized premium paid or less any remaining unamortized
discount received.
LOANS
The Company manages its credit risk by establishing and implementing
strategies and guidelines appropriate to the characteristics of borrowers,
industries, geographic locations and 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 continues to refine 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 by 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, to the extent possible, 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 benefitted from
increased loan demand due to passage of NAFTA and the strong population growth
in the Rio Grande Valley. More recently, the 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 current Mexican financial problems will not have a material adverse effect
on the Company's growth and earnings prospects.
Total loans at March 31, 1996 of $467.1 million increased $112.6 million or
31.8% compared to March 31, 1995 level of $354.4 million and increased $16.2
million or 3.6% compared to December 31, 1995 level of $450.9 million. The
increase in total loans at March 31, 1996 compared to total loans at
45
<PAGE>
March 31, 1995 is primarily attributable to the RGC/Roma Branch Acquisitions,
funding a large leveraged employee stock ownership trust loan and management's
efforts to improve the earnings mix of earning assets by increasing loan volume.
Total loans of $450.9 million for the year ended December 31, 1995 increased
$110.9 million or 32.6% compared to the year ended December 31, 1994 levels of
$339.9 million and increased $49.4 million or 17.0% for the year ended December
31, 1994 compared to levels of $290.5 million at December 31, 1993. The increase
in total loans for the year ended December 31, 1995 is primarily attributable to
the RGC/Roma Branch Acquisitions, funding a large leveraged employee stock
ownership trust loan (hereafter described) and management's efforts to improve
the earnings mix of earning assets by increasing loan volume. The increase in
Commercial loans in general, and Commercial-Tax Exempt loans in particular, for
the year ended December 31, 1995 was primarily attributable to the funding of a
$34.0 million employee stock ownership trust loan which is collateralized by
stock and assets of the employer and approximately $27.5 million of cash and
cash equivalent assets. Excluding this loan, Total Commercial Loans at December
31, 1995 represented an increase of $10.6 million, or 10.4%, compared to levels
at December 31, 1994, and Total Loans at December 31, 1995 represented an
increase of $76.9 million, or 22.6%, compared to levels at December 31, 1994. A
substantial portion of the increase in loans classified as Real
Estate-Commercial Mortgage loans consists of loans secured by real estate and
other assets to commercial customers. The increase in total loans for the year
ended December 31, 1992 is primarily due to the acquisition of Mid Valley Bank.
The following table presents the composition of the loan portfolio at March 31,
1996 and 1995, and at the end of each of the last five years:
<TABLE>
<CAPTION>
MARCH 31, DECEMBER 31,
-------------------- -----------------------------------------------------
LOAN PORTFOLIO COMPOSITION 1996 1995 1995 1994 1993 1992 1991
- ------------------------------------ --------- --------- --------- --------- --------- --------- ---------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C>
Commercial.......................... $ 116,816 $ 106,655 $ 112,042 $ 101,866 $ 91,697 $ 87,240 $ 63,638
Commercial-Tax Exempt............... 34,401 -- 34,419 -- -- -- --
--------- --------- --------- --------- --------- --------- ---------
Total Commercial Loans............ 151,217 106,655 146,461 101,866 91,697 87,240 63,638
Agricultural........................ 28,447 19,982 25,097 17,199 13,829 14,789 10,357
Real Estate
Construction...................... 28,682 20,720 29,967 18,809 11,846 9,534 5,886
Commercial Mortgage............... 136,057 113,120 129,953 113,677 98,635 69,407 42,853
Agricultural Mortgage............. 17,785 12,277 17,057 10,263 5,153 7,547 5,847
1-4 Family Mortgage............... 61,704 49,524 59,052 47,425 42,647 40,403 32,159
Consumer............................ 43,167 32,132 43,267 30,700 26,693 23,198 19,113
--------- --------- --------- --------- --------- --------- ---------
Total Loans....................... $ 467,059 $ 354,410 $ 450,854 $ 339,939 $ 290,500 $ 252,118 $ 179,853
--------- --------- --------- --------- --------- --------- ---------
--------- --------- --------- --------- --------- --------- ---------
</TABLE>
46
<PAGE>
The contractual maturity schedule of the loan portfolio at March 31, 1996 is
presented in the following table:
<TABLE>
<CAPTION>
LOAN MATURITIES
MARCH 31, 1996
--------------------------------------------------
AFTER
ONE ONE YEAR
YEAR THROUGH AFTER
OR LESS FIVE YEARS FIVE YEARS TOTAL
----------- ----------- ----------- -----------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
Commercial.................................................... $ 64,927 $ 47,044 $ 4,845 $ 116,816
Commercial Tax Exempt......................................... 5,233 19,971 9,197 34,401
Agricultural.................................................. 25,752 2,695 -- 28,447
Real Estate
Construction................................................ 24,844 3,838 -- 28,682
Commercial Mortgage......................................... 28,880 88,709 18,468 136,057
Agricultural Mortgage....................................... 3,470 11,742 2,573 17,785
1-4 Family Mortgage......................................... 14,793 44,366 2,545 61,704
Consumer...................................................... 18,885 24,043 239 43,167
----------- ----------- ----------- -----------
Total..................................................... $ 186,784 $ 242,408 $ 37,867 $ 467,059
----------- ----------- ----------- -----------
----------- ----------- ----------- -----------
Variable-Rate Loans........................................... $ 117,182 $ 126,828 $ 35,402 $ 279,412
Fixed-Rate Loans.............................................. 69,602 115,580 2,465 187,647
----------- ----------- ----------- -----------
Total..................................................... $ 186,784 $ 242,408 $ 37,867 $ 467,059
----------- ----------- ----------- -----------
----------- ----------- ----------- -----------
</TABLE>
The contractual maturity schedule of the loan portfolio at December 31, 1995
is presented in the following table:
<TABLE>
<CAPTION>
LOAN MATURITIES
DECEMBER 31, 1995
--------------------------------------------------
AFTER
ONE ONE YEAR
YEAR THROUGH AFTER
OR LESS FIVE YEARS FIVE YEARS TOTAL
----------- ----------- ----------- -----------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
Commercial.................................................... $ 61,134 $ 45,748 $ 5,160 $ 112,042
Commercial Tax Exempt......................................... 4,411 18,851 11,157 34,419
Agricultural.................................................. 22,449 2,648 -- 25,097
Real Estate
Construction................................................ 21,786 8,181 -- 29,967
Commercial Mortgage......................................... 28,613 85,681 15,659 129,953
Agricultural Mortgage....................................... 3,647 10,989 2,421 17,057
1-4 Family Mortgage......................................... 14,489 42,114 2,449 59,052
Consumer...................................................... 19,928 23,070 269 43,267
----------- ----------- ----------- -----------
Total..................................................... $ 176,457 $ 237,282 $ 37,115 $ 450,854
----------- ----------- ----------- -----------
----------- ----------- ----------- -----------
Variable-Rate Loans........................................... $ 105,864 $ 126,965 $ 34,354 $ 267,183
Fixed-Rate Loans.............................................. 70,593 110,317 2,761 183,671
----------- ----------- ----------- -----------
Total..................................................... $ 176,457 $ 237,282 $ 37,115 $ 450,854
----------- ----------- ----------- -----------
----------- ----------- ----------- -----------
</TABLE>
As shown in the preceding tables, loans maturing within one year totaled
$186.8 million at March 31, 1996, and $176.5 million at year-end 1995. 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 or are revolving lines
subject to annual analysis and renewal.
47
<PAGE>
NONPERFORMING ASSETS
The Bank 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, particularly with respect to credits which
have total exposures of $10,000 or more.
Nonperforming assets consist of nonaccrual loans, loans for which the
interest rate has been renegotiated below originally contracted rates and real
estate or other assets that have been acquired in partial or full satisfaction
of loan obligations. At March 31, 1996, eight loan relationships in excess of
$100,000 totaling $2.1 million accounted for 74.8% of the total nonaccrual
loans. These eight nonaccrual credits are secured primarily by real estate, and
management believes that it is unlikely that any material loss will be incurred
on disposition of the collateral. The remaining nonaccrual loans at March 31,
1996 represent loans of less than $100,000 each.
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.
Loans which are contractually 90 days or more past due, 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 March 31, 1996 of $533,000 reflects an
increase of $227,000 or 74.2% compared to the March 31, 1995 level of $306,000.
The amount of such accruing loans 90 days or more past due for the years ended
December 31, 1995, 1994 and 1993 totaled $642,000, $226,000 and $439,000,
respectively. The increase in accruing loans 90 days or more past due at
December 31, 1995 as compared to December 31, 1994 is partly attributable to two
credits over $100,000 included in the category, both of which are in the process
of collection.
Nonperforming assets at March 31, 1996 of $4.3 million increased $859,000 or
24.8% compared to March 31, 1995 of $3.5 million and represent 0.7% of total
assets. The increase in nonperforming assets at March 31, 1996 compared to March
31, 1995 is primarily attributable to one large credit of approximately $403,000
which is in the process of collection.
Nonperforming assets of $3.6 million at December 31, 1995 decreased $1.2
million or 25.5% compared to December 31, 1994 levels of $4.8 million and
decreased $138,000 or 2.9% for the year ended December 31, 1994 compared to
December 31, 1993 levels of $5.0 million. Management actively seeks buyers for
all Other Real Estate. See "Noninterest Expense" above. The ratio of
nonperforming assets plus accruing loans 90 days or more past due as a percent
of total loans and other nonperforming assets at December 31, 1995 decreased to
0.9% from 1.5% at December 31, 1994 due primarily to the reduction in other
nonperforming assets and the addition of $43.7 million of performing loans from
the RGC/Roma Branch Acquisitions.
Management is not aware of any borrower relationships that are not reported
as nonperforming where management has serious doubts as to the ability of such
borrowers to comply with the present loan repayment terms which would cause
nonperforming assets to increase materially.
Effective January 1, 1995, the Company adopted Statement 114 and the
amendment thereof, Statement 118. Under Statement 114, a loan is considered
impaired when, based upon current information and events, it is probable that a
creditor will be unable to collect all amounts due according to the contractual
terms of the loan agreement. Statement 114 requires that an impaired loan be
valued utilizing (i) the present value of expected future cash flows discounted
at the effective interest rate of the loan, (ii) the fair value of the
underlying collateral, or (iii) the observable market price of the loan.
Statement 118 amended Statement 114 by expanding the related disclosure
requirements and permitting use of existing methods for recognizing interest
income on impaired loans. See "Texas Regional Bancshares, Inc. Management's
Discussion and Analysis of Financial Position and Results of Operations--
Analysis of Results of Operations -- Provision for Loan Losses."
48
<PAGE>
At March 31, 1996, the Company had a $2.5 million recorded investment in
impaired loans for which there was a related allowance for loan losses of
$244,000. At March 31, 1996, the Company had a $368,000 investment in impaired
loans for which there was no related allowance for loan losses. The average
level of impaired loans during the three months ended March 31, 1996 was $2.9
million. The Company recorded interest income of $77,000 on its impaired loans
during the three months ended March 31, 1996.
At December 31, 1995, the Company had a $2.0 million recorded investment in
impaired loans for which there was a related allowance for loan losses of
$172,000. At December 31, 1995, there were no impaired loans for which there was
no related allowance for loan losses. The average level of impaired loans during
the year ended December 31, 1995 was $1.9 million. The Company recorded interest
income of $91,000 on its impaired loans during the year ended December 31, 1995.
An analysis of the components of nonperforming assets for the three months
ended March 31, 1996 and 1995, and the last five years is presented in the
following table:
<TABLE>
<CAPTION>
MARCH 31, DECEMBER 31,
-------------------- -----------------------------------------------------
NONPERFORMING ASSETS 1996 1995 1995 1994 1993 1992 1991
- --------------------------------------------------- --------- --------- --------- --------- --------- --------- ---------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C>
Nonaccrual Loans................................... $ 2,855 $ 1,753 $ 2,092 $ 2,435 $ 2,305 $ 1,060 $ 3,441
Renegotiated Loans................................. 5 11 6 13 47 76 355
--------- --------- --------- --------- --------- --------- ---------
Nonperforming Loans.............................. 2,860 1,764 2,098 2,448 2,352 1,136 3,796
Other Nonperforming Assets (Primarily Other Real
Estate)........................................... 1,463 1,700 1,489 2,364 2,598 4,790 4,056
--------- --------- --------- --------- --------- --------- ---------
Total Nonperforming Assets....................... 4,323 3,464 3,587 4,812 4,950 5,926 7,852
Accruing Loans 90 Days or More Past Due............ 533 306 642 226 439 474 21
--------- --------- --------- --------- --------- --------- ---------
Total Nonperforming Assets and Accruing Loans 90
Days or More Past Due.......................... $ 4,856 $ 3,770 $ 4,229 $ 5,038 $ 5,389 $ 6,400 $ 7,873
--------- --------- --------- --------- --------- --------- ---------
--------- --------- --------- --------- --------- --------- ---------
Nonperforming Loans as a % of Total Loans.......... 0.61% 0.50% 0.47% 0.72% 0.81% 0.45% 2.11%
Nonperforming Assets as a % of Total Loans and
Other Nonperforming Assets........................ 0.92 0.97 0.79 1.41 1.69 2.31 4.27
Nonperforming Assets as a % of Total Assets........ 0.66 0.64 0.55 0.90 1.05 1.43 2.64
Nonperforming Assets Plus Accruing Loans 90 Days or
More Past Due as a % of Total Loans And Other
Nonperforming Assets.............................. 1.04 1.06 0.94 1.47 1.84 2.49 4.28
--------- --------- --------- --------- --------- --------- ---------
--------- --------- --------- --------- --------- --------- ---------
</TABLE>
Interest income that would have been recorded for the year ended December
31, 1995 on nonaccrual and renegotiated loans had such loans performed in
accordance with their original contractual terms and been outstanding throughout
the year ended December 31, 1995, or since origination, if held for only part of
that year, was approximately $247,000. For the year ended December 31, 1995, the
amount of interest income actually recorded on nonaccrual and restructured loans
was approximately $176,000.
Management regularly reviews and monitors the loan portfolio to identify
borrowers experiencing financial difficulties. Management believes that, at
March 31, 1996 and at December 31, 1995, all such loans had been identified and
included in the nonaccrual, restructured or 90 days past due loan totals
reflected in the table above. Management continues to emphasize maintaining a
low level of nonperforming assets and returning nonperforming assets to an
earning status.
ALLOWANCE FOR LOAN LOSSES
Management analyzes the loan portfolio to determine the adequacy of the
allowance for loan losses and the appropriate provision required to maintain an
adequate allowance. In assessing the adequacy of the allowance, management
reviews the size, quality and risks of loans in the portfolio and considers
factors such as specific known risks, past experience, the status and amount of
nonperforming assets and economic conditions. A specific percentage is allocated
to total loans in good standing and additional amounts are added for individual
loans considered to have specific loss potential. Loans identified as
49
<PAGE>
losses are charged off. In addition, the loan review committee of the Bank
reviews the assessments of management in determining the adequacy of the Bank's
allowance for loan losses. Based on total allocations, the provision is recorded
to maintain the allowance at a level deemed appropriate by management. While
management uses available information to recognize losses on loans, there can be
no assurance that future additions to the allowance will not be necessary. The
allowance for loan losses at March 31, 1996 of $4.9 million increased $895,000
or 22.4% compared to the March 31, 1995 balance of $4.0 million and increased
$348,000 or 7.7% compared to the December 31, 1995 balance of $4.5 million. The
allowance for loan losses at March 31, 1996 is 1.05% of loans outstanding, net
of unearned discount. Management believes that the allowance for loan losses at
March 31, 1996, adequately reflects the risks in the loan portfolio. The
allowance for loan losses at December 31, 1995 was $4.5 million, which
represents an increase of $1.0 million or 29.3% as compared to the allowance for
loan losses at December 31, 1994. Management believes that the allowance for
loan losses at December 31, 1995 adequately reflects the risks in the loan
portfolio. Various regulatory agencies, as an integral part of their examination
process, periodically review the Company's allowance for loan losses. Such
agencies may require the Company to recognize additions to the allowance based
on their judgments of information available to them at the time of their
examination.
The following table summarizes the activity in the allowance for loan losses
for the three months ended March 31, 1996 and 1995, and for the last five years:
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31, YEARS ENDED DECEMBER 31,
-------------------- ------------------------------------------------------
ALLOWANCE FOR LOAN LOSS ACTIVITY 1996 1995 1995 1994 1993 1992 1991
- ----------------------------------------------------- --------- --------- --------- --------- --------- --------- ----------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C>
Balance at Beginning of Period....................... $ 4,542 $ 3,511 $ 3,511 $ 3,435 $ 2,929 $ 2,547 $ 2,988
Balance from Acquisitions............................ -- -- 450 -- -- 626 --
Provision for Loan Losses............................ 461 366 1,685 1,085 392 220 310
Charge-Offs
Commercial......................................... 60 64 813 169 64 229 483
Agricultural....................................... -- -- 416 781 -- 64 103
Real Estate........................................ 4 49 111 153 89 490 211
Consumer........................................... 106 30 300 132 93 84 124
--------- --------- --------- --------- --------- --------- ----------
Total Charge-Offs................................ 170 143 1,640 1,235 246 867 921
--------- --------- --------- --------- --------- --------- ----------
Recoveries
Commercial......................................... 33 248 401 163 113 233 67
Agricultural....................................... -- 1 66 4 13 41 --
Real Estate........................................ 7 -- 4 10 128 51 29
Consumer........................................... 17 12 65 49 106 78 74
--------- --------- --------- --------- --------- --------- ----------
Total Recoveries................................. 57 261 536 226 360 403 170
--------- --------- --------- --------- --------- --------- ----------
Net Charge-Offs (Recoveries)......................... 113 (118) 1,104 1,009 (114) 464 751
--------- --------- --------- --------- --------- --------- ----------
Balance at End of Period............................. $ 4,890 $ 3,995 $ 4,542 $ 3,511 $ 3,435 $ 2,929 $ 2,547
--------- --------- --------- --------- --------- --------- ----------
--------- --------- --------- --------- --------- --------- ----------
Ratio of Allowance for Loan Losses to Loans
Outstanding, Net of Unearned Discount............... 1.05% 1.13% 1.01% 1.03% 1.18% 1.16% 1.42%
Ratio of Allowance for Loan Losses to Nonperforming
Assets.............................................. 113.12 115.33 126.62 72.96 69.39 49.43 32.44
Ratio of Net Charge-Offs to Average Total Loans
Outstanding, Net of Unearned Discount............... 0.10 (0.03) 0.30 0.33 (0.04) 0.21 0.45
--------- --------- --------- --------- --------- --------- ----------
--------- --------- --------- --------- --------- --------- ----------
</TABLE>
50
<PAGE>
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
three months ended March 31, 1996 and 1995 is presented in the table below:
<TABLE>
<CAPTION>
ALLOCATION OF THE ALLOWANCE FOR LOAN LOSSES
MARCH 31,
--------------------------------------------------------
1996 1995
--------------------------- ---------------------------
% OF LOANS % OF LOANS
IN EACH IN EACH
CATEGORY CATEGORY
TO TOTAL TO TOTAL
AMOUNT LOANS AMOUNT LOANS
----------- -------------- ----------- --------------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C>
Commercial........................................................ $ 1,044 32.4% $ 1,101 30.1%
Agricultural...................................................... 317 6.1 381 5.6
Real Estate....................................................... 2,495 52.3 1,902 55.2
Consumer.......................................................... 300 9.2 216 9.1
Unallocated....................................................... 734 -- 395 --
----------- ----- ----------- -----
Total........................................................... $ 4,890 100.0% $ 3,995 100.0%
----------- ----- ----------- -----
----------- ----- ----------- -----
</TABLE>
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 is presented in the table below:
<TABLE>
<CAPTION>
ALLOCATION OF THE ALLOWANCE FOR LOAN LOSSES
DECEMBER 31,
------------------------------------------------------------------------------------------------------------------
1995 1994 1993 1992
--------------------------- --------------------------- --------------------------- ---------------------------
% OF LOANS % OF LOANS % OF LOANS % OF LOANS
IN EACH IN EACH IN EACH IN EACH
CATEGORY CATEGORY CATEGORY CATEGORY
TO TOTAL TO TOTAL TO TOTAL TO TOTAL
AMOUNT LOANS AMOUNT LOANS AMOUNT LOANS AMOUNT LOANS
----------- -------------- ----------- -------------- ----------- -------------- ----------- --------------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Commercial.... $ 965 32.5% $ 1,057 30.0% $ 1,348 31.6% $ 1,096 34.6%
Agricultural... 304 5.6 478 5.1 138 4.7 148 5.9
Real Estate... 2,401 52.3 1,644 55.9 1,705 54.5 1,380 50.3
Consumer...... 296 9.6 257 9.0 215 9.2 254 9.2
Unallocated... 576 -- 75 -- 29 -- 51 --
----------- ----- ----------- ----- ----------- ----- ----------- -----
Total....... $ 4,542 100.0% $ 3,511 100.0% $ 3,435 100.0% $ 2,929 100.0%
----------- ----- ----------- ----- ----------- ----- ----------- -----
----------- ----- ----------- ----- ----------- ----- ----------- -----
<CAPTION>
1991
---------------------------
% OF LOANS
IN EACH
CATEGORY
TO TOTAL
AMOUNT LOANS
----------- --------------
<S> <C> <C>
Commercial.... $ 787 35.4%
Agricultural.. 104 5.7
Real Estate... 1,346 48.3
Consumer...... 209 10.6
Unallocated... 101 --
----------- -----
Total....... $ 2,547 100.0%
----------- -----
----------- -----
</TABLE>
PREMISES AND EQUIPMENT
Premises and equipment of $19.0 million at March 31, 1996 increased $3.3
million or 21.4% compared to $15.6 million at March 31, 1995. The net increase
for the twelve months ended March 31, 1996 was primarily attributable to the
$1.8 million in fixed assets acquired in the RGC/Roma Branch Acquisitions, $1.2
million of building and equipment costs for the New Weslaco Banking Location and
$673,000 for new equipment and software for the data processing center. Premises
and equipment increased $590,000 or 3.2% for March 31, 1996 compared to $18.4
million at December 31, 1995. The net increases for the three months ended March
31, 1996 was primarily attributable to $393,000 of building and equipment cost
for the New Weslaco Banking Location.
Premises and equipment of $18.4 million at December 31, 1995 increased $3.1
million or 20.3% compared to $15.3 million at December 31, 1994 in addition to a
net increase of $480,000 or 3.2% for December 31, 1994 compared to $14.8 million
at December 31, 1993. The net increase for the year ended December 31, 1995 is
primarily attributable to the $1.8 million in fixed assets acquired in the RGC/
Roma Branch Acquisitions, $1.3 million of land, building and equipment costs for
the New Weslaco Banking Location and $1.0 million for new equipment and software
for the data processing center.
INTANGIBLES
Intangibles of $5.6 million at March 31, 1996 increased $3.7 million or
190.1% compared to $1.9 million at March 31, 1995 and decreased $123,000 or 2.2%
for March 31, 1996 compared to $5.7 million at December 31, 1995. The net
increase for the three months ended March 31, 1996
51
<PAGE>
compared to three months ended March 31, 1995 is attributable to the goodwill
recorded as a result of the RGC/Roma Branch Acquisitions. Intangibles of $5.7
million at December 31, 1995 increased $3.7 million or 188.1% compared to $2.0
million at December 31, 1994 and decreased $224,000 or 10.1% for December 31,
1994 compared to $2.2 million at December 31, 1993. The net increase for the
year ended December 31, 1995 is attributable to the goodwill recorded as a
result of the RGC/Roma Branch Acquisitions.
DEPOSITS
Total deposits at March 31, 1996 of $586.0 million increased $110.0 million
or 23.1% compared to the March 31, 1995 level of $476.0 million and increased
$6.3 million or 1.1% compared to December 31, 1995 levels of $579.7 million. The
increase in total deposits from March 31, 1995 to March 31, 1996 is primarily
attributable to the RGC/Roma Branch Acquisitions. The $6.3 million or 1.1%
increase for total deposits at March 31, 1996 compared to total deposits at
December 31, 1995 is comparable to the $3.9 million or 0.8% increase for total
deposits at March 31, 1995 compared to total deposits at December 31, 1994.
Total deposits of $579.7 million at December 31, 1995 increased $107.6
million or 22.8% compared to December 31, 1994 level of $472.1 million and total
deposits of $472.1 million for the year ended December 31, 1994 increased $42.6
million or 9.9% compared to December 31, 1993 levels of $429.5 million. The
increase in total deposits at December 31, 1995 compared to December 31, 1994 is
primarily attributable to the RGC/Roma Branch Acquisitions. Total
noninterest-bearing deposits of $120.4 million for the year ended December 31,
1995 represented an increase of $20.8 million or 20.8% compared to the year
ended December 31, 1994 and $10.2 million or 11.5% for the year ended December
31, 1994 compared to the year ended December 31, 1993. Total public funds
deposits (consisting of Public Funds Demand Deposits, Public Funds Money Market
Checking and Savings and Public Funds Time Deposits) of $39.3 million for the
year ended December 31, 1995 decreased $16.3 million or 29.3% compared to
December 31, 1994 levels of $55.6 million. The decline in public funds is
primarily due to the loss of a large public fund to a competitor as a result of
a competitive bid in September 1995. 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 three months ended March 31, 1996 and 1995 and at the end of the
last three years:
<TABLE>
<CAPTION>
MARCH 31, DECEMBER 31,
----------------------------------- ---------------------------------------------------
% CHANGE FROM % CHANGE FROM % CHANGE FROM
TOTAL DEPOSITS 1996 PRIOR YEAR 1995 1995 PRIOR YEAR 1994 PRIOR YEAR
- ------------------------------------- --------- ------------- --------- --------- ------------- --------- --------------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C>
Demand Deposits
Commercial and Individual.......... $ 113,072 19.4% $ 94,735 $ 113,345 16.1% $ 97,597 11.5%
Public Funds....................... 7,015 163.6 2,661 7,069 245.5 2,046 9.4
--------- ----- --------- --------- ----- --------- ---
Total Demand Deposits............ 120,087 23.3 97,396 120,414 20.8 99,643 11.5
--------- ----- --------- --------- ----- --------- ---
Interest-Bearing Deposits
Savings
Commercial and Individual........ 38,427 39.6 27,520 35,521 23.8 28,689 (4.6)
Public Funds..................... 423 * -- 612 * -- *
Money Market Checking and Savings
Commercial and Individual........ 106,861 9.3 97,728 105,409 (0.6) 106,062 6.3
Public Funds..................... 20,361 (14.8) 23,886 22,278 (35.8) 34,688 7.6
Time Deposits
Commercial and Individual........ 287,827 36.3 211,123 285,545 55.0 184,177 14.1
Public Funds..................... 12,008 (34.5) 18,332 9,952 (47.2) 18,849 13.7
--------- ----- --------- --------- ----- --------- ---
Total Interest-Bearing Deposits.... 465,907 23.1 378,589 459,317 23.3 372,465 9.5
--------- ----- --------- --------- ----- --------- ---
Total Deposits................... $ 585,994 23.1% $ 475,985 $ 579,731 22.8% $ 472,108 9.9%
--------- ----- --------- --------- ----- --------- ---
--------- ----- --------- --------- ----- --------- ---
Weighted Average Rate on
Interest-Bearing Deposits.......... 4.52% 4.04% 4.39% 3.27%
--------- --------- --------- ---------
--------- --------- --------- ---------
<CAPTION>
TOTAL DEPOSITS 1993
- ------------------------------------- ---------
<S> <C>
Demand Deposits
Commercial and Individual.......... $ 87,533
Public Funds....................... 1,871
---------
Total Demand Deposits............ 89,404
---------
Interest-Bearing Deposits
Savings
Commercial and Individual........ 30,061
Public Funds..................... --
Money Market Checking and Savings
Commercial and Individual........ 99,785
Public Funds..................... 32,232
Time Deposits
Commercial and Individual........ 161,464
Public Funds..................... 16,575
---------
Total Interest-Bearing Deposits.... 340,117
---------
Total Deposits................... $ 429,521
---------
---------
Weighted Average Rate on
Interest-Bearing Deposits.......... 3.21%
---------
---------
</TABLE>
- ------------------------------
* Not meaningful.
52
<PAGE>
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. Texas State Bank does not solicit brokered
deposits. The following table presents the maturities of time deposits of
$100,000 or more at March 31, 1996 and 1995, and at December 31, 1995 and 1994:
<TABLE>
<CAPTION>
MARCH 31, DECEMBER 31,
---------------------- ----------------------
MATURITIES OF TIME DEPOSITS OF $100,000 OR MORE 1996 1995 1995 1994
- ---------------------------------------------------------------- ----------- --------- ----------- ---------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C>
Three Months or Less............................................ $ 37,263 $ 36,277 $ 47,925 $ 35,964
After Three through Six Months.................................. 26,693 19,334 20,184 25,338
After Six through Twelve Months................................. 28,111 6,723 21,152 14,422
After Twelve Months............................................. 40,803 33,847 37,129 15,357
----------- --------- ----------- ---------
Total......................................................... $ 132,870 $ 96,181 $ 126,390 $ 91,081
----------- --------- ----------- ---------
----------- --------- ----------- ---------
Weighted Average Rate on Time Deposits of $100,000 or More...... 5.53% 5.52% 5.54% 4.06%
----------- --------- ----------- ---------
----------- --------- ----------- ---------
</TABLE>
Mexico is a part of the trade territory of the Company and foreign deposits
from Mexican sources have traditionally been a source of funding. In December
1994, the Mexican government announced a 15% devaluation of the Mexican peso
relative to the United States dollar, and the Mexican peso has since continued
to decline relative to the dollar. The Company does not anticipate any negative
impact on foreign deposits due to these recent devaluations of the peso. The
increase in foreign deposits is primarily attributable to Mexican deposits
obtained with the RGC/Roma Branch Acquisitions. The following table presents
foreign deposits, primarily from Mexican sources, at March 31, 1996 and 1995,
and at December 31, 1995 and 1994:
<TABLE>
<CAPTION>
MARCH 31, DECEMBER 31,
-------------------- --------------------
FOREIGN DEPOSITS 1996 1995 1995 1994
- ------------------------------------------------------------------- --------- --------- --------- ---------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C>
Demand Deposits.................................................... $ 1,773 $ 1,063 $ 2,287 $ 1,589
--------- --------- --------- ---------
Interest-Bearing Deposits
Savings.......................................................... 2,193 1,316 2,174 1,336
Money Market Checking and Savings................................ 8,313 5,638 9,178 6,577
Time Deposits Under $100,000..................................... 19,883 11,586 19,376 11,544
Time Deposits of $100,000 or more................................ 27,454 16,552 26,471 14,778
--------- --------- --------- ---------
Total Interest-Bearing Deposits................................ 57,843 35,092 57,199 34,235
--------- --------- --------- ---------
Total Foreign Deposits......................................... $ 59,616 $ 36,155 $ 59,486 $ 35,824
--------- --------- --------- ---------
Percentage of Total Deposits....................................... 10.2% 7.6% 10.3% 7.6%
--------- --------- --------- ---------
Weighted Average Rate on Foreign Deposits.......................... 4.73% 4.44% 4.78% 3.55%
--------- --------- --------- ---------
--------- --------- --------- ---------
</TABLE>
LIQUIDITY
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 investment securities,
sales of loans and investment securities and borrowings. See previous discussion
regarding the maturity dates for "Loans," "Investment Securities" and
"Deposits."
Asset liquidity is provided by cash and assets which are readily marketable,
or which can be pledged, or which will mature in the near future. These include
cash, federal funds sold and U.S. Government-backed securities. At March 31,
1996, the Company's liquidity ratio, defined as cash, U.S. Government-
53
<PAGE>
backed securities and federal funds sold as a percentage of deposits, was 25.8%
compared to 32.4% at March 31, 1995 and compared to 27.5% at December 31, 1995.
At December 31, 1995, the Company's liquidity ratio was 27.5% compared to 34.2%
at December 31, 1994 and compared to 36.0% at December 31, 1993. In each case,
the Company's liquidity ratio has declined as a result of management's efforts
to improve the Company's earnings mix by increasing loan volume.
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 nor does it
solicit brokered deposits. Federal funds purchased and short-term borrowings are
additional sources of liquidity. These sources of liquidity are short-term in
nature and are used, as necessary, to fund asset growth and meet short-term
liquidity needs.
For the three months ended March 31, 1996, liquidity was enhanced primarily
by net cash provided by operating activities of $4.1 million, investing
activities of $641,000 and financing activities of $5.5 million. The increase in
net cash provided by financing activities was primarily attributable to the $6.3
million net increase in deposits. As a result, net cash and cash equivalents at
March 31, 1996 of $44.7 million increased $10.2 million or 29.6% compared to net
cash and cash equivalents at December 31, 1995 of $34.5 million.
During 1995, funds for $79.4 million of investment purchases and $69.5
million of net loan growth came from various sources, including a net increase
in deposits of $27.9 million, $12.6 million in proceeds from sale of investment
securities, $62.5 million in proceeds from maturing investment securities and
$8.7 million of net income.
The Federal Deposit Insurance Corporation Improvement Act of 1991 ("FDICIA")
requires that federal bank regulatory authorities take "prompt corrective
action" with respect to any depository institution which 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." The classifications are generally determined
by applicable ratios of the institution, including Tier I capital to
risk-weighted assets, total capital to risk-weighted assets and leverage ratios.
Based on Texas State Bank's capital ratios at December 31, 1995, Texas State
Bank was classified as "well capitalized" under the applicable regulations. As a
result, the Company does not believe that the prompt corrective action
regulations have any material effect on the activities or operations of the
Company or Texas State Bank.
The principal sources of liquidity for the Company during 1995 were the
proceeds from the 1994 sale of 1.0 million shares of Common Stock and interest
income of $338,000 from the Bank. The funds received were used primarily to pay
common stock dividends and other expenses.
The Company is dependent on dividend and interest income from the Bank and
the sale of stock for its liquidity. Applicable FRB 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 and the Bank is classified
as "well capitalized" for purposes of FDICIA. See "Business -- Regulation and
Supervision" and "Business -- Capital Resources."
The funds management policy of the Company and the Bank is to maintain a
reasonably balanced position of rate sensitive assets and liabilities to avoid
adverse changes in net interest income. Changes in net interest income occur
when interest rates on loans and investments change in a different time period
from that of changes in interest rates on liabilities, or when the mix and
volume of interest-earning assets and interest-bearing liabilities change. 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.
54
<PAGE>
Rate sensitive assets maturing within one year exceeded rate sensitive
liabilities with comparable maturities at March 31, 1996 by $27.0 million.
Management monitors the rate sensitivity GAP on a regular basis and takes steps
when appropriate to improve the sensitivity. The ratio of cumulative rate
sensitivity GAP to total assets at a period of twelve months or less was 4.11%.
The following table summarizes interest rate sensitive assets and
liabilities by maturity at March 31, 1996:
<TABLE>
<CAPTION>
MARCH 31, 1996
--------------------------------------------------------------------------
7-12 1-5 OVER
INTEREST RATE SENSITIVITY ANALYSIS 1-3 MONTHS 4-6 MONTHS MONTHS YEARS 5 YEARS TOTAL
- ------------------------------------ ----------- ---------- ---------- ----------- ----------- -----------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
Loans............................... $ 304,374 $ 17,145 $ 27,455 $ 115,620 $ 2,465 $ 467,059
Investment Securities
Available for Sale................ 1,986 2,988 15,710 35,301 1,468 57,453
Held to Maturity.................. 14,214 2,073 7,540 28,882 3,204 55,913
Federal Funds Sold.................. 13,200 -- -- -- -- 13,200
----------- ---------- ---------- ----------- ----------- -----------
Total Interest-Earning Assets... 333,774 22,206 50,705 179,803 7,137 593,625
----------- ---------- ---------- ----------- ----------- -----------
Savings............................. 38,850 -- -- -- -- 38,850
Money Market Checking and Savings
Accounts........................... 127,222 -- -- -- -- 127,222
Time Deposits....................... 81,229 58,995 72,804 84,551 2,256 299,835
Federal Funds Purchased and
Securities Sold Under Repurchase
Agreements......................... 600 -- -- -- -- 600
----------- ---------- ---------- ----------- ----------- -----------
Total Interest-Bearing
Liabilities................... 247,901 58,995 72,804 84,551 2,256 466,507
----------- ---------- ---------- ----------- ----------- -----------
Rate Sensitivity GAP (1)............ $ 85,873 $ (36,789) $ (22,099) $ 95,252 $ 4,881 $ 127,118
----------- ---------- ---------- ----------- ----------- -----------
----------- ---------- ---------- ----------- ----------- -----------
Cumulative Rate Sensitivity
GAP................................ $ 85,873 $ 49,084 $ 26,985 $ 122,237 $ 127,118
----------- ---------- ---------- ----------- -----------
----------- ---------- ---------- ----------- -----------
Ratio of Cumulative Rate Sensitivity
GAP to Total Assets................ 13.09% 7.48% 4.11%
----------- ---------- ----------
----------- ---------- ----------
Ratio of Cumulative Rate Sensitive
Interest-Earning Assets to
Cumulative Rate Sensitive
Interest-Bearing Liabilities....... 1.35:1 1.16:1 1.07:1
----------- ---------- ----------
----------- ---------- ----------
</TABLE>
- ---------
(1) Rate sensitive interest-earning assets less rate sensitive
interest-bearing liabilities.
55
<PAGE>
Rate sensitive assets maturing within one year exceeded rate sensitive
liabilities with comparable maturities at December 31, 1995 by $22.3 million.
Management monitors the rate sensitivity GAP on a regular basis and takes steps
when appropriate to improve the sensitivity. The ratio of cumulative rate
sensitivity GAP to total assets at a period of twelve months or less was 3.45%.
The following table summarizes interest rate sensitive assets and
liabilities by maturity at December 31, 1995:
<TABLE>
<CAPTION>
DECEMBER 31, 1995
-------------------------------------------------------------------------
7-12 1-5 OVER
INTEREST RATE SENSITIVITY ANALYSIS 1-3 MONTHS 4-6 MONTHS MONTHS YEARS 5 YEARS TOTAL
- ------------------------------------- ----------- ---------- --------- ----------- ----------- -----------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
Loans................................ $ 295,292 $ 16,196 $ 26,288 $ 110,317 $ 2,761 $ 450,854
Investment Securities
Available for Sale................. 9,456 1,001 17,721 33,502 1,470 63,150
Held to Maturity................... 4,445 16,248 5,139 39,209 3,450 68,491
Federal Funds Sold................... 3,600 -- -- -- -- 3,600
----------- ---------- --------- ----------- ----------- -----------
Total Interest-Earning Assets.... 312,793 33,445 49,148 183,028 7,681 586,095
----------- ---------- --------- ----------- ----------- -----------
Savings.............................. 36,133 -- -- -- -- 36,133
Money Market Checking and Savings
Accounts............................ 127,687 -- -- -- -- 127,687
Time Deposits........................ 108,738 48,270 51,501 84,945 2,043 295,497
Federal Funds Purchased and
Securities Sold Under Repurchase
Agreements.......................... 757 -- -- -- -- 757
----------- ---------- --------- ----------- ----------- -----------
Total Interest-Bearing
Liabilities.................... 273,315 48,270 51,501 84,945 2,043 460,074
----------- ---------- --------- ----------- ----------- -----------
Rate Sensitivity GAP (1)............. $ 39,478 $ (14,825) $ (2,353) $ 98,083 $ 5,638 $ 126,021
----------- ---------- --------- ----------- ----------- -----------
----------- ---------- --------- ----------- ----------- -----------
Cumulative Rate Sensitivity
GAP................................. $ 39,478 $ 24,653 $ 22,300 $ 120,383 $ 126,021
----------- ---------- --------- ----------- -----------
----------- ---------- --------- ----------- -----------
Ratio of Cumulative Rate Sensitivity
GAP to Total Assets................. 6.10% 3.81% 3.45%
----------- ---------- ---------
----------- ---------- ---------
Ratio of Cumulative Rate Sensitive
Interest-Earning Assets to
Cumulative Rate Sensitive
Interest-Bearing Liabilities........ 1.14:1 1.08:1 1.06:1
----------- ---------- ---------
----------- ---------- ---------
</TABLE>
- ---------
(1) Rate sensitive interest-earning assets less rate sensitive
interest-bearing liabilities.
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.
56
<PAGE>
CAPITAL RESOURCES
Shareholders' equity at March 31, 1996 of $64.6 million increased $7.2
million or 12.6% compared to the March 31, 1995 level of $57.3 million and
increased $1.8 million or 2.9% compared to the December 31, 1995 level of $62.7
million. The increase was attributable to earnings reduced primarily by
dividends paid on Class A Voting Common Stock.
Shareholders' equity of $62.7 million for the year ended December 31, 1995
reflects a net increase of approximately $7.0 million or 12.5% compared to
shareholders' equity of $55.7 million for the year ended December 31, 1994. This
net increase was primarily attributable to earnings for 1995. The net increase
in shareholders' equity reflects dividends paid on Common Stock of $2.5 million
which included $620,000 declared December 12, 1995 and paid on January 16, 1996.
On March 21, 1994, the Board of Directors of the Company adopted a
resolution calling for redemption on April 22, 1994 of all issued and
outstanding preferred stock, including the Company's First Series Convertible
Preferred Stock, Series 1990 Convertible Preferred Stock and Series 1991
Convertible Preferred Stock (herein collectively called the "Preferred Stock")
at a redemption price of $104 per share plus all accrued and unpaid dividends
through the date fixed for redemption. The Preferred Stock was convertible into
13.2 shares of Common Stock for each share of Preferred Stock held.
Effective April 22, 1994, 356 shares of Preferred Stock were redeemed and
74,172 shares of Preferred Stock were converted into 979,009 shares of Common
Stock.
The risk-based capital standards as established by the FRB 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. Beginning on December 31, 1993, 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
capital 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 FRB 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 the FDICIA if its Total Risk-Based Capital Ratio is equal to or
greater than 10.0%, and Tier I Risk-Based Capital Ratio is equal to or greater
than 6.0%, and Tier I Leverage Capital Ratio is equal to or greater than 5.0%.
The Company's Tier I Risk-Based Capital Ratio was approximately 11.66% and
14.59% at March 31, 1996 and 1995, respectively. The Company's Total Risk-Based
Capital Ratio was approximately 12.63% and 15.63% at March 31, 1996 and 1995,
respectively. The Company's Tier I Leverage Capital Ratio was 9.07% and 10.56%
at March 31, 1996 and 1995, respectively. The Company's Tier I Risk-Based
Capital Ratio was approximately 11.70% and 14.71% at December 31, 1995 and 1994,
respectively. The Company's Total Risk-Based Capital Ratio was approximately
12.64% and 15.67% at December 31, 1995 and 1994, respectively. The Company's
Tier I Leverage Capital Ratio was 8.96% and 10.37%, at December 31, 1995 and
1994, respectively. Based on capital ratios, the Company is within the
definition of "well capitalized" for FRB purposes at March 31, 1996 and December
31, 1995.
57
<PAGE>
The following table presents the Company's risk-based capital calculation:
<TABLE>
<CAPTION>
MARCH 31, DECEMBER 31,
------------------------ ------------------------
RISK-BASED CAPITAL 1996 1995 1995 1994
- -------------------------------------------------------------- ----------- ----------- ----------- -----------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C>
Total Shareholders' Equity, before unrealized gains or losses
on Securities Available for Sale............................. $ 64,537 $ 57,686 $ 62,603 $ 56,318
Less -- Goodwill and Other Deductions......................... 5,588 1,926 5,711 1,982
----------- ----------- ----------- -----------
Total Tier I Capital.......................................... 58,949 55,760 56,892 54,336
Total Tier II Capital......................................... 4,890 3,995 4,542 3,511
----------- ----------- ----------- -----------
Total Qualifying Capital...................................... $ 63,839 $ 59,755 $ 61,434 $ 57,847
----------- ----------- ----------- -----------
----------- ----------- ----------- -----------
Risk Adjusted Assets (Including Off-Balance Sheet Exposure)... $ 505,383 $ 382,290 $ 486,111 $ 369,273
----------- ----------- ----------- -----------
----------- ----------- ----------- -----------
Tier I Risk-Based Capital Ratio............................... 11.66% 14.59% 11.70% 14.71%
Total Risk-Based Capital Ratio................................ 12.63 15.63 12.64 15.67
Leverage Capital Ratio........................................ 9.07 10.56 8.96 10.37
----------- ----------- ----------- -----------
----------- ----------- ----------- -----------
</TABLE>
CURRENT ACCOUNTING ISSUES
Effective January 1, 1995, the Company adopted Statement 114 and the
amendment thereof, Statement 118. Under Statement 114, a loan is considered
impaired when, based upon current information and events, it is probable that a
creditor will be unable to collect all amounts due according to the contractual
terms of the loan agreement. Statement 114 requires that an impaired loan be
valued utilizing (i) the present value of expected future cash flows discounted
at the effective interest rate of the loan, (ii) the fair value of the
underlying collateral, or (iii) the observable market price of the loan.
Statement 118 amended Statement 114 by expanding the related disclosure
requirements and permitting use of existing methods for recognizing interest
income on impaired loans.
Loans which were restructured prior to the adoption of Statement 114 and
which are performing in accordance with the renegotiated terms are not required
to be reported as impaired. Loans restructured subsequent to the adoption of
Statement 114 are required to be reported as impaired in the year of
restructuring. Thereafter, such loans can be removed from the impaired loan
disclosure if the loans were paying a market rate of interest at the time of
restructuring and are performing in accordance with their renegotiated terms.
For loans covered by Statement 114, the Company makes an assessment for
impairment when and while such loans are on nonaccrual status or when the loan
has been restructured. When a loan with unique risk characteristics has been
identified as being impaired, the amount of impairment will be measured by the
Company using discounted cash flows, except when it is determined that the sole
(remaining) source of repayment for the loan is the operation or liquidation of
the underlying collateral. In such case, the current fair value of the
collateral, reduced by costs to sell, will be used in place of discounted cash
flows. At the time a loan is placed on nonaccrual status, interest previously
recognized but uncollected is reversed and charged against current income.
Subsequent interest payments received on nonaccrual loans are either applied
against principal or reported as income, depending upon management's assessment
of the ultimate collectability of principal.
In management's opinion, the adoption of Statement 114 and Statement 118 did
not have a material effect on the Company's results of operations.
In October 1995, FASB issued Statement of Financial Accounting Standards No.
123 ("Statement 123"), "Accounting for Stock-Based Compensation". Statement 123
establishes financial accounting and reporting standards for stock-based
employee compensation plans. Statement 123 encourages entities to adopt a "fair
value" based method of accounting for stock-based compensation plans which
requires an estimate of the fair value of stock options or other equity
instruments to which employees become entitled when they have rendered requisite
service or satisfied other conditions necessary to earn the
58
<PAGE>
right to benefit from the instruments. Compensation cost is then determined
based on the fair value estimate and is recognized over the service period,
which is usually the vesting period. Statement 123 also requires that an
employer's financial statements include certain disclosures about stock-based
employee compensation arrangements regardless of the method used to account for
them.
The accounting requirements of Statement 123 are effective for transactions
entered into in fiscal years that begin after December 15, 1995. In management's
opinion, implementation of Statement 123 has not had and is not anticipated to
have a material effect on the Company's consolidated financial statements.
QUARTER RESULTS
Net income for the three months ended March 31, 1996 was $2.6 million or
$0.41 per share, reflecting a net increase of $567,000 or $0.09 per share,
compared to net income of $2.0 million or $0.32 per share for the three months
ended March 31, 1995 and reflected a net increase of $134,000 or $0.02 per share
compared to net income of $2.4 million or $0.39 per share for the three months
ended December 31, 1995. Earnings performance for the three months ended March
31, 1996 compared to the three months ended March 31, 1995 reflected gains in
net interest income and an increase in noninterest income, partially offset by
an increase in noninterest expense. Earnings performance for the three months
ended March 31, 1996 compared to the three months ended December 31, 1995
reflected gains in net interest income and an increase in noninterest income
reduced by an increase in noninterest expense.
The fourth quarter net income for 1995 of $2.4 million or $0.39 per share
reflected an increase of $139,000 or 6.1% compared to $2.3 million or $0.37 per
share for the fourth quarter of 1994. Earnings performance for the fourth
quarter of 1995 as compared to the fourth quarter of 1994 reflects increases in
net interest income, noninterest income and noninterest expense. The following
table presents a summary of operations for the last six quarters:
<TABLE>
<CAPTION>
1996 1995 1994
----------- -------------------------------------------------- -----------
CONDENSED QUARTERLY INCOME STATEMENTS FIRST FOURTH THIRD SECOND FIRST FOURTH
TAXABLE-EQUIVALENT BASIS QUARTER QUARTER QUARTER QUARTER QUARTER QUARTER
- --------------------------------------------------- ----------- ----------- ----------- ----------- ----------- -----------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C> <C>
Interest Income.................................... $ 13,176 $ 12,804 $ 11,904 $ 10,880 $ 10,218 $ 9,629
Interest Expense................................... 5,281 5,171 4,857 4,295 3,729 3,340
----------- ----------- ----------- ----------- ----------- -----------
Net Interest Income................................ 7,895 7,633 7,047 6,585 6,489 6,289
Provision for Loan Losses.......................... 461 625 372 322 366 455
Noninterest Income................................. 1,946 1,729 1,623 1,576 1,590 1,514
Noninterest Expense................................ 5,314 5,035 4,694 4,654 4,594 3,787
----------- ----------- ----------- ----------- ----------- -----------
Income Before Taxable-Equivalent Adjustment and
Income Tax........................................ 4,066 3,702 3,604 3,185 3,119 3,561
Taxable-Equivalent Adjustment...................... 206 105 35 35 39 34
Applicable Income Tax Expense...................... 1,306 1,177 1,292 1,109 1,093 1,246
----------- ----------- ----------- ----------- ----------- -----------
Net Income $ 2,554 $ 2,420 $ 2,277 $ 2,041 $ 1,987 $ 2,281
----------- ----------- ----------- ----------- ----------- -----------
----------- ----------- ----------- ----------- ----------- -----------
Net Income Per Common Share
Primary.......................................... $ 0.41 $ 0.39 $ 0.37 $ 0.33 $ 0.32 $ 0.37
Fully Diluted.................................... 0.41 0.39 0.36 0.33 0.32 0.37
----------- ----------- ----------- ----------- ----------- -----------
----------- ----------- ----------- ----------- ----------- -----------
</TABLE>
Taxable-equivalent net interest income was $7.9 million for the three months
ended March 31, 1996, reflected an increase of $1.4 million or 21.7% compared to
taxable-equivalent net interest income for the three months ended March 31, 1995
of $6.5 million. The interest rate margin of 5.38% for the three months ended
March 31, 1996 reflects a decrease of 16 basis points compared to 5.54% for the
three months ended March 31, 1995. The increase in net interest income for the
three months ended March 31, 1996 compared to the three months ended March 31,
1995 was primarily attributable to the increase in the volume of
interest-earning assets exceeding the increase in volume of interest-bearing
liabilities and the change in the mix of earnings assets. The increase in net
interest income for the three months ended March 31, 1996 compared to three
months ended December 31, 1995 was primarily attributable to the
59
<PAGE>
change in the mix of interest-earning assets. The average loan balance for the
three months ended March 31, 1996 of $457.4 million increased $44.6 million or
10.8% compared to the average loan balance for the three months ended December
31, 1995. The increase in the average balance of loans outstanding improved
earnings. Total Interest-Earning Assets for the three months ended March 31,
1996 of $590.5 million increased $16.4 million or 2.9% compared to the average
Total Interest-Earning Assets for the three months ended December 31, 1995.
Net interest income of $7.6 million for the fourth quarter of 1995 increased
$1.3 million or 21.4% compared to $6.3 million for the fourth quarter of 1994,
reflecting the increased volume of earning assets and net increase in yield for
the year ended December 31, 1995. Average earning assets of $574.0 million for
the fourth quarter of 1995 increased $104.4 million or 22.2% compared to $469.6
million for the fourth quarter of 1994. The fourth quarter of 1995 interest
margin was 5.28% compared to 5.31% for the fourth quarter of 1994 and 5.15% in
the third quarter of 1995.
The provision for loan losses for the three months ended March 31, 1996 of
$461,000 reflects an increase of $95,000 or 26.0% compared to $366,000 for the
three months ended March 31, 1995 and was primarily attributable to loan growth.
The provision for loan losses charged against earnings in the fourth quarter
of 1995 was $625,000 compared to $455,000 for the fourth quarter of 1994,
reflecting an increase of $170,000 or 37.4%. The provision for loan losses in
the fourth quarter of 1995 was primarily attributable to loan growth.
Noninterest income for the three months ended March 31, 1996 of $1.9 million
increased $356,000 or 22.4% compared to $1.6 million for the three months ended
March 31, 1995 and increased $217,000 or 12.6% compared to $1.7 million for the
three months ended December 31, 1995. The increase in Noninterest income for the
three months ended March 31, 1996 compared to the three months ended March 31,
1995 is primarily attributable to the increased fee income from Total Service
Charges, Trust Service Fees and Data Processing Service Fees. The increase in
Total Service Charges was impacted by an increase in activity levels and
additional volume. The increase in Trust Service Fees for the three months ended
March 31, 1996 compared to three months ended March 31, 1995 is attributable to
increases in both the number of trust accounts and the book value of assets
managed. The book value of assets managed at March 31, 1996 and 1995 was $257.2
million and $205.0 million, respectively. 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. The increase in Data Processing
Service Fees for the three months ended March 31, 1996 compared to three months
ended March 31, 1995 is attributable to an increased volume of business.
Noninterest income of $1.7 million for the fourth quarter of 1995 increased
$215,000 or 14.2% compared to $1.5 million for the fourth quarter of 1994,
primarily due to an increased volume of business and as a result of the RGC/Roma
Branch Acquisitions. All components of noninterest income reflect increases for
fourth quarter of 1995 compared to fourth quarter of 1994 except Other Service
Charges and Investment Securities Gains (Losses). The decline in Other Service
Charges is primarily attributable to a decline in foreign currency exchange
fees. Investment Securities Gains (Losses) of ($98,000) for the fourth quarter
of 1995 compared to Investment Securities Gains (Losses) of $8,000 for the
fourth quarter of 1994.
Noninterest expense for the three months ended March 31, 1996 of $5.3
million increased $720,000 or 15.7% compared to the three months ended March 31,
1995 of $4.6 million and increased $279,000 or 5.5% compared to the three months
ended December 31, 1995 of $5.0 million. The increase for the three months ended
March 31, 1996 compared to the three months ended March 31, 1995 and the three
months ended December 31, 1995 was primarily attributable to the increased
volume of business conducted by the Company. Personnel expense of $2.7 million
for the three months ended March 31, 1996 increased $479,000 or 21.2% compared
to the three months ended March 31, 1995 and $178,000 or 7.0% compared to the
three months ended December 31, 1995. Personnel expense increased for the three
months ended March 31, 1996 compared to the three months ended March 31, 1995
primarily due to staffing increases, including the staff acquired as a result of
the RGC/Roma Branch Acquisitions, staff
60
<PAGE>
for the New Weslaco Banking Location and increases in payroll taxes, medical
insurance premiums and pension expenses for all employees. The Personnel expense
increase for the three months ended March 31, 1996 compared to the three months
ended December 31, 1995, was primarily due to staffing increases, including
staffing increases associated with the Company's New Weslaco Banking Location.
The New Weslaco Banking Location opened in February 1996. Net Occupancy expense
of $317,000 for the three months ended March 31, 1996 increased $64,000 or 25.3%
compared to $253,000 for the three months ended March 31, 1995 and $38,000 or
13.6% compared to $279,000 for the three months ended December 31, 1995. The Net
Occupancy expense increase for the three months ended March 31, 1996 compared to
the three months ended March 31, 1995 is primarily due to the occupancy expenses
associated with the RGC/Roma Branch Acquisitions. Equipment expenses of $643,000
for the three months ended March 31, 1996 increased $212,000 or 49.2% compared
to $431,000 for the three months ended March 31, 1995 and $79,000 or 14.0%
compared to the three months ended December 31, 1995. The Equipment expense
increase for the three months ended March 31, 1996 compared to the three months
ended March 31, 1995 is primarily due to expenses associated with the RGC/Roma
Branch Acquisitions and the New Weslaco Banking Location.
Noninterest expense of $5.0 million for the fourth quarter of 1995 increased
$1.2 million or 33.0% compared to $3.8 million for the fourth quarter of 1994.
The increase in noninterest expense is primarily attributable to Other Losses of
$239,000 for the fourth quarter of 1995 reflecting a net increase of $738,000
compared to a net gain of $499,000 for the fourth quarter of 1994. The net gain
for the fourth quarter of 1994 was primarily attributable to a benefit of
$553,000 from the reversal of a second quarter 1994 accrual. The reversal of the
accrual resulted from the settlement of a lawsuit in the last quarter of 1994.
61
<PAGE>
BUSINESS
GENERAL
Texas Regional, a Texas business corporation registered as a bank holding
company under the Bank Holding Company Act of 1956, was incorporated in 1983.
Texas Regional commenced operations as a bank holding company with the
acquisition of Texas State Bank, McAllen, Texas, and Harlingen State Bank,
Harlingen, Texas ("Harlingen State Bank") in May 1984. In March 1992, the
Company acquired Mid Valley Bank, Weslaco, Texas ("Mid Valley Bank") and merged
Harlingen State Bank and Mid Valley Bank into Texas State Bank. In 1995, Texas
State Bank acquired the Rio Grande City and Roma branches of First National Bank
of South Texas (the "RGC/Roma Branch Acquisitions"). Texas State Bank, which is
the Company's sole subsidiary, operates nine banking locations in the Rio Grande
Valley: four banking locations in McAllen (including its main office), two
banking locations in Weslaco, and one banking location each in Harlingen, Rio
Grande City and Roma. At March 31, 1996, Texas Regional had consolidated total
assets of $655.9 million, loans outstanding (net of unearned discount) of $467.1
million, total deposits of $586.0 million, and shareholders' equity of $64.6
million. At December 31, 1995, Texas Regional had consolidated total assets of
$646.8 million, loans outstanding (net of unearned discount) of $450.9 million,
total deposits of $579.7 million, and shareholders' equity of $62.7 million.
Upon consummation of the Mergers, Texas State Bank will have 15 full service
banking locations. In addition to the banking locations listed in the preceding
paragraph, Texas State Bank will add one banking location in McAllen, three in
Mission and one each in Penitas and Hidalgo. Assuming the Mergers and this
offering had been consummated at March 31, 1996, the Bank would have had pro
forma consolidated assets of $1.172 billion, loans outstanding (net of unearned
discounts) of $709.6 million, total deposits of $1.049 billion, and total
shareholders' equity of $109.8 million. Assuming the Mergers and this offering
had been consummated at December 31, 1995, the Bank would have had pro forma
consolidated assets of $1.144 billion, loans outstanding (net of unearned
discounts) of $685.3 million, total deposits of $1.024 billion, and total
shareholders' equity of $107.9 million.
The business strategy of Texas Regional is for the Bank 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 senior management of the Company have
maintained the Company's community orientation by tailoring products and
services to meet community and customer needs. Management believes that the
Company is well positioned in its market due to its responsive customer service,
the strong community involvement of Texas State Bank management and employees,
recent trends in the Texas banking environment in general and the economy of the
Rio Grande Valley in particular. 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.
Management believes that individualized customer service will allow the Company
to increase its market share in lending volume and deposits. As part of its
operating and growth strategies, the Company is working to continue to attract
business from, and provide service to, small and medium sized businesses, and
expand operations in the Rio Grande Valley. Management believes that the Mergers
are consistent with this strategy.
By maximizing personal knowledge of and contact with customers and
endeavoring to understand the needs and preferences of its customers, the
Company is working to maintain and further enhance its reputation of providing
excellent customer service, allowing it to achieve its growth and earnings
goals. The Company has developed an organizational structure that allows it to
make credit and other banking decisions rapidly. Management believes that this
structure, when compared to competing financial institutions, enables the
Company to provide a higher degree of service and increased flexibility to
creditworthy customers.
The Bank continues to focus on small and medium sized businesses and
individual customers as its principal market, and seeks to provide services to
its customers across all product lines. Many financial institutions in the Rio
Grande Valley have become part of much larger state-wide or national
organizations. Management believes that the acquiring institutions in many cases
have shifted decision making
62
<PAGE>
and operations out of the Rio Grande Valley, and therefore have decreased the
level of personal service that the Company seeks to provide to small and medium
sized businesses that are the core of the Company's existing business and
marketing efforts. The Company intends to continue to target its marketing
efforts to those businesses and individuals who prefer the personalized customer
service emphasized by the Company.
Bank management and other employees participate actively in a wide variety
of civic and community activities and organizations, including local chambers of
commerce, industrial foundations and charitable and civic activities such as
educational institutions, health care organizations and the McAllen Affordable
Housing Corporation. Management has also been actively involved in organizations
to promote border trade and economic development. The Company believes that
these activities assist the Bank through increased visibility and through
development and maintenance of customer relationships.
For its business customers, Texas State 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
Texas State 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. Texas State Bank also
provides travelers checks, money orders and safe deposit facilities, and offers
trust services. While First State Bank and Border Bank provide similar services
and products for their customers, the products and services offered at these
locations will be expanded to include all products and services offered by Texas
State Bank.
Texas State Bank has also expanded the services which it provides to third
party correspondent banks. The Texas State Bank data processing center, for
example, presently serves three banks in addition to providing data processing
services for all Texas State Bank banking locations. It is expected that,
following consummation of the Mergers and a conversion in fall 1996, data
processing for the bank facilities formerly operated as First State Bank and
Border Bank facilities will be performed by the Texas State Bank data processing
facility.
The Company has expanded its market area and increased its market share
through both internal growth and through acquisitions. In August 1995, the
Company completed the RGC/Roma Branch Acquisitions. In that transaction, which
was accounted for as a purchase, Texas State Bank acquired substantially all of
the fixed assets associated with the Rio Grande City and Roma, Texas banking
locations acquired, certain loans coded to the banking locations, and certain
other assets, in consideration of the assumption of certain deposit accounts
coded to the banking locations. The RGC/Roma Branch Acquisitions increased loans
and deposits of the Company by $43.7 million and $79.7 million, respectively, at
the time of the acquisition. In addition to the pending Mergers, management
believes there may be additional opportunities to expand by acquiring financial
institutions or by acquiring assets and deposits that will allow the Company to
enter adjacent markets or further increase market share in existing markets.
Management intends to pursue acquisition opportunities in strategic markets in
circumstances in which management believes that its managerial, operational and
capital resources will enhance the performance of acquired institutions. Except
for the Merger Agreements, there are currently no agreements or understandings
related to any acquisition.
MARKET REGIONS
Texas Regional's operations are located in the Rio Grande Valley, which
consists of Cameron, Hidalgo, Willacy and Starr Counties. Cameron, Hidalgo and
Starr Counties are each directly adjacent to the Rio Grande River, which forms
part of the border between the United States and Mexico. Texas State Bank's
banking locations are located in Hidalgo County (McAllen and Weslaco), Cameron
County (Harlingen), and Starr County (Rio Grande City and Roma). The offices of
First State Bank and Border Bank are all located in Hidalgo County.
63
<PAGE>
The ability of Texas Regional to continue its rate of growth and
profitability is closely linked to the economy of the Rio Grande Valley. The
economy of the Rio Grande Valley is based principally on retailing (including
trade with Mexico), government, agriculture, tourism, manufacturing, health care
and education. A large number of retirees spend all or part of the year in the
Rio Grande Valley. Many twin manufacturing plants, or "maquiladoras", are
located in the Rio Grande Valley or in cities located across the border in
Mexico, such as Reynosa and Matamoros.
The City of McAllen, which is the location of the Company's headquarters,
serves as the center of a 150 mile retail market area. A large part of this
trade area is composed of the Mexican states of Nuevo Leon and Tamaulipas, which
had estimated populations of 3.1 million and 2.2 million, respectively, in 1990.
The major industrial and commercial center of northern Mexico, the City of
Monterrey in the Mexican state of Nuevo Leon, is located approximately 150 miles
southwest of McAllen. Among the largest cities in the Mexican state of
Tamaulipas are Reynosa, located ten miles south of McAllen and estimated to have
a population in excess of 700,000 persons, and Ciudad Victoria, which is located
200 miles south of McAllen. The Rio Grande Valley market includes a U.S.
population of approximately 800,000, a population which increased 128.0% (or
3.5% annually) between 1970 and 1994. The market area served by Texas State Bank
has been recognized as among the fastest growing areas in the nation. The
McAllen-Edinburg-Mission area has a projected population growth rate of 23.8%
between 1994 and 2000, and the Brownsville-Harlingen area has a projected
population growth rate of 16.0% during that same period.
The Rio Grande Valley has also experienced significant recent growth in the
retail and construction industries. Retail sales in the Rio Grande Valley
totaled approximately $5.9 billion in 1994, representing an annual compound
growth rate of 7.9% since 1984. With respect to new construction activity,
building permits in the Rio Grande Valley have grown 89.8% between 1989 and
1994, representing an annual compound growth rate of 13.7%.
LENDING ACTIVITIES
The primary source of income generated by Texas State Bank is the interest
earned from its loan and investment portfolios. Texas State Bank maintains
diversification when considering investments and the granting of loan requests.
Emphasis is placed on the borrower's ability to generate cash flow to support
its debt obligations and other cash related expenses. Lending activities include
commercial loans, agricultural loans, consumer loans and real estate loans.
Commercial loans and agricultural loans are originated primarily for working
capital funding. Consumer loans include those for the purchase of automobiles,
mobile homes, home improvements and investments. Real estate loans include the
origination of loans for commercial property acquisition or remodeling, and also
include conventional mortgages for the purchase of single-family houses or lots.
A substantial proportion of the properties collateralizing Texas State Bank's
mortgage portfolio is located in the Company's primary market area.
During 1995, Frank A. Kavanagh, President of Texas State Bank's Weslaco
banking location, was appointed the Chief Lending Officer of Texas State Bank.
During 1995, Texas State Bank also further standardized documentation
requirements and centralized loan controls and supervision. Texas State Bank
management continues to seek to preserve and enhance the quality of the Bank's
loan portfolio.
At March 31, 1996, Texas Regional's total loan portfolio (net of unearned
discount) was $467.1 million representing 79.7% and 71.2% of its total deposits
and total assets, respectively, at that date. Total loans increased $112.6
million, or 31.8%, during the twelve month period from March 31, 1995 levels of
$354.4 million. At December 31, 1995, Texas Regional's total loan portfolio (net
of unearned discount) was $450.9 million, representing 77.8% and 69.7% of its
total deposits and total assets, respectively, at that date. Total loans
increased $110.9 million, or 32.6%, during 1995 from December 31, 1994 levels of
$339.9 million. In each case, a significant portion of this increase was
attributable to the RGC/Roma Branch Acquisitions. The Company's legal lending
limit to any one borrower was $11.5 million at December 31, 1995. However, the
legal lending limit does not include the portion of a loan collateralized by
cash or cash equivalents and government guaranties. All current loans fall well
below applicable legal lending limits. Texas Regional's lending policy generally
limits loans to one borrower to $8.0 million,
64
<PAGE>
with exceptions allowed for selected customers. An example of an exception is a
$34.0 million loan made during 1995 to fund a leveraged employee stock ownership
trust, which was secured by, among other assets, cash and cash equivalents of
$27.5 million. See "Texas Regional Bancshares, Inc. Management's Discussion and
Analysis of Financial Condition and Results of Operations--Analysis of Financial
Condition--Loans."
Assuming consummation of the Mergers, on a pro forma basis at March 31,
1996, Texas Regional's total loan portfolio (net of unearned discount) would
have been $709.6 million and its legal lending limit would have been $21.5
million. Assuming consummation of the Mergers, on a pro forma basis at December
31, 1995, Texas Regional's total loan portfolio (net of unearned discount) would
have been $685.3 million and its legal lending limit would have been $21.5
million.
At March 31, 1996, First State Bank and Border Bank had $16.4 million of
loans secured by non-U.S. collateral, primarily real estate and other assets in
Mexico. At December 31, 1995, First State Bank and Border Bank had $13.0 million
of loans secured by non-U.S. collateral, primarily real estate and other assets
in Mexico. Management of Texas Regional currently intends to maintain the
portfolio of such loans but does not intend to significantly expand the volume
of such loans.
The following table summarizes the loan portfolio of the Company by loan
category and amount at March 31, 1996 and on a pro forma basis at March 31,
1996, assuming that the Mergers had been consummated at March 31, 1996:
<TABLE>
<CAPTION>
ACTUAL PRO FORMA
----------------------- -----------------------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C>
Commercial........................................................ $ 151,217 32.4% $ 228,499 32.2%
----------- ----- ----------- -----
Agricultural...................................................... 28,447 6.1 38,238 5.4
----------- ----- ----------- -----
Real Estate
Construction.................................................... 28,682 6.2 46,570 6.6
Commerical Mortgage............................................. 136,057 29.1 203,622 28.7
Agricultural Mortgage........................................... 17,785 3.8 28,719 4.0
1-4 Family Mortgage............................................. 61,704 13.2 100,121 14.1
----------- ----- ----------- -----
Total Real Estate............................................. 244,228 52.3 379,032 53.4
----------- ----- ----------- -----
Consumer.......................................................... 43,167 9.2 63,795 9.0
----------- ----- ----------- -----
Total......................................................... $ 467,059 100.0% $ 709,564 100.0%
----------- ----- ----------- -----
----------- ----- ----------- -----
</TABLE>
The following table summarizes the loan portfolio of the Company by loan
category and amount at December 31, 1995 and on a pro forma basis at December
31, 1995, assuming that the Mergers had been consummated at December 31, 1995:
<TABLE>
<CAPTION>
ACTUAL PRO FORMA
----------------------- -----------------------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C>
Commercial........................................................ $ 146,461 32.5% $ 215,279 31.4%
----------- ----- ----------- -----
Agricultural...................................................... 25,097 5.6 33,991 5.0
----------- ----- ----------- -----
Real Estate
Construction.................................................... 29,967 6.6 54,667 7.9
Commerical Mortgage............................................. 129,953 28.8 190,293 27.8
Agricultural Mortgage........................................... 17,057 3.8 27,861 4.1
1-4 Family Mortgage............................................. 59,052 13.1 98,480 14.4
----------- ----- ----------- -----
Total Real Estate............................................. 236,029 52.3 371,301 54.2
----------- ----- ----------- -----
Consumer.......................................................... 43,267 9.6 64,715 9.4
----------- ----- ----------- -----
Total......................................................... $ 450,854 100.0% $ 685,286 100.0%
----------- ----- ----------- -----
----------- ----- ----------- -----
</TABLE>
65
<PAGE>
COMMERCIAL LENDING
Commercial loans at March 31, 1996 of $151.2 million increased $44.6 million
or 41.8% compared to March 31, 1995 level of $106.7 million and increased $4.8
million or 3.2% compared to December 31, 1995 level of $146.5 million. The
increase in commercial loans at March 31, 1996 compared to commercial loans at
March 31, 1995 is primarily attributable to the RGC/Roma Branch Acquisitions,
funding a $34.0 million leveraged employee stock ownership trust loan and
management's efforts to improve the earnings mix of earning assets by increasing
loan volume. At December 31, 1995, the Company had $146.5 million of commercial
loans outstanding, representing 32.5% of its total loans. Commercial loan
balances increased $44.6 million, or 43.8%, during 1995 from December 31, 1994
level of $101.9 million. The increase in commercial loans for the year ended
December 31, 1995 was primarily attributable to the funding of a $34.0 million
leveraged employee stock ownership trust loan which is collateralized by stock
and assets of the employer and approximately $27.5 million of cash and cash
equivalent assets. Excluding this loan, commercial loans at December 31, 1995
represented an increase of $10.6 million, or 10.4%, compared to level at
December 31, 1994. On a pro forma basis at March 31, 1996, the Company would
have had $228.5 million of commercial loans outstanding, representing 32.2% of
total loans at March 31, 1996. On a pro forma basis at December 31, 1995, the
Company would have had $215.3 million of commercial loans outstanding,
representing 31.4% of total loans at December 31, 1995.
Texas State Bank offers a variety of commercial loan services including term
loans, lines of credit, and equipment financing. A broad range of
short-to-medium term commercial loans, both collateralized and uncollateralized,
is made available to businesses for working capital (including inventory and
receivables), business expansion (including acquisitions of real estate and
improvements), and the purchase of equipment and machinery. The purpose of a
particular loan generally determines its structure.
Generally, Texas State Bank's commercial loans are underwritten in the
Bank's primary market area on the basis of the borrower's ability to service
such debt from income. As a general practice, Texas State Bank takes as
collateral a lien on any available real estate, equipment, or other assets.
Working capital loans are primarily collateralized by short-term assets whereas
term loans are primarily collateralized by long-term assets.
Unlike residential mortgage loans, which generally are made on the basis of
the borrower's ability to make repayment from his employment and other income
and which are collateralized by real property whose value tends to be more
readily ascertainable, commercial loans typically are underwritten on the basis
of the borrower's ability to make repayment from the cash flow of its business
and generally are collateralized by business assets, such as accounts
receivable, equipment and inventory. As a result, the availability of funds or
collateral value available to support the repayment of commercial loans may
deteriorate over time, cannot be appraised with precision, and may fluctuate
based on the success of the business.
AGRICULTURAL LOANS
At March 31, 1996, the Company had $28.4 million of agricultural loans
outstanding, representing 6.1% of its total loans. Agricultural loan balances
increased $8.5 million, or 42.4%, during the twelve month period from March 31,
1995 level of $20.0 million. On a pro forma basis at March 31, 1996, the Company
would have had $38.2 million of agricultural loans outstanding, representing
5.4% of total loans. At December 31, 1995, the Company had $25.1 million of
agricultural loans outstanding, representing 5.6% of its total loans.
Agricultural loan balances increased $7.9 million, or 45.9%, during 1995 from
December 31, 1994 level of $17.2 million. On a pro forma basis at December 31,
1995, the Company would have had $34.0 million of agricultural loans
outstanding, representing 5.0% of total loans.
REAL ESTATE LOANS
At March 31, 1996, the Company had $244.2 million of real estate loans
outstanding. Real estate loan balances increased $48.6 million, or 24.8% during
the twelve month period from March 31, 1995 level of $195.6 million. Real estate
loans represented 52.3% and 55.2% of total loans outstanding at March 31, 1996
and 1995, respectively. On a pro forma basis at March 31, 1996, the Company
would have had
66
<PAGE>
$379.0 million of real estate loans outstanding, or 53.4% of total loans. At
December 31, 1995, the Company had $236.0 million of real estate loans
outstanding. Real estate loan balances increased $45.9 million, or 24.1% during
1995 from December 31, 1994 level of $190.2 million. Real estate loans
represented 52.3% and 55.9% of total loans outstanding at December 31, 1995 and
1994, respectively. On a pro forma basis at December 31, 1995, the Company would
have had $371.3 million of real estate loans outstanding, or 54.2% of total
loans.
A substantial portion of the Bank's real estate mortgage loans are secured
by non-farm, non-residential properties, which are loans to commercial customers
for purposes of providing working capital. In addition, some of the Bank's real
estate mortgage loans have been made to finance or refinance the acquisition and
holding of commercial real estate. The Bank offers a variety of mortgage loan
products which generally are (i) amortized over five to 15 years, (ii) payable
in monthly installments of principal and interest, and (iii) due and payable in
full within three to five years.
Finally, a small portion of the Bank's lending activity has consisted of the
origination of single-family residential mortgage loans collateralized by
owner-occupied property located in the Bank's primary market area. The Bank
intends to pursue increased originations of single-family residential mortgage
loans with respect to its existing customer base. Loans collateralized by single
family residential real estate generally have been originated in amounts of no
more than 85% of appraised value. The Bank requires mortgage title insurance and
hazard insurance in the amount of the loan. Although the contractual loan
payment periods for single family residential real estate loans are generally
amortized over five to 20 years, they are payable in monthly installments of
principal and interest and are typically due and payable in full within three to
five years. At March 31, 1996 and December 31, 1995, approximately $13.0 million
of the single family residential mortgage loans at First State Bank and Border
Bank consisted of loans to low and moderate income borrowers. The
characteristics of these loans may contribute to a higher level of
delinquencies. Management believes that this component of the pro forma
portfolio will not have an adverse impact on the financial performance of the
Company.
CONSUMER LOANS
At March 31, 1996, the Company had $43.2 million of consumer loans
outstanding, representing 9.2% of its total loans. Aggregate consumer loan
balances increased $11.0 million, or 34.3%, during the twelve month period from
March 31, 1995 level of $32.1 million. On a pro forma basis at March 31, 1996,
the Company would have had $63.8 million of consumer loans outstanding, or 9.0%
of its total loans. At December 31, 1995, the Company had $43.3 million of
consumer loans outstanding, representing 9.6% of its total loans. Aggregate
consumer loan balances increased $12.6 million, or 40.9%, during 1995 from
December 31, 1994 level of $30.7 million. On a pro forma basis at December 31,
1995, the Company would have had $64.7 million of consumer loans outstanding, or
9.4% of its total loans.
Consumer loans made by the Bank have included automobile loans, recreational
vehicle loans, boat loans, second mortgage loans, home improvement loans,
personal loans (collateralized and uncollateralized) and deposit account
collateralized loans. The terms of these loans typically range from 12 to 60
months and vary based upon the nature of collateral and size of loan.
Consumer loans are attractive to the Bank because they typically have a
short term and carry higher interest rates than those charged on other types of
loans. Installment loans, however, do pose additional risks of collectability
when compared to traditional types of loans granted by commercial banks, such as
residential mortgage loans. In many instances, the Bank is required to rely on
the borrower's ability to repay since the collateral may be of reduced value at
the time of collection. Accordingly, the initial determination of the borrower's
ability to repay is of primary importance in the underwriting of consumer loans.
INVESTMENTS
At March 31, 1996 the Company had federal funds sold of $13.2 million and
investment securities of $113.4 million, including $57.5 million classified as
Available for Sale and $55.9 million classified as Held to Maturity. At December
31, 1995 the Company had federal funds sold of $3.6 million and investment
67
<PAGE>
securities of $131.6 million, including $63.1 million classified as Available
for Sale and $68.5 million classified as Held to Maturity. Investments are
managed to maintain adequate sources of liquidity and diversification and to
generate acceptable levels of tax-equivalent yield.
On a pro forma basis at March 31, 1996, after giving effect to the Mergers
and this offering at March 31, 1996, the Company would have had federal funds
sold of $24.8 million and investment securities of $310.7 million, including
$83.7 million classified as Available for Sale and $227.0 million classified as
Held to Maturity. On a pro forma basis at December 31, 1995, after giving effect
to the Mergers and this offering at December 31, 1995, the Company would have
had federal funds sold of $4.9 million and investment securities of $328.1
million, including $65.9 million classified as Available for Sale and $262.2
million classified as Held to Maturity. The pro forma adjustments include
assumptions regarding the use of sources of liquidity including federal funds
sold and sales of certain investment securities to fund a portion of the
purchase price. See "Texas Regional Bancshares, Inc. Pro Forma Combined
Condensed Financial Information." Management believes that sources of liquidity
will be adequate to fund the required portion of consideration in the Mergers
but will decide on specific securities to be sold, if necessary, based on market
conditions at the time of Closing.
The following table summarizes the investment portfolio of the Company by
investment category and amount at March 31, 1996 and on a pro forma basis at
March 31, 1996, assuming that the Mergers had been consummated at March 31,
1996:
<TABLE>
<CAPTION>
ACTUAL PRO FORMA
----------------------------- -----------------------------
AVAILABLE HELD TO AVAILABLE HELD TO
INVESTMENTS FOR SALE MATURITY TOTAL FOR SALE MATURITY TOTAL
- ------------------------------------------------------------ --------- -------- ------ --------- -------- ------
(IN MILLIONS)
<S> <C> <C> <C> <C> <C> <C>
Federal Funds Sold.......................................... $ N/A $ N/A $ 13.2 $ N/A $ N/A $ 24.8
Investment Securities.......................................
U.S. Treasury............................................. 4.0 24.4 28.4 10.4 31.4 41.8
U.S. Government Agency.................................... 52.0 26.2 78.2 71.8 131.3 203.1
Mortgage-Backed Securities................................ -- -- -- -- 0.1 0.1
State and Political Subdivision Securities................ -- 5.3 5.3 -- 61.7 61.7
Other..................................................... 1.5 -- 1.5 1.5 2.5 4.0
--------- -------- ------ --------- -------- ------
Total....................................................... $57.5 $55.9 $126.6 $83.7 $227.0 $335.5
--------- -------- ------ --------- -------- ------
--------- -------- ------ --------- -------- ------
</TABLE>
The following table summarizes the investment portfolio of the Company by
investment category and amount at December 31, 1995 and on a pro forma basis at
December 31, 1995, assuming that the Mergers had been consummated at December
31, 1995:
<TABLE>
<CAPTION>
ACTUAL PRO FORMA
----------------------------- -----------------------------
AVAILABLE HELD TO AVAILABLE HELD TO
INVESTMENTS FOR SALE MATURITY TOTAL FOR SALE MATURITY TOTAL
- ------------------------------------------------------------ --------- -------- ------ --------- -------- ------
(IN MILLIONS)
<S> <C> <C> <C> <C> <C> <C>
Federal Funds Sold.......................................... $ N/A $ N/A $ 3.6 $ N/A $ N/A $ 4.9
Investment Securities.......................................
U.S. Treasury............................................. 6.0 28.8 34.8 8.0 35.9 43.9
U.S. Government Agency.................................... 55.6 34.2 89.8 56.4 156.8 213.2
Mortgage-Backed Securities................................ -- -- -- -- 0.1 0.1
State and Political Subdivision Securities................ -- 5.5 5.5 -- 66.8 66.8
Other..................................................... 1.5 -- 1.5 1.5 2.6 4.1
--------- -------- ------ --------- -------- ------
Total....................................................... $63.1 $68.5 $135.2 $65.9 $262.2 $333.0
--------- -------- ------ --------- -------- ------
--------- -------- ------ --------- -------- ------
</TABLE>
As a part of the Company's purchase accounting adjustments, the Company will
review investment securities acquired in the Mergers for reclassification as
Available for Sale or Held to Maturity.
68
<PAGE>
DEPOSITS
The Company has a stable noninterest-bearing source of funds as reflected in
the ratio of average demand deposits to average total deposits for the three
months ended March 31, 1996 and 1995 of 20.5% and 20.5%, respectively, and for
the years ended December 31, 1995 and 1994 of 20.2% and 20.9%, respectively.
Deposits provide funding for the Company's investments in loans and securities,
and the interest paid for deposits must be managed carefully to control the
level of interest expense.
Texas State Bank's deposits at March 31, 1996 were $586.0 million,
reflecting an increase of $110.0 million, or 23.1% during the twelve month
period from March 31, 1995 level of $476.0 million. Texas State Bank's deposits
at December 31, 1995 were $579.7 million, an increase of $107.6 million, or
22.8% during 1995 from December 31, 1994 level of $472.1 million. A portion of
this increase was attributable to the RGC/Roma Branch Acquisitions. Deposits
currently consist primarily of core deposits from the Rio Grande Valley and
surrounding areas. Texas State Bank does not have any "brokered deposits",
defined as deposits which, to the knowledge of management of Texas Regional,
have been placed with the Bank by a person who acts as a broker in placing such
deposits on behalf of others. On a pro forma basis at March 31, 1996, the Bank's
deposits would have been $1.049 billion, and on a pro forma basis at December
31, 1995, the Bank's deposits would have been $1.024 billion.
At March 31, 1996, certificates of deposit held by Texas State Bank in
excess of $100,000 were $132.9 million, or 22.7% of total deposits. On a pro
forma basis at March 31, 1996, certificates of deposit held by the Bank in
excess of $100,000 would have been $293.7 million, or 28.0% of total deposits.
Texas State Bank acts as local depository for a number of local governmental
entities in its market area, including the City of McAllen, the South Texas
Community College District, the City of Weslaco, the Weslaco Independent School
District, the City of Rio Grande City, the City of Roma and Starr County. Local
government deposits are subject to competitive bid and in many cases must be
secured by government securities. Total deposits by or on behalf of governmental
entities at March 31, 1996, aggregated approximately $39.8 million, or 6.8% of
total deposits. On a pro forma basis at March 31, 1996, the Bank's total
deposits by or on behalf of government entities would have been $149.2 million,
or 14.2% of total deposits.
As with loan transactions, Texas State Bank has developed deposit relations
with depositors who are Mexican residents. At March 31, 1996, $56.6 million, or
9.7% of the Bank's total demand and time deposits were deposited primarily by or
on behalf of residents of Mexico. On a pro forma basis at March 31, 1996, $147.0
million, or 14.0% of the Bank's total demand and time deposits, would have been
deposited primarily by or on behalf of residents of Mexico. As with loan
transactions, management believes that Texas State Bank's percentage of deposits
by or on behalf of residents of Mexico, and the percentage of deposits on a pro
forma basis at March 31, 1996, on behalf of residents of Mexico, are somewhat
less than that of banks of comparable size located in the Rio Grande Valley.
COMPETITION
The banking industry in the market area served by Texas State Bank is highly
competitive. Competition among financial institutions 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, relative lending limits. A substantial number of the commercial banks
in the Rio Grande Valley are branches of much larger organizations affiliated
with national, regional or state-wide banking companies, and as a result of
those affiliations have greater resources than Texas Regional or Texas State
Bank. However, as an independent community bank headquartered in Texas State
Bank's primary market area, management of the Company believes that Texas State
Bank'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.
69
<PAGE>
PERSONNEL
At March 31, 1996, Texas Regional employed 351 full-time equivalent
employees, and on a pro forma basis at March 31, 1996, would have employed 494
full-time equivalent employees. Substantially all of the present First State
Bank and Border Bank officers and employees are expected to be employed by Texas
State Bank. The Company's employees are not unionized, and management believes
employee relations to be favorable.
PROPERTIES
Texas State Bank targets commercial customers by offering a broad range of
commercial banking services through a total of nine full service banking
locations in the Rio Grande Valley, as follows:
<TABLE>
<CAPTION>
NET BOOK VALUE
OF PREMISES
AND EQUIPMENT
------------------------------------
BANKING LOCATION DATE OPENED MARCH 31, 1996 DECEMBER 31, 1995
- ------------------------------------------------- --------------- --------------- -------------------
(IN THOUSANDS)
<S> <C> <C> <C>
3900 North Tenth Street 1981(1) $ 3,084 $ 3,262
McAllen, Texas
Kerria Plaza 1985(1) 2,896 3,162
3700 North Tenth Street
Suite 301
McAllen, Texas
2250 Nolana 1985(1) 975 981
McAllen, Texas
521 North 77 Sunshine Strip 1974(1) 878 901
Harlingen, Texas
500 South Missouri 1960(1) 1,973 2,056
Weslaco, Texas
900 E. Jackson 1994(1) 3,181 3,255
McAllen, Texas
2009 West Expressway 83 1996(1) 1,681 1,292
Weslaco, Texas
100 N. Britton Avenue 1995(2) 1,706 1,655
Rio Grande City, Texas
1004 East Highway 83 1995(2) 115 119
------- -------
------- -------
Roma, Texas
</TABLE>
- ---------
(1) Represents the date the facility opened for business as a commercial
bank.
(2) Represents the date the facility was acquired by Texas State Bank from a
third party.
All of Texas Regional's banking locations are owned by Texas Regional,
except for the Company's Roma banking location. The banking locations include
extensive drive-through facilities at the main bank location in McAllen, at the
Harlingen location, and at the new south McAllen banking location. The Kerria
Plaza banking location and the main office of Texas Regional are located within
the Kerria Plaza Building. While the Texas Regional banking facilities are
considered adequate for Texas State Bank's present operations, management
believes that it will be desirable in the future to consider the establishment
of additional banking locations in Edinburg, Harlingen and Brownsville, and to
consider development or acquisition of a substantial facility in McAllen.
70
<PAGE>
Upon consummation of the Mergers, Texas State Bank will acquire the
following additional banking locations:
<TABLE>
<CAPTION>
NET BOOK VALUE
OF PREMISES
AND EQUIPMENT
------------------------------------
BANKING LOCATION DATE OPENED (1) MARCH 31, 1996 DECEMBER 31, 1995
- ------------------------------------------------- --------------- --------------- -------------------
(IN THOUSANDS)
<S> <C> <C> <C>
900 Conway 1909 $ 2,672 $ 2,726
Mission, Texas
Kika de la Garza and Tom Landry 1981 306 307
Mission, Texas
West Highway 83 and Tom Gill Road 1993 692 673
Penitas, Texas
Sharyland Road and FM 495 1986 699 707
Mission, Texas
2101 South 10th Street 1989 996 1,009
McAllen, Texas
Bridge & Esperanza 1968 3,075 3,297
------- -------
------- -------
Hidalgo, Texas
</TABLE>
- ------------
(1) Represents the date the facility opened for business as a commercial
bank.
REGULATION AND SUPERVISION
In addition to the generally applicable state and federal laws governing
businesses and employers, the Company and Texas State Bank are further
extensively regulated by special federal and state laws applicable only to
financial institutions and their parent companies. Virtually all aspects of the
Company's operations are subject to specific requirements or restrictions and
general regulatory oversight, from laws regulating consumer finance
transactions, such as the Truth In Lending Act, the Home Mortgage Disclosure Act
and the Equal Credit Opportunity Act, to laws regulating collections and
confidentiality, such as the Fair Debt Collections Practices Act, the Fair
Credit Reporting Act and the Right to Financial Privacy Act. With few
exceptions, state and federal banking laws have as their principal objective
either the maintenance of the safety and soundness of the federal deposit
insurance system or the protection of consumers or classes of consumers, rather
than the specific protection of shareholders of the Company. To the extent the
following material describes statutory or regulatory provisions, it is qualified
in its entirety by reference to the particular statute or regulation.
REGULATION OF THE COMPANY
Texas Regional is a bank holding company within the meaning of the Bank
Holding Company Act of 1956 ("BHCA"), as amended, and therefore is subject to
regulation and supervision by 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-banking activities of non-banking subsidiaries of bank holding companies,
and to order termination of ownership and control of a non-banking subsidiary by
a bank holding company. Certain violations may also result in criminal
penalties. The FRB and 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
71
<PAGE>
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. This
doctrine has become known as the "source of strength" doctrine. Although the
United States Court of Appeals for the Fifth Circuit found the FRB's source of
strength doctrine invalid in 1990, stating that the FRB had no authority to
assert the doctrine under the BHCA, the decision was reversed by the United
States Supreme Court on procedural grounds. Changes in the FDI Act made by the
FDICIA now require an undercapitalized institution to submit to the FRB a
capital restoration plan with a guaranty by each company having control of the
bank of the bank's compliance with the plan.
The BHCA and the Change in Bank Control Act, together with regulations
promulgated by the FRB, require that, depending on the particular circumstances,
either FRB approval must be obtained or notice must be furnished to the FRB and
not disapproved prior to any person or company acquiring "control" of a bank
holding company, such as the Company, subject to certain exemptions for certain
transactions. Control is conclusively presumed to exist if an individual or
company acquires 25% or more of any class of voting securities of the bank
holding company. Control is rebuttably presumed to exist if a person acquires
10% or more but less than 25% of any class of voting securities and either the
company has registered securities under Section 12 of the Exchange Act or no
other person will own a greater percentage of that class of voting securities
immediately after the transaction. The regulations provide a procedure for
challenge of the rebuttable control presumption.
As a bank holding company, the Company is required to obtain approval prior
to merging or consolidating with any other bank holding company, acquiring all
or substantially all of the assets of any bank or acquiring ownership or control
of shares of a bank or bank holding company if, after the acquisition, the
Company would directly or indirectly own or control 5% or more of the voting
shares of such bank or bank holding company.
The Company is also 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 it may engage in and may
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-payout, non-operating basis; and providing certain stock brokerage and
investment advisory services. In approving acquisitions or the addition of
activities, the FRB considers 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 affects 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 BHCA generally 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
72
<PAGE>
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
Texas State Bank is a Texas state-chartered bank subject to regulation by
the Banking Department. Texas State Bank, the deposits of which 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 Texas
State Bank.
The requirements and restrictions applicable to Texas State 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.
Texas Regional is dependent upon dividends received from Texas State Bank
for discharge of Texas Regional's obligations and for payment of dividends to
the Company's shareholders. However, the application of minimum capital
requirements and other rules and regulations applicable to Texas State Bank
restrict dividend payments by Texas State Bank. The 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. In addition, Texas law requires that, before declaring a dividend, not
less than 10% of the net profits of a bank earned since the last dividend was
declared be transferred to a "certified surplus" account. Except to absorb
losses in excess of undivided profits and uncertified surplus, such certified
surplus may not be reduced without the prior written consent of the Banking
Commissioner. However, state banks are not required to transfer any amount that
would increase the certified surplus account to more than the capital of the
bank. See "Texas Regional Bancshares, Inc. Management's Discussion and Analysis
of Financial Condition and Results of Operations -- Liquidity and Capital
Resources."
Interest rate limitations for Texas State Bank are primarily governed by the
laws of the State of Texas. The maximum annual interest rate that may be charged
on most loans made by Texas State 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. State usury laws (but not
late charge limitations) have been preempted by federal law 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.
73
<PAGE>
FDICIA
FDICIA requires that federal bank regulatory authorities take "prompt
corrective action" with respect to any depository institution which 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, which became effective December 19, 1992, 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 which has a
ratio of tangible equity to total assets that is equal to or less than 2.0%.
The FRB is authorized by the legislation 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. These
restrictions, either individually or in aggregate, could if imposed have a
significantly adverse impact on the operations of the Bank.
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.
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.
74
<PAGE>
Based on Texas State Bank's capital ratios at March 31, 1996 and December
31, 1995, Texas State Bank was classified as "well capitalized" under the
applicable regulations. On a pro forma basis at March 31, 1996 and December 31,
1995, Texas State Bank would also have been "well capitalized" under applicable
regulations. As a result, the Company does not believe that FDICIA's prompt
corrective action regulations will have any material effect on the activities or
operations of Texas State Bank.
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. Institutions whose assessment rate would be zero are required to
pay a statutory minimum semiannual assessment of $1,000. Based on the risk
category applicable to Texas State Bank, the premium paid by Texas State Bank is
presently $2,000 per annum.
FDICIA contains numerous other provisions, including accounting, auditing
and reporting requirements, the termination (beginning in 1995) 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.
COMMUNITY REINVESTMENT ACT
Under the CRA, a bank's applicable regulatory authority (the FDIC or the
FRB) is required to assess the record of each financial institution which it
regulates to determine if the institution meets the credit needs of its entire
community, including low- and moderate-income neighborhoods served by the
institution, and to take that record into account in its evaluation of any
application made by such institution for, among other things, approval of the
acquisition or establishment of a branch or other deposit facility, an office
relocation, a merger, or the acquisition or shares of capital stock of another
financial institution. The regulatory authority prepares a written evaluation of
an institution's record of meeting the credit needs of its entire community and
assigns a rating. The Bank received a "satisfactory" rating in its most recent
CRA review. Both the United States Congress and the banking regulatory
authorities have proposed substantial changes to the CRA and fair lending rules
and regulations which, if enacted, could have a material adverse effect on the
Company.
CAPITAL RESOURCES
Capital management, which is a continuous process at Texas Regional and
Texas State Bank, consists of providing equity to support both current and
future operations. The Company is subject to capital adequacy requirements of
various banking regulators, such as the FRB, the Banking Department and the
FDIC. At March 31, 1996 and December 31, 1995, Texas Regional and its
subsidiaries were in compliance with minimum capital requirements of the
respective regulatory agencies and are expected to remain in compliance in the
future.
The various federal bank regulatory agencies, including the FRB, have
adopted risk-based capital requirements for assessing bank holding company and
bank capital adequacy. These standards define capital and establish minimum
capital requirements in relation to assets and off-balance sheet exposure as
adjusted for credit risk. The risk-based capital standards currently in effect
are designed to make regulatory capital requirements more sensitive to
differences in risk profile among bank holding companies and banks, to account
for off-balance sheet exposure and to minimize disincentives for holding liquid
assets. Assets and off-balance sheet items are assigned to broad risk
categories, each with appropriate risk weights. The resulting capital ratios
represent capital as a percentage of total risk-weighted assets and off-balance
sheet items.
The risk-based capital standards as established by the FRB apply to Texas
Regional and Texas State Bank. The minimum standard for the ratio of capital to
risk-weighted assets (including certain off-balance
75
<PAGE>
sheet obligations, such as standby letters of credit) is 8.0%. At least half of
the risk-based capital must consist of common equity, retained earnings, and
qualifying perpetual preferred stock, less deductions for goodwill and various
other intangibles ("Tier I capital"). The remainder ("Tier II capital") may
consist of a limited amount of subordinated debt, certain hybrid capital
instruments and other debt securities, preferred stock, and a limited amount of
the general valuation allowance for loan losses. The sum of Tier I capital and
Tier II capital is "total risk-based capital."
The FRB also has adopted guidelines which supplement the risk-based
regulations to include a minimum leverage ratio of Tier I capital to average
total consolidated assets ("Leverage ratio") of 3.0%. The FRB has emphasized
that the foregoing standards are supervisory minimums and that a banking
organization will be permitted to maintain such minimum levels of capital only
if it has well diversified risk, including no undue interest rate exposure;
excellent asset quality; high liquidity; good earnings; and is in general
considered to be a strong banking organization, rated composite 1 under
applicable federal guidelines, and the banking organization is not experiencing
or anticipating significant growth. All other banking organizations are required
to maintain a Leverage ratio of at least 4.0% to 5.0%. These rules further
provide that banking organizations experiencing internal growth or making
acquisitions will be expected to maintain capital positions substantially above
the minimum supervisory levels and comparable to peer group averages, without
significant reliance on intangible assets. The FRB continues to consider a
"tangible Tier I leverage ratio" in evaluation proposals for expansion or new
activities. The tangible Tier I leverage ratio is the ratio of a banking
organization's Tier I capital, less deductions for intangibles otherwise
includable in Tier I capital, to total tangible assets.
Bank regulators continue to consider raising capital requirements applicable
to banking organizations beyond current levels. However, the Company is unable
to predict whether higher capital requirements will be imposed and, if so, at
what levels and on what schedules, and therefore cannot predict what effect such
higher requirements may have on the Company and the Bank.
The following table presents an analysis of capital for Texas Regional and
Texas State Bank at March 31, 1996 and March 31, 1995, and at the end of each of
the last three years:
<TABLE>
<CAPTION>
MARCH 31, DECEMBER 31,
------------------------ -------------------------------------
ANALYSIS OF CAPITAL 1996 1995 1995 1994 1993
- -------------------------------------------------------- ----------- ----------- ----------- ----------- -----------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
TEXAS REGIONAL
Tier I Capital
Common Stock........................................ $ 6,196 $ 6,193 $ 6,196 $ 6,193 $ 4,186
Capital surplus..................................... 29,239 29,204 29,239 29,204 12,802
Retained earnings................................... 29,102 22,289 27,168 20,921 15,481
Preferred Stock..................................... -- -- -- -- 7,335
Less: Intangibles................................... (5,588) (1,926) (5,711) (1,982) (2,205)
----------- ----------- ----------- ----------- -----------
Total Tier I capital............................ 58,949 55,760 56,892 54,336 37,599
----------- ----------- ----------- ----------- -----------
Tier II Capital
Allowance for loan losses........................... 4,890 3,995 4,542 3,511 3,435
Unrealized gains and losses......................... N/A N/A N/A N/A 179
----------- ----------- ----------- ----------- -----------
Total Tier II capital............................... 4,890 3,995 4,542 3,511 3,614
----------- ----------- ----------- ----------- -----------
Total risk-based capital........................ $ 63,839 $ 59,755 $ 61,434 $ 57,847 $ 41,213
----------- ----------- ----------- ----------- -----------
----------- ----------- ----------- ----------- -----------
Risk-weighted assets.................................... $ 505,383 $ 382,290 $ 485,645 $ 369,196 $ 311,987
----------- ----------- ----------- ----------- -----------
----------- ----------- ----------- ----------- -----------
Capital Ratios
Tier I risk-based capital ratio..................... 11.66% 14.59% 11.71% 14.72% 12.05%
Total risk-based capital ratio...................... 12.63 15.63 12.65 15.67 13.21
Leverage ratio (Tier I capital to average adjusted
total assets)..................................... 9.07 10.56 9.04 10.41 7.91
----------- ----------- ----------- ----------- -----------
----------- ----------- ----------- ----------- -----------
</TABLE>
76
<PAGE>
<TABLE>
<CAPTION>
MARCH 31, DECEMBER 31,
------------------------ -------------------------------------
ANALYSIS OF CAPITAL 1996 1995 1995 1994 1993
- -------------------------------------------------------- ----------- ----------- ----------- ----------- -----------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
TEXAS STATE BANK
Tier I Capital
Common Stock........................................ $ 20,000 $ 20,000 $ 20,000 $ 16,000 $ 16,000
Capital surplus..................................... 26,000 20,000 26,000 16,000 16,000
Retained earnings................................... 14,588 9,252 11,997 15,288 8,591
Less: Intangibles................................... (5,518) (1,854) (5,641) (1,909) (2,130)
----------- ----------- ----------- ----------- -----------
Total Tier I capital............................ 55,070 47,398 52,356 45,379 38,461
----------- ----------- ----------- ----------- -----------
Tier II Capital
Allowance for loan losses........................... 4,890 3,995 4,542 3,511 3,435
Unrealized gains and losses......................... N/A N/A N/A N/A 179
----------- ----------- ----------- ----------- -----------
Total Tier II capital........................... 4,890 3,995 4,542 3,511 3,614
----------- ----------- ----------- ----------- -----------
Total risk-based capital.................... $ 59,960 $ 51,393 $ 56,898 $ 48,890 $ 42,075
----------- ----------- ----------- ----------- -----------
----------- ----------- ----------- ----------- -----------
Risk-weighted assets.................................... $ 506,884 $ 382,288 $ 485,564 $ 370,481 $ 313,011
----------- ----------- ----------- ----------- -----------
----------- ----------- ----------- ----------- -----------
Capital Ratios
Tier I risk-based capital ratio..................... 10.86% 12.40% 10.78% 12.25% 12.29%
Total risk-based capital ratio...................... 11.83 13.44 11.72 13.20 13.44
Leverage ratio (Tier I capital to average adjusted
total assets)..................................... 8.45 8.96 8.31 8.68 8.08
----------- ----------- ----------- ----------- -----------
----------- ----------- ----------- ----------- -----------
</TABLE>
The following table presents an analysis of capital for Texas Regional and
Texas State Bank on a pro forma basis at March 31, 1996 and December 31, 1995.
<TABLE>
<CAPTION>
PRO FORMA ANALYSIS OF CAPITAL MARCH 31, 1996 DECEMBER 31, 1995
- ----------------------------------------------------------------- --------------- -----------------------------
(DOLLARS IN THOUSANDS)
<S> <C> <C>
PRO FORMA TEXAS REGIONAL(1)
Tier I Capital
Common Stock................................................... $ 8,376 $ 8,376
Capital surplus................................................ 72,275 72,275
Retained earnings.............................................. 29,102 27,168
Preferred Stock................................................ -- --
Less: Intangibles.............................................. (25,275) (25,652)
--------------- ----------
Total Tier I capital....................................... 84,478 82,167
--------------- ----------
Tier II Capital
Allowance for loan losses...................................... 9,999 9,838
--------------- ----------
Total Tier II capital.......................................... 9,999 9,838
--------------- ----------
Total risk-based capital................................... $ 94,477 $ 92,005
--------------- ----------
--------------- ----------
Risk-Weighted Assets............................................. $ 816,647 $ 793,602
--------------- ----------
--------------- ----------
Capital Ratios
Tier I risk-based capital ratio................................ 10.34% 10.35%
Total risk-based capital ratio................................. 11.57 11.59
Leverage ratio (Tier I capital to average adjusted total
assets)...................................................... 7.62 7.10
--------------- ----------
--------------- ----------
</TABLE>
77
<PAGE>
<TABLE>
<CAPTION>
PRO FORMA ANALYSIS OF CAPITAL MARCH 31, 1996 DECEMBER 31, 1995
- ----------------------------------------------------------------- --------------- -----------------------------
(DOLLARS IN THOUSANDS)
<S> <C> <C>
PRO FORMA TEXAS STATE BANK(1)
Tier I Capital
Common Stock................................................... $ 60,000 $ 60,000
Capital stock.................................................. 26,000 26,000
Retained earnings.............................................. 14,588 11,997
Less: Intangibles.............................................. (25,206) (27,242)
--------------- ----------
Total Tier I Capital....................................... 75,382 70,755
--------------- ----------
Tier II Capital
Allowance for loan losses...................................... 9,999 9,838
--------------- ----------
Total Tier II Capital...................................... 9,999 9,838
--------------- ----------
Total risk-based capital................................. $ 85,381 $ 80,593
--------------- ----------
--------------- ----------
Risk-Weighted Assets............................................. $ 812,258 $ 784,694
--------------- ----------
--------------- ----------
Capital Ratios
Tier I risk-based capital ratio................................ 9.28% 9.02%
Total risk-based capital ratio................................. 10.51 10.27
Leverage ratio (Tier I capital to average adjusted total
assets)...................................................... 6.80 6.13
--------------- ----------
--------------- ----------
</TABLE>
- ---------
(1) On a pro forma basis at March 31, 1996 and December 31, 1995, and assuming
completion of the Mergers and completion of the offering of Common Stock as
described in this Prospectus at a price of $22.25 per share, net of
estimated underwriting discounts, commissions and expenses of the offering
of $3,289,000.
LEGAL PROCEEDINGS
Texas State Bank is involved in routine litigation in the normal course of
its business, which in the opinion of management of Texas Regional will not have
a material adverse effect on the financial condition or results of operations of
Texas Regional.
78
<PAGE>
MANAGEMENT
DIRECTORS AND EXECUTIVE OFFICERS
The Company's Board of Directors is composed of eight persons elected at
each annual meeting of Texas Regional's shareholders to hold office for one year
or until their respective successors are elected and qualified. Officers of
Texas Regional are elected annually by the Company's Board of Directors at its
first meeting after each annual meeting of shareholders, to hold office until
their respective successors are elected and qualified. Officers may be removed
by the Company's Board of Directors.
The following table is a listing of all of the directors of the Company.
Each director is also a director of Texas State Bank.
<TABLE>
<CAPTION>
DIRECTOR
NAME AGE PRINCIPAL OCCUPATION SINCE
- --------------------------------------- --- ------------------------------------------------------- -----------
<S> <C> <C> <C>
Morris Atlas(1)........................ 69 Managing Partner, Atlas & Hall, L.L.P. (law firm in
McAllen, Texas) 1994
Frank N. Boggus(2)..................... 67 Chairman of the Board of Boggus Motor Company (retail
auto dealer in McAllen and Harlingen) 1983
Robert G. Farris(3).................... 65 President of Valley Transit Company, Inc. (regional bus
company) 1983
Joe M. Kilgore(4)...................... 77 Partner, McGinnis, Lochridge & Kilgore, L.L.P. (law
firm in Austin, Texas) 1983
C. Kenneth Landrum, M.D.(5)............ 66 Retired 1994
Glen E. Roney(6)....................... 65 Chairman of the Board and Chief Executive Officer of
the Company and Texas State Bank 1985
Julie G. Uhlhorn....................... 65 Chairman of the Board, Rio Grande Equipment Company,
Inc. (farming and real estate management company) 1983
Paul G. Veale, Sr. .................... 74 Investments 1985
Jack Whetsel(7)........................ 75 Investments 1985
</TABLE>
- ---------
(1) Serves on the Stock Option and Compensation Committee of the Company,
and serves as a Trustee of the Texas Regional Bancshares, Inc., Employee
Stock Ownership Trust (the "KSOP Trust").
(2) Serves on the Audit and Stock Option and Compensation Committees of the
Company, and serves as a Trustee of the KSOP Trust.
(3) Serves on the Stock Option and Compensation Committee of the Company.
(4) Serves on the Audit and Stock Option and Compensation Committees of the
Company, and serves as a Trustee of the KSOP Trust.
(5) Serves on the Audit and Stock Option and Compensation Committees of the
Company.
(6) Serves as a Trustee of the KSOP Trust.
(7) Serves on the Stock Option and Compensation Committee of the Company.
Each of the foregoing persons has been engaged in the principal occupation
indicated for the past five years, except that Mr. Whetsel's principal
occupation was Chairman of the Board of Broadway Hardware, Inc. (a retail
hardware, electronics and home improvements store located in McAllen) prior to
his retirement in 1993, and Dr. Landrum's principal occupation was as a medical
doctor practicing with Landrum-Chester OB-GYN Associates prior to his retirement
in 1994.
The Company has the following advisory directors: Paul S. Moxley, President
of Texas State Bank; Danny L. Buttery, President of Texas State Bank's Harlingen
banking location; and Frank A. Kavanagh, Senior Executive Vice President and
Chief Lending Officer of the Company.
79
<PAGE>
The Company pays directors and advisory directors $700 for each Texas
Regional Board of Directors meeting, and reimburses all directors for
out-of-pocket expenses incurred in attending meetings. In addition, during 1995,
the Company paid each non-management director a bonus of $2,000 for service as a
director of the Company and Texas State Bank.
Each director of the Company's subsidiary, Texas State Bank (which includes
each director of Texas Regional), receives $600 for each Texas State Bank Board
of Directors meeting. Non-management directors, during 1995 also received
bonuses aggregating $2,500 for service as a director of the Bank.
Mr. Roney has been Chairman of the Board and Chief Executive Officer of the
Company since joining the Company in 1985. In addition to his director
compensation, Mr. Roney receives compensation as an executive officer of the
Company and Texas State Bank, as indicated below. See "Executive Compensation."
Mr. Kilgore is a director of other publicly-held corporations. He serves as
a director of Reno Air, Inc. (a regional airline based in Reno, Nevada) and of
Photo Control, Inc. (a supplier of photographic equipment).
The following table is a listing of all executive and other senior officers
of the Company.
<TABLE>
<CAPTION>
OFFICER
NAME AGE PRINCIPAL OCCUPATION POSITION WITH THE COMPANY SINCE
- ------------------------------- --- ------------------------------- ------------------------------- -----------
<S> <C> <C> <C> <C>
Glen E. Roney.................. 65 Chief Executive Officer of the Chairman of the Board, 1985
Company President and Chief Executive
Officer
George R. Carruthers........... 45 Chief Financial Officer of the Executive Vice President and 1985
Company Chief Financial Officer
Nancy F. Schultz............... 55 Senior Vice President of the Senior Vice President and 1985
Company Secretary-Treasurer
</TABLE>
The Texas State Bank Board of Directors consists of all voting members of
the Board of Directors of the Company and the following additional persons: Maj.
Gen. Walter H. Baxter, III, USAF (Retired), Robert F. Boggus (Boggus Motor
Sales), Douglas G. Bready (Texas State Bank), Danny L. Buttery (Texas State
Bank), Antonio Falcon, M.D. (Medical Doctor), Robert R. Farris (Valley Transit
Company), Frank A. Kavanagh (Texas State Bank), Jan M. Klinck (Klinck Drug
Stores, Inc.), Roel Martinez (Pharmacist and Rancher), Paul S. Moxley (Texas
State Bank), F. Neal Runnels (Valley Beverage, Inc.), James D. Russell (Russell
Plantation) and Tudor G. Uhlhorn (Rio Grande Equipment Company). The following
persons serve as advisory directors of Texas State Bank: Jack Abbott (Arroyo
Farms and The Harlingen Gin Company), Joseph S. Bailes, M.D. (Oncologist, Valley
Oncology Group), Maj. Gen. George S. Bowman, Jr., USMC (Ret.) (Investments),
Vidala Gonzalez (Gonzalez Mercantile, Inc.), H.P. Guerra, III (attorney), Herman
A. Henry (Agriculture), Jose A. Hinojosa (Certified Public Accountant), Archie
L. Jenkines, D.D.S. (Retired), Clarence L. Johnstone (Retired), Marion R.
Lawler, Jr., M.D. (Partner, Cardiovascular Associates), Fred S. Mattar
(Merchant), W. A. McBride (Cicero Smith Lumber Company), William D. Parish
(Retired), Fernando Pena (Pena Brothers Investments), Robert A. Peterson (Starr
Produce Company), Dorothy Schmidt (Personal Financial Consultant), Sam F. Vale
(Starr-Camargo Bridge Company), and Kenneth Weaver (Investments). Each advisory
director receives $400 for each Texas State Bank Advisory Directors meeting
attended.
80
<PAGE>
The Bank has the following senior executive officers:
<TABLE>
<CAPTION>
POSITION WITH OFFICER
NAME AGE TEXAS STATE BANK SINCE
- ----------------------------------------- --- ------------------------------------------------------- -----------
<S> <C> <C> <C>
Glen E. Roney............................ 65 Chairman of the Board, Chief Executive Officer and 1985
Trust Officer
Paul S. Moxley........................... 51 President and Secretary 1986
Danny L. Buttery......................... 49 President -- Harlingen banking location 1985
Frank A. Kavanagh........................ 49 Senior Executive Vice President and Chief Lending 1992
Officer
George R. Carruthers..................... 45 Executive Vice President and Chief Financial Officer 1985
Douglas G. Bready........................ 40 Executive Vice President 1985
Craig K. Lewis........................... 41 Executive Vice President and Chief Operations Officer 1992
Robert C. Norman......................... 32 Executive Vice President 1992
Craig A. Swann........................... 41 Executive Vice President and Director of Management 1994
Information Systems
Larry C. Gonzalez........................ 34 Executive Vice President 1995
</TABLE>
See "Proposed Mergers" regarding additional officers of Texas State Bank as
a result of the consummation of the Mergers.
Each of the executive officers listed above has been employed as a member of
senior management of the Company or its subsidiary for the past five years,
except:
Frank Kavanagh served as president of Mid Valley Bank from August 1988 until
its merger with Texas State Bank in 1992;
Craig Lewis was a Senior Vice President with NationsBank of Texas N.A. (and
its predecessors State National Bank in Robstown and NBC-South Texas) from
1984 until joining Texas State Bank in 1992;
Robert Norman was an officer of Mid Valley Bank from 1982 until its merger
with Texas State Bank in 1992;
Craig A. Swann was Branch Sales Manager for the Financial Services Division
of Unisys Corporation from 1977 until joining Texas State Bank in 1994; and
Larry C. Gonzalez who was Executive Vice President in charge of the Rio
Grande City and Roma banking locations of First National Bank of South Texas
from June 1992 until joining Texas State Bank upon the RGC/Roma Branch
Acquisitions in 1995. Prior to June 1992, Mr. Gonzalez was a national bank
examiner with the Office of the Comptroller of the Currency.
There is no family relationship between any director, executive officer or
person nominated or chosen by the Company to become a director or executive
officer; however, Glen E. Roney, the Chief Executive Officer of the Company and
Texas State Bank and Chairman of the Board of Directors of the Company and Texas
State Bank is the father-in-law of Douglas G. Bready, a Director and Executive
Vice President of Texas State Bank; Tudor G. Uhlhorn, a Director of Texas State
Bank, is the son of Julie G. Uhlhorn, a member of the Board of Directors of the
Company and Texas State Bank; Robert R. Farris, a Director of Texas State Bank,
is the son of Robert G. Farris, a member of the Board of Directors of the
Company and Texas State Bank; and Robert F. Boggus, a Director of Texas State
Bank, is the son of Frank N. Boggus, a Director of the Company and Texas State
Bank.
81
<PAGE>
EXECUTIVE COMPENSATION
The following table sets forth information with respect to the Chief
Executive Officer and the four most highly compensated executive officers of the
Company as to whom the total annual salary and bonus for the year ended December
31, 1995 exceeded $100,000. Except for directors fees paid by Texas Regional and
included in the Salary column, all executive compensation as reflected in the
following table is paid by Texas State Bank.
<TABLE>
<CAPTION>
LONG TERM
COMPENSATION
---------------
AWARDS
ANNUAL COMPENSATION ---------------
NAME AND ----------------------------------- OPTIONS ALL OTHER
PRINCIPAL POSITION YEAR SALARY (1) BONUS /SARS COMPENSATION (2)
- ------------------------------------------ --------- ----------- ----------- --------------- ------------------
<S> <C> <C> <C> <C> <C>
Glen E. Roney............................. 1995 $ 406,273 $ 175,000 65,000 $ 99,430
Chairman of the Board and 1994 385,505 85,000 135,050 99,430
Chief Executive Officer of the Company 1993 357,742 100,000 -- 139,264
and the Bank
Paul S. Moxley............................ 1995 154,001 28,000 4,000 13,014
President 1994 143,403 18,000 5,270 12,790
Texas State Bank 1993 134,440 23,200 -- 16,150
Danny L. Buttery.......................... 1995 152,448 23,000 4,000 12,000
President of the Bank's 1994 143,236 18,000 5,270 12,000
Harlingen banking location 1993 134,367 23,200 -- 15,284
Frank A. Kavanagh......................... 1995 154,408 25,000 4,000 13,500
Senior Executive Vice President 1994 146,464 18,000 5,270 9,345
and Chief Lending Officer 1993 139,518 23,200 -- 17,576
Douglas G. Bready......................... 1995 99,170 20,000 3,500 10,429
Executive Vice President of the 1994 92,900 13,500 3,162 9,345
Bank 1993 86,546 17,200 -- 11,407
</TABLE>
- ---------
(1) The amounts indicated include wages, automobile allowances and director
fees.
(2) The amounts in this column represent the amount of the Company's
optional and matching contribution for each listed executive officer
under the KSOP. In addition, with regard to Mr. Roney, the amount
indicated includes $87,000, $87,000 and $116,000 accrued during 1995,
1994 and 1993, respectively, pursuant to the Deferred Compensation Plan
adopted by the Company for the benefit of Glen Roney, described below.
The compensation upon which the KSOP contributions were determined does
not differ substantially from that set forth under the annual
compensation table, except for the 1993 contribution on behalf of Mr.
Roney, which was limited to the maximum allowable under the KSOP, and
the 1994 and 1995 contributions for Mr. Roney, Mr. Moxley, Mr. Buttery
and Mr. Kavanagh, which were limited to the maximum allowable under the
KSOP.
The following table sets forth certain information concerning stock
options/SARs granted during 1995 to the executive officers named above:
<TABLE>
<CAPTION>
OPTIONS GRANTED IN LAST FISCAL YEAR
----------------------------------------------------------------------------------
INDIVIDUAL GRANTS POTENTIAL REALIZABLE
-------------------------------------------------------- VALUE AT ASSUMED
PERCENT OF ANNUAL RATES OF
NUMBER OF TOTAL OPTIONS/ STOCK PRICE
SECURITIES SARS APPRECIATION FOR
UNDERLYING GRANTED TO EXERCISE OR OPTION TERM
OPTIONS/SARS EMPLOYEES IN BASE PRICE EXPIRATION ------------------------
NAME GRANTED FISCAL YEAR ($/SH) DATE 5%($) 10%($)
- ----------------------------- ------------- --------------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C>
Glen E. Roney................ 65,000 72.22% $ 17.25 7/01/02 $ 422,653 $ 974,363
Paul S. Moxley............... 4,000 4.44 17.25 7/01/02 26,009 59,961
Danny L. Buttery............. 4,000 4.44 17.25 7/01/02 26,009 59,961
Frank A. Kavanagh............ 4,000 4.44 17.25 7/01/02 26,009 59,961
Douglas G. Bready............ 3,500 3.89 17.25 7/01/02 22,758 52,466
</TABLE>
82
<PAGE>
The following table sets forth certain information regarding aggregate
options outstanding and held by the persons named above.
<TABLE>
<CAPTION>
AGGREGATE OPTION EXERCISES IN
LAST FISCAL AND FISCAL YEAR-END OPTION VALUE
---------------------------------------------------------------------------------------------
NUMBER OF SECURITIES VALUE OF UNEXERCISED
UNDERLYING IN-THE-MONEY OPTIONS/ SARS
VALUE REALIZED UNEXERCISED OPTIONS/SARS
(MARKET PRICE AT AT FISCAL YEAR-END AT FISCAL YEAR-END (1)
SHARES ACQUIRED EXERCISE LESS --------------------------- ----------------------------
NAME ON EXERCISE EXERCISE PRICE) EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
- ------------------------- --------------- ----------------- ----------- -------------- ----------- ---------------
<S> <C> <C> <C> <C> <C> <C>
Glen E. Roney............ -- $ -- 135,050 65,000 $ 709,013 $ --
Paul S. Moxley........... -- -- 5,270 4,000 27,668 --
Danny L. Buttery......... -- -- 5,270 4,000 27,668 --
Frank A. Kavanagh........ -- -- 5,270 4,000 27,668 --
Douglas G. Bready........ -- -- 3,162 3,500 16,601 --
</TABLE>
- ------------
(1) Calculated on the basis of the closing sale price per share for the
Common Stock of $17.25 as reported by the Nasdaq National Market System
for December 31, 1995.
The Company has three stock option plans. A fourth plan, the Company's
employee stock bonus plan, was terminated during January 1996. Texas Regional's
Board of Directors has the authority to grant options to purchase up to an
aggregate of 262,988 shares of Common Stock under the terms of the present stock
option plans, in each case at the then present fair market value of the Common
Stock. One of these plans, the Texas Regional Bancshares, Inc. 1995 Nonstatutory
Stock Option Plan, was adopted in 1995 and is expected to be considered and
voted upon by the shareholders of the Company at the 1996 annual meeting of the
shareholders. As of the date of this Prospectus, options for the purchase of an
aggregate of 262,988 shares of Common Stock have been granted under the plans,
including the options included in the tables above, with the result that the
Company's Board of Directors does not have the authority to grant any additional
options to purchase Common Stock pursuant to the stock option plans, except to
the extent that any outstanding options in the future lapse or otherwise
terminate unexercised.
In December 1993, the Company adopted a Deferred Compensation Plan (the
"Deferred Compensation Plan") for the benefit of Mr. Roney, which provides for
payments to be made to Mr. Roney (or in the event of his death during the
period, to his designated beneficiary or his estate) in the amount of $100,000
per year commencing October 29, 2002, and continuing for fourteen years
thereafter. The obligation to make such payments requires Mr. Roney to continue
to be employed by the Company until October 29, 2002, unless his compensation is
reduced from that paid in 1993, his duties are materially changed, his
employment is terminated due to his disability or death, or he is discharged
without cause. If Mr. Roney dies prior to October 29, 2002, the payments would
commence immediately and be paid to his designated beneficiary, or his estate.
At December 31, 1995, the Company had funded, pursuant to the Trust under Glen
E. Roney Deferred Compensation Plan, an aggregate of $291,000. The Trust was set
up for the purpose of payment of the deferred compensation benefit. The Company
incurred expenses of approximately $87,000 during each of the years ended
December 31, 1995 and 1994, with respect to the Deferred Compensation Plan. See
"Business -- Personnel." In January 1996, the Company's Board of Directors
amended the Deferred Compensation Plan and Trust to change the identity of the
Trustee and to make other changes designed to assist in obtaining a favorable
determination letter from the Internal Revenue Service as to the status of the
Deferred Compensation Plan for federal income tax purposes.
First State Bank has three separate deferred compensation plans for the
benefit of three First State Bank employees, and Border Bank has a deferred
compensation plan for the benefit of one Border Bank employee. The plans each
provide for retirement benefits to be paid to the specified employee, a
designated beneficiary or the employee's estate. One plan commenced payments to
a retired employee of approximately $13,000 per year on January 4, 1988,
continuing annually thereafter until June 2003. A second plan provides for
payments of approximately $13,300 per year to commence in April 1990, and
continuing until June 2005; however, the employee elected to receive a lesser
amount payable over a longer period of time. The third plan, covering Elliott
Bottom, provides for retirement benefit payment of
83
<PAGE>
$50,000 per year commencing in March 1999 and continuing annually thereafter for
20 years. A fourth plan commenced payments to a retired employee of
approximately $1,112.50 per month in March 1995, and provides for monthly
payments thereafter for 180 months. First State Bank and Border Bank own and are
beneficiaries of life insurance policies on the employees covered under the
deferred compensation plans, with face values in amounts approximately equal to
the total benefits paid or payable under the plans. Upon consummation of the
Mergers, Texas State Bank will become obligated to make payments under the
plans, and will own and become the beneficiary of the related life insurance
policies.
Beginning in 1991, the Bank established a discretionary incentive bonus pool
for the benefit of employees and directors of the Bank. Contributions are made
to the discretionary bonus pool based on projected year-end return on assets
earned by the Bank, calculated as follows: in the event that the year-end return
on average assets of the Bank, prior to any amount attributable to the
discretionary bonus ("ROA") for the year is in excess of 1.00%, 2% of net income
for the year is contributed; in the event that the ROA for the year exceeds
1.05%, in addition to the base contribution, 5% of net income in excess of 1.00%
ROA is contributed; if the ROA for the year exceeds 1.10%, an additional
contribution is made in the amount of 10% of net income in excess of 1.05% ROA.
For each 0.05% increase in ROA, the proportion of the excess net income
contributed is increased by 5% of net income, up to an ROA of 1.25%. A total of
25% of any amount of net income in excess of 1.25% ROA is contributed to the
pool. Amounts are paid out of the discretionary bonus pool to individual
employees and directors of the Bank as determined by the Stock Option and
Compensation Committee. An aggregate of $574,000 was awarded to employees of the
Bank out of the discretionary bonus pool during 1995, and $43,000 was awarded to
directors of the Bank that are not employees of the Bank. An aggregate of
$375,000 was awarded to employees and $43,000 to non-employee directors out of
the discretionary bonus pool during 1994.
EMPLOYEE STOCK OWNERSHIP PLAN
In 1990, Texas Regional adopted the KSOP. Since adoption of the KSOP, Texas
Regional has made contributions to the KSOP, on behalf of employees of the
Company, in the aggregate amount of $2.8 million, and employees have in addition
made salary deferral contributions to the KSOP in the aggregate amount of
$512,000 through December 31, 1995. All Texas Regional contributions are used to
purchase Common Stock, and employees have the option to direct that salary
deferral contributions (and certain applicable target benefit plan rollover
contributions) be invested either in a money market fund or in Common Stock. The
aggregate number of shares of Common Stock held pursuant to the KSOP as of
December 31, 1995, was 302,007 (about 4.9% of total outstanding shares of Common
Stock). All assets in the KSOP, including Common Stock held pursuant to the
KSOP, are held by the KSOP Trust, which holds the shares of stock on behalf of
the employee participants in the KSOP.
Trustees of the KSOP Trust, who are selected by, and all of whom are
directors of Texas Regional, are Morris Atlas, Frank N. Boggus, Joe M. Kilgore
and Glen E. Roney. Employees are entitled to direct the voting of any shares
allocated to their employee accounts, and the trustees of the KSOP Trust direct
the voting of any unallocated shares held by the KSOP Trust. At March 31, 1996,
there were 2,944 unallocated shares held by the KSOP Trust. At December 31,
1995, there were no unallocated shares held by the KSOP Trust. During 1996,
management of Texas Regional anticipates recommending to the Board of Directors
of Texas Regional certain amendments to the KSOP to make available to plan
participants more diverse investment options.
CERTAIN TRANSACTIONS
Texas State Bank has had, in the ordinary course of business, banking
transactions with certain of its officers and directors and with certain
officers and directors of Texas Regional. Loans by Texas State Bank to executive
officers and directors of Texas State Bank and Texas Regional, in the aggregate,
amounted to $3.4 million at March 31, 1996, or 0.7% of total loans outstanding
and 5.3% of the shareholders' equity of the Bank and in the aggregate, amounted
to $4.0 million at December 31, 1995, or 0.9% of total loans outstanding and
6.3% of the shareholders' equity of the Bank. All loan transactions with
officers and directors of Texas Regional and Texas State Bank, and their related
and affiliated parties, have been on
84
<PAGE>
substantially the same terms as those prevailing for comparable transactions
with other loan customers of the Bank, and have not included more than the
normal risk of collectibility associated with Texas State Bank's other banking
transactions or other unfavorable features.
Prior to 1993, the Company leased office facilities from Kerria Plaza, Ltd.,
a real estate limited partnership in which Mr. James W. Collins, former Director
and former Secretary-Treasurer of the Company, is general partner and certain
principals of the Company own an interest. Management of the Company believes
that the terms of the leases were comparable to terms of leases between the
partnership and third parties. Persons having a direct or indirect interest in
Kerria Plaza, Ltd., their relationship to the Company and their interest in
Kerria Plaza, Ltd., were: James W. Collins, individually and as Trustee for
Carvan, Vanco and KVTC Trusts (of which Mr. Collins is not a beneficiary, but of
which his spouse and children are beneficiaries), owned a 27% interest in Kerria
Plaza, Ltd.; Glen E. Roney, Chairman of the Board and Chief Executive Officer of
the Company, owned an 11% interest in Kerria Plaza, Ltd.; Frank N. Boggus,
former President and a present Director of the Company, owned a 4% interest in
Kerria Plaza, Ltd.; and Robert G. Farris, a Director of the Company, owned a 2%
interest in Kerria Plaza, Ltd.
Kerria Plaza, Ltd. purchased the Kerria Plaza building in 1984. In June
1992, the directors of Texas State Bank obtained an appraisal from an
independent third party appraiser indicating that the market value of Kerria
Plaza office building was $2.5 million. In January 1993, Texas State Bank
purchased the Kerria Plaza office building from Kerria Plaza, Ltd. for the
appraised value of $2.5 million.
Mr. Collins is Chairman of the Board of Rioco Corporation, a real estate
brokerage and property management company. During 1995 and 1994, Rioco
Corporation received from Texas State Bank leasing commissions totaling $1,237
and $1,260, respectively, resulting from leases of office space in Kerria Plaza.
Rioco Corporation continues to manage the Kerria Plaza building for Texas State
Bank under a property management agreement which management of the Company
believes is on terms comparable to terms available from other property
management companies operating in the area, which management agreement, among
other things, provides for payment of management and accounting fees at a
minimum of $2,900 per month and payment of leasing commissions in the event of
the lease of office space in the building to third party tenants.
Texas State Bank, along with other banks in the Rio Grande Valley, sells
credit life insurance for Texas State Life Insurance Company. Texas State Life
Insurance Company is owned 50% by Mr. Roney and 50% by Mr. Collins. Commission
fee income received by Texas State Bank from Texas State Life Insurance Company
totaled $82,475 for the year ended December 31, 1995.
Mr. Joe M. Kilgore, a Director of the Company, is a partner in the law firm
of McGinnis, Lochridge & Kilgore, L.L.P. His firm received fees for legal
services rendered to the Company and its subsidiary during 1995, but the amount
of fees received did not exceed either 5% of his firm's gross revenues for 1995
or 5% of Texas Regional's total operating expenses for the year ended 1995.
Mr. Morris Atlas, a Director of the Company, is a partner in the law firm of
Atlas & Hall, L.L.P. His firm received fees for legal services rendered to the
Company and its subsidiary during 1995, but the amount of fees received did not
exceed either 5% of his firm's gross revenues for 1995 or 5% of Texas Regional's
total operating expenses for the year ended 1995.
During 1995, Texas State Bank purchased a tract of real estate from Scott &
White Memorial Hospital and Scott, Sherwood & Brindley Foundation ("Scott &
White"), a Texas non-profit corporation, for $227,000. Texas State Bank intends
to hold the property for possible future development as a banking location. Mr.
Roney and Mr. Kilgore each serve as members of the Board of Directors of Scott &
White.
85
<PAGE>
PRINCIPAL HOLDERS OF CAPITAL STOCK
The following table sets forth at March 31, 1996 the beneficial ownership of
the Common Stock by each person known by the Company to be the beneficial owner
of more than 5% of the Common Stock, each director and executive officer of the
Company, and all executive officers and directors as a group. The number of
shares beneficially owned by each person as indicated in the table is determined
under rules of the Commission and the information is not necessarily indicative
of beneficial ownership for any other purpose. Except as otherwise noted, the
indicated shareholders have sole voting and investment power over the number of
shares shown. The information is based on data furnished by the respective
persons named.
<TABLE>
<CAPTION>
NAME OF BENEFICIAL OWNER NUMBER(1) %
- ------------------------------------------------------------------------------------------- ----------- ---------
<S> <C> <C>
Morris Atlas(2)............................................................................ 70,779 1.14
Frank N. Boggus(3)......................................................................... 136,026 2.20
Douglas G. Bready(4)....................................................................... 16,321 0.26
Danny L. Buttery(5)........................................................................ 18,168 0.29
George R. Carruthers(6).................................................................... 12,652 0.20
James W. Collins(7)........................................................................ 665,239 10.74
Individually and as Trustee of Vanco, Carvan, KVTC, Cook Memorial and
Vannie Cook Trusts
P.O. Box 1239
McAllen, Texas 78502
Robert G. Farris(8)........................................................................ 4,977 0.08
Frank A. Kavanagh(9)....................................................................... 10,808 0.17
Joe M. Kilgore(10)......................................................................... 187,700 3.03
C. Kenneth Landrum, M.D.(11)............................................................... 73,928 1.19
Paul S. Moxley(12)......................................................................... 21,467 0.35
Glen E. Roney(13).......................................................................... 769,971 12.16
3700 North 10th, #301
McAllen, Texas 78501
Julie G. Uhlhorn(14)....................................................................... 77,828 1.26
Paul G. Veale, Sr.(15)..................................................................... 60,908 0.98
Wanger Asset Management, L.P., of which Wanger Asset Management, Ltd., is the general
partner, of which Ralph Wanger is the principal shareholder.............................. 411,600 6.64
227 West Monroe Street, Suite 3000
Chicago, Illinois 60606
Jack Whetsel(16)........................................................................... 211,839 3.42
All Directors and Executive Officers as a group (14 persons) (17).......................... 1,552,433 24.44
</TABLE>
- ------------
(1) Included in the total indicated for each of Messrs. Atlas, Boggus,
Kilgore and Roney are 2,944 shares which are unallocated shares held by
the KSOP Plan. Messrs. Atlas, Boggus, Kilgore and Roney are the Trustees
for the KSOP Plan. The KSOP Plan gives the Trustees the right to vote
shares not allocated to participant's accounts. Each participant is
entitled to direct the trustees as to the exercise of any voting rights
attributable to shares of Company stock allocated to his account. In the
event voting instructions are not received from participants, the KSOP
Plan provides that the Trustees shall not vote those shares. Each
Director disclaims beneficial ownership of the 2,944 unallocated shares,
except that Mr. Roney does not disclaim beneficial ownership of those
shares later allocated to his account as an employee of the Company in
accordance with the KSOP Plan.
(2) The total includes 2,000 shares held by Mr. Atlas' wife. In addition,
included in this total are 2,944 shares with respect to which Mr. Atlas
holds shared voting power with other Trustees of the Company's KSOP
Plan. Mr. Atlas disclaims any beneficial ownership in such KSOP shares.
(3) The total includes 95,364 shares owned by five companies controlled by
Mr. Boggus. In addition, included in this total are 2,944 shares with
respect to which Mr. Boggus holds shared voting power with other
Trustees of the Company's KSOP Plan. Mr. Boggus disclaims any beneficial
ownership in such KSOP shares.
(4) The total includes 3,601 shares held by Mr. Bready's wife, 985 shares
held by an independent trustee for Mr. and Mrs. Bready's individual
retirement accounts, 8,573 shares allocated to Mr. Bready's account as a
participant in the
86
<PAGE>
KSOP and 3,162 shares Mr. Bready has the right to acquire within 60 days
through the exercise of options. Not included in the total are 3,500
shares which represent options granted in 1995 and not exercisable
within 60 days. See "Management--Executive Compensation."
(5) The total includes 12,898 shares allocated to Mr. Buttery's account as a
participant in the KSOP and 5,270 shares Mr. Buttery has the right to
acquire within 60 days through the exercise of options. Not included in
the total are 4,000 shares which represent options granted in 1995 and
not exercisable within 60 days. See "Management -- Executive
Compensation."
(6) The total includes 9,160 shares allocated to Mr. Carruthers' account as
a participant in the KSOP and 3,162 shares Mr. Carruthers has the right
to acquire within 60 days through the exercise of options. Not included
in the total are 3,500 shares which represent options granted in 1995
and not exercisable within 60 days.
(7) The total includes 20,204 shares owned by a company controlled by Mr.
Collins, 8,023 shares held by an independent trustee for Mr. and Mrs.
Collins' individual retirement accounts and a money purchase pension
plan, 4,854 shares owned by a company controlled 50% by Mr. Collins and
50% by Mr. Roney, 593,600 shares held by trusts for the benefit of Mr.
Collins' wife, children and others, and 6,122 shares held by various
family members who have given Mr. Collins power of attorney to act on
their behalf.
(8) The total includes 2,384 shares held by Mr. Farris' wife. Mr. Farris
disclaims beneficial ownership of his wife's shares.
(9) The total includes 5,538 shares allocated to Mr. Kavanagh's account as a
participant in the KSOP and 5,270 shares Mr. Kavanagh has the right to
acquire within 60 days through the exercise of options. Not included in
the total are 4,000 which represent options granted in 1995 and not
exercisable within 60 days. See "Management--Executive Compensation."
(10)The total includes 8,333 shares held by Mr. Kilgore's wife, 1,156 shares
held by Mr. Kilgore as custodian for his grandchildren and 34,511 shares
held by an independent trustee for Mr. Kilgore's individual retirement
account. In addition, included in this total are 2,944 shares with
respect to which Mr. Kilgore holds shared voting power with other
Trustees of the Company's KSOP Plan. Mr. Kilgore disclaims any
beneficial ownership in such KSOP shares.
(11)The total includes 14,258 shares held by a trust for the benefit of Dr.
Landrum, 6,172 shares held by a trust for Dr. Landrum's pension plan and
53,498 shares held in a trust for the benefit of Dr. Landrum's wife. Dr.
Landrum disclaims beneficial ownership of his wife's shares.
(12)The total includes 406 shares held by Mr. Moxley's wife, 14,209 shares
allocated to Mr. Moxley's account as a participant in the KSOP and 5,270
shares Mr. Moxley has the right to acquire within 60 days through the
exercise of options. Not included in the total are 4,000 which represent
options granted in 1995 and not exercisable within 60 days. See
"Management--Executive Compensation."
(13)The total includes 16,166 shares held by Mr. Roney's wife, 5,202 shares
held by Mr. Roney's wife as trustee, 31,383 shares held by a trust for
the benefit of Mr. Roney's wife, 76,704 shares held by trusts at Texas
State Bank for which Mr. Roney and Mr. Whetsel serve as trustees along
with other individuals who are not directors of the Company but in which
they have no interest as beneficiaries, 4,854 shares owned by a company
controlled 50% by Mr. Roney and 50% by Mr. Collins and 42,202 shares
allocated to Mr. Roney's account as a participant in the KSOP. Included
in this total are 135,050 shares Mr. Roney has the right to acquire
within 60 days through the exercise of options. In addition, included in
this total are 2,944 shares with respect to which Mr. Roney holds shared
voting power with other Trustees of the Company's KSOP Plan. Mr. Roney
disclaims any beneficial ownership in such KSOP shares, except that Mr.
Roney does not disclaim beneficial ownership of those shares later
allocated to his account as an employee of the Company in accordance
with the KSOP Plan. Not included in the total are 65,000 shares which
represent options granted in 1995 and not exercisable within 60 days.
See "Management--Executive Compensation."
(14)The total includes 27,016 shares which represent Mrs. Uhlhorn's
beneficial interests in a trust and 26,854 shares held by a partnership
owned 30% by Mrs. Uhlhorn.
(15)The shares indicated are owned by a limited partnership controlled by
Mr. Veale.
(16)The total includes 108,087 shares held by trusts at Texas State Bank for
which Mr. Whetsel and Mr. Roney serve as trustees along with other
individuals who are not directors of the Company but in which they have
no interest as beneficiaries and 103,752 shares held in a trust for the
benefit of Mr. Whetsel.
(17)The total includes 1,130,592 shares as to which directors and executive
officers have sole voting power; 421,841 shares as to which directors
and executive officers have shared voting power; 1,038,382 shares as to
which directors and executive officers have sole investment power; and
514,051 shares as to which directors and executive officers have shared
investment power. The total also includes 156,129 shares which officers
have the right to acquire within 60 days upon exercise of stock options.
87
<PAGE>
SELLING SHAREHOLDER
Of the shares offered pursuant to this Prospectus, 2,180,000 shares are
being offered by the Company and 20,000 shares are being offered by the Selling
Shareholder. The following table includes the name of the Selling Shareholder,
the amount of Common Stock held by the Selling Shareholder prior to the
offering, the amount of Common Stock to be offered for the account of the
Selling Shareholder in this offering, and the amount and percentage of Common
Stock to be owned by the Selling Shareholder after completion of the offering.
<TABLE>
<CAPTION>
COMMON STOCK HELD
FOLLOWING THIS
COMMON STOCK OFFERING
COMMON STOCK OFFERED IN THIS ----------------------
NAME PRESENTLY HELD OFFERING AMOUNT %
- ------------------------------------------------------------ --------------- --------------- ----------- ---------
<S> <C> <C> <C> <C>
Lindberg Limited Partnership(1)............................. 60,908 20,000 40,908 0.49%
</TABLE>
- ------------
(1) The general partner of Lindberg Limited Partnership is Veale Family
Management Trust, trustees of which are Paul G. Veale and his wife,
Florence Veale. Mr. and Mrs. Veale are also individually limited
partners of the Lindberg Limited Partnership. Mr. Veale is a Director of
the Company.
88
<PAGE>
DESCRIPTION OF CAPITAL STOCK
GENERAL
Texas Regional is authorized to issue 20,000,000 shares of Common Stock, and
10,000,000 shares of Preferred Stock with such preferences, limitations and
relative rights as may be determined by the Board of Directors of the Company.
Prior to April 1991, the Company had authority to issue Class B Non-Voting
Common Stock as well. The Class B Non-Voting Common class was created to provide
a mechanism for equalizing consideration to shareholders at the time of
acquisition of Texas State Bank and Harlingen State Bank in 1983. All
outstanding shares of Class B Non-Voting Common Stock were converted into Class
A Voting Common shares in April 1991, and the class of shares referred to as
Class B Non-Voting Common Stock was eliminated. As used herein, the term "Common
Stock" refers to the Company's Class A Voting Common Stock.
COMMON STOCK
As of the date hereof, Texas Regional has issued and outstanding an
aggregate of 6,196,791 shares of Common Stock and an aggregate of 262,988 shares
of Common Stock are reserved for issuance pursuant to options previously granted
by the Company. The only class of shares which Texas Regional has issued and
outstanding is the Common Stock. The shares of First Series Convertible
Preferred Stock, Series 1990 Convertible Preferred Stock and Series 1991
Convertible Preferred Stock outstanding prior to 1994 have been converted into
Common Stock or redeemed by the Company. The Common Stock has a par value of
$1.00 per share. Holders of Common Stock do not have preemptive rights for the
acquisition of additional capital stock of the Company. Each holder of Common
Stock is entitled to one vote for each share held on all matters submitted to
shareholders, including election of directors. Holders of Common Stock do not
have cumulative voting rights in the election of directors. The Texas Regional
share certificates issued to purchasers of Common Stock in the offering
described in this Prospectus will bear legends describing the fact that the
Texas Regional Articles of Incorporation (the "Articles of Incorporation") deny
preemptive rights and do not allow cumulative voting in the election of
directors.
Holders of Common Stock are entitled to dividends as and when declared by
the Board of Directors of Texas Regional out of legally available funds. See
"Price Range of Common Stock and Dividend Policy."
PREFERRED STOCK
The Company is authorized to issue up to 10,000,000 shares of Preferred
Stock, $1.00 par value per share. The Company does not have any shares of
preferred stock outstanding as of the date of this Prospectus and does not
presently have plans to issue any shares of preferred stock. The Company's Board
of Directors is authorized by the Articles of Incorporation to provide, without
further shareholder action, for the issuance of one or more series of preferred
stock. The Company's Board of Directors has the power to fix the various terms
with respect to each such series, including voting powers, designations,
preferences, dividend rates, conversion and exchange, redemption provisions, the
amount holders are entitled to receive upon any liquidation, dissolution, or
winding up of the Company, and voting rights to which the holders of Preferred
Stock would be entitled.
TRANSFER AGENT
The transfer agent for the Common Stock is Texas Regional Bancshares, Inc.,
Kerria Plaza, Suite 301, 3700 North Tenth Street, McAllen, Texas 78501,
Attention Ann M. Sefcik, Controller.
SHARES ELIGIBLE FOR FUTURE SALE
After completion of this offering, the Company will have outstanding
8,706,791 shares of Common Stock (assuming election by the Underwriters to
purchase shares subject to the Underwriters' over-allotment option). Of these
shares, the 2,510,000 shares of Common Stock sold in this offering (including
such over-allotment shares) will be freely tradable without restriction or
limitation under the Securities Act except to the extent such shares are subject
to the agreement with the Underwriters described below, and except for any
shares purchased by "affiliates" of the Company, as that term is defined in the
Securities Act. In addition, an aggregate of 4,811,531 shares presently
outstanding are also not restricted
89
<PAGE>
and, under certain conditions, may be freely tradable without restriction or
limitation under the Securities Act. The remaining 1,385,260 shares are
"restricted" shares within the meaning of Rule 144 adopted under the Securities
Act ("Rule 144"). Restricted shares outstanding on the date hereof owned by
"affiliates" may only be sold if they are registered under the Securities Act or
unless an exemption from registration, such as that provided by Rule 144, is
available.
The Company, its executive officers, its directors and the Selling
Shareholder have agreed not, directly or indirectly, to offer, sell, offer to
sell, contract to sell, grant any option to purchase or otherwise dispose of (or
announce any offer, sale, offer of sale, contract of sale, grant of any option
to purchase or any other disposition of), any shares of Common Stock or any
securities convertible into or exchangeable, or exercisable for, shares of
Common Stock for a period of 120 days after the date of the Underwriting
Agreement without the prior written consent of the Underwriters (the "Lockup").
Following the Lockup, these shares will be eligible for sale in the public
market, subject to the conditions and restrictions of Rules 144 and Rule 144A
also adopted under the Securities Act ("Rule 144A"), as hereinafter described.
See "Underwriting."
No prediction can be made as to the effect, if any, that market sales of
shares or the availability of shares for sale will have on the market price
prevailing from time to time. Nevertheless, sales of substantial amounts of
Common Stock in the public market after the lapse of the restrictions described
above could adversely affect the prevailing market price and the ability of the
Company to raise equity capital in the future at a time and price which it deems
appropriate.
In general, under Rule 144 as currently in effect, any person (or persons
whose shares are aggregated), including an affiliate, who has beneficially owned
Restricted Shares for at least a two-year period (as computed under Rule 144) is
entitled to sell within any three-month period a number of such shares that does
not exceed the greater of (i) 1% of the then outstanding shares of Common Stock
(approximately 87,000 shares after giving effect to this offering, assuming the
Underwriters exercise the available over-allotment option in full) and (ii) the
average weekly trading volume in the Common Stock on the Nasdaq National Market
System during the four calendar weeks immediately preceding such sale. Sales
under Rule 144 are also subject to certain provisions relating to the manner and
notice of sale and the availability of current public information about the
Company. A person (or persons whose shares are aggregated) who is not deemed an
affiliate of the Company at any time during the 90 days immediately preceding a
sale, and who has beneficially owned Restricted Shares for at least a three-year
period (as computed under Rule 144), would be entitled to sell shares under Rule
144(k) without regard to the volume limitation and other conditions described
above. Restricted Shares and options to purchase Common Stock sold by the
Company to, among others, its employees, officers and directors pursuant to
written compensation plans or contracts and in reliance on Rule 701 under the
Securities Act, may be resold in reliance on Rule 144 by such persons who are
not affiliates subject only to the provisions of Rule 144 regarding manner of
sale, and by such persons who are affiliates without complying with Rule 144's
holding period requirements. Rule 144A permits the immediate sale by the current
holders of Restricted Shares of all or a portion of their shares to certain
qualified institutional buyers as defined in Rule 144A.
90
<PAGE>
UNDERWRITING
Subject to the terms and conditions of the Underwriting Agreement, the
Underwriters named below (the "Underwriters"), through their Representatives,
Alex. Brown & Sons Incorporated and First Southwest Company, have severally
agreed to purchase from the Company the following respective numbers of shares
of Common Stock at the public offering price less the underwriting discounts and
commissions set forth on the cover page of this Prospectus:
<TABLE>
<CAPTION>
NUMBER OF
UNDERWRITER SHARES
- ----------------------------------------------------------------------------------------------------- -----------
<S> <C>
Alex. Brown & Sons Incorporated...................................................................... 702,000
First Southwest Company.............................................................................. 702,000
Bear, Stearns & Co. Inc.............................................................................. 50,000
CS First Boston Corporation.......................................................................... 50,000
Dean Witter Reynolds Inc............................................................................. 50,000
Donaldson, Lufkin & Jenrette Securities Corporation.................................................. 50,000
A.G. Edwards & Sons, Inc............................................................................. 50,000
Lehman Brothers Inc.................................................................................. 50,000
Merrill Lynch, Pierce, Fenner & Smith Incorporated................................................... 50,000
PaineWebber Incorporated............................................................................. 50,000
Prudential Securities Incorporated................................................................... 50,000
Smith Barney Inc..................................................................................... 50,000
Dain Bosworth Incorporated........................................................................... 25,000
Dominick & Dominick, Incorporated.................................................................... 25,000
Legg Mason Wood Walker, Incorporated................................................................. 25,000
Needham & Company, Inc............................................................................... 25,000
Piper Jaffray Inc.................................................................................... 25,000
Principal Financial Securities, Inc.................................................................. 25,000
Stephens Inc......................................................................................... 25,000
Stifel, Nicolaus & Company, Incorporated............................................................. 25,000
Arneson, Kercheville, Ehrenberg & Associates, Inc.................................................... 12,000
Branch, Cabell & Company............................................................................. 12,000
Allen C. Ewing & Co.................................................................................. 12,000
Hoak Securities Corp................................................................................. 12,000
Hoefer & Arnett, Inc................................................................................. 12,000
Sanders Morris Mundy Inc............................................................................. 12,000
Southwest Securities Inc............................................................................. 12,000
Sterne, Agee & Leach, Inc............................................................................ 12,000
-----------
Total................................................................................................ 2,200,000
-----------
-----------
</TABLE>
The Underwriting Agreement provides that the obligations of the Underwriters
are subject to certain conditions precedent and that the Underwriters will
purchase all the shares of the Common Stock offered hereby if any of such shares
are purchased.
The Company has been advised by the Representatives of the Underwriters that
the Underwriters propose to offer the shares of Common Stock to the public at
the public offering price set forth on the cover page of this Prospectus and to
certain dealers at such price less a concession not in excess of $0.76 per
share. The Underwriters may allow, and such dealers may reallow, a concession
not in excess of $0.10 per share to certain other dealers. After the public
offering, the offering price and other selling terms may be changed by the
Representatives of the Underwriters.
The Company has granted to the Underwriters an option, exercisable not later
than 30 days after the date of this Prospectus, to purchase up to 330,000
additional shares of Common Stock at the public offering price less the
underwriting discounts and commissions set forth on the cover page of this
Prospectus. To the extent that the Underwriters exercise such option, each of
the Underwriters will have a
91
<PAGE>
firm commitment to purchase approximately the same percentage thereof that the
number of shares of Common Stock to be purchased by it shown in the above table
bears to 2,200,000 and the Company will be obligated, pursuant to the option, to
sell such shares to the Underwriters. The Underwriters may exercise such option
only to cover over-allotments made in connection with the sale of Common Stock
offered hereby. If purchased, the Underwriters will offer such additional shares
on the same terms as those on which the 2,200,000 shares are being offered.
The Company and the Selling Shareholder have agreed to indemnify the
Underwriters against certain liabilities, including liabilities under the
Securities Act.
The Company and its executive officers, directors and the Selling
Shareholder, holding in the aggregate 1,541,389 shares of Common Stock, have
agreed not to offer, sell or otherwise dispose of any of such Common Stock
(except for shares of Common Stock offered hereby and other than shares offered
pursuant to the KSOP or other employee benefit plans) for a period of 120 days
after the date of this Prospectus without the prior written consent of the
Representatives of the Underwriters. See "Shares Eligible for Future Sale."
Texas State Bank, both in its corporate capacity and on behalf of trust
clients, maintains a substantial portfolio of investment securities. First
Southwest Company, as a securities broker, has sold securities to Texas State
Bank, and First Southwest Company has received compensation for its services as
securities broker. First Southwest Company has also been engaged to provide an
opinion to the Board of Directors of the Company as to the fairness, from a
financial point of view, of the Mergers, for a total consideration of $125,000.
LEGAL MATTERS
McGinnis, Lochridge & Kilgore, Austin, Texas, will render an opinion to
Texas Regional with respect to the legality of the securities being registered,
and provides general legal services to Texas Regional. Joe M. Kilgore, a partner
in the firm, serves as a director of Texas Regional and Texas State Bank, and
beneficially owns 184,756 shares (2.98%) of the Common Stock.
Certain legal matters will be passed upon for the Underwriters by Jones,
Day, Reavis & Pogue, Dallas, Texas.
EXPERTS
The consolidated financial statements of Texas Regional Bancshares, Inc. at
December 31, 1995 and 1994, and for each of the years in the three-year period
ended December 31, 1995, included herein and elsewhere in the Registration
Statement have been audited by KPMG Peat Marwick LLP, independent certified
public accountants, and are included herein in reliance upon such reports and
upon the authority of said firm as experts in accounting and auditing. The
financial statements of First State Bank and Border Bank at December 31, 1995
and 1994, and for each of the years in the three-year period ended December 31,
1995, included herein and elsewhere in the Registration Statement have also been
audited by KPMG Peat Marwick LLP, independent certified public accountants, and
are included herein in reliance upon such reports and upon the authority of said
firm as experts in accounting and auditing.
92
<PAGE>
INDEX TO FINANCIAL STATEMENTS AND FINANCIAL INFORMATION
TEXAS REGIONAL BANCSHARES, INC. AND SUBSIDIARY
FIRST STATE BANK & TRUST CO.
THE BORDER BANK
<TABLE>
<CAPTION>
PAGE
---------
<S> <C>
TEXAS REGIONAL BANCSHARES, INC.
Consolidated Balance Sheets (Unaudited) at March 31, 1996 and 1995 and December 31, 1995............... F-2
Consolidated Statements of Income (Unaudited) for the Year Ended December 31, 1995 and the Three Months
Ended March 31, 1996 and 1995........................................................................ F-3
Consolidated Statements of Changes in Shareholders' Equity (Unaudited) for the Three Months Ended March
31, 1996............................................................................................. F-4
Consolidated Statements of Cash Flows (Unaudited) for the Three Months Ended March 31, 1996 and 1995... F-5
Notes to Unaudited Consolidated Financial Statements................................................... F-6
Independent Auditors' Report........................................................................... F-12
Consolidated Balance Sheets at December 31, 1995 and 1994.............................................. F-13
Consolidated Statements of Income for the Years Ended December 31, 1995, 1994 and 1993................. F-14
Consolidated Statements of Changes in Shareholders' Equity for the Years Ended December 31, 1995, 1994
and 1993............................................................................................. F-15
Consolidated Statements of Cash Flows for the Years Ended December 31, 1995, 1994 and 1993............. F-16
Notes to Consolidated Financial Statements............................................................. F-17
FIRST STATE BANK & TRUST CO.
Selected Financial Information......................................................................... F-42
Management's Discussion and Analysis of Financial Condition and Results of Operations.................. F-43
Balance Sheet (Unaudited) at March 31, 1996............................................................ F-69
Statements of Earnings (Unaudited) for the Three Months Ended March 31, 1996 and 1995.................. F-70
Statements of Changes in Stockholders' Equity (Unaudited) for the Year Ended December 31, 1995 and the
Three Months Ended March 31, 1996.................................................................... F-71
Statements of Cash Flow (Unaudited) for the Three Months Ended March 31, 1996 and 1995................. F-72
Notes to Unaudited Financial Statements................................................................ F-73
Independent Auditors' Report........................................................................... F-74
Balance Sheets at December 31, 1995 and 1994........................................................... F-75
Statements of Earnings for the Years Ended December 31, 1995, 1994 and 1993............................ F-76
Statements of Changes in Stockholders' Equity for the Years Ended December 31, 1995, 1994 and 1993..... F-77
Statements of Cash Flows for the Years Ended December 31, 1995, 1994 and 1993.......................... F-78
Notes to Financial Statements.......................................................................... F-79
THE BORDER BANK
Selected Financial Information......................................................................... F-88
Management's Discussion and Analysis of Financial Condition and Results of Operations.................. F-89
Balance Sheet (Unaudited) at March 31, 1996............................................................ F-113
Statements of Earnings (Unaudited) for the Three Months Ended March 31, 1996 and 1995.................. F-114
Statements of Changes in Stockholders' Equity (Unaudited) for the Year Ended December 31, 1995 and the
Three Months Ended March 31, 1996.................................................................... F-115
Statements of Cash Flows (Unaudited) for the Three Months Ended March 31, 1996 and 1995................ F-116
Notes to Unaudited Financial Statements................................................................ F-117
Independent Auditors' Report........................................................................... F-118
Balance Sheets at December 31, 1995 and 1994........................................................... F-119
Statements of Earnings for the Years Ended December 31, 1995, 1994 and 1993............................ F-120
Statements of Changes in Stockholders' Equity for the Years Ended December 31, 1995, 1994 and 1993..... F-121
Statements of Cash Flows for the Years Ended December 31, 1995, 1994 and 1993.......................... F-122
Notes to Financial Statements.......................................................................... F-123
</TABLE>
F-1
<PAGE>
Texas Regional Bancshares, Inc. and Subsidiary
CONSOLIDATED BALANCE SHEETS (UNAUDITED)
<TABLE>
<CAPTION>
March 31, December 31,
-------------------- -------------
(Dollars in Thousands) 1996 1995 1995
<S> <C> <C> <C>
- ------------------------------------------------------------------------------------------------------
Assets
Cash and Due From Banks $ 31,547 $ 25,792 $ 30,933
Federal Funds Sold 13,200 18,000 3,600
- ------------------------------------------------------------------------------------------------------
Total Cash and Cash Equivalents 44,747 43,792 34,533
Securities Available for Sale 57,453 45,228 63,150
Securities Held to Maturity (Estimated Market Value of $56,081
and $70,978 at March 31, 1996 and 1995, respectively, and
$68,962 at December 31, 1995) 55,913 71,962 68,491
Loans, Net of Unearned Discount of $1,263 and $724 at March 31,
1996 and 1995, respectively and $1,272 at December 31, 1995 467,059 354,410 450,854
Less Allowance for Loan Losses (4,890) (3,995) (4,542)
- ------------------------------------------------------------------------------------------------------
Net Loans 462,169 350,415 446,312
Premises and Equipment, Net 18,964 15,627 18,374
Accrued Interest Receivable 6,724 5,386 6,319
Other Real Estate 1,353 1,680 1,273
Intangibles 5,588 1,926 5,711
Other Assets 2,975 2,989 2,606
- ------------------------------------------------------------------------------------------------------
Total Assets $ 655,886 $ 539,005 $ 646,769
- ------------------------------------------------------------------------------------------------------
Liabilities
Deposits
Demand $ 120,087 $ 97,396 $ 120,414
Savings 38,850 27,520 36,133
Money Market Checking and Savings 127,222 121,614 127,687
Time Deposits 299,835 229,455 295,497
- ------------------------------------------------------------------------------------------------------
Total Deposits 585,994 475,985 579,731
Federal Funds Purchased and Securities Sold Under Repurchase
Agreements 600 1,153 757
Short-Term Borrowings -- 429 --
Accounts Payable and Accrued Liabilities 4,729 4,097 3,561
- ------------------------------------------------------------------------------------------------------
Total Liabilities 591,323 481,664 584,049
- ------------------------------------------------------------------------------------------------------
Commitment and Contingencies
Shareholders' Equity
Preferred Stock; $1.00 par value, 10,000,000 Shares Authorized;
None Issued and Outstanding -- -- --
Common Stock -- Class A; $1.00 par value, 20,000,000 Shares
Authorized; Issued and Outstanding, 6,196,791 at March 31,
1996 and 6,193,629 Shares at March 31, 1995 and 6,196,791 at
December 31, 1995, respectively (Note 2) 6,196 6,193 6,196
Paid-In Capital 29,239 29,204 29,239
Retained Earnings 29,102 22,289 27,168
Unrealized Gain (Loss) on Securities Available for Sale 26 (345) 117
- ------------------------------------------------------------------------------------------------------
Total Shareholders' Equity 64,563 57,341 62,720
- ------------------------------------------------------------------------------------------------------
Total Liabilities and Shareholders' Equity $ 655,886 $ 539,005 $ 646,769
- ------------------------------------------------------------------------------------------------------
The accompanying notes are an integral part of the consolidated financial statements.
</TABLE>
F-2
<PAGE>
Texas Regional Bancshares, Inc. and Subsidiary
CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)
<TABLE>
<CAPTION>
Three Months Ended
March 31,
--------------------
(Dollars in Thousands, Except Per Share Data) 1996 1995
<S> <C> <C>
- --------------------------------------------------------------------------------------------------------
Interest Income
Loans, Including Fees $ 11,011 $ 8,444
Investment Securities
Taxable 1,718 1,517
Tax-Exempt 71 74
Federal Funds Sold 170 144
- --------------------------------------------------------------------------------------------------------
Total Interest Income 12,970 10,179
- --------------------------------------------------------------------------------------------------------
Interest Expense
Deposits 5,275 3,707
Federal Funds Purchased and Securities Sold Under Repurchase Agreements 6 14
Short-Term Borrowing -- 8
- --------------------------------------------------------------------------------------------------------
Total Interest Expense 5,281 3,729
- --------------------------------------------------------------------------------------------------------
Net Interest Income 7,689 6,450
Provision for Loan Losses 461 366
- --------------------------------------------------------------------------------------------------------
Net Interest Income After Provision for Loan Losses 7,228 6,084
- --------------------------------------------------------------------------------------------------------
Noninterest Income
Service Charges on Deposit Accounts 939 781
Other Service Charges 236 273
Trust Service Fees 366 287
Net Investment Security Gains (Losses) 1 (13)
Data Processing Service Fees 220 73
Other Operating Income 184 189
- --------------------------------------------------------------------------------------------------------
Total Noninterest Income 1,946 1,590
- --------------------------------------------------------------------------------------------------------
Noninterest Expense
Salaries and Employee Benefits 2,737 2,258
Net Occupancy Expense 317 253
Equipment Expense 643 431
Other Real Estate (Income) Expense, Net (10) 32
Other Noninterest Expense 1,627 1,620
- --------------------------------------------------------------------------------------------------------
Total Noninterest Expense 5,314 4,594
- --------------------------------------------------------------------------------------------------------
Income Before Income Tax Expense 3,860 3,080
Income Tax Expense 1,306 1,093
- --------------------------------------------------------------------------------------------------------
Net Income $ 2,554 $ 1,987
- --------------------------------------------------------------------------------------------------------
Primary Earnings Per Common Share (Note 2)
Net Income $ 0.41 $ 0.32
Weighted Average Number of Common Shares Outstanding (In Thousands) 6,290 6,194
- --------------------------------------------------------------------------------------------------------
Fully Diluted Earnings Per Common Share (Note 2)
Net Income $ 0.41 $ 0.32
Weighted Average Number of Common Shares Outstanding (In Thousands) 6,295 6,201
- --------------------------------------------------------------------------------------------------------
The accompanying notes are an integral part of the consolidated financial statements.
</TABLE>
F-3
<PAGE>
Texas Regional Bancshares, Inc. and Subsidiary
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY (UNAUDITED)
For the Year Ended December 31, 1995
And the Three Months Ended March 31, 1996
<TABLE>
<CAPTION>
Unrealized Gain
Class A (Loss)
Voting on Securities Total
Preferred Common Paid-in Retained Available Shareholders'
(Dollars in Thousands) Stock Stock Capital Earnings for Sale Equity
<S> <C> <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 -- -- -- -- (91) (91)
Class A Voting Common Stock
Cash Dividends -- -- -- (620) -- (620)
Net Income for the Three Months
Ended March 31, 1996 -- -- -- 2,554 -- 2,554
- -----------------------------------------------------------------------------------------------------------------
Balance, March 31, 1996 $ -- $ 6,196 $ 29,239 $ 29,102 $ 26 $ 64,563
- -----------------------------------------------------------------------------------------------------------------
</TABLE>
F-4
<PAGE>
Texas Regional Bancshares, Inc. and Subsidiary
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
Three Months Ended March 31, 1996 and 1995
<TABLE>
<S> <C> <C>
(Dollars in Thousands) 1996 1995
- ------------------------------------------------------------------------------------------------------
Cash Flows from Operating Activities
Net Income $ 2,554 $ 1,987
Adjustments to Reconcile Net Income to Net Cash Provided by Operating
Activities
Depreciation, Amortization and Accretion, Net 555 469
Provision for Loan Losses 461 366
Loss on Sale of Other Real Estate -- 81
(Gain) Loss on Sale of Securities Available for Sale (1) 13
Loss on Sale of Fixed Assets 2 --
(Gain) Loss on Sale of Other Assets 9 (2)
Increase in Accrued Interest Receivable and Other Assets (707) (1,121)
Increase in Accounts Payable and Accrued Liabilities 1,214 1,432
- ------------------------------------------------------------------------------------------------------
Net Cash Provided by Operating Activities 4,087 3,225
- ------------------------------------------------------------------------------------------------------
Cash Flows from Investing Activities
Proceeds from Sales of Securities Available for Sale 7,497 8,957
Proceeds from Maturing Securities Available for Sale -- 1,000
Proceeds from Maturing Securities Held to Maturity 13,500 160
Purchases of Securities Available for Sale (1,956) --
Purchases of Securities Held to Maturity (1,001) (240)
Proceeds from Sale of Loans 3,254 91
Purchases of Loans (1,488) (23)
Loan Originations and Advances (18,271) (14,744)
Recoveries of Charged-Off Loans 57 261
Proceeds from Sale of Fixed Assets 2 --
Proceeds from Sale of Other Assets 99 7
Proceeds from Sale of Other Real Estate 48 639
Purchases of Premises and Equipment (1,100) (704)
- ------------------------------------------------------------------------------------------------------
Net Cash Provided by (Used In) Investing Activities 641 (4,596)
- ------------------------------------------------------------------------------------------------------
Cash Flows from Financing Activities
Net Increase (Decrease) in Demand Deposits, Money Market Checking
and Savings Accounts 1,925 (22,552)
Net Increase in Time Deposits 4,338 26,429
Net Increase (Decrease) in Securities Sold Under Repurchase Agreements (157) 4
Cash Dividends Paid on Class A Voting Common Stock (Note 4) (620) (495)
- ------------------------------------------------------------------------------------------------------
Net Cash Provided by Financing Activities 5,486 3,386
- ------------------------------------------------------------------------------------------------------
Increase in Cash and Cash Equivalents 10,214 2,015
Cash and Cash Equivalents at Beginning of Year 34,533 41,777
- ------------------------------------------------------------------------------------------------------
Cash and Cash Equivalents at End of Quarter $ 44,747 $ 43,792
- ------------------------------------------------------------------------------------------------------
Supplemental Disclosures of Cash Flow Information
Interest Paid $ 5,366 $ 3,536
Income Taxes Paid 43 --
Supplemental Schedule of Noncash Investing and Financing Activities
Foreclosure and Repossession in Partial Satisfaction of Loans Receivable $ 130 $ 62
Loan Originated to Facilitate Sale of Other Real Estate N/A N/A
- ------------------------------------------------------------------------------------------------------
The accompanying notes are an integral part of the consolidated financial statements.
</TABLE>
F-5
<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 include Texas Regional Bancshares,
Inc. and its subsidiary (the "Company"). Intercompany balances and transactions
have been eliminated.
NOTE 2 -- EARNINGS PER COMMON SHARE COMPUTATIONS
Earnings per common share computations include the effects of common stock
equivalents applicable to the stock option contracts.
NOTE 3 -- INCOME TAX
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 4 -- COMMON STOCK
On March 12, 1996, the Board of Directors approved a $0.10 per share cash
dividend for shareholders of record on April 8, 1996 and payable on April 15,
1996.
NOTE 5 -- ACQUISITION ACTIVITY
On January 10, 1996, the Company announced agreements have been signed under
which Texas State Bank, the principal operating subsidiary of Texas Regional
Bancshares, Inc., will acquire through merger First State Bank & Trust Co.,
Mission, Texas, and The Border Bank, Hidalgo, Texas (the "Mergers"). The
agreements have been approved by the appropriate Boards of Directors of Texas
Regional Bancshares, Inc., Texas State Bank, First State Bank & Trust Co. and
The Border Bank. Under the terms of the agreements, Texas State Bank will
acquire First State Bank & Trust Co. for a total cash consideration of $79.0
million and will acquire The Border Bank for a total cash consideration of $20.5
million.
The following Pro Forma Combined Condensed Balance Sheet was based on the
assumption that the Mergers had been consummated on March 31, 1996. The Mergers
will be accounted for using the purchase method of accounting.
The Mergers are subject to completion of satisfactory due diligence by Texas
Regional Bancshares, Inc. and must be approved by the shareholders of First
State Bank & Trust Co. and The Border Bank. The Mergers have been approved by
the appropriate regulators. Closing is also contingent upon Texas Regional
Bancshares, Inc. having successfully raised $40.0 million of additional capital
to partially fund these transactions on terms and conditions acceptable to Texas
Regional Bancshares, Inc.
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 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.
F-6
<PAGE>
The Company's Consolidated Balance Sheet at December 31, 1995 reflected the
assets and liabilities of the RGC/ Roma Branch Acquisitions. The results of
operations of the RGC/Roma Branch Acquisitions were included in the Company's
Consolidated Financial Statements from the date of acquisition.
The following Unaudited Pro Forma Combined Condensed Statements of Income for
the three months ended March 31, 1996 and for the year ended December 31, 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 $19.7 million and $4.1 million, respectively. The pro forma
adjustments reflect the amortization of the Core Deposit premium over a 10-year
period, the Fixed Maturity Deposit premium over a 3-year period and the Goodwill
intangible over a 15-year period, the reduced interest income on the $54.3
million net purchase price ($99.5 million less $45.2 million) of the Mergers at
an average federal funds sold rate of 5.11% for the three months ended March 31,
1996 and 5.92% for the year ended December 31, 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.
F-7
<PAGE>
<TABLE>
<CAPTION>
Pro Forma Combined Condensed
Balance Sheet First
March 31, 1996 (Unaudited) Texas State Border Pro Forma Pro Forma
(Dollars in Thousands) Regional Bank Bank Adjustments Balance
<S> <C> <C> <C> <C> <C>
- -----------------------------------------------------------------------------------------------------
Assets
Cash and Due From Banks $ 31,547 $ 14,335 $ 6,088 $ 45,216A $ 56,684
(502)B
(40,000)E
Federal Funds Sold 13,200 60,550 10,500 (59,500)E 24,750
- -----------------------------------------------------------------------------------------------------
Total Cash and Cash Equivalents 44,747 74,885 16,588 (54,786) 81,434
Securities Available for Sale 57,453 20,920 5,281 -- 83,654
Securities Held to Maturity 55,913 128,782 42,329 -- 227,024
Loans, Net of Unearned Discount 467,059 192,825 51,017 (1,337)F 709,564
Less: Allowance for Loan Losses (4,890) (4,009) (1,100) -- (9,999)
- -----------------------------------------------------------------------------------------------------
Net Loans 462,169 188,816 49,917 (1,337) 699,565
Premises and Equipment, Net 18,964 5,411 3,075 7,000C 34,450
Accrued Interest Receivable 6,724 6,563 1,979 -- 15,266
Other Real Estate 1,353 275 238 -- 1,866
Goodwill 4,559 -- -- 11,336E 15,895
Core Deposit 960 -- -- 8,351G 9,311
Organization Cost 69 -- -- -- 69
Other Assets 2,975 429 538 (112)I 3,830
- -----------------------------------------------------------------------------------------------------
Total Assets $ 655,886 $ 426,081 $ 119,945 $ (29,548) $1,172,364
- -----------------------------------------------------------------------------------------------------
Liabilities
Deposits
Noninterest-Bearing $ 120,087 $ 39,793 $ 6,543 $ (502)B $ 165,921
Interest-Bearing 465,907 321,621 95,669 (394)H 882,803
- -----------------------------------------------------------------------------------------------------
Total Deposits 585,994 361,414 102,212 (896) 1,048,724
Federal Funds Purchased and Securities
Sold Under Repurchase Agreements 600 -- -- -- 600
Other Borrowings -- 1,139 -- -- 1,139
Accounts Payable and Accrued Liabilities 4,729 1,894 568 5,043D 12,122
(112)I
- -----------------------------------------------------------------------------------------------------
Total Liabilities 591,323 364,447 102,780 4,035 1,062,585
- -----------------------------------------------------------------------------------------------------
Shareholders' Equity
Preferred Stock -- -- -- -- --
Common Stock 6,196 4,000 2,000 2,180A 8,376
(6,000)E
Paid-In Capital 29,239 21,000 9,000 43,036A 72,275
(30,000)E
Retained Earnings 29,102 36,682 6,170 (42,852)E 29,102
Unrealized Gain (Loss) on Securities
Available for Sale 26 (48) (5) 53E 26
- -----------------------------------------------------------------------------------------------------
Total Shareholders' Equity 64,563 61,634 17,165 (33,583) 109,779
- -----------------------------------------------------------------------------------------------------
Total Liabilities and Shareholders'
Equity $ 655,886 $ 426,081 $ 119,945 $ (29,548) $1,172,364
- -----------------------------------------------------------------------------------------------------
</TABLE>
F-8
<PAGE>
<TABLE>
<CAPTION>
Pro Forma Combined Condensed
Statement of Income
For the Three Months Ended
March 31, 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 $ 12,970 $ 8,192 $ 2,341 $ (579)J $ 22,924
Interest Expense 5,281 3,283 1,138 33K 9,735
- -----------------------------------------------------------------------------------------------------------------
Net Interest Income 7,689 4,909 1,203 (612) 13,189
Provision for Loan Losses 461 290 71 -- 822
- -----------------------------------------------------------------------------------------------------------------
Net Interest Income After Provision for Loan
Losses 7,228 4,619 1,132 (612) 12,367
- -----------------------------------------------------------------------------------------------------------------
Noninterest Income
Service Charges on Deposit Accounts 939 246 67 -- 1,252
Other Service Charges 236 54 16 -- 306
Trust Service Fees 366 21 -- -- 387
Other Operating Income 405 17 11 -- 433
- -----------------------------------------------------------------------------------------------------------------
Total Noninterest Income 1,946 338 94 -- 2,378
- -----------------------------------------------------------------------------------------------------------------
Noninterest Expense
Salaries and Employee Benefits 2,737 682 248 -- 3,667
Net Occupancy Expense 317 134 55 59N 565
Equipment Expense 643 85 28 -- 756
Other Noninterest Expense 1,617 865 131 398M 3,011
- -----------------------------------------------------------------------------------------------------------------
Total Noninterest Expense 5,314 1,766 462 457 7,999
- -----------------------------------------------------------------------------------------------------------------
Income Before Income Tax Expense 3,860 3,191 764 (1,069) 6,746
Income Tax Expense 1,306 914 172 (308)N 2,084
- -----------------------------------------------------------------------------------------------------------------
Net Income $ 2,554 $ 2,277 $ 592 $ (761) $ 4,662
- -----------------------------------------------------------------------------------------------------------------
Primary Earnings Per Common Share
Net Income $ 0.41 $ 0.55
Weighted Average Number of Common Shares
Outstanding (In Thousands) 6,290 8,470
- -----------------------------------------------------------------------------------------------------------------
Fully Diluted Earnings Per Common Share
Net Income $ 0.41 $ 0.55
Weighted Average Number of Common Shares
Outstanding (In Thousands) 6,295 8,475
- -----------------------------------------------------------------------------------------------------------------
</TABLE>
F-9
<PAGE>
<TABLE>
<CAPTION>
Pro Forma Combined Condensed
Statement of Income
For the Year Ended
December 31, 1995 (Unaudited) First
(Dollars in Thousands, Texas 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 $ 43,505 $ 6,337 $ 32,472 $ 9,016 $ (3,900)J $ 87,430
Interest Expense 17,041 2,817 13,103 4,415 131K 37,507
- ----------------------------------------------------------------------------------------------------------
Net Interest Income 26,464 3,520 19,369 4,601 (4,031) 49,923
Provision for Loan Losses 1,666 19 2,425 485 -- 4,595
- ----------------------------------------------------------------------------------------------------------
Net Interest Income After
Provision for Loan Losses 24,798 3,501 16,944 4,116 (4,031) 45,328
- ----------------------------------------------------------------------------------------------------------
Noninterest Income
Service Charges on Deposit
Accounts 3,312 469 1,146 255 -- 5,182
Other Service Charges 825 97 151 33 -- 1,106
Trust Service Fees 1,256 -- 24 -- -- 1,280
Other Operating Income 926 24 81 28 -- 1,059
- ----------------------------------------------------------------------------------------------------------
Total Noninterest Income 6,319 590 1,402 316 -- 8,627
- ----------------------------------------------------------------------------------------------------------
Noninterest Expense
Salaries and Employee Benefits 9,247 1,334 2,824 1,056 -- 14,461
Net Occupancy Expense 1,010 176 568 234 294L 2,282
Equipment Expense 1,959 217 341 148 -- 2,665
Other Noninterest Expense 5,631 1,281 2,531 729 1,777M 11,949
- ----------------------------------------------------------------------------------------------------------
Total Noninterest Expense 17,847 3,008 6,264 2,167 2,071 31,357
- ----------------------------------------------------------------------------------------------------------
Income Before Income Tax Expense 13,270 1,083 12,082 2,265 (6,102) 22,598
Income Tax Expense 4,630 367 3,436 381 (1,812)N 7,002
- ----------------------------------------------------------------------------------------------------------
Net Income $ 8,640 $ 716 $ 8,646 $ 1,884 $ (4,290) $ 15,596
- ----------------------------------------------------------------------------------------------------------
Primary Earnings Per Common Share
Net Income $ 1.39 $ 1.86
Weighted Average Number of
Common Shares Outstanding
(In Thousands) 6,218 8,398
- ----------------------------------------------------------------------------------------------------------
Fully Diluted Earnings Per Common
Share
Net Income $ 1.39 $ 1.86
Weighted Average Number of
Common Shares Outstanding (In
Thousands) 6,227 8,407
- ----------------------------------------------------------------------------------------------------------
</TABLE>
F-10
<PAGE>
The unaudited pro forma combined condensed balance sheet combines the three
entities at March 31, 1996. In combining the entities, the following adjustments
were made:
(A) To record the proceeds of the $45.2 million net capital raised through the
offering based on an assumed sale of 2,180,000 shares of Class A Voting
Common Stock for the offering price of $22.25 per share, net of underwriting
discounts, commissions and other estimated offering expenses.
(B) To record the elimination of intercompany demand deposit accounts.
(C) To record estimated $7.0 million increase in fair market value of fixed
assets.
(D) To record estimated deferred federal income tax on the net fair market value
increases.
(E) To record the payment of $99.5 million to the First State Bank and Border
Bank shareholders for 100% of their outstanding stock, elimination of all
First State Bank and Border Bank equity accounts and the recording of
goodwill.
(F) To adjust loan carrying value to estimated fair value.
(G) To record estimated fair value of core deposits.
(H) To record estimated fair value of fixed maturity deposit premium.
(I) To reclassify deferred federal income taxes.
The unaudited pro forma condensed statements of income combined the three
entities for the three months ended March 31, 1996 and the year ended December
31, 1995. In combining the entities, the following adjustments were made:
(J) To record a reduction in interest income on the $54.3 million net purchase
price ($99.5 million less $45.2 million) of the Mergers at an average
federal funds sold rate of 5.11% for the three months ended March 31, 1996.
To record a reduction in interest income on the $54.3 million net purchase
price ($99.5 million less $45.2 million) of the Mergers and $4.25 million
purchase price of the RGC/Roma Branch Acquisitions at an average federal
funds sold rate of 5.92% for the year ended December 31, 1995.
(K) To amortize the fixed maturity deposit premium.
(L) To record depreciation on fair market value increases of depreciable fixed
assets acquired in the Mergers.
(M) To record amortization of the goodwill and core deposit premium recorded in
connection with the Mergers and the RGC/Roma Branch Acquisitions.
(N) To record the effect of the pro forma adjustments using an effective tax
rate of 35% for the three months ended March 31, 1996 and an effective tax
rate of 34% for the year ended December 31, 1995.
F-11
<PAGE>
INDEPENDENT AUDITORS' REPORT
Board of Directors
Texas Regional Bancshares, Inc.
We have audited the accompanying consolidated balance sheets of Texas
Regional Bancshares, Inc. and subsidiary as of December 31, 1995 and 1994, the
related consolidated statements of income, changes in shareholders' equity and
cash flows for each of the years in the three-year period ended December 31,
1995. These consolidated financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
consolidated financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of Texas
Regional Bancshares, Inc. and subsidiary as of December 31, 1995 and 1994, and
the results of their operations and their cash flows for each of the years in
the three-year period ended December 31, 1995 in conformity with generally
accepted accounting principles.
/s/ KPMG PEAT MARWICK LLP
Houston, Texas
January 26, 1996, except as to
note 16 which is dated
May 8, 1996
F-12
<PAGE>
TEXAS REGIONAL BANCSHARES, INC. AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 1995 AND 1994
<TABLE>
<CAPTION>
1995 1994
----------- -----------
(DOLLARS IN THOUSANDS)
<S> <C> <C>
Assets
Cash and Due From Banks (Note 2).................................................... $ 30,933 $ 40,477
Federal Funds Sold.................................................................. 3,600 1,300
----------- -----------
Total Cash and Cash Equivalents................................................. 34,533 41,777
Securities Available for Sale (Notes 1 and 3)....................................... 63,150 54,814
Securities Held to Maturity (Estimated Market Value of $68,962 and $69,626 for 1995
and 1994, Respectively) (Notes 1 and 3)........................................... 68,491 72,014
Loans, Net of Unearned Discount of $1,272 in 1995 and $774 in 1994.................. 450,854 339,939
Less: Allowance for Loan Losses..................................................... (4,542) (3,511)
----------- -----------
Net Loans (Note 4).............................................................. 446,312 336,428
Premises and Equipment, Net (Note 5)................................................ 18,374 15,268
Accrued Interest Receivable......................................................... 6,319 4,538
Other Real Estate................................................................... 1,273 2,342
Intangibles......................................................................... 5,711 1,982
Other Assets........................................................................ 2,606 2,671
----------- -----------
Total Assets.................................................................... $ 646,769 $ 531,834
----------- -----------
----------- -----------
Liabilities
Deposits
Demand.......................................................................... $ 120,414 $ 99,643
Savings......................................................................... 36,133 28,689
Money Market Checking and Savings............................................... 127,687 140,750
Time Deposits (Note 6).......................................................... 295,497 203,026
----------- -----------
Total Deposits.............................................................. 579,731 472,108
Federal Funds Purchased and Securities Sold Under Repurchase Agreements............. 757 1,149
Short-Term Borrowings............................................................... -- 429
Accounts Payable and Accrued Liabilities............................................ 3,561 2,417
----------- -----------
Total Liabilities............................................................... 584,049 476,103
----------- -----------
Commitments and Contingencies (Notes 11 and 12)
Shareholders' Equity
Preferred Stock; $1.00 Par Value, 10,000,000 Shares Authorized; None Issued and
Outstanding (Note 9).............................................................. -- --
Common Stock -- Class A; $1.00 Par Value, 20,000,000 Shares Authorized; Issued and
Outstanding 6,196,791 Shares for 1995 and 6,193,629 for 1994 (Note 10)............ 6,196 6,193
Paid-In Capital..................................................................... 29,239 29,204
Retained Earnings (Notes 9 and 12).................................................. 27,168 20,921
Unrealized Gain (Loss) on Securities Available for Sale (Notes 1 and 3)............. 117 (587)
----------- -----------
Total Shareholders' Equity...................................................... 62,720 55,731
----------- -----------
Total Liabilities and Shareholders' Equity...................................... $ 646,769 $ 531,834
----------- -----------
----------- -----------
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
F-13
<PAGE>
TEXAS REGIONAL BANCSHARES, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF INCOME
YEARS ENDED DECEMBER 31, 1995, 1994 AND 1993
<TABLE>
<CAPTION>
1995 1994 1993
--------- --------- ---------
(DOLLARS IN THOUSANDS,
EXCEPT PER SHARE DATA)
<S> <C> <C> <C>
Interest Income
Loans, Including Fees..................................................................... $ 37,131 $ 28,005 $ 23,674
Investment Securities
Taxable............................................................................... 7,004 5,863 5,119
Tax-Exempt............................................................................ 285 244 275
Federal Funds Sold........................................................................ 1,172 519 623
--------- --------- ---------
Total Interest Income............................................................. 45,592 34,631 29,691
--------- --------- ---------
Interest Expense
Deposits.................................................................................. 17,990 11,619 10,321
Federal Funds Purchased and Securities Sold Under Repurchase Agreements................... 46 23 1
Short-Term Borrowings..................................................................... 16 32 60
Note Payable.............................................................................. -- 16 112
--------- --------- ---------
Total Interest Expense............................................................ 18,052 11,690 10,494
--------- --------- ---------
Net Interest Income........................................................................... 27,540 22,941 19,197
Provision for Loan Losses (Note 4)............................................................ 1,685 1,085 392
--------- --------- ---------
Net Interest Income After Provision for Loan Losses....................................... 25,855 21,856 18,805
--------- --------- ---------
Noninterest Income
Service Charges on Deposit Accounts....................................................... 3,472 3,035 2,718
Other Service Charges..................................................................... 859 904 575
Trust Service Fees........................................................................ 1,256 1,161 1,087
Net Investment Securities Gains (Losses).................................................. (111) 8 33
Data Processing Service Fees.............................................................. 441 255 237
Other Operating Income.................................................................... 601 409 382
--------- --------- ---------
Total Noninterest Income.......................................................... 6,518 5,772 5,032
--------- --------- ---------
Noninterest Expense
Salaries and Employee Benefits (Note 11).................................................. 9,563 8,015 7,798
Net Occupancy Expense..................................................................... 1,069 961 820
Equipment Expense......................................................................... 2,028 1,648 1,366
Other Real Estate (Income) Expense, Net................................................... 107 75 (328)
Other Noninterest Expense (Note 13)....................................................... 6,210 5,808 4,857
--------- --------- ---------
Total Noninterest Expense......................................................... 18,977 16,507 14,513
--------- --------- ---------
Income Before Income Tax Expense.............................................................. 13,396 11,121 9,324
Income Tax Expense (Note 8)................................................................... 4,671 3,936 3,345
--------- --------- ---------
Income Before Cumulative Effect of Change in Accounting Principle............................. 8,725 7,185 5,979
Cumulative Effect of Change in Accounting Principle (Note 8).................................. -- -- 32
--------- --------- ---------
Net Income.................................................................................... $ 8,725 $ 7,185 $ 6,011
--------- --------- ---------
--------- --------- ---------
Primary Earnings Per Common Share
Income Per Share Before Cumulative Effect of Change in Accounting Principle............... $ 1.40 $ 1.19 $ 1.30
Cumulative Effect of Change in Accounting Principle....................................... -- -- 0.01
--------- --------- ---------
Net Income................................................................................ $ 1.40 $ 1.19 $ 1.31
--------- --------- ---------
--------- --------- ---------
Weighted Average Number of Common Shares Outstanding (In Thousands)....................... 6,218 5,791 4,186
--------- --------- ---------
Fully Diluted Earnings Per Common Share
Income Per Share Before Cumulative Effect of Change in Accounting Principle............... $ 1.40 $ 1.16 $ 1.15
Cumulative Effect of Change in Accounting Principle....................................... -- -- 0.01
--------- --------- ---------
Net Income................................................................................ $ 1.40 $ 1.16 $ 1.16
--------- --------- ---------
--------- --------- ---------
Weighted Average Number of Common Shares Outstanding (In Thousands)....................... 6,227 6,035 5,170
--------- --------- ---------
--------- --------- ---------
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
F-14
<PAGE>
TEXAS REGIONAL BANCSHARES, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
YEARS ENDED DECEMBER 31, 1995, 1994 AND 1993
<TABLE>
<CAPTION>
UNREALIZED
GAIN (LOSS)
CLASS A ON
CONVERTIBLE VOTING SECURITIES TOTAL
PREFERRED COMMON PAID-IN RETAINED AVAILABLE SHAREHOLDERS'
STOCK STOCK CAPITAL EARNINGS FOR SALE EQUITY
----------- ------- -------- ---------- ------------ ------------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
Balance, December 31, 1992.............. $ 74 $3,489 $ 20,063 $ 10,692 $ -- $34,318
Stock Split Effected as a 20.00% Stock
Dividend............................... -- 697 -- (700) -- (3)
Preferred Stock Dividends............... -- -- -- (522) -- (522)
Change in Unrealized Gain (Loss) on
Securities Available for Sale.......... -- -- -- -- 179 179
Net Income.............................. -- -- -- 6,011 -- 6,011
----- ------- -------- ---------- ------ ------------
Balance, December 31, 1993.............. 74 4,186 20,063 15,481 179 39,983
Conversion of 74,172 shares of Preferred
Stock into 979,009 shares of Class A
Voting Common Stock (Note 9)........... (74) 979 (905) -- -- --
Redemption of 356 shares of Preferred
Stock at $104.00 per share (Note 9).... -- -- (36) (1) -- (37)
Change in Unrealized Gain (Loss) on
Securities Available for Sale.......... -- -- -- -- (766) (766)
Sale of 1,028,291 shares of Class A
Voting Common Stock.................... -- 1,028 10,082 -- -- 11,110
Preferred Stock Dividends............... -- -- -- (258) -- (258)
Class A Voting Common Stock Cash
Dividends.............................. -- -- -- (1,486) -- (1,486)
Net Income.............................. -- -- -- 7,185 -- 7,185
----- ------- -------- ---------- ------ ------------
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.............................. -- -- -- 8,725 -- 8,725
----- ------- -------- ---------- ------ ------------
Balance, December 31, 1995.............. $ -- $6,196 $ 29,239 $ 27,168 $ 117 $62,720
----- ------- -------- ---------- ------ ------------
----- ------- -------- ---------- ------ ------------
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
F-15
<PAGE>
TEXAS REGIONAL BANCSHARES, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, 1995, 1994 AND 1993
<TABLE>
<CAPTION>
1995 1994 1993
--------- --------- ---------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
Cash Flows from Operating Activities
Net Income................................................................................ $ 8,725 $ 7,185 $ 6,011
Adjustments to Reconcile Net Income to Net Cash Provided by Operating Activities
Depreciation, Amortization and Accretion, Net......................................... 2,013 2,089 1,381
Provision for Loan Losses............................................................. 1,685 1,085 392
Provision for Estimated Losses on Other Real Estate and Other Assets.................. 119 112 358
Gain on Sale of Securities Held for Sale.............................................. -- -- (33)
(Gain) Loss on Sale of Securities Available for Sale.................................. 111 (8) --
(Gain) Loss on Sale of Other Assets................................................... (3) 4 (10)
(Gain) Loss on Sale of Other Real Estate.............................................. 3 2 (507)
(Gain) Loss on Sale of Fixed Assets................................................... 14 8 (3)
(Increase) Decrease in Deferred Income Taxes.......................................... (336) 60 430
Increase in Accrued Interest Receivable and Other Assets.............................. (159) (1,304) (867)
Increase in Accounts Payable and Accrued Liabilities.................................. 613 135 9
--------- --------- ---------
Net Cash Provided by Operating Activities..................................................... 12,785 9,368 7,161
--------- --------- ---------
Cash Flows from Investing Activities
Proceeds from Sales of Securities Held for Sale........................................... -- -- 5,629
Proceeds from Sales of Securities Available for Sale...................................... 12,610 12,404 --
Proceeds from Maturing Securities Available for Sale...................................... 45,000 51,600 --
Proceeds from Maturing Securities Held to Maturity........................................ 17,460 952 63,228
Purchases of Securities Available for Sale................................................ (64,961) (34,728) --
Purchases of Securities Held to Maturity.................................................. (14,390) (31,442) (96,068)
Proceeds from Sale of Loans............................................................... 5,731 1,119 105
Purchases of Loans........................................................................ (1,159) (2,151) (5,671)
Loan Originations and Advances............................................................ (74,068) (50,619) (33,178)
Recoveries of Charged-Off Loans........................................................... 536 226 360
Proceeds from Sale of Fixed Assets........................................................ 2 -- 8
Proceeds from Sale of Other Assets........................................................ 25 116 60
Proceeds from Sale of Other Real Estate................................................... 1,409 970 2,407
Purchases of Premises and Equipment....................................................... (3,597) (1,862) (6,027)
Proceeds from the Acquisition of Two Branch Bank Locations, Net of Cash Acquired.......... 30,606 -- --
--------- --------- ---------
Net Cash Used in Investing Activities......................................................... (44,796) (53,415) (69,147)
--------- --------- ---------
Cash Flows from Financing Activities
Net Increase (Decrease) in Demand Deposits, Money Market Checking and Savings Accounts.... (24,518) 17,600 45,621
Net Increase in Time Deposits............................................................. 52,421 24,987 8,884
Net Increase (Decrease) in Federal Funds Purchased and Securities Sold Under Repurchase
Agreements............................................................................... (392) 1,149 --
Net Decrease in Short-Term Borrowings..................................................... (429) (60) (319)
Repayment of Note Payable................................................................. -- (1,150) (1,450)
Proceeds from Sale of Class A Voting Common Stock......................................... 38 11,110 --
Cash Dividends Paid on Fractional Common Shares........................................... -- -- (3)
Cash Dividends Paid on Preferred Stock.................................................... -- (258) (522)
Cash Dividends Paid on Class A Voting Common Stock........................................ (2,353) (991) --
Redemption of Preferred Stock............................................................. -- (37) --
--------- --------- ---------
Net Cash Provided by Financing Activities..................................................... 24,767 52,350 52,211
--------- --------- ---------
Increase (Decrease) in Cash and Cash Equivalents.............................................. (7,244) 8,303 (9,775)
Cash and Cash Equivalents at Beginning of Year................................................ 41,777 33,474 43,249
--------- --------- ---------
Cash and Cash Equivalents at End of Year...................................................... $ 34,533 $ 41,777 $ 33,474
--------- --------- ---------
--------- --------- ---------
Supplemental Disclosures of Cash Flow Information
Interest Paid............................................................................. $ 17,248 $ 11,518 $ 10,562
Income Taxes Paid......................................................................... 4,752 3,799 2,986
Supplemental Schedule of Noncash Investing and Financing Activities
Cost of Securities Transferred to Available for Sale...................................... 1,455 N/A 85,181
Foreclosure and Repossession in Partial Satisfaction of Loans Receivable.................. 679 977 451
Loans Originated to Facilitate Sale of Other Real Estate.................................. N/A N/A N/A
Stock Split Effected as a Stock Dividend (Note 10)........................................ N/A N/A 697
The Company Acquired Two Branch Bank Locations, One in Rio Grande City, Texas and the
other in Roma, Texas during August 1995. Assets Acquired are as follows:
Fair Value of Assets Acquired......................................................... 75,850 N/A N/A
Cash Paid for the Two Bank Branch Locations........................................... 4,250 N/A N/A
Liabilities Assumed................................................................... 80,100 N/A N/A
--------- --------- ---------
--------- --------- ---------
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
F-16
<PAGE>
TEXAS REGIONAL BANCSHARES, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1995, 1994 AND 1993
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The accounting and reporting policies of Texas Regional Bancshares, Inc.
(the "Parent" or "Corporation") and subsidiary (collectively, the "Company")
conform to generally accepted accounting principles and to prevailing practices
within the banking industry. The preparation of financial statements in
conformity with generally accepted accounting principles requires management to
make estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosures of contingent assets and liabilities at the date of
the financial statements and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from those estimates.
A summary of the more significant accounting policies follows:
FINANCIAL STATEMENT PRESENTATION
The consolidated financial statements include the accounts of Texas Regional
Bancshares, Inc. (the "Corporation") and its wholly owned subsidiary, Texas
State Bank (the "Bank"), collectively (the "Company"). All significant
intercompany accounts and transactions have been eliminated in consolidation.
Investments in the subsidiary are accounted for on the equity method in the
Parent's financial statements.
TRUST ASSETS
Assets held by the trust department of the subsidiary bank in fiduciary or
agency capacities are not assets of Texas Regional Bancshares, Inc. or its
subsidiary and are not included in the consolidated balance sheets.
INVESTMENT SECURITIES
In May 1993, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards No. 115 ("Statement 115"),
"Accounting for Certain Investments in Debt and Equity Securities." Statement
115 establishes standards of financial accounting and reporting for investments
in equity securities that have a readily determinable fair value and for all
investments in debt securities. At acquisition, a bank is required to classify
debt and equity securities into one of three categories: Held to Maturity,
Trading or Available for Sale. At each reporting date, the appropriateness of
the classification is reassessed. Investments in debt securities are classified
as Held to Maturity and measured at amortized cost in the 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 balance sheet with unrealized holding gains and losses included in
net income. Investments not classified as Held to Maturity nor Trading are
classified as Available for Sale and measured at fair value in the balance sheet
with unrealized holding gains and losses reported in a separate component of
shareholders' equity until realized.
Effective December 31, 1993, the Company adopted Statement 115, which caused
various investment securities to be reclassified from Held to Maturity to
Available for Sale. All treasury and agency bonds with a maturity of two years
or less from December 31, 1993, all floating rate bonds and two small equity
securities were reclassified to Available for Sale. As a result, at December 31,
1993 the Company recorded an increase in shareholders' equity of $179,000, as
unrealized holding gains. Future purchases of investment securities will be
classified as Available for Sale or Held to Maturity at time of purchase as
determined by the investment committee. At December 31, 1995 and 1994 no
securities were classified as Trading.
On October 18, 1995, the FASB decided to grant to all entities a one-time
opportunity during the period from approximately mid November to December 31,
1995, to reconsider their intent and ability to hold securities accounted for as
Held to Maturity under Statement 115. This allowed entities to transfer
F-17
<PAGE>
TEXAS REGIONAL BANCSHARES, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
securities from the Held to Maturity category to Available for Sale or trading
without calling into question their intent to hold other debt securities to
maturity. On December 31, 1995, the Bank transferred approximately $1.5 million
in Held to Maturity securities to the Available for Sale category resulting in
no change to stock equity per share. As a result of this transfer, all other
securities are classified as Available for Sale.
LOANS
Loans are stated at the principal amount outstanding, net of unearned
discount. Interest income on discounted loans is recognized on the
sum-of-the-months-digits method which approximates the interest method, while
interest income on other loans is calculated using applicable interest rates and
the daily amount of outstanding principal.
LOAN FEES
Loan origination fees and certain direct loan origination costs are deferred
and recognized over the lives of the related loans as an adjustment of the loan
yields.
NONPERFORMING ASSETS
Nonperforming assets are comprised of (a) loans for which the accrual of
interest has been discontinued, (b) loans for which the interest rate has been
reduced to less than originally contracted rates due to a serious weakening in
the borrower's financial condition and (c) other assets which consist of real
estate and other property which have been acquired in lieu of loan balances due
and which are awaiting disposition.
A loan is generally placed on nonaccrual status when principal or interest
is past due 90 days or more, and the loan is not both well-secured and in the
process of collection. A loan is also placed on nonaccrual status immediately
if, in the opinion of management, full collection of principal or interest is
unlikely. At the time a loan is placed on nonaccrual status, interest previously
recognized but uncollected is reversed and charged against current income.
Subsequent interest payments received on nonaccrual loans are either applied
against principal or reported as income, depending upon management's assessment
of the ultimate collectibility of principal.
Real estate and other assets acquired in lieu of loan balances due are
recorded at the lesser of cost basis or estimated fair value less estimated
closing costs. Valuation losses are charged to the allowance for loan losses on
foreclosure. Write-downs of real estate and other assets are charged to
noninterest expense if the estimated fair value subsequently declines below its
carrying value. Realized gains and losses on sales of other real estate are
included in noninterest expense.
Effective January 1, 1995, the Company adopted Statement of Financial
Accounting Standards No. 114 ("Statement 114"), "Accounting by Creditors for
Impairment of a Loan" and the amendment thereof, Statement of Financial
Accounting Standards No. 118 ("Statement 118"), "Accounting by Creditors for
Impairment of a Loan-Income Recognition and Disclosures". Under Statement 114, a
loan is considered impaired when, based upon current information and events, it
is probable that a creditor will be unable to collect all amounts due according
to the contractual terms of the loan agreement. Statement 114 requires that an
impaired loan be valued utilizing (i) the present value of expected future cash
flows discounted at the effective interest rate of the loan, (ii) the fair value
of the underlying collateral, or (iii) the observable market price of the loan.
Statement 118 amended Statement 114 by expanding the related disclosure
requirements and permitting use of existing methods for recognizing interest
income on impaired loans.
Loans which were restructured prior to the adoption of Statement 114 and
which are performing in accordance with the renegotiated terms are not required
to be reported as impaired. Loans restructured
F-18
<PAGE>
TEXAS REGIONAL BANCSHARES, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
subsequent to the adoption of Statement 114 are required to be reported as
impaired in the year of restructuring. Thereafter, such loans can be removed
from the impaired loan disclosure if the loans were paying a market rate of
interest at the time of restructuring and are performing in accordance with
their renegotiated terms.
For loans covered by this statement, the Company makes an assessment for
impairment when and while such loans are on nonaccrual or when the loan has been
restructured. When a loan with unique risk characteristics has been identified
as being impaired, the amount of impairment will be measured by the Company
using discounted cash flows, except when it is determined that the sole
(remaining) source of repayment for the loan is the operation or liquidation of
the underlying collateral. In such case, the current fair value of the
collateral, reduced by costs to sell, will be used in place of discounted cash
flows. At the time a loan is placed on nonaccrual status, interest previously
recognized but uncollected is reversed and charged against current income.
Subsequent interest payments received on nonaccrual loans are either applied
against principal or reported as income, depending upon management's assessment
of the ultimate collectibility of principal.
The adoption of Statement 114 and Statement 118 did not have a material
effect on the Company's financial position or results of operations.
ALLOWANCE FOR LOAN LOSSES
The allowance for loan losses is established by a charge to operations
(provision for loan losses). Actual loan losses or recoveries are charged or
credited directly to this allowance. The provision for loan losses is based on
management's estimate of the amount required to maintain an allowance adequate
to absorb potential 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.
PREMISES AND EQUIPMENT
Premises and equipment are stated at cost, net of accumulated depreciation.
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.
INCOME TAX
The Company files a consolidated federal income tax return. The Company
establishes a deferred tax asset or liability for the recognition of future
deductions or taxable amounts and operating loss and tax credit carry-forwards.
Deferred tax expense or benefit is recognized as a result of the change in the
asset or liability during the year.
EARNINGS PER SHARE COMPUTATIONS
Primary earnings per share are computed by dividing net income less
preferred stock dividends, if any, by the weighted average number of common
stock and common stock equivalents outstanding during the period, retroactively
adjusted for stock splits effected as a stock dividend. The convertible
preferred stock did not satisfy the criteria for consideration as common stock
equivalents.
Fully diluted earnings per share is computed as if all convertible preferred
stock had been converted to common stock.
CASH FLOWS
For purposes of reporting cash flows, cash and cash equivalents include cash
on hand, amounts due from banks and federal funds sold. Generally, federal funds
are purchased and sold for one-day periods.
F-19
<PAGE>
TEXAS REGIONAL BANCSHARES, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(2) RESERVE REQUIREMENTS
Cash of approximately $16.2 million and $14.6 million at December 31, 1995
and 1994, respectively, was maintained to satisfy regulatory reserve
requirements.
(3) INVESTMENT SECURITIES
The amortized cost and estimated market value of investments in Securities
Available for Sale at December 31, 1995 and December 31, 1994 follows:
SECURITIES AVAILABLE FOR SALE
<TABLE>
<CAPTION>
1995
-----------------------------------------------
GROSS GROSS ESTIMATED
AMORTIZED UNREALIZED UNREALIZED MARKET
COST GAINS LOSSES VALUE
--------- ---------- ---------- ---------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C>
U.S. Treasury Securities................ $ 6,000 $ 19 $ 7 $ 6,012
U.S. Government Agency Securities....... 55,502 205 39 55,668
Other Securities........................ 1,471 2 3 1,470
--------- ----- --- ---------
Total............................... $62,973 $ 226 $49 $63,150
--------- ----- --- ---------
--------- ----- --- ---------
</TABLE>
SECURITIES AVAILABLE FOR SALE
<TABLE>
<CAPTION>
1994
-----------------------------------------------
GROSS GROSS ESTIMATED
AMORTIZED UNREALIZED UNREALIZED MARKET
COST GAINS LOSSES VALUE
--------- ---------- ---------- ---------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C>
U.S. Treasury Securities................ $27,485 $ 1 $354 $27,132
U.S. Government Agency Securities....... 27,707 1 541 27,167
Mortgage-Backed Security................ 500 -- 2 498
Other Securities........................ 17 -- -- 17
--------- ----- ----- ---------
Total............................... $55,709 $ 2 $897 $54,814
--------- ----- ----- ---------
--------- ----- ----- ---------
</TABLE>
The amortized cost and estimated market value of investments in Securities
Held to Maturity at December 31, 1995 and December 31, 1994 follows:
SECURITIES HELD TO MATURITY
<TABLE>
<CAPTION>
1995
-----------------------------------------------
GROSS GROSS ESTIMATED
AMORTIZED UNREALIZED UNREALIZED MARKET
COST GAINS LOSSES VALUE
--------- ---------- ---------- ---------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C>
U.S. Treasury Securities................ $28,787 $104 $115 $28,776
U.S. Government Agencies Securities..... 34,230 245 50 34,425
Obligations of States and Political
Subdivisions Securities................ 5,474 287 -- 5,761
--------- ----- ----- ---------
Total............................... $68,491 $636 $165 $68,962
--------- ----- ----- ---------
--------- ----- ----- ---------
</TABLE>
F-20
<PAGE>
TEXAS REGIONAL BANCSHARES, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(3) INVESTMENT SECURITIES (CONTINUED)
SECURITIES HELD TO MATURITY
<TABLE>
<CAPTION>
1994
-----------------------------------------------
GROSS GROSS ESTIMATED
AMORTIZED UNREALIZED UNREALIZED MARKET
COST GAINS LOSSES VALUE
--------- ---------- ---------- ---------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C>
U.S. Treasury Securities................ $29,270 $-- $ 1,244 $28,026
U.S. Government Agencies Securities..... 35,973 5 1,160 34,818
Obligations of States and Political
Subdivisions Securities................ 5,736 126 104 5,758
Other Securities........................ 1,035 -- 11 1,024
--------- ----- ---------- ---------
Total............................... $72,014 $ 131 $ 2,519 $69,626
--------- ----- ---------- ---------
--------- ----- ---------- ---------
</TABLE>
The amortized cost and estimated market value of debt securities at December
31, 1995, by contractual maturity, are shown below. Expected maturities will
differ from contractual maturities because borrowers may have the right to call
or prepay obligations with or without call or prepayment penalties.
<TABLE>
<CAPTION>
SECURITIES
--------------------------------------------------
AVAILABLE FOR SALE HELD TO MATURITY
------------------------ ------------------------
ESTIMATED ESTIMATED
AMORTIZED MARKET AMORTIZED MARKET
COST VALUE COST VALUE
----------- ----------- ----------- -----------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C>
Due in One Year or Less............................... $ 24,183 $ 24,218 $ 25,832 $ 25,751
Due After One Year Through Five Years................. 37,319 37,462 39,209 39,599
Due After Five Years Through Ten Years................ 75 74 3,253 3,394
Due After Ten Years................................... 1,396 1,396 197 218
----------- ----------- ----------- -----------
Total............................................. $ 62,973 $ 63,150 $ 68,491 $ 68,962
----------- ----------- ----------- -----------
----------- ----------- ----------- -----------
</TABLE>
Proceeds from sales of Securities Available for Sale for the year ended
December 31, 1995 were $12.6 million. Gross losses of $111,000 and no gross
gains were realized on sales for the year ended December 31, 1995. Proceeds from
sales of Securities Available for Sale for the year ended December 31, 1994 were
$12.4 million. Cost was determined on a specific identification basis for
determining realized gain or loss.
Net unrealized holding gain of $117,000 and net unrealized holding loss of
$587,000 at December 31, 1995 and 1994, respectively, on Securities Available
for Sale are included as a separate component of shareholders' equity for each
respective year.
There were no sales from the Held to Maturity category in 1995 and 1994.
Investment securities having a carrying value of $99.6 million at December
31, 1995 and $99.8 million at December 31, 1994 are pledged to secure public
funds and trust assets on deposit and for other purposes required or permitted
by law.
F-21
<PAGE>
TEXAS REGIONAL BANCSHARES, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(4) LOANS AND ALLOWANCE FOR LOAN LOSSES
An analysis of loans at December 31, 1995 and December 31, 1994 follows:
<TABLE>
<CAPTION>
1995 1994
----------- -----------
(DOLLARS IN THOUSANDS)
<S> <C> <C>
Commercial.................................................................... $ 146,461 $ 101,866
Agricultural.................................................................. 25,097 17,199
Real Estate
Construction.............................................................. 29,967 18,809
Commercial Mortgage....................................................... 129,953 113,677
Agricultural Mortgage..................................................... 17,057 10,263
1-4 Family Mortgage....................................................... 59,052 47,425
Consumer...................................................................... 43,267 30,700
----------- -----------
Total................................................................. $ 450,854 $ 339,939
----------- -----------
----------- -----------
</TABLE>
In the ordinary course of business, the Company's subsidiary bank made 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. An analysis of these loans for the years ended December 31, 1995 and
December 31, 1994 follows:
<TABLE>
<CAPTION>
1995 1994
--------- ---------
(DOLLARS IN
THOUSANDS)
<S> <C> <C>
Balance at Beginning of Year...................................................... $ 8,174 $ 14,644
Additions......................................................................... 1,613 4,071
Reductions
Collections................................................................... 3,083 4,702
Changes to Unrelated Status................................................... 2,730 5,839
Charge-Offs................................................................... -- --
--------- ---------
Balance at End of Year............................................................ $ 3,974 $ 8,174
--------- ---------
--------- ---------
</TABLE>
A summary of the transactions in the allowance for loan losses for years
ended December 31, 1995, 1994 and 1993 follows:
<TABLE>
<CAPTION>
1995 1994 1993
--------- --------- ---------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
Balance at Beginning of Year............................................. $ 3,511 $ 3,435 $ 2,929
Balance of Purchased Branches............................................ 450 -- --
Provision Charged to Expense............................................. 1,685 1,085 392
Recovery of Amounts Previously Charged to Allowance...................... 536 226 360
Losses Charged to Allowance.............................................. (1,640) (1,235) (246)
--------- --------- ---------
Balance at End of Year................................................... $ 4,542 $ 3,511 $ 3,435
--------- --------- ---------
--------- --------- ---------
</TABLE>
Nonaccrual loans and renegotiated loans were $2.1 million, $2.4 million and
$2.4 million at December 31, 1995, 1994 and 1993, respectively. If interest on
these nonaccrual and renegotiated loans had been accrued at the original
contractual rates, interest income would have been increased by approximately
$247,000, $476,000 and $149,000 for the years ended December 31, 1995, 1994 and
1993, respectively.
F-22
<PAGE>
TEXAS REGIONAL BANCSHARES, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(4) LOANS AND ALLOWANCE FOR LOAN LOSSES (CONTINUED)
At December 31, 1995, the Company had a $2.0 million recorded investment in
impaired loans for which there was a related allowance for loan losses of
$172,000. At December 31, 1995, there were no impaired loans for which there was
no related allowance for loan losses. The average level of impaired loans during
the year ended December 31, 1995 was $1.9 million. The Company recorded interest
income of $91,000 on its impaired loans during the year ended December 31, 1995.
(5) PREMISES AND EQUIPMENT
A summary of premises and equipment and related accumulated depreciation and
amortization as of December 31, 1995 and December 31, 1994 follows:
<TABLE>
<CAPTION>
ESTIMATED
USEFUL LIVES 1995 1994
------------ --------- ---------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
Land.............................................................. $ 4,526 $ 3,504
Buildings and Leasehold Improvements.............................. 2-40 years 12,440 10,663
Furniture and Equipment........................................... 3-10 years 9,581 8,007
--------- ---------
Subtotal.......................................................... 26,547 22,174
Less Accumulated Depreciation and Amortization.................... (8,173) (6,906)
--------- ---------
Total......................................................... $ 18,374 $ 15,268
--------- ---------
--------- ---------
</TABLE>
Depreciation and amortization expense for the years ended December 31, 1995,
1994 and 1993 was approximately $1.6 million, $1.3 million and $1.1 million,
respectively.
(6) TIME DEPOSITS
Time deposits of $100,000 or more totaled $126.4 million and $91.1 million
at December 31, 1995 and 1994, respectively. Interest expense for the years
ended December 31, 1995, 1994 and 1993 on time deposits of $100,000 or more was
approximately $5.7 million, $3.5 million and $2.8 million, respectively.
(7) FEDERAL FUNDS PURCHASED AND SECURITIES SOLD UNDER REPURCHASE AGREEMENTS
The following table summarizes selected information regarding federal funds
purchased and securities sold under repurchase agreements as of and for the
years ended December 31, 1995, 1994 and 1993:
<TABLE>
<CAPTION>
1995 1994 1993
--------- --------- ---------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
Balance at End of Year................................................... $ 758 $ 1,149 $ --
Rate on Balance at End of Year........................................... 3.60% 4.07% N/A
Average Daily Balance.................................................... $ 1,093 $ 652 $ 1
Average Interest Rate.................................................... 4.20% 3.57% 4.94%
Maximum Month-End Balance................................................ $ 1,349 $ 2,550 $ --
--------- --------- ---------
--------- --------- ---------
</TABLE>
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 investment securities. These pledged securities are
segregated and maintained by a third party bank.
F-23
<PAGE>
TEXAS REGIONAL BANCSHARES, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(8) INCOME TAX
The components of income tax expense for the years ended December 31, 1995,
1994 and 1993 consisted of the following:
<TABLE>
<CAPTION>
1995 1994 1993
--------- --------- ---------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
Current Income Tax Expense
Federal.............................................................. $ 4,790 $ 3,667 $ 3,145
State................................................................ 217 207 149
--------- --------- ---------
Total Current Income Tax Expense................................. 5,007 3,874 3,294
--------- --------- ---------
Deferred Income Tax Expense (Benefit)
Federal.............................................................. (320) 57 29
State................................................................ (16) 5 22
--------- --------- ---------
Total Deferred Income Tax Expense (Benefit)...................... (336) 62 51
--------- --------- ---------
Total Income Tax Expense......................................... $ 4,671 $ 3,936 $ 3,345
--------- --------- ---------
--------- --------- ---------
</TABLE>
Following is a reconciliation between the amount of reported income tax
expense for the years ended December 31, 1995, 1994 and 1993 and the amount
computed by multiplying the income before tax by the federal statutory tax rate:
<TABLE>
<CAPTION>
1995 1994 1993
------------ ------------ ------------
AMOUNT RATE AMOUNT RATE AMOUNT RATE
------ ---- ------ ---- ------ ----
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
Tax at Statutory Rate............................. $4,689 35% $3,781 34% $3,170 34%
(Reductions) Additions
State Earned Surplus Tax, Net of Federal
Income Tax Effect........................... 130 1 140 1 113 2
Tax-Exempt Interest........................... (152 ) (1) (89 ) (1) (100 ) (1)
Other -- Net.................................. 4 -- 104 1 162 1
------ ---- ------ ---- ------ ----
Total Income Tax Expense.................. $4,671 35% $3,936 35% $3,345 36%
------ ---- ------ ---- ------ ----
------ ---- ------ ---- ------ ----
</TABLE>
Effective January 1, 1993, the Company adopted Statement of Financial
Accounting Standards No. 109 ("Statement 109"), "Accounting for Income Taxes",
which requires establishment of deferred tax liabilities and assets, as
appropriate, for the recognition of future deductions or taxable amounts caused
when the tax basis of an asset or liability differs from that reported in the
financial statements. The cumulative effect of the accounting change on years
prior to January 1, 1993, of $32,000 is included for the year ended December 31,
1993 as an increase to income.
F-24
<PAGE>
TEXAS REGIONAL BANCSHARES, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(8) INCOME TAX (CONTINUED)
The net deferred tax liability included with accounts payable and accrued
expenses in the accompanying consolidated balance sheets is comprised of the
following deferred tax assets and liabilities as of December 31, 1995 and
December 31, 1994.
<TABLE>
<CAPTION>
1995 1994
--------- ---------
(DOLLARS IN
THOUSANDS)
<S> <C> <C>
Deferred Tax Liability
Premises and Equipment................................................................... $ 1,071 $ 925
Intangibles.............................................................................. 392 417
Unrealized Gain on Securities Available for Sale......................................... 60 --
Other.................................................................................... 135 135
--------- ---------
Total Deferred Tax Liability......................................................... 1,658 1,477
--------- ---------
Deferred Tax Asset
Allowance for Loan Losses................................................................ 1,034 637
Other Real Estate........................................................................ 237 227
Unrealized Loss on Securities Available for Sale......................................... -- 302
Other.................................................................................... 208 158
--------- ---------
Total Deferred Tax Assets Before Valuation Allowance......................................... 1,479 1,324
Valuation Allowance.......................................................................... (36) (36)
--------- ---------
Total Deferred Tax Assets less Valuation Allowance........................................... 1,443 1,288
--------- ---------
Net Deferred Tax Liability........................................................... $ 215 $ 189
--------- ---------
--------- ---------
</TABLE>
For the years ended December 31, 1995 and December 31, 1994, the deferred
tax liability results primarily from the use of accelerated methods of
depreciation of equipment for tax purposes and the write-off of core deposits
for book purposes. The deferred tax asset results from differences in the bad
debts written-off for financial purposes and the amount allowed under tax law,
and a difference in other real estate basis due to write-downs for financial
statement purposes for both years ended December 31, 1995 and 1994,
respectively.
The valuation allowance was established to reduce the amount that will more
likely than not be realized due to increased recoveries in allowance for loan
losses.
F-25
<PAGE>
TEXAS REGIONAL BANCSHARES, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(9) PREFERRED STOCK
The Corporation has 10,000,000 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.
Series of Preferred Stock outstanding at December 31, 1995, 1994 and 1993 were
as follows:
<TABLE>
<CAPTION>
FIRST SERIES SERIES TOTAL
SERIES 1990 1991 PREFERRED
------ ------ ------ ---------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C>
Balance December 31, 1992............... $ 10 $ 1 $ 63 $ 74
------ ------ ------ ---------
Balance December 31, 1993............... 10 1 63 74
Conversion of 74,172 shares of Preferred
Stock into 979,009 shares of Class A
Voting Common Stock and redemption of
356 shares of Preferred Stock for
$37,000 cash........................... (10) (1) (63) (74)
------ ------ ------ ---------
Balance December 31, 1994............... $-- $-- $-- $--
------ ------ ------ ---------
Balance December 31, 1995............... $-- $-- $-- $--
------ ------ ------ ---------
------ ------ ------ ---------
</TABLE>
The Corporation's First Series Convertible Preferred Stock and Series 1990
Convertible Preferred Stock were issued in 1989 and 1990, respectively, for cash
equal to the stated value of $100.00 per share. The Series 1991 Convertible
Preferred Stock was issued in 1991 in connection with the Company's acquisition
of Mid Valley Bank of Weslaco, Texas. The shares of First Series, Series 1990
and Series 1991 Preferred Stock ranked on a parity with each other, and superior
to the Class A Voting Common Stock of the Corporation, as to dividends and
liquidation preference. Shares of each series of Preferred Stock were
convertible into shares of Class A Voting Common Stock of the Corporation.
On March 21, 1994, the Board of Directors adopted a resolution calling for
the redemption on April 22, 1994, of all issued and outstanding Preferred Stock
at a redemption price of $104.00 per share plus all accrued and unpaid dividends
through the date fixed for redemption. At that time, the Preferred Stock was
convertible into 13.2 shares of Class A Voting Common Stock for each share of
Preferred Stock held. Effective April 22, 1994, 356 shares of Preferred Stock
were redeemed for cash and 74,172 shares of Preferred Stock were converted into
979,009 shares of Class A Voting Common Stock. As a result, as of December 31,
1994, there were no shares of Preferred Stock outstanding.
Pursuant to the Texas Business Corporation Act, the Board of Directors of
the Corporation has the authority to eliminate any series of shares which the
Board has authority to establish, if there are no shares outstanding or held as
treasury shares. Upon adoption of a resolution eliminating the series and all
references to the series, the shares resume status as authorized but unissued
shares of Preferred Stock for which the Board has the authority to determine the
designations, preferences, limitations and relative rights.
On February 14, 1995, the Board of Directors of the Corporation approved a
resolution to eliminate the series of shares known as the First Series
Convertible Preferred, the Series 1990 Convertible Preferred and the Series 1991
Convertible Preferred shares of the Corporation, and further provided for the
elimination of all references thereto from the Articles of Incorporation. As a
result of the elimination of the series of Preferred shares, the shares resume
status as authorized but unissued shares of Preferred Stock for which the Board
has the authority to determine the designations, preferences, limitations and
relative rights.
F-26
<PAGE>
TEXAS REGIONAL BANCSHARES, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
(10) COMMON STOCK
On March 16, 1994, the Corporation completed a public offering of 1.2
million shares of the Corporation's Class A Voting Common Stock at an offering
price of $12.00 per share, and contemporaneously listed the Common Stock for
trading in the NASDAQ Stock Market's National Market System under the trading
symbol "TRBS." In the offering, the Corporation sold one million newly issued
shares and an aggregate of 200,000 shares were sold on behalf of certain selling
shareholders of the Corporation. As a part of the offering, the Corporation
granted the Underwriters an option, exercisable within 30 days following the
date of the Underwriting Agreement, to purchase up to 180,000 additional shares
of Corporation Class A Voting Common Stock solely to cover over-allotments. On
April 15, 1994, the Underwriters exercised this option and purchased 28,291
additional shares of Class A Voting Common Stock.
On May 11, 1993, the Board of Directors approved a 20% stock split effected
as a stock dividend to Class A Voting Common Stock shareholders of record on May
11, 1993, with any fractional shares resulting from such stock split to be paid
in cash based on a value of $10.00 per share.
(11) EMPLOYEE BENEFITS
In 1984, the Company adopted a target benefit pension plan covering
substantially all of their employees. In December, 1990, the Company restated
its target benefit pension plan as an Employee Stock Ownership Plan (with
section 401(k) provisions) (the "KSOP"). The Company received a favorable
determination letter on July 29, 1993, in which the Internal Revenue Service
stated that the plan, as designed, was in compliance with the applicable
requirements of the Internal Revenue Code. Employer contributions to the KSOP
are discretionary, and as such, determined at the sole discretion of the Board
of Directors. The KSOP covers employees who have completed twelve consecutive
months of credited service, as defined in the plan, and attained age 21. A
participant's account balance will be fully vested after six years of credited
service. The purpose of the restatement is to permit employees to acquire an
equity interest in the Company through the KSOP's purchase of common stock.
Pension expense, which includes Employer matching as discussed below, for the
years ended December 31, 1995, 1994 and 1993 was $526,000, $462,000, and
$570,000, respectively.
A Participant of the KSOP may authorize the Company to contribute to the
Trust on his behalf Salary Reduction Contributions. Such Salary Reduction
Contributions shall be stated as a whole percentage and shall not be less than
1% or more than 15% of the Participant's compensation. The total amount of
Salary Reduction Contributions for any Plan Year shall not exceed $7,000,
multiplied by any cost of living adjustment factor prescribed by the Secretary
of the Treasury under Section 415(d) of the Code. Such contributions are matched
at the discretion of the Board of Directors up to a maximum of 100% of the
Participant's Salary Reduction Contribution and shall be based on a
Participant's Salary Reduction Contribution of up to 4% of such Participant's
compensation. The Participant's and Employer matching contributions are vested
immediately.
In March 1986, the shareholders of the Company approved three separate stock
plans involving the Class A Voting Common Stock, providing for the issuance of
up to 253,434 shares to certain key employees for their purchase and 10,000
shares as part of a bonus plan for employees of the Company. One option plan
provides for sale of up to 126,717 shares to the chief executive officer at a
price to be determined by a committee of directors on the date of grant; another
provides for sale of up to 126,717 shares at fair market value at the date the
options are granted to key employees of the Company, excluding the chief
executive officer. The third plan provides for up to 10,000 shares to be
distributed as employee bonuses without payment of consideration by the
employees. The third plan was terminated effective January 9, 1996.
F-27
<PAGE>
TEXAS REGIONAL BANCSHARES, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(11) EMPLOYEE BENEFITS (CONTINUED)
On May 10, 1994, options to acquire up to 126,717 Class A Voting Common
shares at $12.00 per share were granted to Glen E. Roney, Chief Executive
Officer and a member of the Board of Directors of Texas Regional, pursuant to
the Texas Regional Bancshares, Inc. 1985 Non-Statutory Stock Option Plan
exercisable commencing May 10, 1995. In addition, options to acquire up to
49,433 Class A Voting Common shares at $12.00 per share were granted to certain
key employees of the Company pursuant to the Texas Regional Bancshares, Inc.
Incentive Stock Option Plan exercisable commencing May 10, 1995 including
options to acquire 8,333 shares granted to Glen E. Roney. The Incentive Stock
Option Plan expired in September 1995. Any options outstanding under this Plan,
at the time of its termination, remain in effect until the options shall have
been exercised or the expiration date of the option, whichever is earlier. The
options to acquire 49,433 Class A Voting Common Stock were awarded May 10, 1994,
and expire on May 10, 2000. During 1995, options to acquire 3,162 Class A Voting
Common Stock were exercised at a price of $12.00 per share.
Effective December 12, 1995, the Company adopted the 1995 Nonstatutory Stock
Option Plan of Texas Regional Bancshares, Inc. (the "Plan"), which provides for
granting to key employees of the Company options to acquire up to an aggregate
maximum of 90,000 shares of the Class A Voting Common Stock of the Corporation,
subject to adjustment for stock dividends, stock splits and upon the occurrence
of other events as specified in the Plan. The Board of Directors has recommended
the Plan to the shareholders of the Corporation and has authorized and directed
the officers of the Corporation to submit the Plan to the shareholders for
approval at the next regular or special meeting of the shareholders of the
Corporation. In addition, options to acquire up to 90,000 Class A Voting Common
shares at $17.25 per share were granted to certain key employees of the Company
pursuant to the Plan including options to acquire 65,000 shares granted to Glen
E. Roney. Options to purchase one-fourth of the shares as granted shall be
exercisable commencing on the later of July 1, 1996, or the date of approval of
the Plan by the shareholders of the Corporation, and (provided that the Plan has
received the approval of the shareholders of the Corporation) options to
purchase an additional one-fourth of the shares as granted pursuant to these
resolutions shall be exercisable beginning July 1 of each year thereafter, and
in each case options to purchase shares granted pursuant to these resolutions
shall thereafter be exercisable at any time prior to July 1, 2002, subject to
other provisions applicable to such options as specified in the Plan.
F-28
<PAGE>
TEXAS REGIONAL BANCSHARES, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(11) EMPLOYEE BENEFITS (CONTINUED)
The following is a summary of option transactions for the years ended
December 31, 1995, 1994 and 1993.
<TABLE>
<CAPTION>
1985 Nonstatutory 1985 Incentive 1995 Nonstatutory
Stock Option Plan Stock Option Plan 1985 Stock Stock Option Plan
Bonus Plan
------------------------ ------------------------ ------------------------ ------------------------
Option Option Option Option
Options Price Options Price Options Price Options Price
<S> <C> <C> <C> <C> <C> <C> <C> <C>
- -----------------------------------------------------------------------------------------------------------------------------------
Balance December 31, 1992 -- $ -- -- $ -- -- $ --
Granted -- -- -- -- -- --
Exercised -- -- -- -- -- --
Canceled -- -- -- -- -- --
- -----------------------------------------------------------------------------------------------------------------------------------
Balance December 31, 1993 -- -- -- -- -- --
Granted 126,717 12.00 52,595 12.00 -- --
Exercised -- -- -- -- -- --
Canceled -- -- 3,162 12.00 -- --
- -----------------------------------------------------------------------------------------------------------------------------------
Balance December 31, 1994 126,717 12.00 49,433 12.00 -- --
Granted -- -- -- -- -- -- 90,000 $ 17.25
Exercised -- -- 3,162 12.00 -- -- -- --
Canceled -- -- -- -- -- -- -- --
- -----------------------------------------------------------------------------------------------------------------------------------
Balance December 31, 1995 126,717 $ 12.00 46,271 $ 12.00 -- $ -- 90,000 $ 17.25
- -----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
Effective as of December 14, 1993, the Company adopted a Deferred
Compensation Plan for the benefit of Glen E. Roney. 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. 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 in 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. The Company
has incurred Deferred Compensation expense and has funded into the Trust
$87,000, $87,000 and $116,000 respectively, for the years ended December 31,
1995, 1994 and 1993, respectively.
(12) COMMITMENTS AND CONTINGENCIES
In the normal course of business, the Company enters into various
transactions which, in accordance with generally accepted accounting principles,
are not included on the consolidated balance sheets. These transactions are
referred to as "off-balance sheet commitments." The Company enters into these
transactions to meet the financing needs of its customers. These transactions
include commitments to extend credit and letters of credit which involve
elements of credit risk in excess of the amounts recognized in the consolidated
balance sheets. The Company 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.
F-29
<PAGE>
TEXAS REGIONAL BANCSHARES, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(12) COMMITMENTS AND CONTINGENCIES (CONTINUED)
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, 1995, the Company had outstanding commitments to extend
credit of approximately $79.0 million which included standby letters of credit
of approximately $2.6 million. Management does not anticipate any losses as a
result of these commitments.
Future minimum lease payments on operating leases as of December 31, 1995
are as follows:
<TABLE>
<CAPTION>
OFFICE OFFICE
SPACE EQUIPMENT TOTAL
------ --------- -----
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
1996.................................... $ 22 $16 $ 38
1997.................................... 22 16 38
1998.................................... 22 17 39
1999.................................... 20 17 37
2000.................................... 15 17 32
------ --- -----
Total............................... $101 $83 $ 184
------ --- -----
------ --- -----
</TABLE>
The Company is a defendant in various legal proceedings arising in
connection with its ordinary course of business. In the opinion of management,
the financial position of the Company will not be materially affected by the
final outcome of these legal proceedings.
(13) OTHER NONINTEREST EXPENSE
Other noninterest expense for the years ended December 31, 1995, 1994 and
1993 consisted of the following:
<TABLE>
<CAPTION>
1995 1994 1993
--------- --------- ---------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
Advertising and Public Relations................................................... $ 772 $ 693 $ 394
Amortization of Intangibles........................................................ 323 224 235
Data Processing and Check Clearing................................................. 491 360 304
Director Fees...................................................................... 284 267 291
Franchise Tax...................................................................... 198 159 145
Insurance.......................................................................... 228 314 320
FDIC Insurance..................................................................... 540 973 831
Legal and Professional............................................................. 870 1,006 704
Stationery and Supplies............................................................ 658 538 477
Telephone.......................................................................... 250 202 195
Other Losses....................................................................... 624 177 117
Miscellaneous Expense.............................................................. 972 895 844
--------- --------- ---------
Total.......................................................................... $ 6,210 $ 5,808 $ 4,857
--------- --------- ---------
--------- --------- ---------
</TABLE>
F-30
<PAGE>
TEXAS REGIONAL BANCSHARES, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(14) TEXAS REGIONAL BANCSHARES, INC. (PARENT ONLY)
CONDENSED FINANCIAL STATEMENTS
CONDENSED BALANCE SHEETS
DECEMBER 31, 1995 AND 1994
<TABLE>
<CAPTION>
1995 1994
--------- ---------
(DOLLARS IN
THOUSANDS)
<S> <C> <C>
Assets
Cash in Subsidiary Bank................................................................ $ 99 $ 172
Time Deposits in Subsidiary Bank....................................................... 4,979 9,225
--------- ---------
Total Cash and Cash Equivalents.................................................... 5,078 9,397
Investments in Consolidated Subsidiary................................................. 58,114 46,701
Furniture and Equipment................................................................ 80 4
Other Assets........................................................................... 103 158
--------- ---------
Total Assets....................................................................... $ 63,375 $ 56,260
--------- ---------
--------- ---------
Liabilities
Accounts Payable and Accrued Liabilities............................................... $ 35 $ 34
Dividends Payable...................................................................... 620 495
--------- ---------
Total Liabilities.................................................................. 655 529
Shareholders' Equity....................................................................... 62,720 55,731
--------- ---------
Total Liabilities and Shareholders' Equity......................................... $ 63,375 $ 56,260
--------- ---------
--------- ---------
</TABLE>
F-31
<PAGE>
TEXAS REGIONAL BANCSHARES, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(14) TEXAS REGIONAL BANCSHARES, INC. (PARENT ONLY)
CONDENSED FINANCIAL STATEMENTS (CONTINUED)
CONDENSED STATEMENTS OF INCOME
YEARS ENDED DECEMBER 31, 1995, 1994 AND 1993
<TABLE>
<CAPTION>
1995 1994 1993
--------- --------- ---------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
Income
Dividends Received from Subsidiary Bank........................................ $ -- $ 456 $ 2,382
Interest Income................................................................ 338 330 4
--------- --------- ---------
Total Income............................................................... 338 786 2,386
--------- --------- ---------
Expense
Interest on Note Payable....................................................... -- 16 112
Salaries and Employee Benefits................................................. -- 7 1
Occupancy Expense.............................................................. 4 4 4
Director Fees.................................................................. 119 83 72
Equipment Expense.............................................................. 3 3 3
Franchise Tax.................................................................. 80 57 53
Legal and Professional......................................................... 24 30 32
Other.......................................................................... 77 90 42
--------- --------- ---------
Total Expense.............................................................. 307 290 319
--------- --------- ---------
Income Before Income Tax Benefit and Equity in Undistributed Net Income of
Subsidiary........................................................................ 31 496 2,067
Income Tax (Benefit) Expense....................................................... 15 7 (123)
--------- --------- ---------
Income Before Equity in Undistributed Income of Subsidiary......................... 16 489 2,190
Equity in Undistributed Net Income of Subsidiary................................... 8,709 6,696 3,821
--------- --------- ---------
Net Income................................................................. $ 8,725 $ 7,185 $ 6,011
--------- --------- ---------
--------- --------- ---------
</TABLE>
F-32
<PAGE>
TEXAS REGIONAL BANCSHARES, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(14) TEXAS REGIONAL BANCSHARES, INC. (PARENT ONLY)
CONDENSED FINANCIAL STATEMENTS (CONTINUED)
CONDENSED STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, 1995, 1994 AND 1993
<TABLE>
<CAPTION>
1995 1994 1993
--------- --------- ---------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
Cash Flows from Operating Activities
Net Income.................................................................. $ 8,725 $ 7,185 $ 6,011
Adjustments to Reconcile Net Income to Net Cash Provided by Operating
Activities
Depreciation and Amortization........................................... 5 4 6
Undistributed Net Income of Subsidiary.................................. (8,709) (6,697) (3,820)
(Increase) Decrease in Other Assets..................................... 52 (85) 80
Increase (Decrease) in Income Taxes Payable............................. (1) (3) 4
Decrease in Deferred Income Taxes....................................... -- (1) (19)
Increase (Decrease) in Accounts Payable and Accrued Liabilities......... 2 (6) (21)
--------- --------- ---------
Net Cash Provided by Operating Activities........................... 74 397 2,241
--------- --------- ---------
Cash Flows from Investing Activities
Purchase of Equipment....................................................... (78) (3) --
Investment in Subsidiary.................................................... (2,000) -- --
--------- --------- ---------
Net Cash Used In Investing Activities............................... (2,078) (3) --
--------- --------- ---------
Cash Flows from Financing Activities
Repayment of Note Payable................................................... -- (1,150) (1,450)
Proceeds from Issuance of Common Stock...................................... 38 11,110 --
Cash Dividends Paid on Fractional Shares.................................... -- -- (3)
Cash Dividends Paid on Preferred Stock...................................... -- (258) (522)
Cash Dividends Paid on Common Stock......................................... (2,353) (991) --
Redemption of Preferred Stock............................................... -- (37) --
--------- --------- ---------
Net Cash Provided by (Used in) Financing Activities................. (2,315) 8,674 (1,975)
--------- --------- ---------
Net Increase (Decrease) in Cash and Cash Equivalents............................ (4,319) 9,068 266
Cash and Cash Equivalents at Beginning of Year.................................. 9,397 329 63
--------- --------- ---------
Cash and Cash Equivalents at End of Year........................................ $ 5,078 $ 9,397 $ 329
--------- --------- ---------
--------- --------- ---------
Supplemental Disclosures of Cash Flow Information
Interest Paid............................................................... $ -- $ 25 $ 132
Income Taxes Paid........................................................... 4,752 3,799 2,986
Supplemental Schedule of Noncash Investing and Financing Activities
Stock Split Effected as a Stock Dividend (Note 10).......................... N/A N/A 697
--------- --------- ---------
--------- --------- ---------
</TABLE>
The amount of retained earnings in the Bank at December 31, 1995 was $12.0
million. On December 31, 1995, the aggregate amount of dividends which legally
could be paid to the Corporation without prior approval of various regulatory
agencies was approximately $8.7 million.
F-33
<PAGE>
TEXAS REGIONAL BANCSHARES, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(15) 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 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.
DEBT SECURITIES
For securities held as investments, fair market 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.
Investments not classified as Held to Maturity or Trading are classified as
Available for Sale and measured at fair value in the consolidated balance sheets
with unrealized holding gains and losses reported as a separate component of
shareholders' equity until realized.
The following table presents the amortized cost and estimated fair value of
securities classified as Available for Sale at December 31, 1995:
<TABLE>
<CAPTION>
AMORTIZED ESTIMATED
COST FAIR VALUE
----------- -----------
(DOLLARS IN THOUSANDS)
<S> <C> <C>
U.S. Treasury Securities....................................................... $ 6,000 $ 6,012
U.S. Government Agency Securities.............................................. 55,502 55,668
Other Securities............................................................... 1,471 1,470
----------- -----------
Total...................................................................... $ 62,973 $ 63,150
----------- -----------
----------- -----------
</TABLE>
The following table presents the carrying value and estimated fair value of
securities classified as Held to Maturity at December 31, 1995:
<TABLE>
<CAPTION>
CARRYING ESTIMATED
AMOUNT FAIR VALUE
--------- -----------
(DOLLARS IN THOUSANDS)
<S> <C> <C>
U.S. Treasury Securities........................................................ $ 28,787 $ 28,776
U.S. Government Agency Securities............................................... 34,230 34,425
States and Political Subdivisions Securities.................................... 5,474 5,761
--------- -----------
Total....................................................................... $ 68,491 $ 68,962
--------- -----------
--------- -----------
</TABLE>
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.
F-34
<PAGE>
TEXAS REGIONAL BANCSHARES, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(15) FAIR VALUE OF FINANCIAL INSTRUMENTS (CONTINUED)
The following table presents information for loans at or for the year ended
December 31, 1995:
<TABLE>
<CAPTION>
CARRYING AVERAGE CALCULATED
AMOUNT YIELD FAIR VALUE
----------- ---------- -----------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
Commercial and Agriculture
Adjustable..................................................... $ 136,213 9.50% $ 137,308
Fixed.......................................................... 35,298 9.33 34,083
Real Estate
Adjustable..................................................... 128,406 10.13 127,039
Fixed.......................................................... 106,791 9.89 106,483
Consumer........................................................... 44,146 10.61 43,929
----------- -----------
Total Loans, Net of Unearned Discount.............................. 450,854 9.87 448,842
----------- -----------
Allowance for Loan Losses.......................................... (4,542) --
----------- -----------
Total Loans, Net................................................... $ 446,312 $ 448,842
----------- -----------
----------- -----------
</TABLE>
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,
1995:
<TABLE>
<CAPTION>
CARRYING ESTIMATED
AMOUNT FAIR VALUE
----------- -----------
(DOLLARS IN THOUSANDS)
<S> <C> <C>
Noninterest Bearing Demand Deposits........................................... $ 120,414 $ 120,414
Savings....................................................................... 36,133 36,133
Money Market Checking and Savings Accounts.................................... 127,687 127,687
Time Deposits................................................................. 295,497 297,200
----------- -----------
Total Deposits............................................................ $ 579,731 $ 581,434
----------- -----------
----------- -----------
</TABLE>
The fair value estimates above do not include the benefit that results from
the low-cost funding provided by the deposit liabilities compared to the cost of
borrowing funds in the market. The Company has not attempted to determine the
amount of increase in net assets that would result from the benefit of
considering the low-cost funding provided by deposit liabilities.
COMMITMENTS TO EXTEND CREDIT, STANDBY LETTERS OF CREDIT AND FINANCIAL GUARANTEES
WRITTEN
These financial instruments are not sold or traded, and estimated fair
values are not readily available. The carrying amount of commitments to extend
credit and standby letters of credit is the net unamortized deferred cost or
income arising from these unrecognized financial instruments. The estimated fair
value of these commitments is considered to be the carrying value. Financial
guarantees written consist of obligations for credit cards issued to certain
customers. Substantially all of the liability for financial guarantees written
is collateralized by deposits pledged to the Company.
F-35
<PAGE>
TEXAS REGIONAL BANCSHARES, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(15) FAIR VALUE OF FINANCIAL INSTRUMENTS (CONTINUED)
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, 1995:
<TABLE>
<CAPTION>
CONTRACT CARRYING ESTIMATED
AMOUNT AMOUNT FAIR VALUE
--------- ----------- -----------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
Commitments to Extend Credit......................................... $ 75,930 $ (157) $ (157)
Standby Letters of Credit............................................ 2,611 10 10
Financial Guarantees Written......................................... 439 -- --
--------- ----------- -----------
--------- ----------- -----------
</TABLE>
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,
property, plant, 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.
(16) ACQUISITION ACTIVITY
On January 10, 1996, the Company announced definitive agreements have been
signed under which Texas State Bank, the principal operating subsidiary of the
Corporation, will acquire through merger the First State Bank & Trust Co.,
Mission, Texas, and The Border Bank, Hidalgo, Texas (the "Mergers"). The
definitive agreements have been approved by the appropriate Boards of Directors
of the Corporation, Texas State Bank, First State Bank & Trust Co. and The
Border Bank. Under the terms of the definitive agreements, Texas State Bank will
acquire First State Bank & Trust Co. for a total cash consideration of $79.0
million and will acquire The Border Bank for a total cash consideration of $20.5
million.
The following pro forma combined condensed balance sheet was based on the
assumption that the acquisition had been consummated on December 31, 1995. The
Mergers will be accounted for using the purchase method of accounting.
The Mergers are subject to completion of satisfactory due diligence by the
Corporation and must be approved by the shareholders of First State Bank & Trust
Co. and The Border Bank. The Mergers must also be approved by the appropriate
regulators. Closing is also contingent upon the Corporation having successfully
raised $40.0 million of additional capital to partially fund these transactions
on terms and conditions acceptable to the Corporation.
F-36
<PAGE>
TEXAS REGIONAL BANCSHARES, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(16) ACQUISITION ACTIVITY (CONTINUED)
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 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 sheets at December 31, 1995 reflected the
assets and liabilities of the RGC/Roma Branch Acquisitions. The results of
operations of the RGC/Roma Branch Acquisitions were included in the Company's
consolidated financial statements of income from the date of acquisition.
The following unaudited pro forma combined condensed statements of income
for the years ended December 31, 1995 and 1994, assume the Mergers and the
RGC/Roma Branch Acquisitions occurred January 1, 1994. Intangibles arising from
the Mergers and RGC/Roma Branch Acquisitions are approximately $19.9 million and
$4.1 million, respectively. The pro forma adjustments reflect the amortization
of the core deposit premium over a 10-year period, the fixed maturity deposit
premium over a 3-year period and the goodwill intangible over a 15-year period.
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.
F-37
<PAGE>
TEXAS REGIONAL BANCSHARES, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(16) ACQUISITION ACTIVITY (CONTINUED)
PRO FORMA COMBINED CONDENSED BALANCE SHEET
DECEMBER 31, 1995
(UNAUDITED)
<TABLE>
<CAPTION>
FIRST
TEXAS STATE BORDER PRO FORMA PRO FORMA
REGIONAL BANK BANK ADJUSTMENTS BALANCE
------------ --------- --------- ------------ -----------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Assets
Cash and Due From Banks.......................... $ 30,933 $ 16,270 $ 3,982 $ 45,216A $ 54,514
(41,172)F
(715)B
Federal Funds Sold............................... 3,600 23,350 8,750 (30,850)F 4,850
------------ --------- --------- ------------ -----------
Total Cash and Cash Equivalents.............. 34,533 39,620 12,732 (27,521) 59,364
Securities Available for Sale.................... 63,150 23,478 6,779 (27,478)F 65,929
Securities Held to Maturity...................... 68,491 143,283 47,457 2,937C 262,168
Loans, Net of Unearned Discount.................. 450,854 188,424 47,345 (1,337)G 685,286
Less: Allowance for Loan Losses.................. (4,542) (4,196) (1,100) -- (9,838)
------------ --------- --------- ------------ -----------
Net Loans.................................... 446,312 184,228 46,245 (1,337) 675,448
Premises and Equipment, Net...................... 18,374 5,487 3,297 7,000D 34,158
Accrued Interest Receivable...................... 6,319 7,172 2,242 -- 15,733
Other Real Estate................................ 1,273 431 237 -- 1,941
Goodwill......................................... 4,641 -- -- 11,590F 16,231
Core Deposit..................................... 1,000 -- -- 8,351H 9,351
Organization Cost................................ 70 -- -- -- 70
Other Assets..................................... 2,606 771 515 (137)J 3,755
------------ --------- --------- ------------ -----------
Total Assets............................. $ 646,769 $ 404,470 $ 119,504 $ (26,595) $1,144,148
------------ --------- --------- ------------ -----------
------------ --------- --------- ------------ -----------
Liabilities
Deposits
Noninterest-Bearing.......................... $ 120,414 $ 39,810 $ 7,137 $ (715)B $ 166,646
Interest-Bearing............................. 459,317 303,800 94,858 (394)I 857,581
------------ --------- --------- ------------ -----------
Total Deposits........................... 579,731 343,610 101,995 (1,109) 1,024,227
Federal Funds Purchased and Securities Sold Under
Repurchase Agreements.......................... 757 -- -- -- 757
Other Borrowings................................. -- 157 -- -- 157
Accounts Payable and Accrued Liabilities......... 3,561 1,316 434 (137)J 11,071
5,897E
------------ --------- --------- ------------ -----------
Total Liabilities........................ 584,049 345,083 102,429 4,651 1,036,212
------------ --------- --------- ------------ -----------
Shareholders' Equity
Preferred Stock.................................. -- -- -- -- --
Common Stock..................................... 6,196 4,000 2,000 2,180A 8,376
(6,000)F
Paid-In Capital.................................. 29,239 21,000 9,000 43,036A 72,275
(30,000)F
Retained Earnings................................ 27,168 34,405 6,078 (40,483)F 27,168
Unrealized Gain (Loss) on Securities Available
for Sale....................................... 117 (18) (3) 21F 117
------------ --------- --------- ------------ -----------
Total Shareholders' Equity............... 62,720 59,387 17,075 (31,246) 107,936
------------ --------- --------- ------------ -----------
Total Liabilities and Shareholders'
Equity................................. $ 646,769 $ 404,470 $ 119,504 $ (26,595) $1,144,148
------------ --------- --------- ------------ -----------
------------ --------- --------- ------------ -----------
</TABLE>
F-38
<PAGE>
TEXAS REGIONAL BANCSHARES, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(16) ACQUISITION ACTIVITY (CONTINUED)
PRO FORMA COMBINED CONDENSED STATEMENTS OF INCOME
FOR THE YEAR ENDED DECEMBER 31, 1995
(UNAUDITED)
<TABLE>
<CAPTION>
FIRST
TEXAS RGC/ ROMA STATE BORDER PRO FORMA
REGIONAL BRANCHES BANK BANK ADJUSTMENTS
----------- ----------- ----------- ----------- -------------
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C>
Interest Income...................................... $ 43,505 $ 6,337 $ 32,472 $ 9,016 $ (3,900)K
Interest Expense..................................... 17,041 2,817 13,103 4,415 131L
----------- ----------- ----------- ----------- -------------
Net Interest Income.................................. 26,464 3,520 19,369 4,601 (4,031)
Provision for Loan Losses............................ 1,666 19 2,425 485 --
----------- ----------- ----------- ----------- -------------
Net Interest Income After Provision for Loan
Losses......................................... 24,798 3,501 16,944 4,116 (4,031)
----------- ----------- ----------- ----------- -------------
Noninterest Income
Service Charges on Deposit Accounts.............. 3,312 469 1,146 255 --
Other Service Charges............................ 825 97 151 33 --
Trust Service Fees............................... 1,256 -- 24 -- --
Other Operating Income........................... 926 24 81 28 --
----------- ----------- ----------- ----------- -------------
Total Noninterest Income..................... 6,319 590 1,402 316 --
----------- ----------- ----------- ----------- -------------
Noninterest Expense
Salaries and Employee Benefits................... 9,247 1,334 2,824 1,056 --
Net Occupancy Expense............................ 1,010 176 568 234 294M
Equipment Expense................................ 1,959 217 341 148 --
Other Noninterest Expense........................ 5,631 1,281 2,531 729 1,777N
----------- ----------- ----------- ----------- -------------
Total Noninterest Expense.................... 17,847 3,008 6,264 2,167 2,071
----------- ----------- ----------- ----------- -------------
Income Before Income Tax Expense..................... 13,270 1,083 12,082 2,265 (6,102)
Income Tax Expense................................... 4,630 367 3,436 381 (1,812)
----------- ----------- ----------- ----------- -------------
Net Income........................................... $ 8,640 $ 716 $ 8,646 $ 1,884 $ (4,290)
----------- ----------- ----------- ----------- -------------
----------- ----------- ----------- ----------- -------------
Primary Earnings Per Common Share
Net Income....................................... $ 1.39
Weighted Average Number of Common Shares
Outstanding (In Thousands)..................... 6,218
-----------
Fully Diluted Earnings Per Common Share
Net Income....................................... $ 1.39
Weighted Average Number of Common Shares
Outstanding (In Thousands)..................... 6,227
-----------
-----------
<CAPTION>
PRO FORMA
BALANCE
-----------
<S> <C>
Interest Income...................................... $ 87,430
Interest Expense..................................... 37,507
-----------
Net Interest Income.................................. 49,923
Provision for Loan Losses............................ 4,595
-----------
Net Interest Income After Provision for Loan
Losses......................................... 45,328
-----------
Noninterest Income
Service Charges on Deposit Accounts.............. 5,182
Other Service Charges............................ 1,106
Trust Service Fees............................... 1,280
Other Operating Income........................... 1,059
-----------
Total Noninterest Income..................... 8,627
-----------
Noninterest Expense
Salaries and Employee Benefits................... 14,461
Net Occupancy Expense............................ 2,282
Equipment Expense................................ 2,665
Other Noninterest Expense........................ 11,949
-----------
Total Noninterest Expense.................... 31,357
-----------
Income Before Income Tax Expense..................... 22,598
Income Tax Expense................................... 7,002
-----------
Net Income........................................... $ 15,596
-----------
-----------
Primary Earnings Per Common Share
Net Income....................................... $ 1.86
Weighted Average Number of Common Shares
Outstanding (In Thousands)..................... 8,398
-----------
Fully Diluted Earnings Per Common Share
Net Income....................................... $ 1.86
Weighted Average Number of Common Shares
Outstanding (In Thousands)..................... 8,407
-----------
-----------
</TABLE>
F-39
<PAGE>
TEXAS REGIONAL BANCSHARES, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(16) ACQUISITION ACTIVITY (CONTINUED)
PRO FORMA COMBINED CONDENSED STATEMENTS OF INCOME
FOR THE YEAR ENDED DECEMBER 31, 1994
(UNAUDITED)
<TABLE>
<CAPTION>
FIRST
TEXAS RGC/ ROMA STATE BORDER PRO FORMA
REGIONAL BRANCHES BANK BANK ADJUSTMENTS
----------- ----------- ----------- ----------- -------------
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C>
Interest Income...................................... $ 34,631 $ 6,429 $ 30,831 $ 8,879 $ (3,081)K
Interest Expense..................................... 11,690 2,244 11,767 3,771 131L
----------- ----------- ----------- ----------- -------------
Net Interest Income.................................. 22,941 4,185 19,064 5,108 (3,212)
Provision for Loan Losses............................ 1,085 218 2,189 397 --
----------- ----------- ----------- ----------- -------------
Net Interest Income After Provision for Loan
Losses......................................... 21,856 3,967 16,875 4,711 (3,212)
----------- ----------- ----------- ----------- -------------
Noninterest Income
Service Charges on Deposit Accounts.............. 3,035 555 1,078 238 --
Other Service Charges............................ 904 151 141 30 --
Trust Service Fees............................... 1,161 -- 37 -- --
Other Operating Income........................... 672 (39) 45 135 --
----------- ----------- ----------- ----------- -------------
Total Noninterest Income..................... 5,772 667 1,301 403 --
----------- ----------- ----------- ----------- -------------
Noninterest Expense
Salaries and Employee Benefits................... 8,015 1,929 2,562 1,061 --
Net Occupancy Expense............................ 961 191 555 228 294M
Equipment Expense................................ 1,648 310 278 139 --
Other Noninterest Expense........................ 5,883 1,579 2,747 757 1,878N
----------- ----------- ----------- ----------- -------------
Total Noninterest Expense.................... 16,507 4,009 6,142 2,185 2,172
----------- ----------- ----------- ----------- -------------
Income Before Income Tax Expense..................... 11,121 625 12,034 2,929 (5,384)
Income Tax Expense................................... 3,936 198 3,192 604 (1,568)
----------- ----------- ----------- ----------- -------------
Net Income........................................... $ 7,185 $ 427 $ 8,842 $ 2,325 $ (3,816)
----------- ----------- ----------- ----------- -------------
----------- ----------- ----------- ----------- -------------
Primary Earnings Per Common Share
Net Income....................................... $ 1.19
Weighted Average Number of Common Shares
Outstanding (In Thousands)..................... 5,791
-----------
Fully Diluted Earnings Per Common Share
Net Income....................................... $ 1.16
Weighted Average Number of Common Shares
Outstanding (In Thousands)..................... 6,035
-----------
-----------
<CAPTION>
PRO FORMA
BALANCE
-----------
<S> <C>
Interest Income...................................... $ 77,689
Interest Expense..................................... 29,603
-----------
Net Interest Income.................................. 48,086
Provision for Loan Losses............................ 3,889
-----------
Net Interest Income After Provision for Loan
Losses......................................... 44,197
-----------
Noninterest Income
Service Charges on Deposit Accounts.............. 4,906
Other Service Charges............................ 1,226
Trust Service Fees............................... 1,198
Other Operating Income........................... 813
-----------
Total Noninterest Income..................... 8,143
-----------
Noninterest Expense
Salaries and Employee Benefits................... 13,567
Net Occupancy Expense............................ 2,229
Equipment Expense................................ 2,375
Other Noninterest Expense........................ 12,844
-----------
Total Noninterest Expense.................... 31,015
-----------
Income Before Income Tax Expense..................... 21,325
Income Tax Expense................................... 6,362
-----------
Net Income........................................... $ 14,963
-----------
-----------
Primary Earnings Per Common Share
Net Income....................................... $ 1.84
Weighted Average Number of Common Shares
Outstanding (In Thousands)..................... 7,971
-----------
Fully Diluted Earnings Per Common Share
Net Income....................................... $ 1.82
Weighted Average Number of Common Shares
Outstanding (In Thousands)..................... 8,215
-----------
-----------
</TABLE>
F-40
<PAGE>
TEXAS REGIONAL BANCSHARES, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(16) ACQUISITION ACTIVITY (CONTINUED)
The unaudited pro forma combined condensed balance sheet combines the three
entities at December 31, 1995. In combining the entities, the following
adjustments were made:
(A) To record the estimated proceeds of the $45.2 million net capital raised
through the offering based on an assumed sale by Texas Regional of
2,180,000 shares of Class A Voting Common Stock at the offering price of
$22.25 per share, net of underwriting discounts, commissions and other
estimated offering expenses.
(B) To record the elimination of an intercompany demand deposit account.
(C) To adjust securities purchased to fair value at December 31, 1995.
(D) To record estimated $7.0 million increase in fair value of fixed assets.
(E) To record estimated deferred federal income tax on the net fair value
increases.
(F) To record the payment of $99.5 million to the First State Bank and
Border Bank shareholders for 100% of their outstanding stock, elimination
of all the First State Bank and Border Bank equity accounts and the
recording of goodwill.
(G) To adjust loan carrying value to estimated fair value.
(H) To record estimated fair value of core deposits.
(I) To record estimated fair value of fixed maturity deposit premium.
(J) To reclassify deferred federal income taxes.
The unaudited pro forma combined condensed statements of income combine the
three entities for the years ended December 31, 1995 and 1994. In combining the
entities, the following adjustments were made:
(K) To record a reduction in interest income on the $54.3 million net
purchase price ($99.5 million less $45.2 million) of the Mergers and
$4.25 million purchase price of the RGC/Roma Branch Acquisitions at the
Company's average federal funds rate of 5.92% and 4.52% for the years
ended December 31, 1995 and 1994, respectively and the tax effect of the
prior two transactions using an effective tax rate of 34%.
(L) To amortize the fixed maturity deposit premium.
(M) To record depreciation on fair market value increases of depreciable
fixed assets acquired in the Mergers.
(N) To record amortization of the goodwill and core deposit premium recorded
in connection with the Mergers and the RGC/Roma Branch Acquisitions.
F-41
<PAGE>
FIRST STATE BANK & TRUST CO.
SELECTED FINANCIAL INFORMATION
The selected financial information under the captions "Summary of
Operations" and "Period-End Balance Sheet Data" below for, and as of, each of
the years in the three year period ended December 31, 1995 has been derived from
the financial statements of First State Bank & Trust Co. ("First State Bank"),
which financial statements have been audited by KPMG Peat Marwick LLP,
independent auditors. The financial statements of First State Bank at December
31, 1995 and 1994 and for each of the years in the three-year period ended
December 31, 1995 are included elsewhere in this Prospectus. The data presented
for the three-month periods ended March 31, 1996 and 1995 are derived from
unaudited interim financial statements of First State Bank and include, in the
opinion of management, all adjustments necessary to present fairly the data for
such periods.
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31, YEARS ENDED DECEMBER 31,
---------------------- ----------------------------------
1996 1995 1995 1994 1993
---------- ---------- ---------- ---------- ----------
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C>
SUMMARY OF OPERATIONS
Interest Income.................................. $ 8,192 $ 8,085 $ 32,472 $ 30,831 $ 31,623
Interest Expense................................. 3,283 3,111 13,103 11,767 12,968
---------- ---------- ---------- ---------- ----------
Net Interest Income.............................. 4,909 4,974 19,369 19,064 18,655
Provision for Loan Losses........................ 290 81 2,425 2,189 2,287
Noninterest Income............................... 338 374 1,402 1,301 1,326
Noninterest Expense.............................. 1,766 1,471 6,264 6,142 7,335
---------- ---------- ---------- ---------- ----------
Income before Income Tax Expense................. 3,191 3,796 12,082 12,034 10,359
Income Tax Expense............................... 914 1,087 3,436 3,192 2,260
---------- ---------- ---------- ---------- ----------
Net Income....................................... $ 2,277 $ 2,709 $ 8,646 $ 8,842 $ 8,099
---------- ---------- ---------- ---------- ----------
---------- ---------- ---------- ---------- ----------
PER SHARE DATA
Net Income....................................... $ 11.39 $ 13.54 $ 43.23 $ 44.21 $ 40.49
Book Value....................................... 308.17 275.53 296.94 276.32 249.59
Cash Dividends Paid on Common Stock.............. -- 15.00 25.00 15.00 10.00
Average Shares Outstanding
(in thousands)................................. 200 200 200 200 200
PERIOD-END BALANCE SHEET DATA
Total Assets..................................... $ 426,081 $ 411,166 $ 404,470 $ 403,098 $ 402,895
Loans............................................ 192,825 196,847 188,424 194,306 194,853
Investment Securities............................ 149,702 175,049 166,761 179,153 170,588
Interest-Earning Assets.......................... 403,077 387,996 378,535 375,659 377,247
Deposits......................................... 361,414 353,582 343,610 345,680 350,243
Stockholders' Equity............................. 61,634 55,105 59,387 55,264 49,918
PERFORMANCE RATIOS
Return on Average Assets......................... 2.21% 2.69% 2.12% 2.15% 1.99%
Return on Average Stockholders' Equity........... 15.13 20.27 15.28 17.13 17.20
Net Interest Margin.............................. 5.37 5.63 5.40 5.34 5.40
Loan to Deposit Ratio............................ 53.35 55.67 54.84 56.21 55.63
Demand Deposit to Total Deposit Ratio............ 11.01 13.18 11.59 10.84 10.28
ASSET QUALITY RATIOS
Nonperforming Assets to Loans and Other
Nonperforming Assets........................... 1.35% 1.58% 1.67% 1.62% 1.86%
Net Charge-Offs to Average Loans................. 1.00 0.19 1.14 1.14 1.23
Allowance for Loan Losses as a Percentage of:
Loans.......................................... 2.08 1.98 2.22 2.01 2.00
Nonperforming Loans............................ 172.13 151.83 154.04 152.81 134.26
Nonperforming Assets........................... 153.96 124.78 133.00 124.13 107.55
CAPITAL RATIOS
Period-End Stockholders' Equity to Total Assets.. 14.47% 13.40% 14.68% 13.71% 12.39%
Tier 1 Risk-Based Capital........................ 17.51 17.52 18.47 17.99 15.22
Total Risk-Based Capital......................... 18.65 18.75 19.78 19.26 16.74
Leverage Capital Ratio........................... 14.88 13.60 14.88 13.98 12.49
---------- ---------- ---------- ---------- ----------
---------- ---------- ---------- ---------- ----------
</TABLE>
F-42
<PAGE>
FIRST STATE BANK & TRUST CO.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
The following discussion provides additional information regarding the
financial condition and the results of operations for First State Bank for the
three months ended March 31, 1996 and 1995 and for each of the years ended
December 31, 1995, 1994 and 1993. This discussion should be read in conjunction
with the financial statements of First State Bank and the notes thereto
appearing elsewhere in this prospectus.
SELECTED FINANCIAL INFORMATION
Net income for the three months ended March 31, 1996 was $2.3 million or
$11.39 per share compared to $2.7 million or $13.54 per share for the three
months ended March 31, 1995. Earnings for the three months ended March 31, 1996
were below the same period of the prior year because of an increased provision
for loan losses and other noninterest expenses.
Net income for the year ended December 31, 1995 was $8.6 million, a decrease
of 2.2% compared to net income of $8.8 million for the year ended December 31,
1994. The earnings per share of $43.23 for the year ended December 31, 1995
decreased $0.98 or 2.2% compared to earnings per share of $44.21 for the year
ended December 31, 1994.
Return on average assets for 1995 was 2.12%, compared to 2.15% for 1994 and
1.99% for 1993. Return on average stockholders' equity was 15.28% for 1995,
compared to 17.13% for 1994 and 17.20% for 1993.
Earnings performance for the year ended December 31, 1995 reflected a small
increase in net interest income offset by an increase in provision for loan
losses. The increase in net interest income for 1995 resulted primarily from
higher interest rates.
ANALYSIS OF RESULTS OF OPERATIONS
NET INTEREST INCOME
Taxable-equivalent net interest income was $5.2 million for the three months
ended March 31, 1996, a decrease of $94 thousand or 1.8% compared to the three
months ended March 31, 1995 of $5.3 million. The interest rate margin of 5.37%
for the three months ended March 31, 1996 reflects a decrease of 26 basis points
compared to 5.63% for the three months ended March 31, 1995. The decrease in net
interest income for the three months ended March 31, 1996 compared to the three
months ended March 31, 1995 was primarily attributable to changes in the mix of
interest-earning assets and higher rates paid on interest-bearing deposits.
Taxable-equivalent net interest income was $20.7 million for the year ended
December 31, 1995, an increase of $101 thousand or 0.5% compared to the year
ended December 31, 1994 and taxable-equivalent net interest income of $20.6
million for the year ended December 31, 1994 increased $204 thousand or 1.0%
compared to the year ended December 31, 1993.
The net yield on interest-earning assets, also referred to as interest rate
margin, represents net interest income divided by average interest-earning
assets. The net interest margin of 5.40% for the year ended December 31, 1995
increased 6 basis points compared to 5.34% for the year ended December 31, 1994.
The net interest rate margin for the year ended December 31, 1994 reflects a
decrease of 6 basis points from the 5.40% for the year ended December 31, 1993.
Average interest-earnings assets declined $2.1 million or 0.6% to $383.1
million for the year ended December 31, 1995. Small declines in commercial and
consumer loans and federal funds sold were partially offset by increases in real
estate loans and investments. Average interest-earning assets increased $8.0
million or 2.1% to $385.3 million for the year ended December 31, 1994. The
increase in average interest-earning assets for 1994 resulted primarily from
increases in investment securities of $11.5 million and loans of $4.2 million
offset by a decline in federal funds sold.
F-43
<PAGE>
Average interest-earning assets comprised 93.8% of average total assets in
1995, compared to 93.8% in 1994 and 92.9% in 1993.
Average interest-bearing deposits declined $10.0 million or 3.1% to $308.6
million for the year ended December 31, 1995 compared to a decrease of $979
thousand or 0.3% to $318.5 million for the year ended December 31, 1994. These
changes in the mix of interest-earning assets and interest-bearing deposits
caused the ratio of interest-bearing deposits to interest-earning assets to
decline to 80.5% in 1995, compared to 82.7% in 1994 and 84.7% in 1993.
Average noninterest-bearing deposits increased $2.3 million or 6.0% to $40.2
million in 1995 compared to an increase of $1.1 million or 2.9% to $38.0 million
in 1994. The ratio of average noninterest-bearing deposits to average total
deposits was 11.5% for 1995, compared to 10.6% for 1994 and 10.3% for 1993.
F-44
<PAGE>
The following table presents for the three months ended March 31, 1996 and
1995, the total dollar amount of interest income from average interest-earning
assets and resultant yields, reported on a taxable-equivalent basis, as well as
the interest-bearing liabilities, expressed both in dollars and rates. Average
balances are derived from weekly balances and the yields and costs are
established by dividing income or expenses 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 34%
effective income tax rate.
<TABLE>
<CAPTION>
QUARTERLY FINANCIAL SUMMARY
THREE MONTHS ENDED MARCH 31,
--------------------------------------------------------------------
1996 1995
--------------------------------- ---------------------------------
AVERAGE YIELD/ AVERAGE YIELD/
TAXABLE-EQUIVALENT BASIS (1) BALANCE INTEREST RATE BALANCE INTEREST RATE
- --------------------------------------------------------- --------- ----------- --------- --------- ----------- ---------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
ASSETS
Interest-Earning Assets
Loans
Commercial........................................... $ 66,995 $ 1,863 11.18% $ 67,512 $ 1,987 11.94%
Real Estate.......................................... 105,370 2,927 11.17 106,927 2,692 10.21
Consumer............................................. 18,541 539 11.69 21,639 617 11.56
--------- ----------- --------- -----------
Total Loans........................................ 190,906 5,329 11.23 196,078 5,296 10.95
--------- ----------- --------- -----------
Investment Securities
Taxable................................................ 128,001 1,863 5.85 138,808 2,026 5.92
Tax-exempt............................................. 33,668 825 9.86 37,133 944 10.31
--------- ----------- --------- -----------
Total Investment
Securities....................................... 161,669 2,688 6.69 175,941 2,970 6.85
--------- ----------- --------- -----------
Federal Funds Sold....................................... 37,283 474 5.11 10,131 147 5.88
--------- ----------- --------- -----------
Total Interest-Earning
Assets............................................. 389,858 8,491 8.76 382,150 8,413 8.93
--------- ----------- --------- -----------
Cash and Due from Banks.................................. 15,442 15,858
Premises and Equipment, Net.............................. 5,404 5,447
Other Assets............................................. 7,974 8,258
Less Allowance for Loan
Losses............................................... (4,181) (3,907)
--------- ---------
Total Assets....................................... $ 414,497 $ 407,806
--------- ---------
--------- ---------
LIABILITIES
Interest-Bearing Liabilities
Savings................................................ $ 46,776 466 4.01 $ 59,065 567 3.89
Money Market and NOW................................... 99,278 681 2.76 104,756 672 2.60
Time Deposits.......................................... 164,690 2,127 5.19 149,521 1,861 5.05
--------- ----------- --------- -----------
Total Savings and Time Deposits.................... 310,744 3,274 4.24 313,342 3,100 4.01
--------- ----------- --------- -----------
Federal Funds Purchased and Other Borrowings........... 856 9 4.23 694 11 6.43
--------- ----------- --------- -----------
Total Interest-Bearing Liabilities................. 311,600 3,283 4.24 314,036 3,111 4.02
--------- ----------- --------- -----------
Demand Deposits.......................................... 40,782 38,123
Other Liabilities........................................ 1,589 1,433
--------- ---------
Total Liabilities.................................. 353,971 353,592
--------- ---------
STOCKHOLDERS' EQUITY..................................... 60,526 54,214
--------- ---------
Total Liabilities and Stockholders' Equity......... $ 414,497 $ 407,806
--------- ---------
--------- ---------
Net Interest Income...................................... $ 5,208 $ 5,302
----------- -----------
----------- -----------
Net Yield on Total Interest-Earning Assets............... 5.37% 5.63%
--------- ---------
--------- ---------
</TABLE>
- ------------
(1) For analytical purposes, income from tax-exempt assets, primarily issued by
state and local governments or authorities, is adjusted by an increment
which equates tax-exempt income to interest from taxable assets (assuming a
34% effective federal income tax rate).
F-45
<PAGE>
The following table presents for the last three calendar years the total
dollar amount of interest income from average interest-earning assets and the
resultant yields, reported on a taxable-equivalent basis, as well as the average
interest-bearing liabilities, expressed both in dollars and rates. Average
balances are derived from weekly 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 34%
effective federal income tax rate.
<TABLE>
<CAPTION>
THREE-YEAR FINANCIAL SUMMARY
YEARS ENDED DECEMBER 31,
------------------------------------------------------------------------------------------------
1995 1994 1993
----------------------------------- ----------------------------------- ----------------------
AVERAGE AVERAGE AVERAGE
TAXABLE-EQUIVALENT BASIS (1) BALANCE INTEREST YIELD/ RATE BALANCE INTEREST YIELD/ RATE BALANCE INTEREST
- ------------------------------- --------- ----------- ----------- --------- ----------- ----------- --------- -----------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
ASSETS
Interest-Earning Assets
Loans
Commercial................. $ 60,410 $ 6,849 11.34% $ 63,494 $ 7,076 11.14% $ 61,898 $ 6,636
Real Estate................ 107,183 11,599 10.82 104,954 10,473 9.98 100,860 11,059
Consumer................... 20,436 2,361 11.55 21,884 2,583 11.80 23,400 2,846
--------- ----------- --------- ----------- --------- -----------
Total Loans.............. 188,029 20,809 11.07 190,332 20,132 10.58 186,158 20,541
--------- ----------- --------- ----------- --------- -----------
Investment Securities
Taxable...................... 138,125 8,129 5.89 134,258 7,204 5.37 117,736 7,117
Tax-exempt................... 35,905 3,632 10.12 38,657 4,159 10.76 43,717 4,818
--------- ----------- --------- ----------- --------- -----------
Total Investment
Securities............. 174,030 11,761 6.76 172,915 11,363 6.57 161,453 11,935
--------- ----------- --------- ----------- --------- -----------
Federal Funds Sold............. 21,079 1,217 5.77 22,018 855 3.88 29,606 871
--------- ----------- --------- ----------- --------- -----------
Total Interest-Earning
Assets................... 383,138 33,787 8.82 385,265 32,350 8.40 377,217 33,347
--------- ----------- --------- ----------- --------- -----------
Cash and Due from Banks........ 15,274 15,496 19,072
Premises and Equipment, Net.... 5,474 5,492 5,198
Other Assets................... 8,319 8,540 8,617
Less Allowance for Loan
Losses..................... (3,911) (3,904) (3,905)
--------- --------- ---------
Total Assets............. $ 408,294 $ 410,889 $ 406,199
--------- --------- ---------
--------- --------- ---------
LIABILITIES
Interest-Bearing Liabilities
Savings...................... $ 51,495 2,008 3.90 $ 62,046 2,476 3.99 $ 29,901 1,182
Money Market and NOW......... 96,428 2,616 2.71 108,458 3,028 2.79 126,593 4,262
Time Deposits................ 160,629 8,436 5.25 148,041 6,235 4.21 163,030 7,503
--------- ----------- --------- ----------- --------- -----------
Total Savings and Time
Deposits............... 308,552 13,060 4.23 318,545 11,739 3.68 319,524 12,947
--------- ----------- --------- ----------- --------- -----------
Federal Funds Purchased and
Other Borrowings........... 837 43 5.14 767 28 3.65 820 21
--------- ----------- --------- ----------- --------- -----------
Total Interest-Bearing
Liabilities............ 309,389 13,103 4.24 319,312 11,767 3.68 320,344 12,968
--------- ----------- --------- ----------- --------- -----------
Demand Deposits................ 40,239 37,958 36,888
Other Liabilities.............. 2,076 2,001 1,889
--------- --------- ---------
Total Liabilities........ 351,704 359,271 359,121
--------- --------- ---------
STOCKHOLDERS' EQUITY........... 56,590 51,618 47,078
--------- --------- ---------
Total Liabilities and
Stockholders' Equity... $ 408,294 $ 410,889 $ 406,199
--------- --------- ---------
--------- --------- ---------
Net Interest Income............ $ 20,684 $ 20,583 $ 20,379
----------- ----------- -----------
----------- ----------- -----------
Net Yield on Total Interest-
Earning Assets................ 5.40% 5.34%
----- -----
----- -----
<CAPTION>
TAXABLE-EQUIVALENT BASIS (1) YIELD/ RATE
- ------------------------------- -----------
<S> <C>
ASSETS
Interest-Earning Assets
Loans
Commercial................. 10.72%
Real Estate................ 10.96
Consumer................... 12.16
Total Loans.............. 11.03
Investment Securities
Taxable...................... 6.04
Tax-exempt................... 11.02
Total Investment
Securities............. 7.39
Federal Funds Sold............. 2.94
Total Interest-Earning
Assets................... 8.84
Cash and Due from Banks........
Premises and Equipment, Net....
Other Assets...................
Less Allowance for Loan
Losses.....................
Total Assets.............
LIABILITIES
Interest-Bearing Liabilities
Savings...................... 3.95
Money Market and NOW......... 3.37
Time Deposits................ 4.60
Total Savings and Time
Deposits............... 4.05
Federal Funds Purchased and
Other Borrowings........... 2.56
Total Interest-Bearing
Liabilities............ 4.05
Demand Deposits................
Other Liabilities..............
Total Liabilities........
STOCKHOLDERS' EQUITY...........
Total Liabilities and
Stockholders' Equity...
Net Interest Income............
Net Yield on Total Interest-
Earning Assets................ 5.40%
-----
-----
</TABLE>
- ------------
(1) For analytical purposes, income from tax-exempt assets, primarily issued by
state and local governments or authorities, is adjusted by an increment
which equates tax-exempt income to interest from taxable assets (assuming a
34% effective federal income tax rate).
F-46
<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. 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>
TAXABLE-EQUIVALENT BASIS(1) DUE TO CHANGE IN
THREE MONTHS ENDED MARCH 31, 1996 NET -----------------------------
COMPARED TO 1995 CHANGE VOLUME RATE RATE/VOLUME
- -------------------------------------------------------------------------------- ------- ------ ------- -----------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
Interest Income
Loans, Including Fees......................................................... $ 33 $(140) $ 180 $ (7)
Investment Securities
Taxable..................................................................... (163 ) (158) (7) 2
Tax-Exempt.................................................................. (119 ) (88) (33) 2
Federal Funds Sold............................................................ 327 394 (18) (49)
------- ------ ------- -----
Total Interest Income..................................................... 78 8 122 (52)
------- ------ ------- -----
Interest Expense
Deposits...................................................................... 174 (26) 204 (4)
Other Borrowings.............................................................. (2 ) 3 (4) (1)
------- ------ ------- -----
Total Interest Expense.................................................... 172 (23) 200 (5)
------- ------ ------- -----
Net Interest Income Before Allocation Rate/Volume............................... (94 ) 31 (78) (47)
------- ------ ------- -----
Allocation of Rate/Volume....................................................... -- (12) (35) 47
------- ------ ------- -----
Changes in Net Interest Income.................................................. $ (94 ) $ 19 $ (113) $ --
------- ------ ------- -----
------- ------ ------- -----
</TABLE>
- ---------
(1) For analytical purposes, income from tax-exempt assets, primarily
securities issued by state and local governments or authorities, is
adjusted by an increment which equates tax-exempt income to interest
from taxable assets (assuming a 34% effective federal income tax rate).
F-47
<PAGE>
<TABLE>
<CAPTION>
TAXABLE-EQUIVALENT BASIS(1) DUE TO CHANGE IN
YEAR ENDED DECEMBER 31, 1995 NET -----------------------------
COMPARED TO 1994 CHANGE VOLUME RATE RATE/VOLUME
- -------------------------------------------------------------------------------- ------- ------ ------- -----------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
Interest Income
Loans, Including Fees......................................................... $ 677 $(244) $ 921 $--
Investment Securities
Taxable..................................................................... 925 208 718 (1)
Tax-Exempt.................................................................. (527) (296) (230) (1)
Federal Funds Sold............................................................ 362 (36) 398 --
------- ------ ------- -----
Total Interest Income..................................................... 1,437 (368) 1,807 (2)
------- ------ ------- -----
Interest Expense
Deposits...................................................................... 1,321 (368) 1,697 (8)
Other Borrowings.............................................................. 15 3 12 --
------- ------ ------- -----
Total Interest Expense.................................................... 1,336 (365) 1,709 (8)
------- ------ ------- -----
Net Interest Income Before Allocation Rate/Volume............................... 101 (3) 98 6
------- ------ ------- -----
Allocation of Rate/Volume....................................................... -- -- 6 (6)
------- ------ ------- -----
Changes in Net Interest Income.................................................. $ 101 $ (3) $ 104 $--
------- ------ ------- -----
------- ------ ------- -----
<CAPTION>
TAXABLE-EQUIVALENT BASIS(1) DUE TO CHANGE IN
YEAR ENDED DECEMBER 31, 1994 NET -----------------------------
COMPARED TO 1993 CHANGE VOLUME RATE RATE/VOLUME
- -------------------------------------------------------------------------------- ------- ------ ------- -----------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
Interest Income
Loans, Including Fees......................................................... $ (409) $ 460 $ (856) $ (13)
Investment Securities
Taxable..................................................................... 87 998 (900) (11)
Tax-Exempt.................................................................. (659) (558) (101) --
Federal Funds Sold............................................................ (16) (223) 207 --
------- ------ ------- -----
Total Interest Income..................................................... (997) 677 (1,650) (24)
------- ------ ------- -----
Interest Expense
Deposits...................................................................... (1,208) (39) (1,179) 10
Other Borrowings.............................................................. 7 (1) 8 --
------- ------ ------- -----
Total Interest Expense.................................................... (1,201) (40) (1,171) 10
------- ------ ------- -----
Net Interest Income Before Allocation Rate/Volume............................... 204 717 (479) (34)
------- ------ ------- -----
Allocation of Rate/Volume....................................................... -- (20) (14) 34
------- ------ ------- -----
Changes in Net Interest Income.................................................. $ 204 $ 697 $ (493) $--
------- ------ ------- -----
------- ------ ------- -----
</TABLE>
- ---------
(1) For analytical purposes, income from tax-exempt assets, primarily
securities issued by state and local governments or authorities, is
adjusted by an increment which equates tax-exempt income to interest
from taxable assets (assuming a 34% effective federal income tax rate).
F-48
<PAGE>
NET YIELD ON EARNING ASSETS
The following table presents net interest income, average earning assets and
the net yield for the first quarter of 1996 and by quarter for the past three
years. Income and yield on earning assets include amounts to convert tax-exempt
income to a taxable-equivalent basis, assuming a 34% effective federal income
tax rate.
<TABLE>
<CAPTION>
NET YIELD ON % CHANGE QUARTER
EARNING ASSETS FROM --------------------------------------------------
TAXABLE-EQUIVALENT BASIS PRIOR YEAR YEAR FOURTH THIRD SECOND FIRST
- ------------------------------------ ----------- ----------- ----------- ----------- ----------- -----------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
1996
Net Interest Income................. 1.3%* 5,208 5,208
Average Earning Assets.............. 1.8 389,858 389,858
Net Yield........................... 5.37 5.37%
1995
Net Interest Income................. 0.5% $ 20,684 $ 5,065 $ 4,833 $ 5,484 $ 5,302
Average Earning Assets.............. (0.6) 383,138 376,061 386,085 388,399 382,005
Net Yield........................... 5.40% 5.34% 4.97% 5.66% 5.63%
1994
Net Interest Income................. 1.0% $ 20,583 $ 4,842 $ 5,029 $ 5,149 $ 5,563
Average Earning Assets.............. 2.1 385,265 374,776 383,327 394,337 388,623
Net Yield........................... 5.34% 5.13% 5.20% 5.24% 5.81%
1993
Net Interest Income................. 15.1% $ 20,379 $ 5,359 $ 4,788 $ 5,237 $ 4,995
Average Earning Assets.............. 16.4 377,217 373,468 384,155 387,205 364,036
Net Yield........................... 5.40% 5.69% 4.94% 5.42% 5.56%
----------- ----------- ----------- ----------- ----------- -----------
----------- ----------- ----------- ----------- ----------- -----------
</TABLE>
- ------------------------------
*Annualized.
PROVISION FOR LOAN LOSSES
The provision for loan losses for the three months ended March 31, 1996 of
$290 thousand reflects an increase of $209 thousand or 258.0% compared to $81
thousand for the three months ended March 31, 1995.
The provision for loan losses for the year ended December 31, 1995 was $2.4
million an increase of $236 thousand or 10.8% from the year ended December 31,
1994. The provision for loan losses for the year ended December 31, 1994 of $2.2
million reflects a decrease of $98 thousand or 4.3% from the $2.3 million
provision for loan losses for the year ended December 31,1993. Provisions for
loan losses are charged to earnings to bring the total allowance for loan losses
to a level deemed appropriate by management based upon such factors as
historical experience, the volume and type of lending conducted by First State
Bank, the amount of nonperforming assets, regulatory policies, generally
accepted accounting principles, general economic conditions, particularly as
they relate to First State Bank's lending area, and other factors related to the
collectibility of First State Bank's loan portfolio. See "Allowance for Loan
Losses."
In January 1995, First State Bank adopted Statement of Financial Accounting
Standards No. 114 ("Statement 114"), "Accounting by Creditors for Impairment of
a Loan" and the amendment thereof, Statement of Financial Accounting Standards
No. 118 ("Statement 118"), "Accounting by Creditors for Impairment of a
Loan-Income Recognition and Disclosures". In management's opinion, the adoption
of Statement 114 and Statement 118 did not have a material effect on First State
Bank's results of operations.
NONINTEREST INCOME
Noninterest income for the three months ended March 31, 1996 of $338
thousand decreased $36 thousand or 9.6% compared to $374 thousand for the three
months ended March 31, 1995.
F-49
<PAGE>
Noninterest income of $1.4 million for the year ended December 31, 1995
increased $101 thousand or 7.8% compared to the year ended December 31, 1994,
and noninterest income of $1.3 million for the year ended December 31, 1994
decreased $25 thousand or 1.9% compared to $1.3 million for the year ended
December 31, 1993.
First State Bank offers trust services, but does not actively pursue this
type of business. Trust service fees were $24 thousand, $37 thousand and $3
thousand for the years ended December 31, 1995, 1994 and 1993, respectively. The
book value of assets managed at December 31, 1995 was approximately $11.5
million. Assets held by the trust department of First State Bank in fiduciary or
agency capacities are not assets of First State Bank and are not included in the
balance sheet.
A detailed summary of noninterest income for the three months ended March
31, 1996 and 1995 and during the last three years is presented in the following
table:
<TABLE>
<CAPTION>
THREE MONTHS ENDED MARCH 31,
YEARS ENDED DECEMBER 31,
----------------------------------- --------------------------------------------------
% CHANGE FROM % CHANGE FROM % CHANGE FROM
NONINTEREST INCOME 1996 PRIOR YEAR 1995 1995 PRIOR YEAR 1994 PRIOR YEAR
- --------------------------------------- --------- ------------- --------- --------- ------------- --------- -------------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C>
Service Charges on Deposit Accounts.... $ 246 (13.7)% $ 285 $ 1,146 6.3% $ 1,078 0.1%
Other Service Charges.................. 54 (1.8) 55 151 7.1 141 64.0
--------- ----- --------- --------- ----- --------- -----
Total Service Charges................ 300 (11.8) 340 1,297 6.4 1,219 4.8
Trust Service Fees..................... 21 * 2 24 (35.1) 37 *
Other Operating Income................. 17 (46.9) 32 81 80.0 45 71.7
--------- ----- --------- --------- ----- --------- -----
Total................................ $ 338 (9.6)% $ 374 $ 1,402 7.8% $ 1,301 (1.8)%
--------- ----- --------- --------- ----- --------- -----
--------- ----- --------- --------- ----- --------- -----
<CAPTION>
NONINTEREST INCOME 1993
- --------------------------------------- ---------
<S> <C>
Service Charges on Deposit Accounts.... $ 1,077
Other Service Charges.................. 86
---------
Total Service Charges................ 1,163
Trust Service Fees..................... 3
Other Operating Income................. 159
---------
Total................................ $ 1,325
---------
---------
</TABLE>
- ---------
* Not meaningful.
NONINTEREST EXPENSE
Noninterest expense for the three months ended March 31, 1996 of $1.8
million increased $295 thousand or 20.1% compared to the three months ended
March 31, 1995 or $1.5 million. The increase in noninterest expense for the
three months ended March 31, 1996 resulted primarily from the cost to settle
litigation and other costs associated with disposing of other real estate
recorded in the three months ended March 31, 1996. These increases were offset,
in part, by the decrease in FDIC insurance.
Noninterest expense of $6.3 million for the year ended December 31, 1995
increased $122 thousand or 2.0% compared to the year ended December 31, 1994,
and noninterest expense of $6.1 million for the year ended December 31,1994
decreased $1.2 million or 16.3% compared with $7.3 million for the year ended
December 31, 1993.
The largest category of noninterest expense, Total Salaries and Employee
Benefits ("Personnel"), of $2.8 million for the year ended December 31, 1995
increased $262 thousand or 10.2% compared to year ended December 31, 1994
levels. Personnel expenses of $2.6 million for the year ended December 31, 1994
increased $224 thousand or 9.6% compared to year ended December 31, 1993 levels
of $2.3 million. Personnel expense increased primarily due to an increase in
compensation levels.
Occupancy expense of $568 thousand for the year ended December 31, 1995
increased $13 thousand or 2.3% compared to the year ended December 31,1994, and
occupancy expense of $555 thousand for the year ended December 31, 1994
decreased $85 thousand or 13.3% when compared to occupancy expense of $640
thousand for the year ended December 31, 1993.
Equipment expense was $341 thousand, $278 thousand and $261 thousand for the
years ended December 31, 1995, 1994 and 1993, respectively.
Other noninterest expense of $2.4 million for the year ended December 31,
1995 decreased $114 thousand or 4.5% compared to the year ended December 31,
1994 and other noninterest expense of $2.5 million for the year ended December
31, 1994 decreased $1.5 million or 36.8% when compared
F-50
<PAGE>
with the $4.0 million for the year ended December 31, 1993. The increase in
other noninterest expense in 1995 resulted from an increase in legal and
professional, caused primarily from audit fees incurred in 1995, and increases
in stationery, supplies and postage, all of which were offset by a reduction in
FDIC insurance premiums. The principal factor attributable to the decrease in
other noninterest expense for the year ended December 31, 1994 was a cost to
settle litigation which was recorded in 1993 and is included in other losses in
the detailed summary. In 1993, First State Bank settled a lender liability claim
by a former borrower.
A detailed summary of noninterest expense for the three months ended March
31, 1996 and 1995 and during the last three years is presented in the following
table:
<TABLE>
<CAPTION>
THREE MONTHS ENDED MARCH 31, YEARS ENDED DECEMBER 31,
--------------------------------------------------------
------------------------------------- % %
% CHANGE FROM CHANGE FROM CHANGE FROM
NONINTEREST EXPENSE 1996 PRIOR YEAR 1995 1995 PRIOR YEAR 1994 PRIOR YEAR
- ------------------------------- --------- --------------- --------- --------- ----------------- --------- ---------------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C>
Salaries and Wages............. $ 580 2.7% $ 565 $ 2,390 11.9% $ 2,136 10.2%
Employee Benefits.............. 102 (2.9) 105 434 1.9 426 6.8
--------- ------ --------- --------- ----- --------- -----
Total Salaries and Employee
Benefits................. 682 1.8 670 2,824 10.2 2,562 9.6
--------- ------ --------- --------- ----- --------- -----
Net Occupancy Expense.......... 134 -- 134 568 2.3 555 (13.3)
--------- ------ --------- --------- ----- --------- -----
Equipment Expense.............. 85 (8.6) 93 341 22.7 278 6.5
--------- ------ --------- --------- ----- --------- -----
Other Real Estate (Income)
Expense, Net.................. 84 460.0 15 96 (51.5) 198 204.6
--------- ------ --------- --------- ----- --------- -----
Other Noninterest Expense
Advertising and Public
Relations.................. 48 (12.7) 55 202 (5.2) 213 (17.4)
Data Processing and Check
Clearing................... 66 1.5 65 372 2.5 363 30.1
Director Fees................ 14 (6.7) 15 62 1.6 61 (7.6)
Franchise Tax................ -- -- -- 131 3.1 127 49.4
FDIC Insurance............... 1 (99.2) 128 397 (50.5) 802 4.0
Legal and Professional....... 184 75.2 105 526 66.5 316 (33.2)
Stationery and Supplies...... 47 (24.2) 62 203 17.3 173 8.1
Telephone.................... 11 22.2 9 39 8.3 36 33.3
Postage...................... 32 -- 32 138 30.2 106 (3.6)
Other Losses................. 304 * 1 83 53.7 54 (96.5)
Other........................ 74 (14.9) 87 282 (5.4) 298 21.1
--------- ------ --------- --------- ----- --------- -----
Total Other Noninterest
Expense.................. 781 39.7 559 2,435 (4.5) 2,549 (36.8)
--------- ------ --------- --------- ----- --------- -----
Total...................... $ 1,766 20.1% $ 1,471 $ 6,264 2.0% $ 6,142 (16.3)%
--------- ------ --------- --------- ----- --------- -----
--------- ------ --------- --------- ----- --------- -----
<CAPTION>
NONINTEREST EXPENSE 1993
- ------------------------------- ---------
<S> <C>
Salaries and Wages............. $ 1,939
Employee Benefits.............. 399
---------
Total Salaries and Employee
Benefits................. 2,338
---------
Net Occupancy Expense.......... 640
---------
Equipment Expense.............. 261
---------
Other Real Estate (Income)
Expense, Net.................. 65
---------
Other Noninterest Expense
Advertising and Public
Relations.................. 258
Data Processing and Check
Clearing................... 279
Director Fees................ 66
Franchise Tax................ 85
FDIC Insurance............... 771
Legal and Professional....... 473
Stationery and Supplies...... 160
Telephone.................... 27
Postage...................... 110
Other Losses................. 1,556
Other........................ 246
---------
Total Other Noninterest
Expense.................. 4,031
---------
Total...................... $ 7,335
---------
---------
</TABLE>
- ------------------------------
* Not meaningful.
POSTRETIREMENT BENEFITS OTHER THAN PENSIONS
In December 1990, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards No. 106 ("Statement 106"),
"Employers' Accounting for Postretirement Benefits Other Than Pensions", which
is effective for fiscal years beginning after December 15, 1992. Statement 106
requires companies that have postretirement benefit plans to accrue the
estimated cost of providing those benefits to an employee and the employee's
beneficiaries and covered dependents. First State Bank does not provide
postretirement benefits other than nonqualified deferred compensation plans for
the benefit of the President and two other former officers of First State Bank.
F-51
<PAGE>
INCOME TAX
Income tax expense amounted to $914 thousand for the three months ended
March 31, 1996 compared to $1.1 million for the three months ended March 31,
1995. The decrease in income tax expense for the three months ended March 31,
1996 is due primarily to a decreased level of pretax income during the three
months ended March 31, 1996.
Income tax expense amounted to $3.4 million for the year ended December 31,
1995 compared to $3.2 million for the year ended December 31, 1994. Tax expense
varies from one year to the next with changes in the level of income before
taxes, changes in the amount of tax-exempt interest income, and the relationship
of these changes to each other.
First State Bank's effective tax rate for 1995 was 28.4% compared with 26.5%
in 1994. Income tax expense differs from the amount computed at statutory rates
primarily due to tax-exempt interest from certain investment securities and
loans.
Effective January 1, 1993, First State Bank adopted Statement of Financial
Accounting Standards No. 109 ("Statement 109"), "Accounting for Income Taxes".
Through December 31, 1992, First State Bank accounted for income taxes under
Accounting Principles Board Opinion No. 11 ("APB 11"). Statement 109 has changed
First State Bank's method of accounting for income taxes from the deferred
method required under APB 11 to the asset and liability method. Under the
deferred method, annual income tax expense is matched with pretax accounting
income by providing deferred taxes at current tax rates for timing differences
between the determination of net income for financial reporting and tax
purposes. The objective of the asset and liability method is to establish
deferred tax assets and liabilities for the recognition of future deductions or
taxable amounts. Deferred tax expense or benefit is recognized as a result of
the change in the asset or liability during the year.
NET INCOME
Net income was $8.6 million, $8.8 million, and $8.1 million for the years
ended December 31, 1995, 1994, and 1993, respectively.
ANALYSIS OF FINANCIAL CONDITION
BALANCE SHEET COMPOSITION
The average assets and liabilities of First State Bank have remained stable
over the last three years. Average interest-earning assets of $383.1 million
declined $2.1 million or 0.6% for the year ended December 31, 1995 compared to
the year ended December 31, 1994. Average interest-earning assets of $385.3
million increased $8.0 million or 2.1% for the year ended December 31, 1994
compared to $377.2 million for the year ended December 31, 1993. Average loans
to average interest-earning assets was 49.1% in 1995, compared to 49.4% in 1994
and 49.4% in 1993. Average investment securities amounted to $174.0 million,
$172.9 million and $161.5 million in 1995, 1994 and 1993 respectively.
Average interest-bearing deposits declined $10.0 million or 3.1% to $308.6
million for the year ended December 31, 1995 and declined $979 thousand or 0.3%
to $318.5 million for the year ended December 31, 1994. The ratio of average
demand deposits to average total deposits for the years ended December 31, 1995,
1994 and 1993 was 11.5%, 10.6%, and 10.3%, respectively.
F-52
<PAGE>
The following table presents First State Bank's average balance sheets for
the three months ended March 31, 1996 and 1995, and during the last three years:
<TABLE>
<CAPTION>
THREE MONTHS ENDED MARCH
31, YEARS ENDED DECEMBER 31,
------------------------ -------------------------------------
AVERAGE BALANCE SHEETS 1996 1995 1995 1994 1993
- ------------------------------------------------ ----------- ----------- ----------- ----------- -----------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
ASSETS
Loans........................................... $ 190,906 $ 196,078 $ 188,029 $ 190,332 $ 186,158
Investment Securities
Taxable....................................... 128,001 138,808 138,125 134,258 117,736
Tax-Exempt.................................... 33,668 37,133 35,905 38,657 43,717
Federal Funds Sold.............................. 37,283 10,131 21,079 22,018 29,606
----------- ----------- ----------- ----------- -----------
Total Interest-Earning Assets............... 389,858 382,150 383,138 385,265 377,217
Cash and Due From Banks......................... 15,442 15,858 15,274 15,496 19,072
Bank Premises and Equipment, Net................ 5,404 5,447 5,474 5,492 5,198
Other Assets.................................... 7,974 8,258 8,319 8,540 8,617
Allowance for Loan Losses....................... (4,181) (3,907) (3,911) (3,904) (3,905)
----------- ----------- ----------- ----------- -----------
Total....................................... $ 414,497 $ 407,806 $ 408,294 $ 410,889 $ 406,199
----------- ----------- ----------- ----------- -----------
LIABILITIES
Demand Deposits................................. $ 40,782 $ 38,123 $ 40,239 $ 37,958 $ 36,888
----------- ----------- ----------- ----------- -----------
Savings......................................... 46,776 59,065 51,495 62,046 29,901
Money Market Checking and Savings............... 99,278 104,756 96,428 108,458 126,593
Time Deposits................................... 164,690 149,521 160,629 148,041 163,030
----------- ----------- ----------- ----------- -----------
Total Interest-Bearing Deposits............. 310,744 313,342 308,552 318,545 319,524
----------- ----------- ----------- ----------- -----------
Total Deposits.................................. 351,526 351,465 348,791 356,503 356,412
Short-Term Borrowings........................... 856 694 837 767 820
Other Liabilities............................... 1,589 1,433 2,076 2,001 1,889
STOCKHOLDERS' EQUITY............................ 60,526 54,214 56,590 51,618 47,078
----------- ----------- ----------- ----------- -----------
Total....................................... $ 414,497 $ 407,806 $ 408,294 $ 410,889 $ 406,199
----------- ----------- ----------- ----------- -----------
----------- ----------- ----------- ----------- -----------
</TABLE>
CASH AND DUE FROM BANKS
First State Bank offers a broad range of commercial banking services to
individuals and businesses. The amount of cash and due from banks held on any
one day is significantly influenced by changes in cash items in the process of
collection. At December 31, 1995, cash and due from banks was $16.3 million,
$1.7 million less than at December 31, 1994.
INVESTMENT SECURITIES
Investment securities consist of two categories: Available for Sale and Held
to Maturity. Securities classified as Held to Maturity are those securities
First State Bank has both the positive intent and ability to hold to maturity
and are carried at amortized cost. Securities classified as Available for Sale
are those securities which First State Bank intends to hold for an indefinite
period of time but not necessarily to maturity. These securities may be sold as
part of asset/liability management strategy, or in response to significant
movements in interest rates, liquidity needs, regulatory capital considerations,
and other similar factors. These securities are carried at fair value in the
accompanying balance sheet. The percentage of the investment portfolio allocated
to Available for Sale and Held to Maturity was 14.1% and 85.9%, respectively at
December 31, 1995 compared with 18.5% and 81.5%, respectively at December 31,
1994.
F-53
<PAGE>
The following table presents the estimated market value of Securities
Available for Sale at March 31, 1996 and 1995.
<TABLE>
<CAPTION>
% CHANGE FROM
SECURITIES AVAILABLE FOR SALE 1996 PRIOR YEAR 1995
- ------------------------------------------------------------------------------ --------- ------------- ---------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
U.S. Treasury Securities...................................................... $ 4,426 (40.1)% $ 7,384
U.S. Government Agency Securities............................................. 16,494 0.0 16,488
--------- ----- ---------
Total....................................................................... $ 20,920 (12.4)% $ 23,872
--------- ----- ---------
--------- ----- ---------
</TABLE>
The following table presents the estimated market value of Securities
Available for Sale at December 31, 1995 and 1994. No securities were classified
as Securities Available for Sale in years prior to 1994 as management of First
State Bank adopted Statement 115 in January 1994.
<TABLE>
<CAPTION>
% CHANGE
FROM PRIOR
SECURITIES AVAILABLE FOR SALE 1995 YEAR 1994
- ------------------------------------------------------------------------------ --------- ------------ ---------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
U.S. Treasury Securities...................................................... $ 8,504 16.9% $ 7,274
U.S. Government Agency Securities............................................. 14,974 (42.1) 25,879
--------- ----- ---------
Total....................................................................... $ 23,478 (29.2)% $ 33,153
--------- ----- ---------
--------- ----- ---------
</TABLE>
The following table presents the maturities, amortized cost, estimated
market value and weighted average yields of Securities Available for Sale at
March 31, 1996:
<TABLE>
<CAPTION>
AMORTIZED COST (1) MATURING
------------------------------------------------
AFTER ONE AFTER FIVE ESTIMATED
ONE YEAR THROUGH THROUGH TEN AFTER TEN AMORTIZED MARKET
SECURITIES AVAILABLE FOR SALE OR LESS FIVE YEARS YEARS YEARS COST (1) VALUE
- ---------------------------------------- --------- ----------- ----------- ----------- ----------- -----------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
U.S. Treasury Securities................ $ 2,425 $ 2,007 $ -- $ -- $ 4,432 $ 4,426
U.S. Government Agency
Securities............................. 11,466 5,096 -- -- 16,562 16,494
--------- ----------- ----------- ----------- ----------- -----------
Total................................. $ 13,891 $ 7,103 $ -- $ -- $ 20,994 $ 20,920
--------- ----------- ----------- ----------- ----------- -----------
--------- ----------- ----------- ----------- ----------- -----------
<CAPTION>
WEIGHTED AVERAGE YIELDS
(TAXABLE-EQUIVALENT BASIS)
- ----------------------------------------
<S> <C> <C> <C> <C> <C> <C>
U.S. Treasury Securities................ 4.90% 5.60% --% --% 5.22%
U.S. Government Agency
Securities............................. 4.98 5.71 -- -- 5.20
Total................................. 4.97 5.68 -- -- 5.21
--------- ----------- ----------- ----------- -----------
--------- ----------- ----------- ----------- -----------
</TABLE>
- ---------
(1) Amortized cost for Securities Available for Sale is stated at par plus
any remaining unamortized premium paid less any remaining unamortized
discount received.
F-54
<PAGE>
The following table presents the maturities, amortized cost, estimated
market value and weighted average yields of Securities Available for Sale at
December 31, 1995:
<TABLE>
<CAPTION>
AMORTIZED COST (1) MATURING
------------------------------------------------
AFTER ONE AFTER FIVE ESTIMATED
ONE YEAR THROUGH THROUGH TEN AFTER TEN AMORTIZED MARKET
SECURITIES AVAILABLE FOR SALE OR LESS FIVE YEARS YEARS YEARS COST (1) VALUE
- ---------------------------------------- --------- ----------- ----------- ----------- ----------- -----------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
U.S. Treasury Securities................ $ 6,497 $ 2,007 $ -- $ -- $ 8,504 $ 8,504
U.S. Government Agency
Securities............................. 10,470 4,531 -- -- 15,001 14,974
--------- ----------- ----------- ----------- ----------- -----------
Total................................. $ 16,967 $ 6,538 $ -- $ -- $ 23,505 $ 23,478
--------- ----------- ----------- ----------- ----------- -----------
--------- ----------- ----------- ----------- ----------- -----------
<CAPTION>
WEIGHTED AVERAGE YIELDS
(TAXABLE-EQUIVALENT BASIS)
- ----------------------------------------
<S> <C> <C> <C> <C> <C> <C>
U.S. Treasury Securities................ 4.79% 5.58% -- -- 4.97%
U.S. Government Agency
Securities............................. 4.87 6.22 -- -- 5.28
Total................................. 4.84 6.03 -- -- 5.17
--------- ----------- ----------- ----------- -----------
--------- ----------- ----------- ----------- -----------
</TABLE>
- ---------
(1) Amortized cost for Securities Available for Sale is stated at par plus
any remaining unamortized premium paid less any remaining unamortized
discount received.
The following table presents the amortized cost of Securities Held to
Maturity at March 31, 1996 and 1995:
<TABLE>
<CAPTION>
% CHANGE FROM
SECURITIES HELD TO MATURITY 1996 PRIOR YEAR 1995
- ---------------------------------------------------------------------- ----------- ------------------ -----------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
U.S. Treasury Securities.............................................. $ 6,932 0.6 % $ 6,889
U.S. Government Agency Securities..................................... 82,705 (18.2) 101,078
States and Political Subdivisions Securities.......................... 38,807 (9.6) 42,052
Mortgage-Backed Securities............................................ 113 (15.0) 133
Other Securities...................................................... 1,025 -- 1,025
----------- ----- -----------
Total............................................................... $ 128,782 (14.8)% $ 151,177
----------- ----- -----------
----------- ----- -----------
</TABLE>
The following table presents amortized cost of Securities Held to Maturity
at December 31, 1995, 1994 and 1993:
<TABLE>
<CAPTION>
% CHANGE FROM % CHANGE FROM
SECURITIES HELD TO MATURITY 1995 PRIOR YEAR 1994 PRIOR YEAR 1993
- --------------------------------------- ----------- ----------------- ----------- ----------------- -----------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
U.S. Treasury Securities............... $ 6,921 0.6% $ 6,879 (59.4)% $ 16,931
U.S. Government Agency Securities...... 96,074 1.0 95,139 (10.9) 106,739
States and Political Subdivisions
Securities............................ 39,145 (8.6) 42,814 (1.1) 43,297
Mortgage-Backed Securities............. 118 (17.5) 143 -- --
Other Securities....................... 1,025 -- 1,025 (71.7) 3,621
----------- ----- ----------- ----- -----------
Total................................ $ 143,283 (1.9)% $ 146,000 (14.4)% $ 170,588
----------- ----- ----------- ----- -----------
----------- ----- ----------- ----- -----------
</TABLE>
Investments in entities within the State of Texas comprised 91.2% of the
total investment in states and political subdivisions. No single issue accounted
for as much as 10.0% of total stockholders' equity at December 31, 1995. Of the
obligations of states and political subdivisions held by First State Bank at
December 31, 1995, 52.5% were rated A or better by Moody's Investor Services,
Inc.
F-55
<PAGE>
The following table presents the maturities, amortized cost, estimated
market value and weighted average yields of Securities Held to Maturity at March
31, 1996:
<TABLE>
<CAPTION>
AMORTIZED COST (1) MATURING
------------------------------------------------
AFTER ONE AFTER FIVE ESTIMATED
ONE YEAR THROUGH THROUGH TEN AFTER TEN AMORTIZED MARKET
SECURITIES HELD TO MATURITY OR LESS FIVE YEARS YEARS YEARS COST (1) VALUE
- --------------------------------------- --------- ----------- ----------- ----------- ----------- -----------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
U.S. Treasury Securities............... $ 4,988 $ 1,944 $ -- $ -- $ 6,932 $ 7,032
U.S. Government Agency Securities...... 14,386 67,319 1,000 -- 82,705 81,885
States and Political Subdivisions
Securities............................ 7,076 13,703 13,531 3,697 38,007 39,788
Mortgage-Backed Securities............. -- 113 -- -- 113 115
Other Securities....................... -- 1,000 -- 25 1,025 940
--------- ----------- ----------- ----------- ----------- -----------
Total................................ $ 26,450 $ 84,079 $ 14,531 $ 3,722 $ 128,782 $ 129,760
--------- ----------- ----------- ----------- ----------- -----------
--------- ----------- ----------- ----------- ----------- -----------
<CAPTION>
WEIGHTED AVERAGE YIELDS
(TAXABLE-EQUIVALENT BASIS)
- ---------------------------------------
<S> <C> <C> <C> <C> <C> <C>
U.S. Treasury Securities............... 7.75% 6.51% --% --% 7.40%
U.S. Government Agency Securities...... 4.50 5.82 6.51 -- 5.60
States and Political Subdivisions
Securities............................ 9.27 10.48 9.47 9.13 9.76
Mortgaged-Backed Securities............ -- 8.50 -- -- 8.50
Other Securities....................... -- -- -- 4.00 0.10
Total................................ 6.39 6.53 9.27 9.10 6.88
--------- ----------- ----------- ----------- -----------
--------- ----------- ----------- ----------- -----------
</TABLE>
The following table presents the maturities, amortized cost, estimated
market value and weighted average yields of Securities Held to Maturity at
December 31, 1995:
<TABLE>
<CAPTION>
AMORTIZED COST (1) MATURING
------------------------------------------------
AFTER ONE AFTER FIVE ESTIMATED
ONE YEAR THROUGH THROUGH TEN AFTER TEN AMORTIZED MARKET
SECURITIES HELD TO MATURITY OR LESS FIVE YEARS YEARS YEARS COST (1) VALUE
- --------------------------------------- --------- ----------- ----------- ----------- ----------- -----------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
U.S. Treasury Securities............... $ 4,483 $ 2,438 $ -- $ -- $ 6,921 $ 7,070
U.S. Government Agency Securities...... 11,701 82,381 1,992 -- 96,074 95,490
States and Political Subdivisions
Securities............................ 5,267 16,246 13,203 4,429 39,145 41,377
Mortgage-Backed Securities............. -- 118 -- -- 118 121
Other Securities....................... -- 1,000 -- 25 1,025 940
--------- ----------- ----------- ----------- ----------- -----------
Total................................ $ 21,451 $ 102,183 $ 15,195 $ 4,454 $ 143,283 $ 144,998
--------- ----------- ----------- ----------- ----------- -----------
--------- ----------- ----------- ----------- ----------- -----------
<CAPTION>
WEIGHTED AVERAGE YIELDS
(TAXABLE-EQUIVALENT BASIS)
- ---------------------------------------
<S> <C> <C> <C> <C> <C> <C>
U.S. Treasury Securities............... 7.83% 6.60% -- % -- % 7.40%
U.S. Government Agency Securities...... 4.05 5.83 6.48 -- 5.63
States and Political Subdivisions
Securities............................ 10.06 10.03 9.61 9.08 9.78
Mortgaged-Backed Securities............ -- 8.47 -- -- 8.47
Other Securities....................... -- -- -- 4.00 4.00
Total................................ 6.32 6.46 9.20 9.05 6.81
--------- ----------- ----------- ----------- -----------
--------- ----------- ----------- ----------- -----------
</TABLE>
- ---------
(1) Amortized cost for Securities Held to Maturity is stated at par plus any
remaining unamortized premium paid or less any remaining unamortized
discount received.
F-56
<PAGE>
At December 31, 1995, U.S. Government Agency securities with a carrying
value of approximately $11.4 million contained interest features which adjust
according to various dual indices and/or which could adjust to zero. These
features relate only to the interest payments and do not affect the principal
amount due. At December 31, 1995, the weighted average coupon of these
securities equalled 3.00%. One issue with a book value of $3.5 million has
adjusted to zero percent and will mature in May 1996. The following table
presents the maturities, amortized cost and estimated market value of such
securities at December 31, 1995:
<TABLE>
<CAPTION>
AMORTIZED COST (1) MATURING
--------------------------------------------------
AFTER ONE AFTER FIVE ESTIMATED
ONE YEAR OR THROUGH THROUGH TEN AFTER TEN AMORTIZED MARKET
LESS FIVE YEARS YEARS YEARS COST (1) VALUE
----------- ----------- ----------- ----------- ----------- -----------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
Available for Sale....................... $ 3,500 $ -- $ -- $ -- $ 3,500 $ 3,448
Held to Maturity......................... 5,950 2,000 -- -- 7,950 7,782
----------- ----------- ----------- ----------- ----------- -----------
Total.................................. $ 9,450 $ 2,000 $ -- $ -- $ 11,450 $ 11,230
----------- ----------- ----------- ----------- ----------- -----------
----------- ----------- ----------- ----------- ----------- -----------
</TABLE>
- ---------
(1) Amortized cost for Securities Held to Maturity is stated at par plus any
remaining unamortized premium paid or less any remaining unamortized
discount received.
LOANS
First State Bank closely monitors the markets in which it conducts its
lending. A certain degree of risk is inherent in the extension of credit.
Management has instituted credit policies designed to monitor and control the
level of losses and nonperforming assets. These policies require evaluation of
new credit requests and continuing review of existing credits to identify,
monitor and quantify any evidence of deterioration of quality or potential loss.
First State Bank attempts to diversify risk with the objective of achieving
optimum rates of return while minimizing losses for the benefit of stockholders
and protection of depositors. Diversification of the loan portfolio by type of
loan, industry concentration and type of borrower also tends to reduce risk by
minimizing the adverse impact of any single event or set of occurrences.
Total loans at December 31, 1995 decreased $5.9 million or 3.0% to $188.4
million compared to the year-end balance at December 31, 1994. Total loans at
December 31, 1994 of $194.3 million decreased $547 thousand or 0.3% compared to
the year-end balance of $194.9 million at December 31, 1993. The principal
reason for the decrease in total loans at year-end 1995 was reductions in
agricultural and agricultural mortgage loans outstanding.
Real estate loans, including construction, commercial mortgage, agricultural
mortgage and 1-4 family mortgage, continue to represent the largest component of
First State Bank's loan portfolio. The percent of real estate loans to total
loans was 56.2%, 53.2% and 53.0%, at December 31, 1995, 1994 and 1993,
respectively.
The decline in agricultural and agricultural mortgage loans resulted
primarily from reduced borrowing by certain customers and several large
borrowers who discontinued farming and paid off their loans. This was offset by
increases in other lines which are normally paid down at this time of the year.
See "Nonperforming Assets."
F-57
<PAGE>
The following table presents the composition of the loan portfolio at March
31, 1996 and at the end of each of the last five years:
<TABLE>
<CAPTION>
DECEMBER 31,
MARCH 31, -----------------------------------------------------
LOAN PORTFOLIO COMPOSITION 1996 1995 1994 1993 1992 1991
- ---------------------------------------------- ----------- --------- --------- --------- --------- ---------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
Commercial.................................... $ 57,904 $ 52,390 $ 54,550 $ 54,758 $ 57,822 $ 50,655
Commercial-Tax Exempt......................... 2,001 2,044 2,353 1,969 1,954 1,570
----------- --------- --------- --------- --------- ---------
Total Commercial Loans...................... 59,905 54,434 56,903 56,727 59,776 52,225
Agricultural.................................. 9,791 8,893 12,183 11,539 15,082 14,913
Real Estate
Construction................................ 17,172 23,949 21,001 13,852 12,016 11,050
Commercial Mortgage......................... 46,631 40,123 37,031 50,477 45,486 41,223
Agricultural Mortgage....................... 9,150 9,673 11,356 8,788 9,989 7,960
1-4 Family Mortgage......................... 31,765 32,221 34,072 30,058 28,774 29,922
Consumer...................................... 18,411 19,131 21,760 23,412 21,872 19,997
----------- --------- --------- --------- --------- ---------
Total Loans................................. $ 192,825 $ 188,424 $ 194,306 $ 194,853 $ 192,995 $ 177,290
----------- --------- --------- --------- --------- ---------
----------- --------- --------- --------- --------- ---------
</TABLE>
The contractual maturity schedule of the loan portfolio at March 31, 1996 is
presented in the following table:
<TABLE>
<CAPTION>
LOAN MATURITIES
MARCH 31, 1996
----------------------------------------------------
AFTER ONE YEAR
ONE YEAR THROUGH AFTER FIVE
OR LESS FIVE YEARS YEARS TOTAL
--------- --------------- ----------- -----------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
Commercial.................................................. $ 42,922 $ 16,099 $ 884 $ 59,905
Agricultural................................................ 9,174 570 47 9,791
Real Estate................................................. 33,397 59,308 12,013 104,718
Consumer.................................................... 12,021 6,296 94 18,411
--------- --------------- ----------- -----------
Total..................................................... $ 97,514 $ 82,273 $ 13,038 $ 192,825
--------- --------------- ----------- -----------
--------- --------------- ----------- -----------
Variable-Rate Loans......................................... $ 82,619 $ 59,528 $ 6,779 $ 148,926
Fixed-Rate Loans............................................ 14,895 22,745 6,259 43,899
--------- --------------- ----------- -----------
Total..................................................... $ 97,514 $ 82,273 $ 13,038 $ 192,825
--------- --------------- ----------- -----------
--------- --------------- ----------- -----------
</TABLE>
The contractual maturity schedule of the loan portfolio at December 31, 1995
is presented in the following table:
<TABLE>
<CAPTION>
LOAN MATURITIES
DECEMBER 31, 1995
----------------------------------------------------
AFTER ONE YEAR
ONE YEAR THROUGH AFTER FIVE
OR LESS FIVE YEARS YEARS TOTAL
--------- --------------- ----------- -----------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
Commercial.................................................. $ 37,448 $ 16,073 $ 913 $ 54,434
Agricultural................................................ 8,149 691 53 8,893
Real Estate................................................. 36,431 58,626 10,909 105,966
Consumer.................................................... 12,615 6,403 113 19,131
--------- --------------- ----------- -----------
Total..................................................... $ 94,643 $ 81,793 $ 11,988 $ 188,424
--------- --------------- ----------- -----------
--------- --------------- ----------- -----------
Variable-Rate Loans......................................... $ 17,920 $ 23,592 $ 5,704 $ 47,216
Fixed-Rate Loans............................................ 76,723 58,201 6,284 141,208
--------- --------------- ----------- -----------
Total..................................................... $ 94,643 $ 81,793 $ 11,988 $ 188,424
--------- --------------- ----------- -----------
--------- --------------- ----------- -----------
</TABLE>
As shown in the preceding table, loans maturing within one year totaled
$94.6 million or 50.2% of total loans at December 31, 1995. First State Bank may
renew or extend a loan on maturity based on
F-58
<PAGE>
management's assessment of individual loans. Extension or renewal of loans
without reduction of principal for more than one twelve-month period are
generally avoided, unless loans are fully secured, or are revolving lines of
credit subject to annual analysis and renewal.
NONPERFORMING ASSETS
Nonperforming assets consist of nonaccrual loans, loans for which the
interest rate has been renegotiated below originally contracted rates and real
estate or other assets that have been acquired in partial or full satisfaction
of loan obligations.
First State Bank'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 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. At March 31,
1996, three of the loan relationships on nonaccrual status totaling $2.0 million
had balances in excess of $100 thousand. At December 31, 1995, three of the
loans on nonaccrual status totaling approximately $1.8 million had balances in
excess of $100 thousand.
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 March 31, 1996 and for the years ended
December 31, 1995, 1994 and 1993 that are not classified as nonaccrual totaled
$1.8 million, $4.9 million, $3.2 million and $3.4 million, respectively.
Included in this classification at December 31, 1995 were agricultural loans of
$2.4 million which represent carryovers from the 1995 crop year and for which
borrowers are awaiting disaster payments and/or insurance proceeds.
Nonperforming assets of $3.2 million at December 31, 1995 increased $1
thousand compared to December 31, 1994 levels of $3.2 million and decreased $475
thousand or 13.1% for the year ended December 31, 1994 compared to December 31,
1993 levels of $3.6 million.
First State Bank's classification of nonperforming loans includes those
loans for which management believes collection is doubtful. Management is not
aware of any specific borrower relationships that are not reported as
nonperforming where management has serious doubts as to the ability of such
borrowers to comply with the present loan repayment terms which would cause
nonperforming assets to increase materially.
An analysis of the components of nonperforming assets at March 31, 1996 and
at the end of each of the last five years is presented in the following table:
<TABLE>
<CAPTION>
DECEMBER 31,
MARCH 31, -----------------------------------------------------
NONPERFORMING ASSETS 1996 1995 1994 1993 1992 1991
- --------------------------------------------------------- ----------- --------- --------- --------- --------- ---------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
Nonaccrual Loans......................................... $ 2,329 $ 2,724 $ 2,562 $ 2,907 $ 993 $ 4,376
Renegotiated Loans....................................... -- -- -- -- -- --
----------- --------- --------- --------- --------- ---------
Nonperforming Loans.................................... 2,329 2,724 2,562 2,907 993 4,376
Other Nonperforming Assets (Primarily Other Real
Estate)................................................. 275 431 592 722 671 1,519
----------- --------- --------- --------- --------- ---------
Total Nonperforming Assets............................. 2,604 3,155 3,154 3,629 1,664 5,895
Accruing Loans 90 Days or More Past Due.................. 1,767 4,859 3,173 3,439 3,351 3,890
----------- --------- --------- --------- --------- ---------
Total Nonperforming Assets and Accruing Loans 90 Days
or More Past Due..................................... $ 4,371 $ 8,014 $ 6,327 $ 7,068 $ 5,015 $ 9,785
----------- --------- --------- --------- --------- ---------
----------- --------- --------- --------- --------- ---------
Nonperforming Loans as a % of Total Loans................ 1.21% 1.45% 1.32% 1.49% 0.51% 2.47%
Nonperforming Assets as a % of Total Loans and Other
Nonperforming Assets.................................... 1.35 1.67 1.62 1.86 0.86 3.30
Nonperforming Assets as a % of Total Assets.............. 0.61 0.78 0.78 0.90 0.44 1.84
Nonperforming Assets Plus Accruing Loans 90 Days or More
Past Due as a % of Total Loans and Other Nonperforming
Assets.................................................. 2.26 4.24 3.25 3.61 2.59 5.47
----------- --------- --------- --------- --------- ---------
----------- --------- --------- --------- --------- ---------
</TABLE>
F-59
<PAGE>
Interest income that would have been recorded for the years ended December
31, 1995, 1994 and 1993 on nonaccrual loans had such loans performed in
accordance with their original contract terms was approximately $531 thousand,
$820 thousand and $232 thousand, respectively.
ALLOWANCE FOR LOAN LOSSES
Management analyzes the loan portfolio to determine the adequacy of the
allowance for loan losses and the appropriate provision required to maintain an
adequate allowance. In assessing the adequacy of the allowance, management
reviews the size, quality and risks of loans in the portfolio and considers
factors such as specific known risks, past experience, the status and amount of
nonperforming assets and economic conditions. A specific percentage is allocated
to total loans in good standing and additional amounts are added for individual
loans considered to have specific loss potential. Loans identified as losses are
charged off. Based on total allocations, the provision is recorded to maintain
the allowance at a level deemed appropriate by management. While management uses
available information to recognize losses on loans, there can be no assurance
that future additions to the allowance will not be necessary. The allowance for
loan losses at December 31, 1995 was $4.2 million, which represents an increase
of $281 thousand or 7.2% as compared to the allowance for loan losses at
December 31, 1994. Management believes that the allowance for loan losses at
December 31, 1995 adequately reflects the risks in the loan portfolio. However,
various regulatory agencies, as an integral part of their examination process,
periodically review First State Bank's allowance for loan losses. Such agencies
may require First State Bank to recognize additions to the allowance based on
their judgments of information available to them at the time of their
examination.
As a result of criticisms reflected in the October 4, 1993 Report of
Examination by the Texas Department of Banking, a Memorandum of Understanding
(the "Memorandum") was entered into between the Board of Directors of First
State Bank and the Banking Commissioner of Texas on December 14, 1993. The
Memorandum required that First State Bank, among other provisions, increase
Board of Directors supervision over loan activities, revise the existing loan
policy, increase the allowance for loan losses and reduce criticized assets.
Additionally, First State Bank's Board of Directors is required to submit to the
Commissioner and Regional Director of the FDIC a written report of the actions
taken to comply with the Memorandum. Management has made efforts to comply with
the requirements of the Memorandum.
F-60
<PAGE>
The following table summarizes the activity in the allowance for loan losses
for the three months ended March 31, 1996 and 1995, and for the last five years:
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31, YEARS ENDED DECEMBER 31,
-------------------- -----------------------------------------------------
ALLOWANCE FOR LOAN LOSS ACTIVITY 1996 1995 1995 1994 1993 1992 1991
- ---------------------------------------------- --------- --------- --------- --------- --------- --------- ---------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C>
Balance at Beginning of Period................ $ 4,196 $ 3,915 $ 3,915 $ 3,903 $ 3,903 $ 3,905 $ 3,503
Provision for Loan Losses..................... 290 81 2,425 2,189 2,287 5,179 4,015
Charge-Offs
Commercial.................................. 11 37 184 213 265 1,036 3,021
Agricultural................................ -- -- 173 -- 18 790 --
Real Estate................................. 396 9 1,518 1,405 1,397 3,042 90
Consumer.................................... 167 68 390 704 720 388 602
--------- --------- --------- --------- --------- --------- ---------
Total Charge-Offs......................... 574 114 2,265 2,322 2,400 5,256 3,713
--------- --------- --------- --------- --------- --------- ---------
Recoveries
Commercial.................................. 2 5 32 45 33 9 37
Agricultural................................ 49 -- -- -- 10 4 --
Real Estate................................. 15 1 10 11 4 25 15
Consumer.................................... 31 14 79 89 66 37 48
--------- --------- --------- --------- --------- --------- ---------
Total Recoveries.......................... 97 20 121 145 113 75 100
--------- --------- --------- --------- --------- --------- ---------
Net Charge-Offs (Recoveries).................. 477 94 2,144 2,177 2,287 5,181 3,613
--------- --------- --------- --------- --------- --------- ---------
Balance at End of Period...................... $ 4,009 $ 3,902 $ 4,196 $ 3,915 $ 3,903 $ 3,903 $ 3,905
--------- --------- --------- --------- --------- --------- ---------
--------- --------- --------- --------- --------- --------- ---------
Ratio of Allowance for Loan Losses to Loans
Outstanding, Net of Unearned Discount........ 2.08% 1.98% 2.22% 2.01% 2.00% 2.02% 2.20%
Ratio of Allowance for Loan Losses to
Nonperforming Assets......................... 153.96 124.78 133.00 124.13 107.55 234.56 66.24
Ratio of Net Charge-Offs to Average Total
Loans Outstanding, Net of Unearned
Discount..................................... 1.00 0.19 1.14 1.14 1.23 2.82 2.16
--------- --------- --------- --------- --------- --------- ---------
--------- --------- --------- --------- --------- --------- ---------
</TABLE>
The allocation of the allowance for loan losses by loan category and the
percentage of loans in each category to total loans at March 31, 1996 is
presented in the table below:
ALLOCATION OF THE ALLOWANCE FOR LOAN LOSSES
<TABLE>
<CAPTION>
MARCH 31,
1996
-------------------------
% OF
LOANS
IN EACH
CATEGORY
TO TOTAL
AMOUNT LOANS
----------- ------------
<S> <C> <C>
Commercial........................................................................ $ 702 31.1%
Agricultural...................................................................... 118 5.1
Real Estate....................................................................... 1,548 54.3
Consumer.......................................................................... 166 9.5
Unallocated....................................................................... 1,475 --
----------- -----
Total......................................................................... $ 4,009 100.0%
----------- -----
----------- -----
</TABLE>
F-61
<PAGE>
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 is presented in the table below:
<TABLE>
<CAPTION>
ALLOCATION OF THE ALLOWANCE FOR LOAN LOSSES
DECEMBER 31,
----------------------------------------------------------------------------------------------------------
1995 1994 1993 1992
------------------------- ------------------------- ------------------------- -------------------------
% OF % OF % OF % OF
LOANS LOANS LOANS LOANS
IN EACH IN EACH IN EACH IN EACH
CATEGORY CATEGORY CATEGORY CATEGORY
TO TOTAL TO TOTAL TO TOTAL TO TOTAL
AMOUNT LOANS AMOUNT LOANS AMOUNT LOANS AMOUNT LOANS
----------- ------------ ----------- ------------ ----------- ------------ ----------- ------------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Commercial.............. $ 645 28.9% $ 741 29.3% $ 717 29.1% $ 698 31.0%
Agricultural............ 279 4.7 108 6.3 107 5.9 142 7.8
Real Estate............. 1,469 56.2 1,855 53.2 2,325 53.0 1,713 49.9
Consumer................ 254 10.2 278 11.2 328 12.0 354 11.3
Unallocated............. 1,549 -- 933 -- 426 -- 996 --
----------- ----- ----------- ----- ----------- ----- ----------- -----
Total............... $ 4,196 100.0% $ 3,915 100.0% $ 3,903 100.0% $ 3,903 100.0%
----------- ----- ----------- ----- ----------- ----- ----------- -----
----------- ----- ----------- ----- ----------- ----- ----------- -----
<CAPTION>
1991
-------------------------
% OF
LOANS
IN EACH
CATEGORY
TO TOTAL
AMOUNT LOANS
----------- ------------
<S> <C> <C>
Commercial.............. $ 1,420 29.4%
Agricultural............ 127 8.4
Real Estate............. 1,617 50.9
Consumer................ 400 11.3
Unallocated............. 341 --
----------- -----
Total............... $ 3,905 100.0%
----------- -----
----------- -----
</TABLE>
PREMISES AND EQUIPMENT
Bank premises and equipment of $5.5 million at December 31, 1995 increased
$37 thousand or 0.7% compared to $5.4 million at December 31, 1994. The net
increase for the year ended December 31, 1995 is primarily attributable to the
completion of a branch facility of First State Bank begun in 1994.
DEPOSITS
Total deposits of $343.6 million at December 31, 1995 decreased $2.1 million
or 0.6% compared to December 31, 1994 levels and total deposits of $345.7
million at the December 31, 1994 decreased $4.6 million or 1.3% compared to
December 31, 1993 levels of $350.2 million. Total public funds (including public
funds demand deposits, public funds money market and NOW account and public
funds time deposits) were $79.2 million, $66.2 million, and $61.7 million. First
State Bank actively seeks consumer and commercial deposits. The following table
presents the composition of total deposits at March 31, 1996 and at the end of
the last three years:
<TABLE>
<CAPTION>
DECEMBER 31,
----------------------------------------------------------------
MARCH 31, % CHANGE FROM % CHANGE FROM
TOTAL DEPOSITS 1996 1995 PRIOR YEAR 1994 PRIOR YEAR 1993
- --------------------------------------------------- ---------- ---------- ------------- ---------- ------------- ----------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
Demand Deposits
Commercial and Individual........................ $ 38,864 $ 39,238 6.9% $ 36,707 5.1% $ 34,934
Public Funds..................................... 929 573 (26.1) 775 (29.3) 1,096
---------- ---------- ----- ---------- ----- ----------
Total Demand Deposits.......................... 39,793 39,811 6.2 37,482 4.0 36,030
---------- ---------- ----- ---------- ----- ----------
Interest-Bearing Deposits
Savings.......................................... 46,037 46,623 (26.4) 63,322 36.4 46,422
Money Market Checking and Savings
Commercial and Individual...................... 67,472 68,407 (13.6) 79,137 (18.3) 96,821
Public Funds................................... 33,319 36,041 15.8 31,116 15.3 26,993
Time Deposits
Commercial and Individual...................... 109,901 110,126 9.8 100,277 (9.2) 110,376
Public Funds................................... 64,892 42,602 24.0 34,346 2.2 33,601
---------- ---------- ----- ---------- ----- ----------
Total Interest-Bearing Deposits................ 321,621 303,799 (1.4) 308,198 (1.9) 314,213
---------- ---------- ----- ---------- ----- ----------
Total Deposits............................... $ 361,414 $ 343,610 (0.6)% $ 345,680 (1.3)% $ 350,243
---------- ---------- ----- ---------- ----- ----------
---------- ---------- ----- ---------- ----- ----------
Weighted Average Rate on Interest-Bearing
Deposits.......................................... 4.11% 4.05% 3.77% 3.60%
---------- ---------- ---------- ----------
---------- ---------- ---------- ----------
</TABLE>
Time deposits of $100,000 or more are solicited from markets served by First
State Bank and are not sought through brokered sources. Time deposits continue
to be a significant source of funds.
F-62
<PAGE>
The following table presents the maturities of time deposits of $100,000 or
more at March 31, 1996 and at December 31, 1995 and 1994:
<TABLE>
<CAPTION>
DECEMBER 31,
MARCH 31, --------------------
MATURITIES OF TIME DEPOSITS OF $100,000 OR MORE 1996 1995 1994
- ------------------------------------------------------------------------------ ----------- --------- ---------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
Three Months or Less.......................................................... $ 79,982 $ 59,695 $ 57,110
After Three through Six Months................................................ 20,856 22,434 17,152
After Six through Twelve Months............................................... 13,970 11,212 8,929
After Twelve Months........................................................... 1,537 1,116 653
----------- --------- ---------
Total..................................................................... $ 116,345 $ 94,457 $ 83,844
----------- --------- ---------
----------- --------- ---------
Weighted Average Rate on Time Deposits of $100,000 or More.................... 5.30% 5.37% 4.81%
----------- --------- ---------
----------- --------- ---------
</TABLE>
Mexico is a part of the trade territory of First State Bank and foreign
deposits from Mexican sources have traditionally been a source of funding.
Although First State Bank experienced a short term negative impact on its
Mexican deposits due to the recent devaluation of the peso, First State Bank's
Mexican deposit levels have since recovered.
The following table presents foreign deposits, primarily from Mexican
sources, at March 31, 1996 and December 31, 1995:
<TABLE>
<CAPTION>
MARCH 31, DECEMBER 31,
FOREIGN DEPOSITS 1996 1995
- ------------------------------------------------------------------------------------- ----------- --------------
(DOLLARS IN THOUSANDS)
<S> <C> <C>
Demand Deposits...................................................................... $ 391 $ 674
----------- --------------
Interest-Bearing Deposits
Savings............................................................................ 962 1,267
Money Market Checking and Savings.................................................. 5,809 5,106
Time Deposits Under $100,000....................................................... 12,759 3,261
Time Deposits of $100,000 or More.................................................. 3,345 13,587
----------- --------------
Total Interest-Bearing Deposits.................................................. 22,875 23,221
----------- --------------
Total Foreign Deposits........................................................... $ 23,266 $ 23,895
----------- --------------
----------- --------------
Percentage of Total Deposits......................................................... 6.4% 7.0%
----------- --------------
----------- --------------
Weighted Average Rate on Foreign Deposits............................................ 4.50% 4.80%
----------- --------------
----------- --------------
</TABLE>
LIQUIDITY
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 or acquire additional deposit
liabilities is a major source of liquidity. First State Bank's principal sources
of funds are primarily within the local markets of First State Bank and consist
of deposits, interest and principal payments on loans and investment securities.
Asset liquidity is provided by cash and assets which are readily marketable,
or which can be pledged, or which will mature in the near future. These include
cash, federal funds sold and U.S. Government-backed securities. At December 31,
1995, First State Bank's liquidity ratio, defined as cash, U.S.
Government-backed securities, and federal funds sold as a percentage of deposits
was 48.1% compared to 45.2% at December 31, 1994.
Liability liquidity is provided by access to core funding sources,
principally various customers' interest-bearing and noninterest-bearing deposit
accounts in the First State Bank's trade area.
F-63
<PAGE>
During 1995, funds for $34.3 million of investment purchases and the $2.1
million net decrease in deposits came from various sources, including $3.4
million net repayments on loans, $47.8 million proceeds from maturing or called
securities and $8.6 million of net income.
The Federal Deposit Insurance Corporation Act of 1991 ("FDICIA") requires
that federal bank regulatory authorities take "prompt corrective action" with
respect to any depository institution which does not meet specified minimum
capital requirements. The applicable regulations establish five capital levels
which require or permit the Federal Deposit Insurance Corporation (the "FDIC")
and other regulatory authorities to take supervisory action. The relevant
classifications range from "well capitalized" to "critically capitalized." The
classifications are generally determined by applicable ratios of the
institution, including Tier I capital to risk-weighted assets, total capital to
risk-weighted assets and leverage ratios. Based on First State Bank's capital
ratios at December 31, 1995, First State Bank was classified as "well
capitalized" under the applicable regulations. As a result, First State Bank
does not believe that the prompt corrective action regulations have any material
effect on its activities or operations.
The funds management policy of First State Bank is to maintain a liability
sensitive position. Changes in net interest income occur when interest rates on
loans and investments change in a different time period from that of changes in
interest rates on liabilities, or when the mix and volume of interest-earning
assets and interest-bearing liabilities change. 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.
Rate sensitive liabilities maturing within one year exceeded rate sensitive
assets with comparable maturities at December 31, 1995 by $83.3 million.
F-64
<PAGE>
The following table summarizes interest rate sensitive assets and
liabilities by maturity at March 31, 1996:
<TABLE>
<CAPTION>
MARCH 31, 1996
-----------------------------------------------------------------------------
1-3 4-6 7-12 1-5 OVER
INTEREST RATE SENSITIVITY ANALYSIS MONTHS MONTHS MONTHS YEARS 5 YEARS TOTAL
- ---------------------------------- ------------ ------------ ------------ ----------- --------- -----------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
Loans............................. $ 37,296 $ 32,933 $ 27,285 $ 82,273 $ 13,038 $ 192,825
Investment Securities
Available for Sale.............. 999 3,474 9,381 7,066 -- 20,920
Held to Maturity................ 4,309 11,874 10,267 84,079 18,253 128,782
Federal Funds Sold................ 60,550 -- -- -- -- 60,550
------------ ------------ ------------ ----------- --------- -----------
Total Interest-Earning
Assets...................... 103,154 48,281 46,933 173,418 31,291 403,077
------------ ------------ ------------ ----------- --------- -----------
Savings........................... 46,037 -- -- -- -- 46,037
Money Market Checking and Savings
Accounts......................... 100,791 -- -- -- -- 100,791
Time Deposits..................... 96,269 34,914 33,249 10,361 -- 174,793
Other Borrowings.................. 1,139 -- -- -- -- 1,139
------------ ------------ ------------ ----------- --------- -----------
Total Interest-Bearing
Liabilities................. 244,236 34,914 33,249 10,361 -- 322,760
------------ ------------ ------------ ----------- --------- -----------
Rate Sensitivity GAP (1).......... $ (141,082) $ 13,367 $ 13,684 $ 163,057 $ 31,291 $ 80,317
------------ ------------ ------------ ----------- --------- -----------
------------ ------------ ------------ ----------- --------- -----------
Cumulative Rate Sensitivity
GAP.............................. $ (141,082) $ (127,715) $ (114,031) $ 49,026 $ 80,317
------------ ------------ ------------ ----------- ---------
------------ ------------ ------------ ----------- ---------
Ratio of Cumulative Rate
Sensitivity GAP to Total
Assets........................... (33.11)% (29.97)% (26.76)%
------------ ------------ ------------
------------ ------------ ------------
Ratio of Cumulative Rate Sensitive
Interest-Earning Assets to
Cumulative Rate Sensitive
Interest-Bearing Liabilities..... 0.42:1 0.54:1 0.63:1
------------ ------------ ------------
------------ ------------ ------------
</TABLE>
- ---------
(1) Rate sensitive interest-earning assets less rate sensitive
interest-bearing liabilities.
F-65
<PAGE>
The following table summarizes interest rate sensitive assets and
liabilities by maturity at December 31, 1995:
<TABLE>
<CAPTION>
DECEMBER 31, 1995
---------------------------------------------------------------------------
1-3 4-6 7-12 1-5 OVER
INTEREST RATE SENSITIVITY ANALYSIS MONTHS MONTHS MONTHS YEARS 5 YEARS TOTAL
- ----------------------------------- ------------ ------------ ---------- ----------- --------- -----------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
Loans.............................. $ 73,015 $ 19,222 $ 31,702 $ 58,201 $ 6,284 $ 188,424
Investment Securities
Available for Sale............... 8,962 1,499 6,932 6,085 -- 23,478
Held to Maturity................. 23,359 4,278 17,763 78,260 19,623 143,283
Federal Funds Sold................. 23,350 -- -- -- -- 23,350
------------ ------------ ---------- ----------- --------- -----------
Total Interest-Earning
Assets....................... 128,686 24,999 56,397 142,546 25,907 378,535
------------ ------------ ---------- ----------- --------- -----------
Savings............................ 46,623 -- -- -- -- 46,623
Money Market Checking and Savings
Accounts.......................... 104,448 -- -- -- -- 104,448
Time Deposits...................... 78,974 36,017 27,155 10,580 -- 152,726
Other Borrowings................... 157 -- -- -- -- 157
------------ ------------ ---------- ----------- --------- -----------
Total Interest-Bearing
Liabilities.................. 230,202 36,017 27,155 10,580 -- 303,954
------------ ------------ ---------- ----------- --------- -----------
Rate Sensitivity GAP (1)........... $ (101,516) $ (11,018) $ 29,242 $ 131,966 $ 25,907 $ 74,581
------------ ------------ ---------- ----------- --------- -----------
------------ ------------ ---------- ----------- --------- -----------
Cumulative Rate Sensitivity
GAP............................... $ (101,516) $ (112,534) $ (83,292) $ 48,674 $ 74,581
------------ ------------ ---------- ----------- ---------
------------ ------------ ---------- ----------- ---------
Ratio of Cumulative Rate
Sensitivity GAP to Total Assets... (25.10)% (27.82)% (20.59)%
------------ ------------ ----------
------------ ------------ ----------
Ratio of Cumulative Rate Sensitive
Interest-Earning Assets to
Cumulative Rate Sensitive
Interest-Bearing Liabilities...... 0.56:1 0.58:1 0.72:1
------------ ------------ ----------
------------ ------------ ----------
</TABLE>
- ---------
(1) Rate sensitive interest-earning assets less rate sensitive
interest-bearing liabilities.
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 yields through adjustments to 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.
CAPITAL RESOURCES
Stockholders' equity of $59.4 million at December 31, 1995 reflects a net
increase of $4.1 million or 7.5% compared to stockholders' equity of $55.3
million at December 31,1994. This net increase was primarily attributable to
earnings for 1995 of $8.6 million. The net increase in stockholders' equity
reflects dividends paid on common stock of $5.0 million in 1995.
F-66
<PAGE>
The risk-based capital standards as established by the FDIC apply to First
State Bank. The numerator of the risk-based capital ratio for banks includes
Tier I capital, consisting of common stockholders' 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. Beginning on December 31, 1993,
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 capital 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 FDIC has guidelines for a leverage
capital ratio that is an additional evaluation of capital adequacy of banks. The
leverage ratio is defined to be First State Bank's Tier I capital divided by its
risk adjusted total 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 10.0%, and Tier I Risk-Based Capital Ratio is equal to
or grater than 6.0%, and Tier I Leverage Capital Ratio is equal to or greater
than 5.0%. Based on capital ratios, First State Bank is within the definition of
"well capitalized" for FDIC purposes at December 31, 1995.
First State Bank's Tier I Risk-Based Capital Ratio was approximately 18.47%
and 17.99% at December 31, 1995 and 1994, respectively. First State Bank's Total
Risk-Based Capital Ratio was approximately 19.78% and 19.26% at December 31,
1995 and 1994, respectively. First State Bank's Tier I Leverage Capital Ratio
was approximately 14.88% and 13.98% at December 31, 1995 and 1994, respectively.
The following table presents First State Bank's risk-based capital
calculation:
<TABLE>
<CAPTION>
MARCH 31, DECEMBER 31,
---------------------------- ----------------------------
RISK-BASED CAPITAL 1996 1995 1995 1994
- ------------------------------------------------------ ------------- ------------- ------------- -------------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C>
Total Stockholders' Equity, before unrealized gains or
losses on Securities Available
for Sale............................................. $ 61,683 $ 55,469 $ 59,405 $ 55,760
Less-Goodwill and Other Deductions.................... -- -- -- --
------------- ------------- ------------- -------------
Total Tier I Capital.................................. 61,683 55,469 59,405 55,760
Total Tier II Capital................................. 4,009 3,902 4,196 3,915
------------- ------------- ------------- -------------
Total Qualifying Capital.............................. $ 65,692 $ 59,371 $ 63,601 $ 59,675
------------- ------------- ------------- -------------
------------- ------------- ------------- -------------
Risk Adjusted Assets (Including Off-Balance Sheet
Exposure)............................................ $ 352,261 $ 316,689 $ 321,575 $ 309,874
------------- ------------- ------------- -------------
------------- ------------- ------------- -------------
Tier I Risk-Based Capital Ratio....................... 17.51% 17.52% 18.47% 17.99%
Total Risk-Based Capital Ratio........................ 18.65 18.75 19.78 19.26
Leverage Capital Ratio................................ 14.88 13.60 14.88 13.98
------------- ------------- ------------- -------------
------------- ------------- ------------- -------------
</TABLE>
CURRENT ACCOUNTING ISSUES
Effective January 1, 1995, First State Bank adopted Statement 114 and the
amendment thereof, Statement 118. Under Statement 114, a loan is considered
impaired when, based upon current information and events, it is probable that a
creditor will be unable to collect all amounts due according to the contractual
terms of the loan agreement. Statement 114 requires that an impaired loan be
valued utilizing (i) the present value of expected future cash flows discounted
at the effective interest rate of the loan, (ii) the fair value of the
underlying collateral, or (iii) the observable market price of the loan.
Statement 118 amended Statement 114 by expanding the related disclosure
requirements and permitting use of existing methods for recognizing interest
income on impaired loans.
Loans which were restructured prior to the adoption of Statement 114 and
which are performing in accordance with the renegotiated terms are not required
to be reported as impaired. Loans restructured subsequent to the adoption of
Statement 114 are required to be reported as impaired in the year of
F-67
<PAGE>
restructuring. Thereafter, such loans can be removed from the impaired loan
disclosure if the loans were paying a market rate of interest at the time of
restructuring and are performing in accordance with their renegotiated terms.
For loans covered by Statement 114, First State Bank makes an assessment for
impairment when and while such loans are on nonaccrual status or when the loan
has been restructured. When a loan with unique risk characteristics has been
identified as being impaired, the amount of impairment will be measured by First
State Bank using discounted cash flows, except when it is determined that the
sole source of repayment for the loan is the operation or liquidation of the
underlying collateral. In such case, the current fair value of the collateral,
reduced by costs to sell, will be used in place of discounted cash flows. At the
time a loan is placed on nonaccrual status, interest previously recognized but
uncollected is reversed and charged against current income. Subsequent interest
payments received on nonaccrual loans are either applied against principal or
reported as income, depending upon management's assessment of the ultimate
collectibility of principal.
In management's opinion, the adoption of Statement 114 and Statement 118 did
not have a material effect on First State Bank's results of operations.
In October 1995, the FASB issued Statement of Financial Accounting Standards
No. 123 ("Statement 123"), "Accounting for Stock-Based Compensation." Statement
123 establishes financial accounting and reporting standards for stock-based
employee compensation plans.
Statement 123 encourages entities to adopt a "fair value" based method of
accounting for stock-based compensation plans which requires an estimate of the
fair value of stock options or other equity instruments which employees become
entitled to when they have rendered requisite service or satisfied other
conditions necessary to earn the right to benefit from the instruments.
Compensation cost is then determined based on the fair value estimate and is
recognized over the service period, which is usually the vesting period.
Statement 123 also requires that an employer's financial statements include
certain disclosures about stock-based employee compensation arrangements
regardless of the method used to account for them.
The accounting requirements of Statement 123 are effective for transactions
entered into in fiscal years that begin after December 15, 1995. In management's
opinion, implementation of Statement 123 should have no material effect on First
State Bank's financial statements.
QUARTER RESULTS
The following table presents a summary of operations for the last six
quarters:
<TABLE>
<CAPTION>
1996 1995 1994
--------- ------------------------------------------ ---------
CONDENSED QUARTERLY INCOME STATEMENTS FIRST FOURTH THIRD SECOND FIRST FOURTH
TAXABLE-EQUIVALENT BASIS QUARTER QUARTER QUARTER QUARTER QUARTER QUARTER
- --------------------------------------------------- --------- --------- --------- --------- --------- ---------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C> <C>
Interest Income.................................... $ 8,491 $ 8,284 $ 8,197 $ 8,893 $ 8,413 $ 7,714
Interest Expense................................... 3,283 3,219 3,364 3,409 3,111 2,873
--------- --------- --------- --------- --------- ---------
Net Interest Income................................ 5,208 5,065 4,833 5,484 5,302 4,841
Provision for Loan Losses.......................... 290 1,625 583 136 81 1,359
Noninterest Income................................. 338 77 552 385 388 190
Noninterest Expense................................ 1,766 1,656 1,506 1,629 1,473 1,516
--------- --------- --------- --------- --------- ---------
Income Before Taxable-Equivalent Adjustment and
Income Tax........................................ 3,490 1,861 3,296 4,104 4,136 2,156
Taxable-Equivalent Adjustment...................... 299 308 330 335 341 340
Applicable Income Tax Expense...................... 914 483 800 1,067 1,087 423
--------- --------- --------- --------- --------- ---------
Net Income......................................... $ 2,277 $ 1,070 $ 2,166 $ 2,702 $ 2,708 $ 1,393
--------- --------- --------- --------- --------- ---------
--------- --------- --------- --------- --------- ---------
Net Income Per Common Share........................ $ 11.39 $ 5.35 $ 10.83 $ 13.51 $ 13.54 $ 6.97
--------- --------- --------- --------- --------- ---------
--------- --------- --------- --------- --------- ---------
</TABLE>
F-68
<PAGE>
FIRST STATE BANK & TRUST CO.
BALANCE SHEET (UNAUDITED)
MARCH 31, 1996
<TABLE>
<S> <C>
Assets
Cash and due from banks.................................................. $ 14,335,422
Federal funds sold....................................................... 60,550,000
-------------
Total cash and cash equivalents.............................. 74,885,422
-------------
Investment securities available for sale................................. 20,920,054
Investment securities held to maturity................................... 128,781,737
Loans, net of unearned discount.......................................... 192,824,586
Less allowance for loan losses........................................... 4,009,016
-------------
Net loans.................................................... 188,815,570
-------------
Bank premises and equipment, net of accumulated depreciation and
amortization........................................................... 5,411,277
Accrued interest receivable.............................................. 6,563,448
Other real estate owned.................................................. 274,671
Other assets............................................................. 429,204
-------------
$ 426,081,383
-------------
-------------
Liabilities and Stockholders' Equity
Liabilities:
Deposits:
Noninterest-bearing.............................................. $ 39,792,897
Interest-bearing................................................. 321,621,137
-------------
Total deposits............................................... 361,414,034
-------------
Other borrowings..................................................... 1,139,246
Accrued interest payable............................................. 799,546
Deferred compensation payable........................................ 537,430
Other liabilities.................................................... 545,816
Deferred federal income taxes........................................ 11,120
-------------
Total liabilities............................................ 364,447,192
-------------
Stockholders' equity:
Common stock, $20 par value, 200,000 shares authorized, issued and
outstanding........................................................ 4,000,000
Certified surplus.................................................... 21,000,000
Undivided profits.................................................... 36,682,686
Unrealized loss on securities available for sale..................... (48,495)
-------------
Total stockholders' equity................................... 61,634,191
Commitments and contingent liabilities
-------------
$ 426,081,383
-------------
-------------
</TABLE>
See accompanying notes to financial statements.
F-69
<PAGE>
FIRST STATE BANK & TRUST CO.
STATEMENTS OF EARNINGS (UNAUDITED)
FOR THE THREE MONTHS ENDED MARCH 31, 1996 AND 1995
<TABLE>
<CAPTION>
1996 1995
------------- -------------
<S> <C> <C>
Interest Income:
Loans........................................................................... $ 5,310,738 $ 5,289,270
Investment securities........................................................... 2,407,453 2,649,503
Federal funds sold.............................................................. 473,995 146,531
------------- -------------
Total interest income....................................................... 8,192,186 8,085,304
------------- -------------
Interest expense:
Savings, NOW and money market deposits.......................................... 1,146,759 1,238,248
Time deposits................................................................... 2,127,051 1,861,286
Other borrowings................................................................ 9,164 11,379
------------- -------------
Total interest expense...................................................... 3,282,974 3,110,913
------------- -------------
Net interest income......................................................... 4,909,212 4,974,391
Provision for loan losses........................................................... 290,000 81,000
------------- -------------
Net interest income after provision for loan losses......................... 4,619,212 4,893,391
------------- -------------
Noninterest income:
Service charges on deposit accounts............................................. 246,142 284,605
Other service charges and fees.................................................. 75,052 57,232
Other........................................................................... 17,210 31,843
------------- -------------
Total noninterest income.................................................... 338,404 373,680
------------- -------------
Noninterest expense:
Salaries and employee benefits.................................................. 681,735 670,089
Net occupancy expense........................................................... 134,427 134,246
Equipment expense............................................................... 85,268 93,108
Legal and professional fees..................................................... 183,725 104,993
Data processing fees............................................................ 66,060 65,400
Other real estate and repossessed asset expense, net............................ 84,155 14,800
FDIC assessment................................................................. 500 127,948
Other........................................................................... 530,417 260,197
------------- -------------
Total noninterest expense................................................... 1,766,287 1,470,781
------------- -------------
Income before income tax expense............................................ 3,191,329 3,796,290
Income tax expense.................................................................. 914,000 1,087,502
------------- -------------
Net income.................................................................. $ 2,277,329 $ 2,708,788
------------- -------------
------------- -------------
Net income per share................................................................ $ 11.39 $ 13.54
------------- -------------
------------- -------------
</TABLE>
See accompanying notes to financial statements.
F-70
<PAGE>
FIRST STATE BANK & TRUST CO.
STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY (UNAUDITED)
FOR THE YEAR ENDED DECEMBER 31, 1995 AND THE THREE MONTHS ENDED MARCH 31, 1996
<TABLE>
<CAPTION>
UNREALIZED
GAIN (LOSS)
ON SECURITIES TOTAL
COMMON CERTIFIED UNDIVIDED AVAILABLE FOR STOCKHOLDERS'
STOCK SURPLUS PROFITS SALE EQUITY
---------- ----------- ----------- ------------- --------------
<S> <C> <C> <C> <C> <C>
Balance at December 31, 1994.............. $4,000,000 $21,000,000 $30,759,829 $ (496,235) $ 55,263,594
Cash dividends on common stock............ -- -- (5,000,000) -- (5,000,000)
Changes in unrealized gain (loss) on
securities available for sale............ -- -- -- 478,527 478,527
Net income for the year ended December 31,
1995..................................... -- -- 8,645,528 -- 8,645,528
---------- ----------- ----------- ------------- --------------
Balance at December 31, 1995.............. 4,000,000 21,000,000 34,405,357 (17,978) 59,387,379
Changes in unrealized gain (loss) on
securities available for sale............ -- -- -- (30,517) (30,517)
Net income for the three months ended
March 31, 1996........................... -- -- 2,277,329 -- 2,277,329
---------- ----------- ----------- ------------- --------------
Balance at March 31, 1996................. $4,000,000 $21,000,000 $36,682,686 $ (48,495) $ 61,634,191
---------- ----------- ----------- ------------- --------------
---------- ----------- ----------- ------------- --------------
</TABLE>
See accompanying notes to financial statements.
F-71
<PAGE>
FIRST STATE BANK & TRUST CO.
STATEMENTS OF CASH FLOW (UNAUDITED)
FOR THE THREE MONTHS ENDED MARCH 31, 1996 AND 1995
<TABLE>
<CAPTION>
1996 1995
------------- -------------
<S> <C> <C>
Cash flows from operating activities:
Net income..................................................................... $ 2,277,329 $ 2,708,788
Adjustments to reconcile net income to net cash provided by operating
activities:
Depreciation and amortization of bank premises and equipment............... 100,127 91,727
Net discount accretion on investment securities............................ (166,615) (80,061)
Provision for loan losses.................................................. 290,000 81,000
Losses on sales of other real estate owned................................. 84,155 14,800
(Increase) decrease in accrued interest receivable, federal income tax
refundable and other assets.............................................. 965,863 (855,104)
Increase in accrued interest payable and other liabilities................. 578,761 1,008,527
------------- -------------
Total adjustments...................................................... 1,852,291 260,889
------------- -------------
Net cash provided by operating activities.............................. 4,129,620 2,969,677
------------- -------------
Cash flows from investing activities:
Proceeds from investment security maturities and principal repayments.......... 8,465,405 12,139,776
Proceeds from called investment securities..................................... 16,705,000 --
Purchases of investment securities............................................. (7,991,089) (7,753,943)
Net increase in loans.......................................................... (4,907,971) (2,767,838)
Recoveries on loans charged off................................................ 96,355 19,258
Purchases of bank premises and equipment....................................... (24,339) (142,080)
Proceeds from sales of other real estate owned................................. 6,652 132,840
------------- -------------
Net cash provided by investing activities.............................. 12,350,013 1,628,013
------------- -------------
Cash flows from financing activities:
Increase in deposits........................................................... 17,803,612 7,901,961
(Decrease) increase in other borrowings........................................ 982,693 (683,958)
Dividends paid on common stock................................................. -- (3,000,000)
------------- -------------
Net cash provided by financing activities.............................. 18,786,305 4,218,003
------------- -------------
Net increase in cash and cash equivalents.............................. 35,265,938 8,815,693
Cash and cash equivalents at beginning of year..................................... 39,619,484 20,207,420
------------- -------------
Cash and cash equivalents at end of year........................................... $ 74,885,422 $ 29,023,113
------------- -------------
------------- -------------
Supplemental disclosure of cash flow information:
Interest paid.................................................................. $ 3,202,080 $ 3,071,712
------------- -------------
------------- -------------
Supplemental schedule of noncash investing and financing activities;
Foreclosure of assets in partial satisfaction of loans receivable.............. $ 73,317 $ 112,666
------------- -------------
------------- -------------
</TABLE>
See accompanying notes to financial statements.
F-72
<PAGE>
FIRST STATE BANK & TRUST CO.
NOTES TO UNAUDITED FINANCIAL STATEMENTS
(1) BASIS OF PRESENTATION
The accompanying unaudited financial information does 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 information furnished reflects 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.
(2) INCOME TAX
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.
F-73
<PAGE>
INDEPENDENT AUDITORS' REPORT
The Board of Directors
First State Bank & Trust Co.:
We have audited the accompanying balance sheets of First State Bank & Trust
Co. (the "Bank") as of December 31, 1995 and 1994, and the related statements of
earnings, changes in stockholders' equity and cash flows for each of the years
in the three-year period ended December 31, 1995. These financial statements are
the responsibility of the Bank's management. Our responsibility is to express an
opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of First State Bank & Trust Co.
as of December 31, 1995 and 1994, and the results of its operations and its cash
flows for the each of the years in the three-year period ended December 31, 1995
in conformity with generally accepted accounting principles.
As discussed in note 1 to the financial statements, the Bank changed its
method of accounting for investment securities in 1994 to adopt the provisions
of Statement of Financial Accounting Standards No. 115, "Accounting for Certain
Investments in Debt and Equity Securities."
/s/ KPMG PEAT MARWICK LLP
Houston, Texas
January 31, 1996
F-74
<PAGE>
FIRST STATE BANK & TRUST CO.
BALANCE SHEETS
DECEMBER 31, 1995 AND 1994
<TABLE>
<CAPTION>
1995 1994
---------------- ----------------
<S> <C> <C>
Assets
Cash and due from banks (note 2).......................................... $ 16,269,484 $ 18,007,420
Federal funds sold........................................................ 23,350,000 2,200,000
---------------- ----------------
Total cash and cash equivalents............................... 39,619,484 20,207,420
---------------- ----------------
Investment securities available for sale (note 3)......................... 23,478,011 33,153,515
Investment securities held to maturity (note 3)........................... 143,282,719 145,999,757
Loans, net of unearned discount (note 4).................................. 188,424,300 194,305,658
Less allowance for loan losses (note 5)................................... 4,196,028 3,914,948
---------------- ----------------
Net loans..................................................... 184,228,272 190,390,710
---------------- ----------------
Bank premises and equipment, net of accumulated depreciation and
amortization (note 6)................................................... 5,487,065 5,449,897
Accrued interest receivable............................................... 7,172,017 6,232,652
Other real estate owned................................................... 431,160 591,781
Other assets.............................................................. 743,615 857,724
Deferred federal income taxes (note 8).................................... 27,162 214,498
---------------- ----------------
$ 404,469,505 $ 403,097,954
---------------- ----------------
---------------- ----------------
Liabilities and Stockholders' Equity
Liabilities:
Deposits:
Noninterest-bearing............................................... $ 39,810,680 $ 37,481,439
Interest-bearing (note 7)......................................... 303,799,742 308,198,878
---------------- ----------------
Total deposits................................................ 343,610,422 345,680,317
Other borrowings...................................................... 156,553 1,092,000
Accrued interest payable.............................................. 718,652 547,157
Deferred compensation payable (note 9)................................ 529,430 506,389
Other liabilities..................................................... 67,069 8,497
---------------- ----------------
Total liabilities............................................. 345,082,126 347,834,360
---------------- ----------------
Stockholders' equity:
Common stock, $20 par value, 200,000 shares authorized, issued and
outstanding......................................................... 4,000,000 4,000,000
Certified surplus..................................................... 21,000,000 21,000,000
Undivided profits..................................................... 34,405,357 30,759,829
Unrealized loss on securities available for sale (note 3)............. (17,978) (496,235)
---------------- ----------------
Total stockholders' equity.................................... 59,387,379 55,263,594
Commitments and contingent liabilities (notes 4 and 10)
---------------- ----------------
$ 404,469,505 $ 403,097,954
---------------- ----------------
---------------- ----------------
</TABLE>
See accompanying notes to financial statements.
F-75
<PAGE>
FIRST STATE BANK & TRUST CO.
STATEMENTS OF EARNINGS
YEARS ENDED DECEMBER 31, 1995, 1994 AND 1993
<TABLE>
<CAPTION>
1995 1994 1993
-------------- -------------- --------------
<S> <C> <C> <C>
Interest income:
Loans........................................................ $ 20,728,570 $ 20,026,524 $ 20,454,890
Investment securities........................................ 10,526,478 9,949,080 10,297,111
Federal funds sold........................................... 1,217,370 855,109 870,640
-------------- -------------- --------------
Total interest income.................................... 32,472,418 30,830,713 31,622,641
-------------- -------------- --------------
Interest expense:
Savings, NOW and money market deposits....................... 4,623,914 5,503,762 5,443,720
Time deposits................................................ 8,436,377 6,235,155 7,502,979
Other borrowings............................................. 42,689 27,874 21,444
-------------- -------------- --------------
Total interest expense................................... 13,102,980 11,766,791 12,968,143
-------------- -------------- --------------
Net interest income...................................... 19,369,438 19,063,922 18,654,498
Provision for loan losses (note 5)............................... 2,425,323 2,188,960 2,287,000
-------------- -------------- --------------
Net interest income after provision for loan losses...... 16,944,115 16,874,962 16,367,498
Noninterest income:
Service charges on deposit accounts.......................... 1,145,720 1,078,481 1,076,729
Other service charges and fees............................... 151,991 141,083 85,742
Other........................................................ 104,403 81,598 163,325
-------------- -------------- --------------
Total noninterest income................................. 1,402,114 1,301,162 1,325,796
-------------- -------------- --------------
Noninterest expense:
Salaries and employee benefits............................... 2,823,641 2,562,973 2,338,022
Net occupancy expense........................................ 568,673 554,942 639,994
Equipment expense............................................ 340,948 278,082 260,962
Legal and professional fees.................................. 526,025 316,080 473,455
Data processing fees......................................... 372,130 363,596 279,119
Other real estate and repossessed asset expense, net......... 96,377 197,856 65,072
FDIC assessment.............................................. 397,282 801,740 770,595
Other........................................................ 1,139,267 1,067,232 2,507,707
-------------- -------------- --------------
Total noninterest expense................................ 6,264,343 6,142,501 7,334,926
-------------- -------------- --------------
Income before income tax expense......................... 12,081,886 12,033,623 10,358,368
Income tax expense (note 8)...................................... 3,436,358 3,191,573 2,260,025
-------------- -------------- --------------
Net income............................................... $ 8,645,528 $ 8,842,050 $ 8,098,343
-------------- -------------- --------------
-------------- -------------- --------------
Net income per share............................................. $ 43.23 $ 44.21 $ 40.49
-------------- -------------- --------------
-------------- -------------- --------------
</TABLE>
See accompanying notes to financial statements.
F-76
<PAGE>
FIRST STATE BANK & TRUST CO.
STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
YEARS ENDED DECEMBER 31, 1995, 1994 AND 1993
<TABLE>
<CAPTION>
UNREALIZED
GAIN (LOSS)
ON SECURITIES TOTAL
CERTIFIED UNDIVIDED AVAILABLE FOR STOCKHOLDERS'
COMMON STOCK SURPLUS PROFITS SALE EQUITY
------------- -------------- -------------- ------------- --------------
<S> <C> <C> <C> <C> <C>
Balance at December 31, 1992............ $ 4,000,000 $ 21,000,000 $ 18,819,436 $ -- $ 43,819,436
Cash dividends on common
stock.................................. -- -- (2,000,000) -- (2,000,000)
Net income for 1993..................... -- -- 8,098,343 -- 8,098,343
------------- -------------- -------------- ------------- --------------
Balance at December 31, 1993............ 4,000,000 21,000,000 24,917,779 -- 49,917,779
Effect of change to adopt an accounting
principle -- accounting for unrealized
gain (loss) on securities available for
sale (note 3).......................... -- -- -- 137,434 137,434
Cash dividends on common
stock.................................. -- -- (3,000,000) -- (3,000,000)
Change in unrealized gain (loss) on
securities available for sale (note
3)..................................... -- -- -- (633,669) (633,669)
Net income for 1994..................... -- -- 8,842,050 -- 8,842,050
------------- -------------- -------------- ------------- --------------
Balance at December 31, 1994............ 4,000,000 21,000,000 30,759,829 (496,235) 55,263,594
Cash dividends on common
stock.................................. -- -- (5,000,000) -- (5,000,000)
Change in unrealized gain (loss) on
securities available for sale (note
3)..................................... -- -- -- 478,257 478,257
Net income for 1995..................... -- -- 8,645,528 -- 8,645,528
------------- -------------- -------------- ------------- --------------
Balance at December 31, 1995............ $ 4,000,000 $ 21,000,000 $ 34,405,357 $ (17,978) $ 59,387,379
------------- -------------- -------------- ------------- --------------
------------- -------------- -------------- ------------- --------------
</TABLE>
See accompanying notes to financial statements.
F-77
<PAGE>
FIRST STATE BANK & TRUST CO.
STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, 1995, 1994 AND 1993
<TABLE>
<CAPTION>
1995 1994 1993
---------------- ---------------- ----------------
<S> <C> <C> <C>
Cash flows from operating activities:
Net income.............................................. $ 8,645,528 $ 8,842,050 $ 8,098,343
Adjustments to reconcile net income to net cash provided
by operating activities:
Depreciation and amortization of bank premises and
equipment......................................... 370,813 363,443 327,355
Net discount accretion on investment securities..... (428,999) (138,022) (22,619)
Provision for loan losses........................... 2,425,323 2,188,960 2,287,000
Losses on sales of other real estate owned.......... 96,377 197,856 68,774
(Increase) decrease in accrued interest receivable,
federal income tax refundable and other assets.... (884,298) 788,385 294,713
Increase (decrease) in accrued interest payable and
other liabilities................................. 253,108 (13,207) (294,201)
---------------- ---------------- ----------------
Total adjustments............................... 1,832,324 3,387,415 2,661,022
---------------- ---------------- ----------------
Net cash provided by operating activities....... 10,477,852 12,229,465 10,759,365
---------------- ---------------- ----------------
Cash flows from investing activities:
Proceeds from investment security maturities and
principal repayments.................................. 20,161,980 19,455,000 22,464,681
Proceeds from called investment securities.............. 27,685,000 15,066,415 13,736,583
Purchase of investment securities....................... (34,300,805) (43,700,191) (74,882,531)
Net decrease (increase) in loans........................ 3,260,671 (2,886,642) (4,867,463)
Recoveries on loans charged off......................... 120,104 143,405 114,571
Purchases of bank premises and equipment................ (407,981) (150,048) (1,268,904)
Proceeds from sales of other real estate owned.......... 420,585 1,106,919 489,939
---------------- ---------------- ----------------
Net cash provided by (used in) investing
activities.................................... 16,939,554 (10,965,142) (44,213,124)
---------------- ---------------- ----------------
Cash flows from financing activities:
(Decrease) increase in deposits......................... (2,069,895) (4,569,866) 17,679,043
(Decrease) increase in other borrowings................. (935,447) (559,288) 76,333
Dividends paid on common stock.......................... (5,000,000) (3,000,000) (2,000,000)
---------------- ---------------- ----------------
Net cash (used in) provided by financing
activities.................................... (8,005,342) (8,129,154) 15,755,376
---------------- ---------------- ----------------
Net increase (decrease) in cash and cash
equivalents................................... 19,412,064 (6,864,831) (17,698,383)
Cash and cash equivalents at beginning of year.............. 20,207,420 27,072,251 44,770,634
---------------- ---------------- ----------------
Cash and cash equivalents at end of year.................... $ 39,619,484 $ 20,207,420 $ 27,072,251
---------------- ---------------- ----------------
---------------- ---------------- ----------------
Supplemental disclosure of cash flow information:
Interest paid........................................... $ 12,931,485 $ 11,779,735 $ 13,259,963
Taxes paid.............................................. 3,815,113 3,243,371 2,304,000
---------------- ---------------- ----------------
---------------- ---------------- ----------------
Supplemental schedule of noncash investing and financing
activities -- foreclosure of assets in partial satisfaction
of loans receivable........................................ $ 357,000 $ 1,174,000 $ 611,000
---------------- ---------------- ----------------
---------------- ---------------- ----------------
</TABLE>
See accompanying notes to financial statements.
F-78
<PAGE>
FIRST STATE BANK & TRUST CO.
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1995, 1994 AND 1993
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The accounting and reporting policies of the Bank conform to generally
accepted accounting principles and to prevailing practices within the banking
industry. A summary of the more significant accounting policies follows:
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
CASH AND CASH EQUIVALENTS
For purposes of reporting cash flows, cash and due from banks and federal
funds sold are considered to be cash equivalents. Federal funds sold generally
have one-day maturities.
TRUST ASSETS
Assets held by the trust department in fiduciary or agency capacities are
not assets of the Bank and are not included in the balance sheets. Trust assets
at December 31, 1995 and 1994 are approximately $11,542,000 and $11,400,000
respectively.
INVESTMENT SECURITIES
In May 1993, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards No. 115 ("Statement 115"),
"Accounting for Certain Investments in Debt and Equity Securities." Statement
115 establishes standards of financial accounting and reporting for investments
in equity securities that have a readily determinable fair value and for all
investments in debt securities. At acquisition, a bank is required to classify
debt and equity securities into one of three categories: held to maturity,
trading or available for sale. At each reporting date, the appropriateness of
the classification is reassessed. Investments in debt securities are classified
as held to maturity and measured at amortized cost in the 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 balance sheet with unrealized holding gains and losses included in
earnings. Investments not classified as held to maturity nor trading are
classified as available for sale and measured at fair value in the balance sheet
with unrealized holding gains and losses, net of applicable income taxes,
reported in a separate component of stockholders' equity until realized.
Effective January 1, 1994, the Bank adopted Statement 115, which had no
impact on the Bank's income statement as all securities were classified as
either held to maturity or available for sale. Accounting for securities
classified as held to maturity will continue on the basis of amortized cost.
Securities classified as available for sale will be measured at market value
with the net unrealized holding gains and losses reported in a separate
component of stockholders' equity until realized. Purchases of investment
securities are classified as available for sale or held to maturity at time of
purchase as determined by management.
Premiums and discounts are amortized and accreted using a method which
approximates level yield. Gains and losses on available for sale investment
securities sold are recognized in operations at the time of sale based on the
specific identification method. Security purchases and sales are recorded on the
trade date.
F-79
<PAGE>
FIRST STATE BANK & TRUST CO.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
LOANS
Management continually reviews the loan portfolio to identify loans which,
with respect to principal or interest, have or may become collection problems. A
loan is generally placed on nonaccrual status when principal or interest is past
due 90 days or more, and the loan is not both well-secured and in the process of
collection. A loan is also placed on nonaccrual status immediately if, in the
opinion of management, full collection of principal or interest is unlikely. At
the time a loan is placed on nonaccrual status, interest previously recognized
but uncollected is reversed and charged against current income. Subsequent
interest payments received on nonaccrual loans are either applied against
principal or reported as income, depending on management's assessment of the
ultimate collectibility of principal.
Unearned interest on installment loans is recognized as income over the
terms of the related loans on a basis which results in approximately level rates
of return over the terms of the loans.
In May 1993, the FASB issued Statement of Financial Accounting Standards No.
114 ("Statement 114"), "Accounting by Creditors for Impairment of a Loan," which
addresses the accounting by creditors for impairment of certain loans, as
defined. In October 1994, Statement 114 was amended by Statement of Financial
Accounting Standards No. 118, "Accounting by Creditors for Impairment of a Loan,
Income Recognition and Disclosures." Implementation of these pronouncements in
the first quarter of 1995 did not have a material effect on the Bank's financial
statements.
ALLOWANCE FOR LOAN LOSSES
The allowance for loan losses is established by a charge to operations as
deemed necessary by management to maintain the allowance for loan losses at an
amount considered adequate to absorb known or possible loan losses in the Bank's
loan portfolio. The provision is determined based on management's evaluation of
the loan portfolio, giving consideration to existing economic conditions,
changes in the loan portfolio, historical loan loss factors and other relevant
information. Management believes that the allowance for loan losses is adequate.
Loans are charged against the allowance for loan losses when management
believes the collection of principal is unlikely. Recoveries of amounts
previously charged off are credited to the allowance.
BANK PREMISES AND EQUIPMENT
Bank premises and equipment are recorded at cost. Expenditures for
improvements are capitalized. Repairs and maintenance which do not extend the
life of bank premises and equipment are charged to expense as incurred.
Depreciation and amortization are calculated using the straight-line method over
the estimated useful lives of the assets. Any gain or loss resulting from
disposition of premises and equipment is reflected in earnings.
OTHER REAL ESTATE OWNED
Other real estate owned is recorded at fair value at the date of foreclosure
which is subsequently considered cost. At subsequent dates, other real estate is
carried at the lower of fair value less estimated costs to sell or cost. Fair
values are determined generally by reference to appraisals. Rental income earned
and expenses incurred related to real estate owned are recognized during the
period earned or incurred and are included in noninterest expense at their net
amount.
FEDERAL INCOME TAXES
Deferred tax assets and liabilities are recognized for estimated future tax
consequences attributable to differences between the financial statement
carrying amounts of existing assets and liabilities and their respective tax
bases, and operating loss and tax credit carryforwards. Deferred tax assets and
liabilities
F-80
<PAGE>
FIRST STATE BANK & TRUST CO.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
are measured using tax rates expected to apply to taxable income in the years in
which those temporary differences are expected to be recovered or settled.
Deferred tax expense or benefit is recognized as a result of the change in the
asset or liability during the year.
(2) RESERVE REQUIREMENTS
The Bank is required to maintain certain daily reserve balances on hand or
on deposit with the Federal Reserve Bank in accordance with Federal Reserve
Board requirements. These deposits are noninterest bearing and not available for
investment purposes. Cash and due from bank balances maintained in accordance
with such requirements at December 31, 1995 was approximately $5,611,000.
(3) INVESTMENT SECURITIES
The amortized cost and estimated market value, which is the carrying value,
of investment securities available for sale at December 31, 1995 and December
31, 1994 are as follows:
<TABLE>
<CAPTION>
1995
---------------------------------------------------------
GROSS GROSS
UNREALIZED UNREALIZED ESTIMATED
AVAILABLE FOR SALE AMORTIZED COST GAINS LOSSES MARKET VALUE
- ----------------------------------------------- -------------- ----------- ------------ --------------
<S> <C> <C> <C> <C>
U.S. treasuries................................ $ 8,505,399 $ 7,907 $ (9,156) $ 8,504,150
U.S. government agencies....................... 14,999,852 43,818 (69,809) 14,973,861
-------------- ----------- ------------ --------------
$ 23,505,251 $ 51,725 $ (78,965) $ 23,478,011
-------------- ----------- ------------ --------------
-------------- ----------- ------------ --------------
<CAPTION>
1994
---------------------------------------------------------
GROSS GROSS
UNREALIZED UNREALIZED ESTIMATED
AVAILABLE FOR SALE AMORTIZED COST GAINS LOSSES MARKET VALUE
- ----------------------------------------------- -------------- ----------- ------------ --------------
<S> <C> <C> <C> <C>
U.S. treasuries................................ $ 7,485,019 $ -- $ (210,769) $ 7,274,250
U.S. government agencies....................... 26,420,372 33,482 (574,589) 25,879,265
-------------- ----------- ------------ --------------
$ 33,905,391 $ 33,482 $ (785,358) $ 33,153,515
-------------- ----------- ------------ --------------
-------------- ----------- ------------ --------------
</TABLE>
At December 31, 1995 and 1994, the Bank has recorded net unrealized holding
losses on securities available for sale, net of income tax, as a decrease in
stockholders' equity of $17,978 and $496,235, respectively.
The amortized cost, which is the carrying value, and estimated market value
of investment securities held to maturity at December 31, 1995 and December 31,
1994 are as follows:
<TABLE>
<CAPTION>
1995
---------------------------------------------------
GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED ESTIMATED
HELD TO MATURITY COST GAINS LOSSES MARKET VALUE
------------ ---------- ----------- ------------
<S> <C> <C> <C> <C>
U.S. treasuries............................................................ $ 6,921,316 $ 148,684 $ -- $ 7,070,000
U.S. government agencies................................................... 96,073,990 580,034 (1,163,653) 95,490,371
Mortgage-backed securities................................................. 117,931 3,131 -- 121,062
Obligations of state and political subdivisions............................ 39,144,482 2,273,531 (41,554) 41,376,459
Other...................................................................... 1,025,000 -- (85,000) 940,000
------------ ---------- ----------- ------------
$143,282,719 $3,005,380 $(1,290,207) $144,997,892
------------ ---------- ----------- ------------
------------ ---------- ----------- ------------
</TABLE>
<TABLE>
<S> <C> <C> <C> <C>
F-81
</TABLE>
<PAGE>
FIRST STATE BANK & TRUST CO.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
(3) INVESTMENT SECURITIES (CONTINUED)
<TABLE>
<CAPTION>
1994
---------------------------------------------------
GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED ESTIMATED
HELD TO MATURITY COST GAINS LOSSES MARKET VALUE
------------ ---------- ----------- ------------
<S> <C> <C> <C> <C>
U.S. treasuries............................................................ $ 6,878,988 $ 14,614 $ (67,051) $ 6,826,551
U.S. government agencies................................................... 95,138,721 46,299 (4,281,522) 90,903,498
Mortgage-backed securities................................................. 143,244 716 -- 143,960
Obligations of state and political subdivisions............................ 42,813,804 1,181,413 (794,410) 43,200,807
Other...................................................................... 1,025,000 -- (145,000) 880,000
------------ ---------- ----------- ------------
$145,999,757 $1,243,042 $(5,287,983) $141,954,816
------------ ---------- ----------- ------------
------------ ---------- ----------- ------------
</TABLE>
The amortized cost and estimated market value of investment securities at
December 31, 1995, by contractual maturity, are shown below. Expected maturities
will differ from contractual maturities because issuers may have the right to
call or prepay obligations with or without call or prepayment penalties.
<TABLE>
<CAPTION>
ESTIMATED MARKET
AVAILABLE FOR SALE AMORTIZED COST VALUE
- -------------------------------------------------------------------- ---------------- ----------------
<S> <C> <C>
Due in one year or less............................................. $ 16,967,383 $ 16,896,451
Due after one year through five years............................... 6,537,868 6,581,560
---------------- ----------------
$ 23,505,251 $ 23,478,011
---------------- ----------------
---------------- ----------------
<CAPTION>
HELD TO MATURITY
- --------------------------------------------------------------------
<S> <C> <C>
Due in one year or less............................................. $ 21,450,361 $ 21,517,429
Due after one year through five years............................... 102,176,590 102,449,356
Due after five years through ten years.............................. 15,109,876 16,169,479
Due after ten years................................................. 4,427,961 4,740,566
Mortgage-backed securities.......................................... 117,931 121,062
---------------- ----------------
$ 143,282,719 $ 144,997,892
---------------- ----------------
---------------- ----------------
</TABLE>
Included in held to maturity and available for sale securities at December
31, 1995 are approximately $7,950,000 and $3,447,000, respectively, of
investment securities that pay interest based on a set coupon rate with a
foreign exchange rate adjustment or based directly on a foreign index. The held
to maturity securities have a market value of $7,681,000. All of the securities
mature during 1996 and 1997, with the exception of one security maturing in the
year 2000. The securities are paying interest at a rate of approximately 3.00%.
One security of approximately $500,000 has an interest rate floor of 3.00%. The
interest rate on the other securities could reset to zero. No loss of principal
is anticipated by management on any of the aforementioned securities.
There were no sales for the year ended December 31, 1995 and December 31,
1994 from either the available for sale or held to maturity categories.
Securities with a carrying value of approximately $88,016,000 and
$84,645,000 were pledged to secure public deposits of $79,216,000 and
$66,238,000 at December 31, 1995 and 1994, respectively.
F-82
<PAGE>
FIRST STATE BANK & TRUST CO.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
(4) LOANS
Loans at December 31, 1995 and 1994 are as follows:
<TABLE>
<CAPTION>
1995 1994
---------------- ----------------
<S> <C> <C>
Commercial.......................................................... $ 54,365,622 $ 56,890,953
Real estate:
Construction.................................................... 23,949,363 21,001,841
Commercial...................................................... 40,123,334 37,030,742
Agriculture..................................................... 9,673,106 11,356,403
1-4 single family residential................................... 32,220,920 34,072,308
Agriculture......................................................... 8,892,678 12,182,994
Consumer............................................................ 19,207,770 21,862,891
Overdraft and other................................................. 68,549 11,637
---------------- ----------------
188,501,342 194,409,769
Less unearned discount.............................................. (77,042) (104,111)
---------------- ----------------
$ 188,424,300 $ 194,305,658
---------------- ----------------
---------------- ----------------
</TABLE>
The majority of the Bank's loans are to companies and individuals which are
headquartered or are employed in the Rio Grande Valley, but may conduct business
on a statewide, national, or international scale. Repayment of those loans may
be dependent on the economy in the Rio Grande Valley which is impacted by the
economic situation in Mexico and surrounding areas.
All loans to officers, directors and stockholders of the Bank and associates
of such persons are, in the opinion of management, made in the ordinary course
of business on substantially the same terms, including interest rates and
collateral, as those prevailing at the time for comparable loans of like quality
and risk of collectibility. The outstanding balance of total personal borrowings
of executive officers and directors of the Bank at December 31, 1995 and 1994
were approximately $2,032,000 and $1,446,000, respectively.
At December 31, 1995, the Bank had a $1,736,000 recorded investment in
impaired loans, all of which are nonaccrual loans, for which there was a related
allowance of $836,000. All loans considered impaired at December 31, 1995 had a
related allowance for loan losses. The average level of impaired loans during
the year ended December 31, 1995 was $2,536,000. The Bank recorded interest
income of $41,500 on its impaired loans during the year ended December 31, 1995.
Nonaccrual loans approximated $2,724,000 and $2,562,000 at December 31, 1995
and 1994, respectively. If interest on these loans had been accrued at the
original contractual rates, interest income would have been increased by
approximately $531,000, $820,000 and $232,000 for the years ended December 31,
1995, 1994 and 1993. There were no renegotiated loans outstanding at December
31, 1995, 1994 and 1993, respectively.
In the normal course of business, the Bank enters into various transactions
which, in accordance with generally accepted accounting principles, are not
included on the balance sheets. These transactions are referred to as
"off-balance sheet commitments." The Bank 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. The
Bank minimizes its exposure to loss under these commitments by subjecting them
to credit approval and monitoring procedures.
F-83
<PAGE>
FIRST STATE BANK & TRUST CO.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
(4) LOANS (CONTINUED)
Outstanding commitments and letters of credit at December 31, 1995 and 1994
are approximately as follows:
<TABLE>
<CAPTION>
1995 1994
-------------- --------------
<S> <C> <C>
Commitments to extend credit........................................... $ 18,465,000 $ 16,276,000
Letters of credit...................................................... 3,916,000 3,932,000
-------------- --------------
-------------- --------------
</TABLE>
(5) ALLOWANCE FOR LOAN LOSSES
A summary of the activity in the allowance for loan losses for the years
ended December 31, 1995 and 1994 is as follows:
<TABLE>
<CAPTION>
1995 1994
-------------- --------------
<S> <C> <C>
Balance at beginning of year............................................ $ 3,914,948 $ 3,903,420
Provision for loan losses............................................... 2,425,323 2,188,960
Loans charged off....................................................... (2,264,347) (2,320,837)
Recoveries.............................................................. 120,104 143,405
-------------- --------------
Balance at end of year.................................................. $ 4,196,028 $ 3,914,948
-------------- --------------
-------------- --------------
</TABLE>
(6) BANK PREMISES AND EQUIPMENT
Bank premises and equipment and related accumulated depreciation and
amortization at December 31, 1995 and 1994 are as follows:
<TABLE>
<CAPTION>
ESTIMATED
USEFUL LIVES 1995 1994
------------ -------------- --------------
<S> <C> <C> <C>
Land..................................................... -- $ 636,397 $ 636,397
Premises................................................. 40 years 5,085,032 4,896,758
Furniture, fixtures and equipment........................ 10 years 2,930,492 2,759,784
Automobiles.............................................. 3 years 147,605 98,605
-------------- --------------
8,799,526 8,391,544
Less accumulated depreciation and amortization........... (3,312,461) (2,941,647)
-------------- --------------
$ 5,487,065 $ 5,449,897
-------------- --------------
-------------- --------------
</TABLE>
Depreciation expense was approximately $371,000, $360,000 and $327,000 for
the years ended December 31, 1995, 1994 and 1993, respectively.
(7) INTEREST-BEARING DEPOSITS
Interest-bearing deposits at December 31, 1995 and 1994 are as follows:
<TABLE>
<CAPTION>
1995 1994
---------------- ----------------
<S> <C> <C>
Savings, money market and NOW accounts.............................. $ 151,071,040 $ 173,575,728
Certificates of deposit less than $100,000.......................... 58,271,834 50,780,305
Certificates of deposit of $100,000 or more......................... 94,456,868 83,842,845
---------------- ----------------
$ 303,799,742 $ 308,198,878
---------------- ----------------
---------------- ----------------
</TABLE>
Interest expense for certificates of deposit of $100,000 or more for the
years ended December 31, 1995, 1994 and 1993 was approximately $5,544,000,
$4,148,000 and $4,850,000, respectively.
F-84
<PAGE>
FIRST STATE BANK & TRUST CO.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
(8) INCOME TAXES
The components of income tax expense for the years ended December 31, 1995,
1994 and 1993 are as follows:
<TABLE>
<CAPTION>
1995 1994 1993
------------- ------------- -------------
<S> <C> <C> <C>
Federal:
Current tax expense.................................... $ 3,495,399 $ 3,331,309 $ 2,190,957
Deferred tax (benefit) expense......................... (59,041) (139,736) 69,068
------------- ------------- -------------
Income tax expense................................. $ 3,436,358 $ 3,191,573 $ 2,260,025
------------- ------------- -------------
------------- ------------- -------------
</TABLE>
The income tax expense for the years ended December 31, 1995, 1994 and 1993
differs from the amount computed by applying the federal income tax rate of 34%
to income before income tax expense as follows:
<TABLE>
<CAPTION>
1995 1994 1993
------------- -------------- --------------
<S> <C> <C> <C>
Computed "expected" tax expense.......................... $ 4,107,841 $ 4,091,432 $ 3,521,845
Increase (reduction) in tax resulting from:
Tax-exempt interest, net............................. (799,767) (1,002,634) (1,092,876)
Utilization of alternative minimum tax credit........ -- -- (229,267)
Other, net........................................... 128,284 102,775 60,323
------------- -------------- --------------
$ 3,436,358 $ 3,191,573 $ 2,260,025
------------- -------------- --------------
------------- -------------- --------------
</TABLE>
The tax effects of temporary differences that give rise to deferred tax
assets and deferred tax liabilities at December 31, 1995 and 1994 are as
follows:
<TABLE>
<CAPTION>
1995 1994
----------- -----------
<S> <C> <C>
Deferred tax assets:
Allowance for loan losses................................................. $ 269,552 $ 228,920
Deferred compensation..................................................... 180,006 172,172
Other real estate......................................................... 2,833 2,369
Unrealized losses on investment securities................................ 9,261 255,638
----------- -----------
461,652 659,099
----------- -----------
Deferred tax liabilities -- premises and equipment............................ 434,490 444,601
----------- -----------
Net deferred tax asset................................................ $ 27,162 $ 214,498
----------- -----------
----------- -----------
</TABLE>
Management believes that it is more likely than not that the results of
future operations will generate sufficient taxable income to realize the
deferred tax assets.
(9) EMPLOYEE BENEFITS
The Bank has three separate deferred compensation plans for the benefit of
certain 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
F-85
<PAGE>
FIRST STATE BANK & TRUST CO.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
(9) EMPLOYEE BENEFITS (CONTINUED)
1999 and continuing annually thereafter for 20 years. The amounts charged to
compensation expense related to the deferred compensation plans for the years
ended December 31, 1995, 1994 and 1993 were $15,300, $13,600 and $11,800,
respectively.
The Bank owns and is the beneficiary of three life insurance policies on the
employees or former employees covered by the deferred compensation plans. The
life insurance policy face values are amounts approximately equal to the total
benefits paid under the plans.
(10) CONTINGENT LIABILITIES
The Bank is involved in certain claims and suits occurring in the ordinary
course of business. Management believes that the probable resolution of such
claims and suits will not have a material adverse affect on the financial
condition of the Bank.
(11) FAIR VALUE OF FINANCIAL INSTRUMENTS
The estimated fair values at December 31, 1995 and methods and assumptions
used to determine the estimated fair values are set forth below for the Bank's
financial instruments:
<TABLE>
<CAPTION>
CARRYING OR
NOTIONAL VALUE FAIR VALUE
---------------- ----------------
<S> <C> <C>
Financial assets:
Cash and due from banks......................................... $ 16,269,484 $ 16,269,484
Federal funds sold.............................................. 23,350,000 23,350,000
Investment securities........................................... 166,760,730 168,475,903
Net loans....................................................... 184,228,272 184,165,336
Financial liabilities -- deposits................................... 343,610,422 343,872,059
Off-balance sheet instruments:
Commitments to extend credit.................................... 18,465,000 18,465,000
Letters of credit............................................... 3,916,000 3,916,000
---------------- ----------------
---------------- ----------------
</TABLE>
CASH AND DUE FROM BANKS
Carrying value approximates fair value because of the short maturity of
these instruments and no anticipated credit concerns.
FEDERAL FUNDS SOLD
Carrying value approximates fair value because of the short maturity of
these instruments and no anticipated credit concerns.
INVESTMENT SECURITIES
The fair values of investment securities are estimated based on quoted
market prices from investment dealers and companies.
NET LOANS
The fair value of loans is estimated for segregated groupings of loans with
similar financial characteristics. Loans are segregated by type and the fair
value of loans is estimated using current market rates for the type of loan.
DEPOSITS
The fair value of deposits with short-term or no stated maturity, such as
checking, savings, NOW accounts and money market accounts, is equal to the
amounts payable at December 31, 1995. The fair value of certificates of deposits
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.
F-86
<PAGE>
FIRST STATE BANK & TRUST CO.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
(11) FAIR VALUE OF FINANCIAL INSTRUMENTS (CONTINUED)
COMMITMENTS TO EXTEND CREDIT AND LETTERS OF CREDIT
The fair value of commitments to extend credit and letters of credit are
estimated using current interest rates and committed rates.
(12) REGULATORY SUPERVISION
As a result of criticisms reflected in the October 4, 1993 Report of
Examination by the Texas Department of Banking, a Memorandum of Understanding
(the "Memorandum") was entered into between the Board of Directors of the Bank
and the Banking Commissioner of Texas on December 14, 1993. The Memorandum
required that the Bank, among other provisions, increase Board of Director
supervision over loan activities, revise the existing loan policy, increase the
allowance for loan losses and reduce criticized assets. Additionally, the Bank's
Board of Directors is required to submit to the Commissioner and Regional
Director of the FDIC, a written report of the actions taken to comply with the
Memorandum within fifteen days after the end of each calendar quarter. Failure
to comply with the requirements of the Memorandum could subject the Bank to
additional action by bank regulatory authorities. Management has made efforts to
comply with the requirements of the Memorandum and believes such additional
action will not be taken by regulatory authorities.
(13) PENDING TRANSACTION
On January 9, 1996, a definitive agreement was signed under which First
State Bank & Trust Co. will be purchased by Texas State Bank, the principal
operating subsidiary of Texas Regional Bancshares, Inc. The agreement has been
approved by the Boards of Directors of First State Bank & Trust Co., Texas State
Bank and Texas Regional Bancshares, Inc. The sale of the Bank is subject to
approval by the appropriate regulatory agencies and contingent upon, among other
things, Texas Regional Bancshares, Inc. having successfully raised additional
capital to partially fund the transaction.
F-87
<PAGE>
THE BORDER BANK
SELECTED FINANCIAL INFORMATION
The selected financial information under the captions "Summary of
Operations" and "Period-End Balance Sheet Data" below for, and as of, each of
the years in the three-year period ended December 31, 1995 has been derived from
the financial statements of The Border Bank ("Border Bank"), which financial
statements have been audited by KPMG Peat Marwick LLP, independent auditors. The
financial statements of Border Bank at December 31, 1995 and 1994 and for each
of the years in the three-year period ended December 31, 1995 are included
elsewhere in this Prospectus. The data presented for the three month periods
ended March 31, 1996 and 1995 are derived from unaudited interim financial
statements of Border Bank and include, in the opinion of management, all
adjustments necessary to present fairly the data for such periods.
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31, YEARS ENDED DECEMBER 31,
-------------------- -------------------------------
1996 1995 1995 1994 1993
--------- --------- --------- --------- ---------
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C>
SUMMARY OF OPERATIONS
Interest Income.......................................... $ 2,341 $ 2,275 $ 9,016 $ 8,879 $ 8,928
Interest Expense......................................... 1,138 1,040 4,415 3,771 3,892
--------- --------- --------- --------- ---------
Net Interest Income...................................... 1,203 1,235 4,601 5,108 5,036
Provision for Loan Losses................................ 71 52 485 397 265
Noninterest Income....................................... 94 75 316 403 286
Noninterest Expense...................................... 462 520 2,167 2,185 2,481
--------- --------- --------- --------- ---------
Income before Income Tax Expense......................... 764 738 2,265 2,929 2,576
Income Tax Expense....................................... 173 135 381 604 501
--------- --------- --------- --------- ---------
Net Income............................................... $ 591 $ 603 $ 1,884 $ 2,325 $ 2,075
--------- --------- --------- --------- ---------
--------- --------- --------- --------- ---------
PER SHARE DATA
Net Income............................................... $ 2.96 $ 3.02 $ 9.42 $ 11.62 $ 10.38
Book Value............................................... 85.83 79.96 85.38 79.21 70.35
Cash Dividends Paid on Common Stock...................... 2.50 2.50 4.00 2.00 2.00
Average Shares Outstanding (in thousands)................ 200 200 200 200 200
PERIOD-END BALANCE SHEET DATA
Total Assets............................................. $ 119,945 $ 115,671 $ 119,505 $ 117,123 $ 114,874
Loans.................................................... 51,017 48,538 47,345 45,859 48,382
Investment Securities.................................... 47,610 56,224 54,236 58,720 54,438
Interest-Earning Assets.................................. 109,127 107,262 110,331 109,079 105,520
Deposits................................................. 102,212 99,141 101,995 100,865 100,521
Stockholders' Equity..................................... 17,165 15,992 17,075 15,842 14,070
PERFORMANCE RATIOS
Return on Average Assets................................. 2.00% 2.12% 1.62% 1.98% 1.83%
Return on Average Stockholders' Equity................... 13.88 15.66 11.50 15.73 15.79
Net Interest Margin...................................... 5.00 5.36 4.92 5.34 5.49
Loan to Deposit Ratio.................................... 49.91 48.96 46.42 45.47 48.13
Demand Deposit to Total Deposit Ratio.................... 6.40 7.80 7.00 6.95 6.79
ASSET QUALITY RATIOS
Nonperforming Assets to Loans and Other Nonperforming
Assets................................................. 0.76% 0.49% 0.91% 1.05% 1.64%
Net Charge-Offs to Average Loans......................... 0.59 0.44 0.62 0.25 0.53
Allowance for Loan Losses as a Percentage of:
Loans.................................................. 2.16 1.86 2.32 1.96 1.29
Nonperforming Loans.................................... 723.68 * 582.01 398.67 106.30
Nonperforming Assets................................... 282.05 378.99 254.04 186.93 78.10
CAPITAL RATIOS
Period-End Stockholders' Equity to Total Assets.......... 14.31% 13.83% 14.29% 13.53% 12.25%
Tier 1 Risk-Based Capital................................ 17.08 18.10 18.12 18.01 15.89
Total Risk-Based Capital................................. 18.17 19.11 19.29 19.02 16.59
Leverage Capital Ratio................................... 14.41 13.98 14.51 13.58 12.20
--------- --------- --------- --------- ---------
--------- --------- --------- --------- ---------
</TABLE>
- ------------------------------
*Not meaningful.
F-88
<PAGE>
THE BORDER BANK
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
The following discussion provides additional information regarding the
financial condition and the results of operations for Border Bank for the three
months ended March 31, 1996 and 1995 and for each of the years ended December
31, 1995, 1994 and 1993. This discussion should be read in conjunction with the
financial statements of Border Bank and the notes thereto appearing elsewhere in
this prospectus.
SELECTED FINANCIAL INFORMATION
Net income for the three months ended March 31, 1996 was $591 thousand or
$2.96 per share compared to $603 thousand or $3.02 per share for the three
months ended March 31, 1995.
Net income for the year ended December 31, 1995 was $1.9 million, a decrease
of 19.0% compared to net income of $2.3 million for the year ended December 31,
1994. The earnings per share of $9.42 for the year ended December 31, 1995
decreased $2.20 or 18.9% compared to earnings per share of $11.62 for the year
ended December 31, 1994.
Return on average assets for 1995 was 1.62%, compared to 1.98% for 1994 and
1.83% for 1993. Return on average stockholders' equity was 11.50% for 1995,
compared to 15.73% for 1994 and 15.79% for 1993.
Earnings performance for the year ended December 31, 1995 reflected a
decrease in net interest income, a decrease in noninterest income and an
increase in provision for loan losses. The decrease in net interest income for
1995 resulted primarily from an increase in interest expense.
ANALYSIS OF RESULTS OF OPERATIONS
NET INTEREST INCOME
Taxable-equivalent net interest income was $1.4 million for the three months
ended March 31, 1996 and 1995. The interest rate margin of 5.00% for the three
months ended March 31, 1996 reflects a decrease of 36 basis points compared to
5.36% for the three months ended March 31, 1995. The decrease in net interest
income resulted primarily from increased volumes and rates on interest-bearing
deposits offset by increased volumes of interest-earning assets.
Taxable-equivalent net interest income was $5.2 million for the year ended
December 31, 1995, a decrease of $529 thousand or 9.2% compared to the year
ended December 31, 1994 and taxable-equivalent net interest income of $5.8
million for the year ended December 31, 1994 increased $52 thousand or 0.9%
compared to the year ended December 31, 1993.
The net yield on interest-earning assets, also referred to as interest rate
margin, represents net interest income divided by average interest-earning
assets. The net interest rate margin of 4.92% for the year ended December 31,
1995 decreased 42 basis points compared to 5.34% for the year ended December 31,
1994. The decrease in net interest rate margin is due primarily to higher rates
paid on time deposits. The net interest rate margin for the year ended December
31, 1994 reflects a decrease of 15 basis points from the 5.49% for the year
ended December 31, 1993.
Average interest-earning assets declined $1.5 million or 1.4% to $106.5
million for the year ended December 31, 1995. The decrease in interest-earning
assets was consistent for all categories of interest-earning assets, including
loans, investment securities and federal funds sold. Average interest-earning
assets increased $3.8 million or 3.7% to $108.0 million for the year ended
December 31, 1994. The increase in average interest-earning assets for 1994
resulted primarily from an increase in investment securities of $5.8 million
offset by declines in loans and federal funds sold.
Average interest-earning assets comprised 91.6% of average total assets in
1995, compared to 92.0% in 1994 and 91.8% in 1993.
Average interest-bearing deposits declined $3.0 million or 3.2% to $92.2
million for the year ended December 31, 1995 compared to an increase of $2.2
million or 2.4% to $95.3 million for the year ended
F-89
<PAGE>
December 31, 1994. These changes in the mix of interest-earning assets and
interest-bearing deposits caused the ratio of interest-bearing deposits to
interest-earning assets to decline to 86.6% in 1995, compared to 88.2% in 1994
and 89.3% in 1993.
Average noninterest-bearing deposits increased $180 thousand or 2.6% to $7.1
million in 1995 compared to an increase of $113 thousand or 1.7% to $6.9 million
in 1994. The ratio of average noninterest-bearing deposits to average total
deposits was 7.2% for 1995, compared to 6.8% for each of 1994 and 1993.
The following table presents for the three months ended March 31, 1996 and
1995, the total dollar amount of interest income from average interest-earning
assets and resultant yields, reported on a taxable-equivalent basis, as well as
the interest-bearing liabilities, expressed both in dollars and rates. Average
balances are derived from weekly 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 34%
effective income tax rate.
<TABLE>
<CAPTION>
QUARTERLY FINANCIAL SUMMARY
THREE MONTHS ENDED MARCH 31,
----------------------------------------------------------------------
1996 1995
---------------------------------- ----------------------------------
AVERAGE YIELD/ AVERAGE YIELD/
TAXABLE-EQUIVALENT BASIS (1) BALANCE INTEREST RATE BALANCE INTEREST RATE
- ------------------------------------------------------ ----------- --------- ---------- ----------- --------- ----------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
ASSETS
Interest-Earning Assets
Loans
Commercial........................................ $ 16,211 $ 440 10.92% $ 17,531 $ 481 11.13%
Real Estate....................................... 30,081 857 11.46 26,085 756 11.75
Consumer.......................................... 2,277 82 14.48 3,038 120 16.02
----------- --------- ----------- ---------
Total Loans..................................... 48,569 1,379 11.42 46,654 1,357 11.80
----------- --------- ----------- ---------
Investment Securities
Taxable............................................. 33,339 546 6.59 37,879 557 5.96
Tax-exempt.......................................... 18,560 458 9.92 19,738 500 10.27
----------- --------- ----------- ---------
Total Investment Securities..................... 51,889 1,004 7.78 57,617 1,057 7.44
----------- --------- ----------- ---------
Federal Funds Sold.................................... 8,786 114 5.22 1,731 26 6.09
----------- --------- ----------- ---------
Total Interest-Earning Assets..................... 109,254 2,497 9.19 106,002 2,440 9.34
----------- --------- ----------- ---------
Cash and Due from Banks............................... 4,831 4,161
Premises and Equipment, Net........................... 3,117 3,544
Other Assets.......................................... 2,904 2,373
Less Allowance for Loan Losses...................... (959) (901)
----------- -----------
Total Assets.................................... $ 119,147 $ 115,179
----------- -----------
----------- -----------
LIABILITIES
Interest-Bearing Liabilities
Savings............................................. $ 16,696 166 4.00 $ 15,774 159 4.09
Money Market Checking and Savings................... 12,413 96 3.11 12,394 83 2.72
Time Deposits....................................... 65,533 876 5.38 63,887 798 5.07
----------- --------- ----------- ---------
Total Savings and Time Deposits................. 94,642 1,138 4.84 92,055 1,040 4.58
----------- --------- ----------- ---------
Demand Deposits....................................... 6,912 6,941
Other Liabilities..................................... 465 567
----------- -----------
Total Liabilities............................... 102,019 99,563
----------- -----------
STOCKHOLDERS' EQUITY.................................. 17,128 15,616
----------- -----------
Total Liabilities and Stockholders' Equity...... $ 119,147 $ 115,179
----------- -----------
----------- -----------
Net Interest Income................................... $ 1,359 $ 1,400
--------- ---------
--------- ---------
Net Yield on Total Interest-Earning Assets............ 5.00% 5.36%
----- -----
----- -----
</TABLE>
- ------------
(1) For analytical purposes, income from tax-exempt assets, primarily issued
by state and local governments or authorities, is adjusted by an
increment which equates tax-exempt income to interest from taxable
assets (assuming a 34% effective federal income tax rate).
F-90
<PAGE>
The following table presents for the last three calendar years the total
dollar amount of interest income from average interest-earning assets and the
resultant yields, reported on a taxable-equivalent basis, as well as the average
interest-bearing liabilities, expressed both in dollars and rates. Average
balances are derived from weekly 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 34%
effective federal income tax rate.
<TABLE>
<CAPTION>
THREE-YEAR FINANCIAL SUMMARY
YEARS ENDED DECEMBER 31,
----------------------------------------------------------------------------------------------
1995 1994 1993
---------------------------------- ---------------------------------- ----------------------
AVERAGE YIELD/ AVERAGE YIELD/ AVERAGE
TAXABLE-EQUIVALENT BASIS (1) BALANCE INTEREST RATE BALANCE INTEREST RATE BALANCE INTEREST
- ----------------------------------- --------- ----------- ---------- --------- ----------- ---------- --------- -----------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
ASSETS
Interest-Earning Assets
Loans
Commercial..................... $ 16,289 $ 1,765 10.84% $ 18,858 $ 2,070 10.98% $ 17,074 $ 1,794
Real Estate.................... 27,452 3,159 11.51 25,051 2,761 11.02 27,868 3,115
Consumer....................... 2,748 402 14.63 3,229 497 15.39 3,131 502
--------- ----------- --------- ----------- --------- -----------
Total Loans.................. 46,489 5,326 11.46 47,138 5,328 11.30 48,073 5,411
--------- ----------- --------- ----------- --------- -----------
Investment Securities
Taxable.......................... 36,837 2,185 5.93 36,735 2,053 5.59 31,911 2,046
Tax-exempt....................... 18,744 1,886 10.06 19,148 1,948 10.17 18,203 1,976
--------- ----------- --------- ----------- --------- -----------
Total Investment
Securities................. 55,581 4,071 7.32 55,883 4,001 7.16 50,114 4,022
--------- ----------- --------- ----------- --------- -----------
Federal Funds Sold................. 4,462 259 5.80 5,010 212 4.23 5,995 177
--------- ----------- --------- ----------- --------- -----------
Total Interest-Earning
Assets....................... 106,532 9,656 9.06 108,031 9,541 8.83 104,182 9,610
--------- ----------- --------- ----------- --------- -----------
Cash and Due from Banks............ 4,568 5,146 5,473
Premises and Equipment, Net........ 3,456 2,841 1,945
Other Assets....................... 2,644 2,267 2,451
Less Allowance for Loan Losses... (901) (829) (614)
--------- --------- ---------
Total Assets................. $ 116,299 $ 117,456 $ 113,437
--------- --------- ---------
--------- --------- ---------
LIABILITIES
Interest-Bearing Liabilities
Savings.......................... $ 15,071 603 4.00 $ 15,320 612 4.00 $ 11,006 443
Money Market Checking and
Savings........................ 11,843 344 2.90 14,158 395 2.79 14,994 530
Time Deposits.................... 65,335 3,468 5.31 65,801 2,764 4.20 67,069 2,919
--------- ----------- --------- ----------- --------- -----------
Total Savings and Time
Deposits................... 92,249 4,415 4.79 95,279 3,771 3.96 93,069 3,892
--------- ----------- --------- ----------- --------- -----------
Demand Deposits.................... 7,119 6,939 6,826
Other Liabilities.................. 548 459 398
--------- --------- ---------
Total Liabilities............ 99,916 102,677 100,293
--------- --------- ---------
STOCKHOLDERS' EQUITY............... 16,383 14,779 13,144
--------- --------- ---------
Total Liabilities and
Stockholders' Equity....... $ 116,299 $ 117,456 $ 113,437
--------- --------- ---------
--------- --------- ---------
Net Interest Income................ $ 5,241 $ 5,770 $ 5,718
----------- ----------- -----------
----------- ----------- -----------
Net Yield on Total Interest-Earning
Assets............................ 4.92% 5.34%
----- -----
----- -----
<CAPTION>
YIELD/
TAXABLE-EQUIVALENT BASIS (1) RATE
- ----------------------------------- ----------
<S> <C>
ASSETS
Interest-Earning Assets
Loans
Commercial..................... 10.51%
Real Estate.................... 11.18
Consumer....................... 16.03
Total Loans.................. 11.26
Investment Securities
Taxable.......................... 6.41
Tax-exempt....................... 10.86
Total Investment
Securities................. 8.03
Federal Funds Sold................. 2.95
Total Interest-Earning
Assets....................... 9.22
Cash and Due from Banks............
Premises and Equipment, Net........
Other Assets.......................
Less Allowance for Loan Losses...
Total Assets.................
LIABILITIES
Interest-Bearing Liabilities
Savings.......................... 4.03
Money Market Checking and
Savings........................ 3.53
Time Deposits.................... 4.35
Total Savings and Time
Deposits................... 4.18
Demand Deposits....................
Other Liabilities..................
Total Liabilities............
STOCKHOLDERS' EQUITY...............
Total Liabilities and
Stockholders' Equity.......
Net Interest Income................
Net Yield on Total Interest-Earning
Assets............................ 5.49%
-----
-----
</TABLE>
- ---------
(1) For analytical purposes, income from tax-exempt assets, primarily issued
by state and local governments or authorities, is adjusted by an
increment which equates tax-exempt income to interest from taxable
assets (assuming a 34% effective federal income tax rate).
F-91
<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. 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>
TAXABLE-EQUIVALENT BASIS(1) DUE TO CHANGE IN
THREE MONTHS ENDED MARCH 31, NET ---------------------------
1996 COMPARED TO 1995 CHANGE VOLUME RATE RATE/VOLUME
- -------------------------------------------------------------------------------- ------ ------ ----- -----------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
Interest Income
Loans, Including Fees......................................................... $ 22 $ 56 $ (36) $ 2
Investment Securities
Taxable..................................................................... (11) (67) 64 (8)
Tax-Exempt.................................................................. (42) (30) (13) 1
Federal Funds Sold............................................................ 88 106 (4) (14)
------ ------ ----- -----
Total Interest Income..................................................... 57 65 11 (19)
------ ------ ----- -----
Interest Expense - Deposits..................................................... 98 29 68 1
------ ------ ----- -----
Net Interest Income Before Allocation Rate/Volume............................... (41) 36 (57) (20)
------ ------ ----- -----
Allocation of Rate/Volume....................................................... -- (7) (13) 20
------ ------ ----- -----
Changes in Net Interest Income.................................................. $ (41) $ 29 $ (70) $--
------ ------ ----- -----
------ ------ ----- -----
</TABLE>
<TABLE>
<CAPTION>
TAXABLE-EQUIVALENT BASIS(1) DUE TO CHANGE IN
YEAR ENDED DECEMBER 31, NET ---------------------------
1995 COMPARED TO 1994 CHANGE VOLUME RATE RATE/VOLUME
- -------------------------------------------------------------------------------- ------ ------ ----- -----------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
Interest Income
Loans, Including Fees......................................................... $ (2) $ (73) $ 74 $ (3)
Investment Securities
Taxable..................................................................... 132 6 125 1
Tax-Exempt.................................................................. (62) (41) (21) --
Federal Funds Sold............................................................ 47 (23) 70 --
------ ------ ----- -----
Total Interest Income..................................................... 115 (131) 248 (2)
------ ------ ----- -----
Interest Expense - Deposits..................................................... 644 (120) 766 (2)
------ ------ ----- -----
Net Interest Income Before Allocation Rate/Volume............................... (529) (11) (518) --
------ ------ ----- -----
Allocation of Rate/Volume....................................................... -- -- -- --
------ ------ ----- -----
Changes in Net Interest Income.................................................. $(529) $ (11) $(518) $--
------ ------ ----- -----
------ ------ ----- -----
</TABLE>
- ---------
(1) For analytical purposes, income from tax-exempt assets, primarily
securities issued by state and local governments or authorities, is
adjusted by an increment which equates tax-exempt income to interest
from taxable assets (assuming a 34% effective federal income tax rate).
F-92
<PAGE>
<TABLE>
<CAPTION>
TAXABLE-EQUIVALENT BASIS(1) DUE TO CHANGE IN
YEAR ENDED DECEMBER 31, NET ---------------------------
1994 COMPARED TO 1993 CHANGE VOLUME RATE RATE/VOLUME
- -------------------------------------------------------------------------------- ------ ------ ----- -----------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
Interest Income
Loans, Including Fees......................................................... $ (83) $(105) $ 19 $ 3
Investment Securities
Taxable..................................................................... 7 309 (301) (1)
Tax-Exempt.................................................................. (28) 103 (132) 1
Federal Funds Sold............................................................ 35 (29) 64 --
------ ------ ----- -----
Total Interest Income..................................................... (69) 278 (350) 3
------ ------ ----- -----
Interest Expense - Deposits..................................................... (121) 92 (210) (3)
------ ------ ----- -----
Net Interest Income Before Allocation Rate/Volume............................... 52 186 (140) 6
Allocation of Rate/Volume -- 3 3 (6)
------ ------ ----- -----
Changes in Net Interest Income.................................................. $ 52 $ 189 $(137) $--
------ ------ ----- -----
------ ------ ----- -----
</TABLE>
- ---------
(1) For analytical purposes, income from tax-exempt assets, primarily
securities issued by state and local governments or authorities, is
adjusted by an increment which equates tax-exempt income to interest
from taxable assets (assuming a 34% effective federal income tax rate).
NET YIELD ON EARNING ASSETS
The following table presents net interest income, average earning assets and
the net yield by quarter for the three months ended March 31, 1996 and for each
of the past three years. Income and yield on earning assets include amounts to
convert tax-exempt income to a taxable-equivalent basis, assuming a 34%
effective federal income tax rate.
<TABLE>
<CAPTION>
NET YIELD ON % CHANGE QUARTER
EARNING ASSETS FROM ----------------------------------------------------------
TAXABLE-EQUIVALENT BASIS PRIOR YEAR YEAR FOURTH THIRD SECOND FIRST
- ----------------------------------- ------------ ------------- ------------- ------------- ------------- -------------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
1996
Net Interest Income................ 4.3%* $ 1,359 $ 1,359
Average Earnings Assets............ 2.6 109,254 109,254
Net Yield.......................... 5.00% 5.00
1995
Net Interest Income................ (9.2)% $ 5,241 $ 1,253 $ 1,262 $ 1,326 $ 1,400
Average Earning Assets............. (1.4) 106,532 107,507 105,765 106,854 106,002
Net Yield.......................... 4.92% 4.62% 4.73% 4.98% 5.36%
1994
Net Interest Income................ 0.9% $ 5,770 $ 1,412 $ 1,438 $ 1,463 $ 1,457
Average Earning Assets............. 3.6 108,031 108,540 109,808 107,981 105,794
Net Yield.......................... 5.34% 5.16% 5.20% 5.43% 5.58%
1993
Net Interest Income................ 15.2% $ 5,718 $ 1,432 $ 1,414 $ 1,472 $ 1,400
Average Earning Assets............. 15.7 104,182 106,463 106,405 103,597 100,265
Net Yield.......................... 5.49% 5.34% 5.27% 5.70% 5.66%
----- ------------- ------------- ------------- ------------- -------------
----- ------------- ------------- ------------- ------------- -------------
</TABLE>
- ------------------------------
*Annualized.
PROVISION FOR LOAN LOSSES
The provision for loan losses for the three months ended March 31, 1996 of
$71 thousand reflects an increase of $19 thousand or 36.5% compared to $52
thousand for the three months ended March 31, 1995.
F-93
<PAGE>
The provision for loan losses for the year ended December 31, 1995 was $485
thousand, an increase of $88 thousand or 22.2% from $397 thousand for the year
ended December 31, 1994. The provision for loan losses for the year ended
December 31, 1994 reflects an increase of $132 thousand or 49.8% from the $265
thousand provision for loan losses for the year ended December 31,1993.
Provisions for loan losses are charged to earnings to bring the total allowance
for loan losses to a level deemed appropriate by management based upon such
factors as historical experience, the volume and type of lending conducted by
Border Bank, the amount of nonperforming assets, regulatory policies, generally
accepted accounting principles, general economic conditions, particularly as
they relate to Border Bank's lending area, and other factors related to the
collectibility of Border Bank's loan portfolio. See "Allowance for Loan Losses."
In January 1995, Border Bank adopted Statement of Financial Accounting
Standards No. 114 ("Statement 114"), "Accounting by Creditors for Impairment of
a Loan" and the amendment thereof, Statement of Financial Accounting Standards
No. 118 ("Statement 118"), "Accounting by Creditors for Impairment of a
Loan-Income Recognition and Disclosures". In management's opinion, the adoption
of Statement 114 and Statement 118 did not have a material effect on Border
Bank's results of operations.
NONINTEREST INCOME
Noninterest income for the three months ended March 31, 1996 of $94 thousand
increased $19 thousand or 25.3% compared to $75 thousand for the three months
ended March 31, 1995.
Noninterest income of $316 thousand for the year ended December 31, 1995
decreased $87 thousand or 21.6% compared to the year ended December 31, 1994,
and noninterest income of $403 thousand for the year ended December 31, 1994
increased $117 thousand or 40.9% compared to $286 thousand for the year ended
December 31, 1993. The principal factor affecting the level of noninterest
income in 1994 was a reimbursement to Border Bank of $142 thousand by an
insurance company in connection with the prior year settlement of a lawsuit (See
"Noninterest Expense") which was partially offset by a payment by Border Bank of
$48 thousand to resolve unrelated litigation.
A detailed summary of noninterest income for the three months ended March
31, 1996 and 1995 and during the last three years is presented in the following
table:
<TABLE>
<CAPTION>
THREE MONTHS ENDED MARCH 31,
YEARS ENDED DECEMBER 31,
------------------------------------------- -------------------------------------------
% %
CHANGE FROM CHANGE FROM
NONINTEREST INCOME 1996 PRIOR YEAR 1995 1995 PRIOR YEAR 1994
- ---------------------------------------- ----- ----------------- ----- ----- ----------------- -----
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
Service Charges on Deposit Accounts..... $ 67 21.8% $ 55 $ 255 7.1% $ 238
Other Service Charges................... 16 60.0 10 33 10.0 30
----- ----- ----- ----- ----- -----
Total Service Charges............... 83 27.7 65 288 7.5 268
Other Operating Income.................. 11 10.0 10 28 (79.2) 135
----- ----- ----- ----- ----- -----
Total............................... $ 94 25.3% $ 75 $ 316 (21.6)% $ 403
----- ----- ----- ----- ----- -----
----- ----- ----- ----- ----- -----
<CAPTION>
%
CHANGE FROM
NONINTEREST INCOME PRIOR YEAR 1993
- ---------------------------------------- --------------- -----
<S> <C> <C>
Service Charges on Deposit Accounts..... 27.3% $ 187
Other Service Charges................... (21.1) 38
----- -----
Total Service Charges............... 19.1 225
Other Operating Income.................. 121.3 61
----- -----
Total............................... 40.9% $ 286
----- -----
----- -----
</TABLE>
NONINTEREST EXPENSE
Noninterest expense of $2.2 million for the year ended December 31, 1995
decreased $18 thousand or 0.8% compared to the year ended December 31, 1994, and
noninterest expense of $2.2 million for the year ended December 31,1994
decreased $296 thousand or 11.9% compared with $2.5 million for the year ended
December 31, 1993.
The largest category of noninterest expense, Total Salaries and Employee
Benefits ("Personnel") of $1.1 million for the year ended December 31, 1995
decreased $5 thousand or 0.5% compared to year ended December 31, 1994 levels.
Personnel expense of $1.1 million for the year ended December 31, 1994 increased
$116 thousand or 12.3% compared to year ended December 31, 1993 levels of $945
thousand. Personnel expense increased for the year ended December 31, 1994
primarily due to an increase in compensation levels.
F-94
<PAGE>
Occupancy expense of $234 thousand for the year ended December 31, 1995
increased $6 thousand or 2.6% compared to the year ended December 31,1994, and
occupancy expense of $228 thousand for the year ended December 31, 1994
increased $57 thousand or 33.3% when compared to occupancy expense of $171
thousand for the year ended December 31, 1993. The increases in 1995 and 1994
are primarily attributable to an expansion to Border Bank which began in 1994.
Equipment expense was $148 thousand, $139 thousand and $144 thousand for the
years ended December 31, 1995, 1994 and 1993, respectively.
Other noninterest expense of $729 thousand for the year ended December 31,
1995 decreased $15 thousand or 2.0% compared to the year ended December 31, 1994
and other noninterest expense of $744 thousand for the year ended December 31,
1994 decreased $474 thousand or 38.9% when compared with the $1.2 million for
the year ended December 31, 1993. The principal factor attributable to the
decrease in other noninterest expense for the year ended December 31, 1994 was a
cost to settle litigation which was recorded in 1993. In 1993, Border Bank
settled a lender liability claim by a former borrower.
The increase in legal and professional fees in 1995 was primarily
attributable to audit fees incurred in 1995.
A detailed summary of noninterest expense for the three months ended March
31, 1996 and 1995 and during the last three years is presented in the following
table:
<TABLE>
<CAPTION>
THREE MONTHS ENDED MARCH 31,
YEARS ENDED DECEMBER 31,
------------------------------------- ------------------------------------------------------
% % %
CHANGE FROM CHANGE FROM CHANGE FROM
NONINTEREST EXPENSE 1996 PRIOR PERIOD 1995 1995 PRIOR YEAR 1994 PRIOR YEAR
- ---------------------------------- --------- --------------- --------- --------- --------------- --------- ---------------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C>
Salaries and Wages................ $ 213 (10.5)% $ 238 $ 906 0.1% $ 905 14.3%
Employee Benefits................. 35 (5.4) 37 150 3.8 156 2.0
--------- ------ --------- --------- ------ --------- ------
Total Salaries and Employee
Benefits.................... 248 (9.8) 275 1,056 (0.5) 1,061 12.3
--------- ------ --------- --------- ------ --------- ------
Net Occupancy Expense............. 55 12.2 49 234 2.6 228 33.3
--------- ------ --------- --------- ------ --------- ------
Equipment Expense................. 28 (15.2) 33 148 6.5 139 (3.5)
--------- ------ --------- --------- ------ --------- ------
Other Real Estate (Income)
Expense, Net
Expenses........................ 1 -- -- -- -- -- (100.0)
Write-Downs..................... -- -- -- -- (100.0) 13 --
--------- ------ --------- --------- ------ --------- ------
Total Other Real Estate
(Income) Expense, Net....... 1 -- -- -- (100.0) 13 333.3
--------- ------ --------- --------- ------ --------- ------
Other Noninterest Expense
Advertising and Public
Relations..................... 6 50.0 4 31 (22.5) 40 185.7
Data Processing and Check
Clearing...................... 31 19.2 26 106 19.1 89 20.3
Director Fees................... 11 (15.4) 13 46 (4.2) 48 41.2
Franchise Tax................... -- -- -- 38 8.5 35 66.7
Insurance....................... 4 (42.9) 7 17 13.3 15 (34.8)
FDIC Insurance.................. -- (100.0) 49 124 (45.9) 229 11.2
Legal and Professional.......... 20 81.8 11 215 138.9 90 3.4
Stationery and Supplies......... 23 (4.2) 24 53 (38.4) 86 43.3
Telephone....................... 7 40.0 5 25 25.0 20 --
Other Losses.................... 1 -- -- -- -- -- (100.0)
Other........................... 27 12.5 24 74 (19.6) 92 22.7
--------- ------ --------- --------- ------ --------- ------
Total Other Noninterest
Expense..................... 130 (20.2) 163 729 (2.0) 744 (38.9)
--------- ------ --------- --------- ------ --------- ------
Total......................... $ 462 (11.2)% $ 520 $ 2,167 (0.8)% $ 2,185 (11.9)%
--------- ------ --------- --------- ------ --------- ------
--------- ------ --------- --------- ------ --------- ------
<CAPTION>
NONINTEREST EXPENSE 1993
- ---------------------------------- ---------
<S> <C>
Salaries and Wages................ $ 792
Employee Benefits................. 153
---------
Total Salaries and Employee
Benefits.................... 945
---------
Net Occupancy Expense............. 171
---------
Equipment Expense................. 144
---------
Other Real Estate (Income)
Expense, Net
Expenses........................ 3
Write-Downs..................... --
---------
Total Other Real Estate
(Income) Expense, Net....... 3
---------
Other Noninterest Expense
Advertising and Public
Relations..................... 14
Data Processing and Check
Clearing...................... 74
Director Fees................... 34
Franchise Tax................... 21
Insurance....................... 23
FDIC Insurance.................. 206
Legal and Professional.......... 87
Stationery and Supplies......... 60
Telephone....................... 20
Other Losses.................... 604
Other........................... 75
---------
Total Other Noninterest
Expense..................... 1,218
---------
Total......................... $ 2,481
---------
---------
</TABLE>
F-95
<PAGE>
POSTRETIREMENT BENEFITS OTHER THAN PENSIONS
In December 1990, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards No. 106 ("Statement 106"),
"Employers' Accounting for Postretirement Benefits Other Than Pensions", which
is effective for fiscal years beginning after December 15, 1992. Statement 106
requires companies that have postretirement benefit plans to accrue the
estimated cost of providing those benefits to an employee and the employee's
beneficiaries and covered dependents. Border Bank does not provide
postretirement benefits other than a nonqualified deferred compensation plan for
the benefit of a former President.
INCOME TAX
Income tax expense amounted to $172 thousand for the three months ended
March 31, 1996 compared to $136 thousand for the three months ended March 31,
1995. The increase in income tax expense for the three months ended March 31,
1996 is due primarily to an increased level of pretax income and decreased level
of tax-exempt interest.
Income tax expense amounted to $381 thousand for the year ended December 31,
1995 compared to $604 thousand for the year ended December 31, 1994. Tax expense
varies from one year to the next with changes in the level of income before
taxes, changes in the amount of tax-exempt interest income, and the relationship
of these changes to each other.
Border Bank's effective tax rate for 1995 was 16.8% compared with 20.6% in
1994. Income tax expense differs from the amount computed at statutory rates
primarily due to tax-exempt interest from certain investment securities.
Effective January 1, 1993, Border Bank adopted Statement of Financial
Accounting Standards No. 109 ("Statement 109"), "Accounting for Income Taxes".
Through December 31, 1992, Border Bank accounted for income taxes under
Accounting Principles Board Opinion No. 11 ("APB 11"). Statement 109 has changed
Border Bank's method of accounting for income taxes from the deferred method
required under APB 11 to the asset and liability method. Under the deferred
method, annual income tax expense is matched with pretax accounting income by
providing deferred taxes at current tax rates for timing differences between the
determination of net income for financial reporting and tax purposes. The
objective of the asset and liability method is to establish deferred tax assets
and liabilities for the recognition of future deductions or taxable amounts.
Deferred tax expense or benefit is recognized as a result of the change in the
asset or liability during the year.
NET INCOME
Net income was $1.9 million, $2.3 million and $2.1 million for the years
ended December 31, 1995, 1994 and 1993, respectively.
ANALYSIS OF FINANCIAL CONDITION
BALANCE SHEET COMPOSITION
The average assets and liabilities of Border Bank have remained stable over
the last three years. Average interest-earning assets of $106.5 million declined
$1.5 million or 1.4% for the year ended December 31, 1995 compared to the year
ended December 31, 1994. Average interest-earning assets of $108.0 million
increased $3.8 million or 3.7% for the year ended December 31, 1994 compared to
$104.2 million for the year ended December 31, 1993. Average loans to average
interest-earning assets was 43.6% in 1995 and 1994 compared to 46.1% in 1993.
Average investment securities amounted to $55.6 million, $55.9 million and $50.1
million in 1995, 1994 and 1993, respectively.
Average interest-bearing deposits declined $3.0 million or 3.2% to $92.2
million for the year ended December 31, 1995 after increasing $2.2 million or
2.4% to $95.3 million for the year ended December 31, 1994. The ratio of average
demand deposits to average total deposits for the years ended December 31, 1995,
1994 and 1993 was 7.2%, 6.8%, and 6.8%, respectively.
F-96
<PAGE>
The following table presents Border Bank's average balance sheets during the
three months ended March 31, 1996 and 1995 and the last three years:
<TABLE>
<CAPTION>
THREE MONTHS ENDED MARCH
31, YEARS ENDED DECEMBER 31,
------------------------ -------------------------------------
AVERAGE BALANCE SHEETS 1996 1995 1995 1994 1993
- ------------------------------------------------ ----------- ----------- ----------- ----------- -----------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
ASSETS
Loans........................................... $ 48,569 $ 46,654 $ 46,489 $ 47,138 $ 48,073
Investment Securities
Taxable....................................... 33,339 37,879 36,837 36,735 31,911
Tax-Exempt.................................... 18,560 19,738 18,744 19,148 18,203
Federal Funds Sold.............................. 8,786 1,731 4,462 5,010 5,995
----------- ----------- ----------- ----------- -----------
Total Interest-Earning Assets................. 109,254 106,002 106,532 108,031 104,182
Cash and Due From Banks......................... 4,831 4,161 4,568 5,146 5,473
Bank Premises and Equipment, Net................ 3,117 3,544 3,456 2,841 1,945
Other Assets.................................... 2,904 2,373 2,644 2,267 2,451
Allowance for Loan Losses....................... (959) (901) (901) (829) (614)
----------- ----------- ----------- ----------- -----------
Total......................................... $ 119,147 $ 115,179 $ 116,299 $ 117,456 $ 113,437
----------- ----------- ----------- ----------- -----------
LIABILITIES
Demand Deposits................................. $ 6,912 $ 6,941 $ 7,119 $ 6,939 $ 6,826
----------- ----------- ----------- ----------- -----------
Savings......................................... 16,696 15,774 15,071 15,320 11,006
Money Market Checking and Savings............... 12,413 12,394 11,843 14,158 14,994
Time Deposits................................... 65,533 63,887 65,335 65,801 67,069
----------- ----------- ----------- ----------- -----------
Total Interest-Bearing Deposits............... 94,642 92,055 92,249 95,279 93,069
----------- ----------- ----------- ----------- -----------
Total Deposits.................................. 101,554 98,996 99,368 102,218 99,895
Other Liabilities............................... 465 567 548 459 398
STOCKHOLDERS' EQUITY............................ 17,128 15,616 16,383 14,779 13,144
----------- ----------- ----------- ----------- -----------
Total......................................... $ 119,147 $ 115,179 $ 116,299 $ 117,456 $ 113,437
----------- ----------- ----------- ----------- -----------
----------- ----------- ----------- ----------- -----------
</TABLE>
CASH AND DUE FROM BANKS
Border Bank offers a broad range of commercial banking services to
individuals and businesses. The amount of cash and due from banks held on any
one day is significantly influenced by changes in cash items in process of
collection. At December 31, 1995, cash and due from banks was $4.0 million, $0.9
million more than at December 31, 1994.
INVESTMENT SECURITIES
Investment securities consist of two categories: Available for Sale and Held
to Maturity. Securities classified as Held to Maturity are those securities
Border Bank has both the positive intent and ability to hold to maturity and are
carried at amortized cost. Securities classified as Available for Sale are those
securities which Border Bank intends to hold for an indefinite period of time
but not necessarily to maturity. These securities may be sold as part of
asset/liability management strategy, or in response to significant movements in
interest rates, liquidity needs, regulatory capital considerations, and other
similar factors. These securities are carried at fair value in the accompanying
balance sheet. The percentage of the investment portfolio allocated to Available
for Sale and Held to Maturity was 12.5% and 87.5%, respectively at December 31,
1995 compared with 14.9% and 85.1%, respectively at December 31, 1994.
F-97
<PAGE>
The following table presents the estimated market value of Securities
Available for Sale at March 31, 1996 and 1995.
<TABLE>
<CAPTION>
% CHANGE FROM
SECURITIES AVAILABLE FOR SALE 1996 PRIOR YEAR 1995
- --------------------------------------------------------------------------------- --------- ------------- ---------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
U.S. Treasury Securities......................................................... $ 2,001 1.7 % $ 1,967
U.S. Government Agency Securities................................................ 3,280 (24.3) 4,334
--------- ----- ---------
Total.......................................................................... $ 5,281 (16.2)% $ 6,301
--------- ----- ---------
--------- ----- ---------
</TABLE>
The following table presents the estimated market value of Securities
Available for Sale at December 31, 1995 and 1994. No securities were classified
as Securities Available for Sale in years prior to 1994 as management of Border
Bank adopted Statement 115 in January 1994:
<TABLE>
<CAPTION>
% CHANGE
FROM PRIOR
SECURITIES AVAILABLE FOR SALE 1995 YEAR 1994
- --------------------------------------------------------------------------------- --------- ------------ ---------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
U.S. Treasury Securities......................................................... $ 3,007 55.2% $ 1,937
U.S. Government Agency Securities................................................ 3,772 (44.4) 6,788
--------- ----- ---------
Total.......................................................................... $ 6,779 22.3% $ 8,725
--------- ----- ---------
--------- ----- ---------
</TABLE>
The following table presents the maturities, amortized cost, estimated
market value and weighted average yields of Securities Available for Sale at
March 31, 1996:
<TABLE>
<CAPTION>
AMORTIZED COST (1) MATURING
------------------------------------------------
AFTER ONE AFTER FIVE ESTIMATED
ONE YEAR THROUGH THROUGH TEN AFTER TEN AMORTIZED MARKET
SECURITIES AVAILABLE FOR SALE OR LESS FIVE YEARS YEARS YEARS COST (1) VALUE
- ---------------------------------------- --------- ----------- ----------- ----------- ----------- -----------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
U.S. Treasury Securities................ $ 500 $ 1,504 $ -- $ -- $ 2,004 $ 2,001
U.S. Government Agency
Securities............................. 2,985 299 -- -- 3,284 3,280
--------- ----------- ----------- ----------- ----------- -----------
Total................................. $ 3,485 $ 1,803 $ -- $ -- $ 5,288 $ 5,281
--------- ----------- ----------- ----------- ----------- -----------
--------- ----------- ----------- ----------- ----------- -----------
<CAPTION>
WEIGHTED AVERAGE YIELDS
(TAXABLE-EQUIVALENT BASIS)
- ----------------------------------------
<S> <C> <C> <C> <C> <C> <C>
U.S. Treasury Securities................ 4.46% 5.60% -- % -- % 5.32%
U.S. Government Agency
Securities............................. 5.96 6.22 -- -- 5.98
Total................................. 5.74 5.70 -- -- 5.73
--------- ----------- ----------- ----------- -----------
--------- ----------- ----------- ----------- -----------
</TABLE>
- ---------
(1) Amortized cost for Securities Available for Sale is stated at par plus
any remaining unamortized premium paid less any remaining unamortized
discount received.
F-98
<PAGE>
The following table presents the maturities, amortized cost, estimated
market value and weighted average yields of Securities Available for Sale at
December 31, 1995:
<TABLE>
<CAPTION>
AMORTIZED COST (1) MATURING
------------------------------------------------
AFTER ONE AFTER FIVE ESTIMATED
ONE YEAR THROUGH THROUGH TEN AFTER TEN AMORTIZED MARKET
SECURITIES AVAILABLE FOR SALE OR LESS FIVE YEARS YEARS YEARS COST (1) VALUE
- ---------------------------------------- --------- ----------- ----------- ----------- ----------- -----------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
U.S. Treasury Securities................ $ 1,499 $ 1,506 $ -- $ -- $ 3,005 $ 3,007
U.S. Government Agency
Securities............................. 1,994 1,785 -- -- 3,779 3,772
--------- ----------- ----------- ----------- ----------- -----------
Total................................. $ 3,493 $ 3,291 $ -- $ -- $ 6,784 $ 6,779
--------- ----------- ----------- ----------- ----------- -----------
--------- ----------- ----------- ----------- ----------- -----------
<CAPTION>
WEIGHTED AVERAGE YIELDS
(TAXABLE-EQUIVALENT BASIS)
- ----------------------------------------
<S> <C> <C> <C> <C> <C> <C>
U.S. Treasury Securities................ 5.13% 5.60% -- % -- % 5.37%
U.S. Government Agency
Securities............................. 4.97 7.19 -- -- 6.02
Total................................. 5.04 6.46 -- -- 5.73
--------- ----------- ----------- ----------- -----------
--------- ----------- ----------- ----------- -----------
</TABLE>
- ---------
(1) Amortized cost for Securities Available for Sale is stated at par plus
any remaining unamortized premium paid less any remaining unamortized
discount received.
The following table presents the amortized cost of Securities Held to
Maturity at March 31, 1996 and 1995:
<TABLE>
<CAPTION>
% CHANGE
FROM PRIOR
SECURITIES HELD TO MATURITY 1996 YEAR 1995
- ------------------------------------------------------------------------------ --------- ----------- ---------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
U.S. Government Agency Securities............................................. $ 22,337 (23.3)% $ 29,115
States and Political Subdivisions Securities.................................. 18,414 (9.3 ) 20,308
Other Securities.............................................................. 1,577 215.4 500
--------- ----------- ---------
Total....................................................................... $ 42,328 (15.2 )% $ 49,923
--------- ----------- ---------
--------- ----------- ---------
</TABLE>
The following table presents the amortized cost of Securities Held to
Maturity at December 31, 1995, 1994 and 1993:
<TABLE>
<CAPTION>
% CHANGE
% CHANGE FROM FROM PRIOR
SECURITIES HELD TO MATURITY 1995 PRIOR YEAR 1994 YEAR 1993
- ----------------------------------------------------- --------- ------------- --------- ----------- ---------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
U.S. Treasury Securities............................. $ -- -- % $ -- (100.0)% $ 3,497
U.S. Government Agency Securities.................... 27,247 (1.6 ) 27,689 (11.0 ) 31,116
States and Political Subdivisions Securities......... 18,633 (7.9 ) 20,233 4.7 19,326
Other Securities..................................... 1,577 (23.9 ) 2,073 315.4 499
--------- ----- --------- ----------- ---------
Total.............................................. $ 47,457 (5.1 )% $ 49,995 (8.2 )% $ 54,438
--------- ----- --------- ----------- ---------
--------- ----- --------- ----------- ---------
</TABLE>
Investments in entities within the State of Texas comprised 92.6% of the
total investment in states and political subdivisions. No single issue accounted
for as much as 10.0% of total stockholders' equity at December 31, 1995. Of the
obligations of states and political subdivisions held by Border Bank at December
31, 1995, 51.2% were rated A or better by Moody's Investor Services, Inc.
F-99
<PAGE>
The following table presents the maturities, amortized cost, estimated
market value and weighted average yields of Securities Held to Maturity at March
31, 1996:
<TABLE>
<CAPTION>
AMORTIZED COST (1) MATURING
--------------------------------------------------
AFTER ONE AFTER FIVE ESTIMATED
ONE YEAR OR THROUGH THROUGH TEN AFTER TEN AMORTIZED MARKET
SECURITIES HELD TO MATURITY LESS FIVE YEARS YEARS YEARS COST (1) VALUE
- ----------------------------------------- ----------- ----------- ----------- ----------- ----------- -----------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
U.S. Government Agency
Securities.............................. $ 3,000 $ 18,837 $ 500 $ -- $ 22,337 $ 22,057
States and Political Subdivisions
Securities.............................. 1,578 6,089 7,933 2,814 18,414 19,394
Other Securities......................... -- 1,577 -- -- 1,577 1,614
----------- ----------- ----------- ----------- ----------- -----------
Total.................................. $ 4,578 $ 26,503 $ 8,433 $ 2,814 $ 42,328 $ 43,065
----------- ----------- ----------- ----------- ----------- -----------
----------- ----------- ----------- ----------- ----------- -----------
<CAPTION>
WEIGHTED AVERAGE YIELDS
(TAXABLE-EQUIVALENT BASIS)
- -----------------------------------------
<S> <C> <C> <C> <C> <C> <C>
U.S. Government Agency
Securities.............................. 3.17% 5.74% 6.51% -- % 5.41%
States and Political Subdivisions
Securities.............................. 11.24 10.94 9.22 8.73 9.89
Other Securities......................... -- 6.98 -- -- 6.98
Total.................................. 5.95 7.01 9.06 8.73 7.42
----------- ----------- ----------- ----------- -----------
----------- ----------- ----------- ----------- -----------
</TABLE>
The following table presents the maturities, amortized cost, estimated
market value and weighted average yields of Securities Held to Maturity at
December 31, 1995:
<TABLE>
<CAPTION>
AMORTIZED COST (1) MATURING
--------------------------------------------------
AFTER ONE AFTER FIVE ESTIMATED
ONE YEAR OR THROUGH THROUGH TEN AFTER TEN AMORTIZED MARKET
SECURITIES HELD TO MATURITY LESS FIVE YEARS YEARS YEARS COST (1) VALUE
- ----------------------------------------- ----------- ----------- ----------- ----------- ----------- -----------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
U.S. Government Agency
Securities.............................. $ 2,500 $ 24,247 $ 500 $ -- $ 27,247 $ 27,058
States and Political Subdivisions
Securities.............................. 1,054 6,694 7,176 3,709 18,633 19,895
Other Securities......................... -- 1,577 -- -- 1,577 1,644
----------- ----------- ----------- ----------- ----------- -----------
Total.................................. $ 3,554 $ 32,518 $ 7,676 $ 3,709 $ 47,457 $ 48,597
----------- ----------- ----------- ----------- ----------- -----------
----------- ----------- ----------- ----------- ----------- -----------
<CAPTION>
WEIGHTED AVERAGE YIELDS
(TAXABLE-EQUIVALENT BASIS)
- -----------------------------------------
<S> <C> <C> <C> <C> <C> <C>
U.S. Government Agency
Securities.............................. 3.00% 5.85% 6.51% -- % 5.60%
States and Political Subdivisions
Securities.............................. 10.24 11.12 9.30 8.73 9.89
Other Securities......................... -- 6.98 -- -- 6.98
Total.................................. 5.15 6.99 9.12 8.73 7.33
----------- ----------- ----------- ----------- -----------
----------- ----------- ----------- ----------- -----------
</TABLE>
- ---------
(1) Amortized cost for Securities Held to Maturity is stated at par plus any
remaining unamortized premium paid or less any remaining unamortized
discount received.
At December 31, 1995, U.S. Government Agency securities with a carrying
value of approximately $4.0 million contained interest features which adjust
according to various dual indices and/or which could adjust to zero. These
features relate only to the interest payments and do not affect the principal
amount due. At December 31, 1995, the weighted average coupon of these
securities equalled 2.76%.
F-100
<PAGE>
One issue with a book value of $1.5 million has adjusted to zero percent and
will mature in May 1996. The following table presents the maturities, amortized
cost and estimated market value of such securities at December 31, 1995:
<TABLE>
<CAPTION>
AMORTIZED COST (1) MATURING
--------------------------------------------------
AFTER ONE AFTER FIVE ESTIMATED
ONE YEAR OR THROUGH THROUGH TEN AFTER TEN AMORTIZED MARKET
LESS FIVE YEARS YEARS YEARS COST (1) VALUE
----------- ----------- ----------- ----------- ----------- -----------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
Available for Sale....................... $ 1,000 $ -- $ -- $ -- $ 1,000 $ 987
Held to Maturity......................... 2,000 1,000 -- -- 3,000 2,922
----------- ----------- ----------- ----------- ----------- -----------
Total.................................. $ 3,000 $ 1,000 $ -- $ -- $ 4,000 $ 3,909
----------- ----------- ----------- ----------- ----------- -----------
----------- ----------- ----------- ----------- ----------- -----------
</TABLE>
- ---------
(1) Amortized cost for Securities Held to Maturity is stated at par plus any
remaining unamortized premium paid or less any remaining unamortized
discount received.
F-101
<PAGE>
LOANS
Border Bank closely monitors the markets in which it conducts its lending. A
certain degree of risk is inherent in the extension of credit. Management has
instituted credit policies designed to monitor and control the level of losses
and nonperforming assets. These policies require evaluation of new credit
requests and continuing review of existing credits in order to identify, monitor
and quantify any evidence of deterioration of quality or potential loss.
Border Bank attempts to diversify risk with the objective of achieving
optimum rates of return while minimizing losses for the benefit of stockholders
and protection of depositors. Diversification of the loan portfolio by type of
loan, industry concentration and type of borrower also tends to reduce risk by
minimizing the adverse impact of any single event or set of occurrences.
Total loans of $47.3 million for the year ended December 31, 1995 increased
$1.5 million or 3.2% compared to the year ended December 31,1994 levels of $45.9
million and decreased $2.5 million or 5.2% for the year ended December 31,1994
compared to levels of $48.4 million at December 31, 1993. The increase in loans
outstanding at December 31, 1995 compared to December 31, 1994 was the result of
increases in real estate loans which were offset by small declines in commercial
and consumer loans. The largest component of the portfolio continues to be
commercial mortgages. At December 31, 1995, commercial mortgages totaled $20.2
million or 42.7% of the total loan portfolio. At December 31, 1994 commercial
mortgages were $15.9 million or 34.7% of the total loan portfolio.
Border Bank has made loans to individuals or companies that are residents
of, or domiciled in, Mexico. Such loans may be secured or unsecured. Secured
loans include loans secured by deposits in Border Bank, real estate loans
secured by properties located within the United States and loans on real estate
and equipment where the collateral is located in Mexico. Following is a summary
of loans to individuals and companies that are residents of, or domiciled in,
Mexico at March 31, 1996 and at the end of each of the last three years:
<TABLE>
<CAPTION>
DECEMBER 31,
MARCH 31, -------------------------------
1996 1995 1994 1993
----------- --------- --------- ---------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
Cash secured...................................................... $ 3,485 $ 3,715 $ 3,084 $ 6,890
Secured by U.S. real estate....................................... 863 867 979 741
Secured by assets located outside U.S............................. 6,525 5,935 6,609 3,493
Other............................................................. 1,968 1,309 1,506 1,312
----------- --------- --------- ---------
$ 12,841 $ 11,826 $ 12,178 $ 12,436
----------- --------- --------- ---------
----------- --------- --------- ---------
</TABLE>
The following table presents the composition of the loan portfolio at March
31, 1996 and at the end of each of the last five years:
<TABLE>
<CAPTION>
DECEMBER 31,
MARCH 31, -----------------------------------------------------
LOAN PORTFOLIO COMPOSITION 1996 1995 1994 1993 1992 1991
- ------------------------------------------- ----------- --------- --------- --------- --------- ---------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
Commercial................................. $ 18,714 $ 15,721 $ 16,954 $ 17,839 $ 12,650 $ 13,782
Agricultural............................... -- 1 2 54 16 120
Real estate
Construction............................. 716 751 957 1,445 703 703
Commercial Mortgage...................... 20,934 20,217 15,903 15,430 16,880 14,663
Agricultural Mortgage.................... 1,784 1,131 629 1,543 1,827 2,026
1-4 Family Mortgage...................... 6,652 7,207 8,362 8,765 7,661 6,050
Consumer................................... 2,217 2,317 3,052 3,306 3,058 2,644
----------- --------- --------- --------- --------- ---------
Total Loans.............................. $ 51,017 $ 47,345 $ 45,859 $ 48,382 $ 42,795 $ 39,988
----------- --------- --------- --------- --------- ---------
----------- --------- --------- --------- --------- ---------
</TABLE>
F-102
<PAGE>
The contractual maturity schedule of the loan portfolio at March 31, 1996 is
presented in the following table:
<TABLE>
<CAPTION>
LOAN MATURITIES
MARCH 31, 1996
------------------------------------------------
ONE AFTER ONE YEAR AFTER
YEAR THROUGH FIVE
OR LESS FIVE YEARS YEARS TOTAL
--------- --------------- --------- ---------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
Commercial..................................................... $ 15,548 $ 3,086 $ 80 $ 18,714
Real Estate.................................................... 9,364 19,129 1,593 30,086
Consumer....................................................... 1,457 760 -- 2,217
--------- --------------- --------- ---------
Total........................................................ $ 26,369 $ 22,975 $ 1,673 $ 51,017
--------- --------------- --------- ---------
--------- --------------- --------- ---------
Variable-Rate Loans............................................ $ 7,204 $ 11,691 $ 1,095 $ 19,990
Fixed-Rate Loans............................................... 19,165 11,284 578 31,027
--------- --------------- --------- ---------
Total........................................................ $ 26,369 $ 22,975 $ 1,673 $ 51,017
--------- --------------- --------- ---------
--------- --------------- --------- ---------
</TABLE>
The contractual maturity schedule of the loan portfolio at December 31, 1995
is presented in the following table:
<TABLE>
<CAPTION>
LOAN MATURITIES
DECEMBER 31, 1995
------------------------------------------------
ONE AFTER ONE YEAR AFTER
YEAR THROUGH FIVE
OR LESS FIVE YEARS YEARS TOTAL
--------- --------------- --------- ---------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
Commercial..................................................... $ 12,527 $ 3,194 $ -- $ 15,721
Agricultural................................................... 1 -- -- 1
Real Estate.................................................... 13,921 13,970 1,415 29,306
Consumer....................................................... 1,480 837 -- 2,317
--------- --------------- --------- ---------
Total........................................................ $ 27,929 $ 18,001 $ 1,415 $ 47,345
--------- --------------- --------- ---------
--------- --------------- --------- ---------
Variable-Rate Loans............................................ $ 10,085 $ 8,660 $ 910 $ 19,655
Fixed-Rate Loans............................................... 17,844 9,341 505 27,690
--------- --------------- --------- ---------
Total........................................................ $ 27,929 $ 18,001 $ 1,415 $ 47,345
--------- --------------- --------- ---------
--------- --------------- --------- ---------
</TABLE>
As shown in the preceding table, loans maturing within one year totaled
$27.9 million or 59.0% of total loans at December 31, 1995. Border Bank may
renew or extend a loan upon maturity based on management's assessment of
individual loans. Extension or renewal of loans without reduction of principal
for more than one twelve-month period are generally avoided, unless loans are
fully secured, or are revolving lines of credit subject to at least annual
analysis and renewal.
NONPERFORMING ASSETS
Nonperforming assets consist of nonaccrual loans, loans for which the
interest rate has been renegotiated below originally contracted rates and real
estate or other assets that have been acquired in partial or full satisfaction
of loan obligations. At December 31, 1995, there were twelve loans totalling
$189 thousand on nonaccrual status, none of which had a balance greater than $40
thousand.
Border Bank'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 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 for the years ended December 31,
F-103
<PAGE>
1995, 1994 and 1993 that are not classified as nonaccrual totaled $1.1 million,
$414 thousand, and $395 thousand, respectively. The increase for the year ended
December 31, 1995 as compared to the year ended December 31, 1994 is partly
attributable to two credits totaling $491 thousand included in that category,
which are secured by real estate and in the process of collection.
Nonperforming assets of $433 thousand at December 31, 1995 decreased $49
thousand or 10.2% compared to December 31, 1994 levels of $482 thousand and
decreased $317 thousand or 39.7% for the year ended December 31, 1994 compared
to December 31, 1993 levels of $799 thousand.
Border Bank's classification of nonperforming loans includes those loans for
which management believes collection is doubtful. Management is not aware of any
specific borrower relationships that are not reported as nonperforming where
management has serious doubts as to the ability of such borrowers to comply with
the present loan repayment terms which would cause nonperforming assets to
increase materially.
An analysis of the components of nonperforming assets at March 31, 1996 and
for the last five years is presented in the following table:
<TABLE>
<CAPTION>
DECEMBER 31,
MARCH 31, ----------------------------------------------------------
NONPERFORMING ASSETS 1996 1995 1994 1993 1992 1991
- ----------------------------------------------------- ------------ ---------- ---------- ---------- ---------- ----------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
Nonaccrual Loans..................................... $ 152 $ 189 $ 226 $ 587 $ 790 $ 844
Renegotiated Loans................................... -- -- -- -- -- --
------------ ---------- ----- ---------- ----- ----------
Nonperforming Loans................................ 152 189 226 587 790 844
Other Nonperforming Assets
(Primarily Other Real Estate)....................... 238 244 256 212 62 124
------------ ---------- ----- ---------- ----- ----------
Total Nonperforming Assets......................... 390 433 482 799 852 968
Accruing Loans 90 Days or More Past Due.............. 442 1,085 414 395 35 49
------------ ---------- ----- ---------- ----- ----------
Total Nonperforming Assets and Accruing Loans 90
Days or More Past Due............................ $ 832 $ 1,518 $ 896 $ 1,194 $ 887 $ 1,017
------------ ---------- ----- ---------- ----- ----------
------------ ---------- ----- ---------- ----- ----------
Nonperforming Loans as a % of Total Loans............ 0.30% 0.40% 0.49% 1.21% 1.85% 2.11%
Nonperforming Assets as a % of Total Loans and Other
Nonperforming Assets................................ 0.76 0.91 1.05 1.64 2.00 2.41
Nonperforming Assets as a % of Total Assets.......... 0.33 0.36 0.41 0.70 0.80 1.07
Nonperforming Assets Plus Accruing Loans
90 Days or More Past Due as a % of Total Loans and
Other Nonperforming Assets....................... 1.62 3.19 1.94 2.46 2.07 2.54
------------ ---------- ----- ---------- ----- ----------
------------ ---------- ----- ---------- ----- ----------
</TABLE>
Interest income that would have been recorded for the years ended December
31, 1995 and 1994 on nonaccrual loans had such loans performed in accordance
with their original contract terms was approximately $2 thousand and $34
thousand, respectively.
ALLOWANCE FOR LOAN LOSSES
Management analyzes the loan portfolio to determine the adequacy of the
allowance for loan losses and the appropriate provision required to maintain an
adequate allowance. In assessing the adequacy of the allowance, management
reviews the size, quality and risks of loans in the portfolio and considers
factors such as specific known risks, past experience, the status and amount of
nonperforming assets and economic conditions. A specific percentage is allocated
to total loans in good standing and additional amounts are added for individual
loans considered to have specific loss potential. Loans identified as losses are
charged off. Based on total allocations, the provision is recorded to maintain
the allowance at a level deemed appropriate by management. While management uses
available information to recognize losses on loans, there can be no assurance
that future additions to the allowance will not be necessary. The allowance for
loan losses at December 31, 1995 was $1.1 million, which represents an increase
of $199 thousand or 22.1% as compared to the allowance for loan losses at
December 31, 1994. Management believes that the allowance for loan losses at
December 31, 1995 adequately reflects the risks in the loan portfolio. However,
various regulatory agencies, as an integral part of their examination process,
F-104
<PAGE>
periodically review Border Bank's allowance for loan losses. Such agencies may
require Border Bank to recognize additions to the allowance based on their
judgments of information available to them at the time of their examination.
Management of Border Bank does not consider loans to residents of, and
companies domiciled in, Mexico to present an unusual risk. Border Bank's net
charge-offs from these loans has not been significant and it has not
specifically allocated allowance for loan losses to these loans.
As a result of criticisms reflected in the June 28, 1993 Report of
Examination by the Texas Department of Banking, a Memorandum of Understanding
(the "Memorandum") was entered into between the Board of Directors of Border
Bank and the Banking Commissioner of Texas on October 8, 1993. The Memorandum
required that Border Bank, among other provisions, increase Board of Directors
supervision over loan activities, revise the existing loan policy, increase the
allowance for loan losses and reduce criticized assets. Additionally, Border
Bank's Board of Directors is required to submit to the Commissioner and Regional
Director of the FDIC a written report of the actions taken to comply with the
Memorandum. Management has made efforts to comply with the requirements of the
Memorandum.
The following table summarizes the activity in the allowance for loan losses
for the three months ended March 31, 1996 and 1995 and the last five years:
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31, YEARS ENDED DECEMBER 31,
-------------------- -----------------------------------------------------
ALLOWANCE FOR LOAN LOSS ACTIVITY 1996 1995 1995 1994 1993 1992 1991
- --------------------------------------------- --------- --------- --------- --------- --------- --------- ---------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C>
Balance at Beginning of Period............... $ 1,100 $ 901 $ 901 $ 624 $ 612 $ 500 $ 490
Provision for Loan Losses.................... 71 52 485 397 265 486 157
Charge-Offs
Commercial................................. -- 15 135 40 38 206 48
Real Estate................................ -- -- 10 222 71 60
Consumer................................... 85 38 169 83 21 98 57
--------- --------- --------- --------- --------- --------- ---------
Total Charge-Offs........................ 85 53 304 133 281 375 165
--------- --------- --------- --------- --------- --------- ---------
Recoveries
Commercial................................. -- -- 6 11 7 -- 7
Real Estate................................ -- -- -- -- 17 -- --
Consumer................................... 14 2 12 2 4 1 11
--------- --------- --------- --------- --------- --------- ---------
Total Recoveries......................... 14 2 18 13 28 1 18
--------- --------- --------- --------- --------- --------- ---------
Net Charge-Offs (Recoveries)................. 71 51 286 120 253 374 147
--------- --------- --------- --------- --------- --------- ---------
Balance at End of Period..................... $ 1,100 $ 902 $ 1,100 $ 901 $ 624 $ 612 $ 500
--------- --------- --------- --------- --------- --------- ---------
--------- --------- --------- --------- --------- --------- ---------
Ratio of Allowance for Loan Losses to Loans
Outstanding, Net of Unearned Discount....... 2.16% 1.86% 2.32% 1.96% 1.29% 1.43% 1.25%
Ratio of Allowance for Loan Losses to
Nonperforming Assets........................ 282.05 378.99 254.04 186.93 78.10 74.83 51.65
Ratio of Net Charge-Offs to Average Total
Loans Outstanding, Net of Unearned
Discount.................................... 0.59 0.44 0.62 0.25 0.53 0.86 0.45
--------- --------- --------- --------- --------- --------- ---------
--------- --------- --------- --------- --------- --------- ---------
</TABLE>
F-105
<PAGE>
The allocation of the allowance for loan losses by loan category and the
percentage of loans in each category to total loans at March 31, 1996 is
presented in the table below:
ALLOCATION OF THE ALLOWANCE FOR LOAN LOSSES
<TABLE>
<CAPTION>
MARCH 31, 1996
-------------------------
% OF
LOANS
IN EACH
CATEGORY TO
TOTAL
AMOUNT LOANS
----------- ------------
(DOLLARS IN THOUSANDS)
<S> <C> <C>
Commercial............................................................................ $ 263 36.7%
Real Estate........................................................................... 154 59.0
Consumer.............................................................................. 64 4.3
Unallocated........................................................................... 619 --
----------- -----
Total............................................................................. $ 1,100 100.0%
----------- -----
----------- -----
</TABLE>
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 is presented in the table below:
<TABLE>
<CAPTION>
ALLOCATION OF THE ALLOWANCE FOR LOAN LOSSES
DECEMBER 31,
----------------------------------------------------------------------------------------------------------
1995 1994 1993 1992
------------------------- ------------------------- ------------------------- -------------------------
% OF % OF % OF % OF
LOANS LOANS LOANS LOANS
IN EACH IN EACH IN EACH IN EACH
CATEGORY TO CATEGORY TO CATEGORY TO CATEGORY TO
TOTAL TOTAL TOTAL TOTAL
AMOUNT LOANS AMOUNT LOANS AMOUNT LOANS AMOUNT LOANS
----------- ------------ ----------- ------------ ----------- ------------ ----------- ------------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Commercial......... $ 147 33.2% $ 66 37.0% $ 52 36.9% $ 41 29.6%
Agricultural....... -- -- -- -- -- 0.1 -- --
Real Estate........ 293 61.9 129 56.4 279 56.2 245 63.3
Consumer........... 153 4.9 164 6.6 173 6.8 156 7.1
Unallocated........ 507 -- 542 -- 120 -- 170 --
----------- ----- ----- ----- ----- ----- ----- -----
Total.......... $ 1,100 100.0% $ 901 100.0% $ 624 100.0% $ 612 100.0%
----------- ----- ----- ----- ----- ----- ----- -----
----------- ----- ----- ----- ----- ----- ----- -----
<CAPTION>
1991
-------------------------
% OF
LOANS
IN EACH
CATEGORY TO
TOTAL
AMOUNT LOANS
----------- ------------
<S> <C> <C>
Commercial......... $ 42 34.5%
Agricultural....... 1 0.3
Real Estate........ 225 58.6
Consumer........... 139 6.6
Unallocated........ 93 --
----- -----
Total.......... $ 500 100.0%
----- -----
----- -----
</TABLE>
PREMISES AND EQUIPMENT
Bank premises and equipment of $3.3 million at December 31,1995 increased
$77 thousand or 2.4% compared to $3.2 million at December 31, 1994. The net
increase for the year ended December 31, 1995 is primarily attributable to the
completion of an expansion of Border Bank, which began in 1994, and the purchase
of additional land for future expansion.
DEPOSITS
Total deposits of $102.0 million at December 31, 1995 increased $1.1 million
or 1.1% compared to December 31, 1994 levels and total deposits of $100.9
million for the year ended December 31, 1994 increased $344 thousand or 0.3%
compared to December 31, 1993 levels of $100.5 million. The relatively small
changes in deposits are consistent in all categories of deposits including
public funds and reflect the stable level of deposits at Border Bank. Total
public funds (including public funds demand deposits, public funds money market
and NOW accounts and public funds time deposits) were $10.0 million,
F-106
<PAGE>
$9.8 million and $10.6 million at December 31, 1995, 1994 and 1993,
respectively. Border Bank actively seeks consumer and commercial deposits. The
following table presents the composition of total deposits at March 31, 1996 and
at the end of the last three years:
<TABLE>
<CAPTION>
DECEMBER 31,
----------------------------------------------------------------
MARCH 31, % CHANGE FROM % CHANGE FROM
TOTAL DEPOSITS 1996 1995 PRIOR YEAR 1994 PRIOR YEAR 1993
- --------------------------------------------------- ---------- ---------- ------------- ---------- ------------- ----------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
Demand Deposits
Commercial and Individual........................ $ 5,622 $ 5,639 0.9% $ 5,588 2.1% $ 5,475
Public Funds..................................... 921 1,498 5.2 1,424 5.3 1,352
---------- ---------- ----- ---------- ----- ----------
Total Demand Deposits........................ 6,543 7,137 1.8 7,012 2.7 6,827
---------- ---------- ----- ---------- ----- ----------
Interest-Bearing Deposits
Savings.......................................... 16,980 16,365 -- 16,364 22.2 13,391
Money Market Checking and Savings
Commercial and Individual...................... 10,454 10,839 (5.6) 11,486 (13.4) 13,263
Public Funds................................... 2,258 1,464 2.4 1,430 (11.6) 1,617
Time Deposits
Commercial and Individual...................... 58,938 59,122 2.6 57,635 (0.2) 57,749
Public Funds................................... 7,039 7,068 1.9 6,938 (9.6) 7,674
---------- ---------- ----- ---------- ----- ----------
Total Interest-Bearing Deposits................ 95,669 94,858 1.1 93,853 0.2 93,694
---------- ---------- ----- ---------- ----- ----------
Total Deposits............................... $ 102,212 $ 101,995 1.1% $ 100,865 0.3% $ 100,521
---------- ---------- ----- ---------- ----- ----------
---------- ---------- ----- ---------- ----- ----------
Weighted Average Rate on Interest-Bearing
Deposits.......................................... 4.72% 4.81% 4.34% 3.93%
---------- ---------- ---------- ----------
---------- ---------- ---------- ----------
</TABLE>
Time deposits of $100,000 or more are solicited from markets served by
Border 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 at March 31, 1996 and at December 31, 1995 and 1994:
<TABLE>
<CAPTION>
DECEMBER 31,
MATURITIES OF TIME DEPOSITS MARCH 31, ------------------------
OF $100,000 OR MORE 1996 1995 1994
- --------------------------------------------------------------------------- ----------- ----------- -----------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
Three Months or Less....................................................... $ 24,641 $ 29,084 $ 34,555
After Three through Six Months............................................. 15,689 10,348 7,017
After Six through Twelve Months............................................ 3,880 4,813 3,240
After Twelve Months........................................................ 300 425 303
----------- ----------- -----------
Total.................................................................. $ 44,510 $ 44,670 $ 45,115
----------- ----------- -----------
----------- ----------- -----------
Weighted Average Rate on Time Deposits of $100,000 or More................. 5.55% 5.61% 4.96%
----------- ----------- -----------
----------- ----------- -----------
</TABLE>
Based upon the location of Border Bank with regard to the international
boundary with Mexico, foreign deposits from Mexican sources represent a major
source of funding. Although Border Bank experienced some short-term negative
impact on its Mexican deposits due to the recent devaluation of the peso, Border
Bank's Mexican deposit levels have since recovered.
F-107
<PAGE>
The following table presents foreign deposits, primarily from Mexican
sources, at March 31, 1996 and at December 31, 1995 and 1994:
<TABLE>
<CAPTION>
DECEMBER 31,
MARCH 31, ------------------------
FOREIGN DEPOSITS 1996 1995 1994
- ------------------------------------------------------------------------- ----------- ----------- -----------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
Demand Deposits.......................................................... $ 1,882 $ 2,221 $ 2,600
----------- ----------- -----------
Interest-Bearing Deposits
Savings................................................................ 12,962 12,289 11,971
Money Market Checking and Savings...................................... 7,458 7,880 8,604
Time Deposits Under $100,000........................................... 15,041 14,997 13,075
Time Deposits of $100,000 or More...................................... 29,707 29,148 27,240
----------- ----------- -----------
Total Interest-Bearing Deposits...................................... 65,168 64,314 60,890
----------- ----------- -----------
Total Foreign Deposits............................................... $ 67,050 $ 66,535 $ 63,490
----------- ----------- -----------
----------- ----------- -----------
Percentage of Total Deposits............................................. 65.6% 65.2% 62.9%
----------- ----------- -----------
----------- ----------- -----------
Weighted Average Rate on Foreign Deposits................................ 4.77% 4.80% 4.16%
----------- ----------- -----------
----------- ----------- -----------
</TABLE>
LIQUIDITY
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 or acquire additional deposit
liabilities is a major source of liquidity. Border Bank's principal sources of
funds are primarily within the local markets of Border Bank and consist of
deposits, interest and principal payments on loans and investment securities.
Asset liquidity is provided by cash and assets which are readily marketable,
or which can be pledged, or which will mature in the near future. These include
cash, federal funds sold and U.S. Government-backed securities. At December 31,
1995, Border Bank's liquidity ratio, defined as cash, U.S. Government-backed
securities, and federal funds sold as a percentage of deposits was 45.8%
compared to 43.6% at December 31, 1994 and compared to 39.0% at December 31,
1993.
Liability liquidity is provided by access to core funding sources,
principally various customers' interest-bearing and noninterest-bearing deposit
accounts in Border Bank's trade area.
During 1995, funds for $10.7 million of investment purchases and $1.9
million of net loan growth came from various sources, including a net increase
in deposits of $1.1 million, $15.6 million proceeds from maturing or called
securities and $1.9 million of net income.
The Federal Deposit Insurance Corporation Improvement Act of 1991 ("FDICIA")
requires that federal bank regulatory authorities take "prompt corrective
action" with respect to any depository institution which does not meet specified
minimum capital requirements. The applicable regulations establish five capital
levels which require or permit the Federal Deposit Insurance Corporation (the
"FDIC") and other regulatory authorities to take supervisory action. The
relevant classifications range from "well capitalized" to "critically
capitalized." The classifications are generally determined by applicable ratios
of the institution, including Tier I capital to risk-weighted assets, total
capital to risk-weighted assets and leverage ratios. Based on Border Bank's
capital ratios at December 31, 1995, Border Bank was classified as "well
capitalized" under the applicable regulations. As a result, Border Bank does not
believe that the prompt corrective action regulations have any material effect
on its activities or operations.
The funds management policy of Border Bank is to maintain a liability
sensitive position. Changes in net interest income occur when interest rates on
loans and investments change in a different time period from that of changes in
interest rates on liabilities, or when the mix and volume of interest-earning
assets and interest-bearing liabilities change. The interest rate sensitivity
gap represents the dollar amount of
F-108
<PAGE>
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.
Rate sensitive liabilities maturing within one year exceeded rate sensitive
assets with comparable maturities at December 31, 1995 by $33.2 million.
The following table summarizes interest rate sensitive assets and
liabilities by maturity at March 31, 1996:
<TABLE>
<CAPTION>
MARCH 31, 1996
---------------------------------------------------------------------
7-12 OVER
INTEREST RATE SENSITIVITY ANALYSIS 1-3 MONTHS 4-6 MONTHS MONTHS 1-5 YEARS 5 YEARS TOTAL
- --------------------------------------- ---------- ---------- ---------- --------- --------- -----------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
Loans.................................. $ 12,099 $ 6,035 $ 8,235 $ 22,975 $ 1,673 $ 51,017
Investment Securities
Available for Sale................... -- 992 2,486 1,803 -- 5,281
Held to Maturity..................... 1,695 1,435 1,448 26,504 11,247 42,329
Federal Funds Sold..................... 10,500 -- -- -- -- 10,500
---------- ---------- ---------- --------- --------- -----------
Total Interest-Earning Assets...... 24,294 8,462 12,169 51,282 12,920 109,127
---------- ---------- ---------- --------- --------- -----------
Savings................................ 16,980 -- -- -- -- 16,980
Money Market Checking and Savings
Accounts.............................. 12,712 -- -- -- -- 12,712
Time Deposits.......................... 36,799 20,909 6,851 1,418 -- 65,977
---------- ---------- ---------- --------- --------- -----------
Total Interest-Bearing
Liabilities...................... 66,491 20,909 6,851 1,418 -- 95,669
---------- ---------- ---------- --------- --------- -----------
Rate Sensitivity GAP (1)............... $ (42,197) $ (12,447) $ 5,318 $ 49,864 $ 12,920 $ 13,458
---------- ---------- ---------- --------- --------- -----------
---------- ---------- ---------- --------- --------- -----------
Cumulative Rate Sensitivity GAP........ $ (42,197) $ (54,644) $ (49,326) $ 538 $ 13,458
---------- ---------- ---------- --------- ---------
---------- ---------- ---------- --------- ---------
Ratio of Cumulative Rate Sensitivity
GAP to Total Assets................... (35.18)% (45.56)% (41.12)%
---------- ---------- ----------
---------- ---------- ----------
Ratio of Cumulative Rate Sensitive
Interest-Earning Assets to Cumulative
Rate Sensitive Interest-Bearing
Liabilities........................... 0.37:1 0.37:1 0.48:1
---------- ---------- ----------
---------- ---------- ----------
</TABLE>
- ---------
(1) Rate sensitive interest-earning assets less rate sensitive
interest-bearing liabilities.
F-109
<PAGE>
The following table summarizes interest rate sensitive assets and
liabilities by maturity at December 31, 1995:
<TABLE>
<CAPTION>
DECEMBER 31, 1995
---------------------------------------------------------------------
7-12 OVER
INTEREST RATE SENSITIVITY ANALYSIS 1-3 MONTHS 4-6 MONTHS MONTHS 1-5 YEARS 5 YEARS TOTAL
- --------------------------------------- ---------- ---------- ---------- --------- --------- -----------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
Loans.................................. $ 28,078 $ 3,383 $ 6,037 $ 9,341 $ 506 $ 47,345
Investment Securities
Available for Sale................... 1,986 -- 1,488 3,305 -- 6,779
Held to Maturity..................... 4,374 4,944 1,060 25,693 11,386 47,457
Federal Funds Sold..................... 8,750 -- -- -- -- 8,750
---------- ---------- ---------- --------- --------- -----------
Total Interest-Earning Assets...... 43,188 8,327 8,585 38,339 11,892 110,331
---------- ---------- ---------- --------- --------- -----------
Savings................................ 16,365 -- -- -- -- 16,365
Money Market Checking and Savings
Accounts.............................. 12,303 -- -- -- -- 12,303
Time Deposits.......................... 42,556 14,670 7,383 1,580 -- 66,189
---------- ---------- ---------- --------- --------- -----------
Total Interest-Bearing
Liabilities...................... 71,224 14,670 7,383 1,580 -- 94,857
---------- ---------- ---------- --------- --------- -----------
Rate Sensitivity GAP (1)............... $ (28,036) $ (6,343) $ 1,202 $ 36,759 $ 11,892 $ 15,474
---------- ---------- ---------- --------- --------- -----------
---------- ---------- ---------- --------- --------- -----------
Cumulative Rate Sensitivity GAP........ $ (28,036) $ (34,379) $ (33,177) $ 3,582 $ 15,474
---------- ---------- ---------- --------- ---------
---------- ---------- ---------- --------- ---------
Ratio of Cumulative Rate Sensitivity
GAP to Total Assets................... (23.46)% (28.77)% (27.76)%
---------- ---------- ----------
---------- ---------- ----------
Ratio of Cumulative Rate Sensitive
Interest-Earning Assets to Cumulative
Rate Sensitive Interest-Bearing
Liabilities........................... 0.61:1 0.60:1 0.64:1
---------- ---------- ----------
---------- ---------- ----------
</TABLE>
- ---------
(1) Rate sensitive interest-earning assets less rate sensitive
interest-bearing liabilities.
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 to 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.
CAPITAL RESOURCES
Stockholders' equity of $17.1 million at December 31, 1995 reflects a net
increase of $1.2 million or 7.8% compared to stockholders' equity of $15.8
million at December 31, 1994. This net increase was primarily attributable to
earnings for 1995 of $1.9 million. The net increase in stockholders' equity
reflects dividends paid on common stock of $800 thousand in 1995. Border Bank
also declared and paid a $500 thousand dividend in January 1996.
The risk-based capital standards as established by the FDIC apply to Border
Bank. The numerator of the risk-based capital ratio for banks includes Tier I
capital, consisting of common stockholders' equity and qualifying cumulative and
noncumulative perpetual preferred stock; and Tier II capital, consisting of
F-110
<PAGE>
other preferred stock, reserve for possible loan losses and certain subordinated
and term-debt securities. Beginning on December 31, 1993, 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 capital 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 capital 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 FDIC has guidelines for a
leverage ratio that is an additional evaluation of capital adequacy of banks.
The leverage ratio is defined to be Border Bank's Tier I capital divided by its
risk adjusted total 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 10.0%, and Tier I Risk-Based Capital Ratio is equal to
or greater than 6.0%, and Tier I Leverage Capital Ratio is equal to or greater
than 5.0%. Based on capital ratios, Border Bank is within the definition of
"Well Capitalized" for FDIC purposes at December 31, 1995.
Border Bank's Tier I Risk-Based Capital Ratio was approximately 18.12% and
18.01% at December 31, 1995 and 1994, respectively. Border Bank's Total
Risk-Based Capital Ratio was approximately 19.29% and 19.02% at December 31,
1995 and 1994, respectively. Border Bank's Tier I Leverage Capital Ratio was
approximately 14.51% and 13.58% at December 31, 1995 and 1994, respectively.
The following table presents Border Bank's risk-based capital calculation:
<TABLE>
<CAPTION>
MARCH 31, DECEMBER 31,
-------------------------- ------------------------
RISK-BASED CAPITAL 1996 1995 1995 1994
- ---------------------------------------------------------- ------------- ----------- ----------- -----------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C>
Total Stockholders' Equity, before unrealized gains or
losses on Securities Available for Sale.................. $ 17,170 $ 16,098 $ 17,079 $ 15,994
Less -- Goodwill and Other Deductions..................... -- -- -- --
------------- ----------- ----------- -----------
Total Tier I Capital...................................... 17,170 16,098 17,079 15,994
Total Tier II Capital..................................... 1,100 902 1,100 901
------------- ----------- ----------- -----------
Total Qualifying Capital.................................. $ 18,270 $ 17,000 $ 18,179 $ 16,895
------------- ----------- ----------- -----------
------------- ----------- ----------- -----------
Risk Adjusted Assets (Including Off-Balance Sheet
Exposure)................................................ $ 100,536 $ 88,939 $ 94,232 $ 88,822
------------- ----------- ----------- -----------
------------- ----------- ----------- -----------
Tier I Risk-Based Capital Ratio........................... 17.08% 18.10% 18.12% 18.01%
Total Risk-Based Capital Ratio............................ 18.17 19.11 19.29 19.02
Leverage Capital Ratio.................................... 14.41 13.98 14.51 13.58
------------- ----------- ----------- -----------
------------- ----------- ----------- -----------
</TABLE>
CURRENT ACCOUNTING ISSUES
Effective January 1, 1995, Border Bank adopted Statement 114 and the
amendment thereof, Statement 118. Under Statement 114, a loan is considered
impaired when, based upon current information and events, it is probable that a
creditor will be unable to collect all amounts due according to the contractual
terms of the loan agreement. Statement 114 requires that an impaired loan be
valued utilizing (i) the present value of expected future cash flows discounted
at the effective interest rate of the loan, (ii) the fair value of the
underlying collateral, or (iii) the observable market price of the loan.
Statement 118 amended Statement 114 by expanding the related disclosure
requirements and permitting use of existing methods for recognizing interest
income on impaired loans.
Loans which were restructured prior to the adoption of Statement 114 and
which are performing in accordance with the renegotiated terms are not required
to be reported as impaired. Loans restructured subsequent to the adoption of
Statement 114 are required to be reported as impaired in the year of
restructuring. Thereafter, such loans can be removed from the impaired loan
disclosure if the loans were paying a market rate of interest at the time of
restructuring and are performing in accordance with their renegotiated terms.
F-111
<PAGE>
For loans covered by Statement 114, Border Bank makes an assessment for
impairment when and while such loans are on nonaccrual status or when the loan
has been restructured. When a loan with unique risk characteristics has been
identified as being impaired, the amount of impairment will be measured by
Border Bank using discounted cash flows, except when it is determined that the
sole source of repayment for the loan is the operation or liquidation of the
underlying collateral. In such case, the current fair value of the collateral,
reduced by costs to sell, will be used in place of discounted cash flows. At the
time a loan is placed on nonaccrual status, interest previously recognized but
uncollected is reversed and charged against current income. Subsequent interest
payments received on nonaccrual loans are either applied against principal or
reported as income, depending upon management's assessment of the ultimate
collectibility of principal.
In management's opinion, the adoption of Statement 114 and Statement 118 has
not had, and is not anticipated to have, a material effect on Border Bank's
results of operations.
In October 1995, the FASB issued Statement of Financial Accounting Standards
No. 123 ("Statement 123"), "Accounting for Stock-Based Compensation." Statement
123 establishes financial accounting and reporting standards for stock-based
employee compensation plans.
Statement 123 encourages entities to adopt a "fair value" based method of
accounting for stock-based compensation plans which requires an estimate of the
fair value of stock options or other equity instruments which employees become
entitled to when they have rendered requisite service or satisfied other
conditions necessary to earn the right to benefit from the instruments.
Compensation cost is then determined based on the fair value estimate and is
recognized over the service period, which is usually the vesting period.
Statement 123 also requires that an employer's financial statements include
certain disclosures about stock-based employee compensation arrangements
regardless of the method used to account for them.
The accounting requirements of Statement 123 are effective for transactions
entered into in fiscal years that begin after December 15, 1995. In management's
opinion, the implementation of Statement 123 should have no material effect on
Border Bank's financial statements.
QUARTER RESULTS
The following table presents a summary of operations for the last six
quarters:
<TABLE>
<CAPTION>
1996 1995 1994
--------- ------------------------------------------ ---------
CONDENSED QUARTERLY INCOME STATEMENTS FIRST FOURTH THIRD SECOND FIRST FOURTH
TAXABLE-EQUIVALENT BASIS QUARTER QUARTER QUARTER QUARTER QUARTER QUARTER
- --------------------------------------------------- --------- --------- --------- --------- --------- ---------
(IN THOUSANDS EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C> <C>
Interest Income.................................... $ 2,497 $ 2,390 $ 2,379 $ 2,447 $ 2,440 $ 2,370
Interest Expense................................... 1,138 1,137 1,117 1,121 1,040 958
--------- --------- --------- --------- --------- ---------
Net Interest Income................................ 1,359 1,253 1,262 1,326 1,400 1,412
Provision for Loan Losses.......................... 71 351 62 20 52 15
Noninterest Income................................. 94 89 84 68 75 71
Noninterest Expense................................ 462 595 485 567 520 657
--------- --------- --------- --------- --------- ---------
Income Before Taxable-Equivalent Adjustment and
Income Tax........................................ 920 396 799 807 903 811
Taxable-Equivalent Adjustment...................... 156 155 156 164 166 157
Applicable Income Tax Expense...................... 173 (5) 115 135 134 179
--------- --------- --------- --------- --------- ---------
Net Income......................................... $ 591 $ 246 $ 528 $ 508 $ 603 $ 475
--------- --------- --------- --------- --------- ---------
--------- --------- --------- --------- --------- ---------
Net Income Per Common Share........................ $ 2.96 $ 1.23 $ 2.64 $ 2.54 $ 3.02 $ 2.38
--------- --------- --------- --------- --------- ---------
--------- --------- --------- --------- --------- ---------
</TABLE>
F-112
<PAGE>
THE BORDER BANK
BALANCE SHEET
(UNAUDITED)
MARCH 31, 1996
<TABLE>
<S> <C>
Assets
Cash and due from banks.................................................... $ 6,088,182
Federal funds sold......................................................... 10,500,000
-------------
Total cash and cash equivalents...................................... 16,588,182
-------------
Investment securities available for sale................................... 5,281,206
Investment securities held to maturity..................................... 42,328,509
Loans, net of unearned discount............................................ 51,016,869
Less allowance for loan losses............................................. 1,100,000
-------------
Net loans............................................................ 49,916,869
-------------
Bank premises and equipment, net of accumulated
depreciation and amortization............................................ 3,075,209
Accrued interest receivable................................................ 1,978,568
Other real estate owned.................................................... 237,617
Other assets............................................................... 427,759
Deferred federal income taxes.............................................. 111,393
-------------
$ 119,945,312
-------------
-------------
Liabilities and Stockholders' Equity
Liabilities:
Deposits:
Noninterest-bearing.................................................... $ 6,542,930
Interest-bearing....................................................... 95,669,360
-------------
Total deposits....................................................... 102,212,290
Accrued interest payable................................................. 229,550
Deferred compensation payable............................................ 107,600
Other liabilities........................................................ 230,640
-------------
Total Liabilities.................................................... 102,780,080
-------------
Stockholders' equity:
Common stock, $20 par value, 200,000 shares authorized,
issued and outstanding................................................... 2,000,000
Certified surplus.......................................................... 9,000,000
Undivided profits.......................................................... 6,169,878
Unrealized loss on securities available for sale........................... (4,646)
-------------
Total stockholders' equity........................................... 17,165,232
Commitments and contingent liabilities
-------------
$ 119,945,312
-------------
-------------
</TABLE>
See accompanying notes to financial statement.
F-113
<PAGE>
THE BORDER BANK
STATEMENTS OF EARNINGS
(UNAUDITED)
FOR THE THREE MONTHS ENDED MARCH 31, 1996 AND 1995
<TABLE>
<CAPTION>
1996 1995
------------- -------------
<S> <C> <C>
Interest Income:
Loans............................................................................. $ 1,379,108 $ 1,362,296
Investment securities............................................................. 848,057 887,197
Federal funds sold................................................................ 113,809 25,998
------------- -------------
Total interest income........................................................... 2,340,974 2,275,491
------------- -------------
Interest expense:
Savings, NOW and money market deposits............................................ 262,159 242,101
Time deposits..................................................................... 875,660 797,767
------------- -------------
Total interest expense.............................................................. 1,137,819 1,039,868
------------- -------------
Net interest income............................................................. 1,203,155 1,235,623
Provision for loan losses........................................................... 71,331 51,833
------------- -------------
Net interest income after provision for loan losses............................. 1,131,824 1,183,790
------------- -------------
Noninterest income:
Service charges on deposit accounts............................................... 67,001 55,345
Other service charges and fees.................................................... 16,143 9,514
Other............................................................................. 10,502 9,892
------------- -------------
Total noninterest income...................................................... 93,646 74,751
------------- -------------
Noninterest expense:
Salaries and employee benefits.................................................... 248,370 274,779
Net occupancy expense............................................................. 83,343 82,405
Legal and professional fees....................................................... 19,990 10,495
Data processing fees.............................................................. 30,731 26,612
Directors fees.................................................................... 11,200 12,600
FDIC assessment................................................................... -- 49,000
Other............................................................................. 68,022 64,016
------------- -------------
Total noninterest expense....................................................... 461,656 519,907
------------- -------------
Income before income tax expense................................................ 763,814 738,634
Income tax expense.................................................................. 172,454 135,534
------------- -------------
Net income...................................................................... $ 591,360 $ 603,100
------------- -------------
------------- -------------
Net income per share................................................................ $ 2.96 $ 3.02
------------- -------------
------------- -------------
</TABLE>
See accompanying notes to financial statements.
F-114
<PAGE>
THE BORDER BANK
STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
(UNAUDITED)
FOR THE YEAR ENDED DECEMBER 31, 1995 AND THE THREE MONTHS ENDED MARCH 31, 1996
<TABLE>
<CAPTION>
UNREALIZED
GAIN (LOSS)
ON
SECURITIES TOTAL
CERTIFIED UNDIVIDED AVAILABLE STOCKHOLDERS'
COMMON STOCK SURPLUS PROFITS FOR SALE EQUITY
------------- ------------- ------------- ------------ --------------
<S> <C> <C> <C> <C> <C>
Balance at December 31, 1994.......... $ 2,000,000 $ 9,000,000 $ 4,994,409 $ (152,028) $ 15,842,381
Cash dividends on common stock........ -- -- (800,000) -- (800,000)
Changes in unrealized gain (loss) on
securities available for sale........ -- -- -- 148,728 148,728
Net income for the year ended December
31, 1995............................. -- -- 1,884,109 -- 1,884,109
------------- ------------- ------------- ------------ --------------
Balance at December 31, 1995.......... 2,000,000 9,000,000 6,078,518 (3,300) 17,075,218
Cash dividends on common stock........ -- -- (500,000) -- (500,000)
Changes in unrealized gain (loss) on
securities available for sale........ -- -- -- (1,346) (1,346)
Net income for the three months ended
March 31, 1996....................... -- -- 591,360 -- 591,360
------------- ------------- ------------- ------------ --------------
Balance at March 31, 1996............. $ 2,000,000 $ 9,000,000 $ 6,169,878 $ (4,646) $ 17,165,232
------------- ------------- ------------- ------------ --------------
------------- ------------- ------------- ------------ --------------
</TABLE>
See accompanying notes to financial statements.
F-115
<PAGE>
THE BORDER BANK
STATEMENTS OF CASH FLOWS
(UNAUDITED)
FOR THE THREE MONTHS ENDED MARCH 31, 1996 AND 1995
<TABLE>
<CAPTION>
1996 1995
-------------- --------------
<S> <C> <C>
Cash flows from operating activities:
Net income...................................................................... $ 591,360 $ 603,100
Adjustments to reconcile net income to net cash provided by operating
activities:
Depreciation and amortization of bank premises and equipment.................. 42,980 35,336
Net discount accretion on investment securities............................... (100,589) (22,876)
Provision for loan losses..................................................... 71,331 51,833
(Increase) decrease in accrued interest receivable, federal income tax
refundable and other assets................................................. 241,190 (64,839)
Increase in accrued interest payable and other liabilities.................... 133,637 121,708
-------------- --------------
Total adjustments........................................................... 388,549 121,162
-------------- --------------
Net cash provided by operating activities................................... 979,909 724,262
-------------- --------------
Cash flows from investing activities:
Proceeds from investment security maturities and principal repayments........... 1,269,000 4,005,000
Proceeds from called investments securities..................................... 5,530,000 500,000
Purchases of investment securities.............................................. (74,252) (1,914,844)
Net increase in loans........................................................... (3,764,553) (2,731,811)
Recoveries on loans charged off................................................. 13,935 2,270
Purchases of bank premises and equipment........................................ (940) (69,052)
Proceeds from sales of bank premises and equipment.............................. 180,000 --
Proceeds from sales of other real estate owned.................................. 6,368 --
-------------- --------------
Net cash provided by (used in) investing activities......................... 3,159,558 (208,437)
-------------- --------------
Cash flows from financing activities:
(Decrease) increase in deposits................................................. 216,952 (1,723,751)
Dividends paid on common stock.................................................. (500,000) (500,000)
-------------- --------------
Net cash used in financing activities....................................... (283,048) (2,223,751)
-------------- --------------
Net increase (decrease) in cash and cash equivalents........................ 3,856,419 (1,707,926)
Cash and cash equivalents at beginning of year.................................... 12,731,763 7,579,938
-------------- --------------
Cash and cash equivalents at end of year.......................................... $ 16,588,182 $ 5,872,012
-------------- --------------
-------------- --------------
Supplemental disclosure of cash flow information:
Interest paid................................................................... $ 1,154,971 $ 1,024,256
-------------- --------------
-------------- --------------
Supplemental schedule of noncash investing and financing activities:
Foreclosure of assets in partial satisfaction of loans receivable............... $ 6,836 $ --
-------------- --------------
-------------- --------------
</TABLE>
See accompanying notes to financial statements.
F-116
<PAGE>
THE BORDER BANK
NOTES TO UNAUDITED FINANCIAL STATEMENTS
NOTE 1 -- BASIS OF PRESENTATION
The accompanying unaudited financial information does 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 information furnished reflects 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.
NOTE 2 -- INCOME TAX
Deferred income tax assets and liabilities are computed for differences
between the financial statement 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 3 -- COMMON STOCK
On January 12, 1996, the Board of Directors approved a $2.50 per share cash
dividend for shareholders of record at that date.
F-117
<PAGE>
INDEPENDENT AUDITORS' REPORT
The Board of Directors
The Border Bank:
We have audited the accompanying balance sheets of The Border Bank (the
"Bank") as of December 31, 1995 and 1994, and the related statements of
earnings, changes in stockholders' equity and cash flows for each of the years
in the three-year period ended December 31, 1995. These financial statements are
the responsibility of the Bank's management. Our responsibility is to express an
opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of The Border Bank as of
December 31, 1995 and 1994, and the results of its operations and its cash flows
for the each of the years in the three-year period ended December 31, 1995 in
conformity with generally accepted accounting principles.
As discussed in note 1 to the financial statements, the Bank changed its
method of accounting for investment securities in 1994 to adopt the provisions
of Statement of Financial Accounting Standards No. 115, "Accounting for Certain
Investments in Debt and Equity Securities."
/s/ KPMG PEAT MARWICK LLP
Houston, Texas
January 31, 1996
F-118
<PAGE>
THE BORDER BANK
BALANCE SHEETS
DECEMBER 31, 1995 AND 1994
<TABLE>
<CAPTION>
1995 1994
---------------- ----------------
<S> <C> <C>
Assets
Cash and due from banks (note 2).......................................... $ 3,981,763 $ 3,079,938
Federal funds sold........................................................ 8,750,000 4,500,000
---------------- ----------------
Total cash and cash equivalents............................... 12,731,763 7,579,938
---------------- ----------------
Investment securities available for sale (note 3)......................... 6,778,515 8,725,350
Investment securities held to maturity (note 3)........................... 47,457,398 49,994,782
Loans, net of unearned discount (note 4).................................. 47,344,518 45,858,959
Less allowance for loan losses (note 5)................................... 1,100,100 900,663
---------------- ----------------
Net loans..................................................... 46,244,418 44,958,296
---------------- ----------------
Bank premises and equipment, net of accumulated depreciation and
amortization (note 6)................................................... 3,297,249 3,220,156
Accrued interest receivable............................................... 2,242,370 1,726,997
Other real estate owned................................................... 237,149 220,790
Other assets.............................................................. 405,691 576,634
Deferred federal income taxes (note 8).................................... 110,156 120,395
---------------- ----------------
$ 119,504,709 $ 117,123,338
---------------- ----------------
---------------- ----------------
Liabilities and Stockholders' Equity
Liabilities:
Deposits:
Noninterest-bearing............................................... $ 7,137,218 $ 7,012,379
Interest-bearing (note 7)......................................... 94,858,120 93,852,472
---------------- ----------------
Total deposits................................................ 101,995,338 100,864,851
Accrued interest payable.............................................. 246,702 207,772
Deferred compensation payable (note 9)................................ 107,600 107,600
Other liabilities..................................................... 79,851 100,734
---------------- ----------------
Total liabilities............................................. 102,429,491 101,280,957
---------------- ----------------
Stockholders' equity:
Common stock, $10 par value, 200,000 shares authorized, issued and
outstanding......................................................... 2,000,000 2,000,000
Certified surplus..................................................... 9,000,000 9,000,000
Undivided profits..................................................... 6,078,518 4,994,409
Unrealized loss on securities available for sale (note 3)............. (3,300) (152,028)
---------------- ----------------
Total stockholders' equity.................................... 17,075,218 15,842,381
Commitments and contingent liabilities (notes 4 and 10)
---------------- ----------------
$ 119,504,709 $ 117,123,338
---------------- ----------------
---------------- ----------------
</TABLE>
See accompanying notes to financial statements.
F-119
<PAGE>
THE BORDER BANK
STATEMENTS OF EARNINGS
YEARS ENDED DECEMBER 31, 1995, 1994 AND 1993
<TABLE>
<CAPTION>
1995 1994 1993
------------- ------------- -------------
<S> <C> <C> <C>
Interest income:
Loans............................................................ $ 5,326,329 $ 5,328,325 $ 5,411,271
Investment securities............................................ 3,430,612 3,338,920 3,340,360
Federal funds sold............................................... 259,176 211,885 176,570
------------- ------------- -------------
Total interest income........................................ 9,016,117 8,879,130 8,928,201
------------- ------------- -------------
Interest expense:
Savings, NOW and money market deposits........................... 947,113 1,023,946 987,085
Time deposits.................................................... 3,468,212 2,747,527 2,904,981
------------- ------------- -------------
Total interest expense....................................... 4,415,325 3,771,473 3,892,066
------------- ------------- -------------
Net interest income.......................................... 4,600,792 5,107,657 5,036,135
Provision for loan losses (note 5)................................... 485,283 396,523 265,219
------------- ------------- -------------
Net interest income after provision for loan losses.......... 4,115,509 4,711,134 4,770,916
Noninterest income:
Service charges on deposit accounts.............................. 255,241 237,979 186,743
Other service charges and fees................................... 32,554 29,644 38,678
Other............................................................ 28,385 135,260 60,629
------------- ------------- -------------
Total noninterest income..................................... 316,180 402,883 286,050
------------- ------------- -------------
Noninterest expense:
Salaries and employee benefits................................... 1,055,597 1,060,701 945,165
Net occupancy expense............................................ 381,852 367,077 314,787
Legal and professional fees...................................... 215,052 89,935 86,781
Data processing fees............................................. 106,169 89,035 73,699
Directors' fees.................................................. 46,200 47,600 33,600
FDIC assessment.................................................. 121,269 229,312 205,873
Other............................................................ 241,051 301,428 820,777
------------- ------------- -------------
Total noninterest expense.................................... 2,167,190 2,185,088 2,480,682
------------- ------------- -------------
Income before income tax expense............................. 2,264,499 2,928,929 2,576,284
Income tax expense (note 8).......................................... 380,390 604,132 500,840
------------- ------------- -------------
Net income................................................... $ 1,884,109 $ 2,324,797 $ 2,075,444
------------- ------------- -------------
------------- ------------- -------------
Net income per share................................................. $ 9.42 $ 11.62 $ 10.38
------------- ------------- -------------
------------- ------------- -------------
</TABLE>
See accompanying notes to financial statements.
F-120
<PAGE>
THE BORDER BANK
STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
YEARS ENDED DECEMBER 31, 1995, 1994 AND 1993
<TABLE>
<CAPTION>
UNREALIZED
GAIN (LOSS)
ON
SECURITIES TOTAL
CERTIFIED UNDIVIDED AVAILABLE STOCKHOLDERS'
COMMON STOCK SURPLUS PROFITS FOR SALE EQUITY
------------- ------------- -------------- ------------ --------------
<S> <C> <C> <C> <C> <C>
Balance at December 31, 1992................... $ 2,000,000 $ 7,000,000 $ 3,394,168 $ -- $ 12,394,168
Cash dividends on common stock................. -- -- (400,000) -- (400,000)
Transfer of Undivided profits to Certified
surplus....................................... -- 2,000,000 (2,000,000) -- --
Net income for 1993............................ 2,075,444 -- 2,075,444
------------- ------------- -------------- ------------ --------------
Balance at December 31, 1993................... 2,000,000 9,000,000 3,069,612 -- 14,069,612
Effect of change to adopt an accounting
principle -- accounting for unrealized gain
(loss) on securities available for sale (note
3)............................................ -- -- -- (37,546) (37,546)
Cash dividends on common stock................. -- -- (400,000) -- (400,000)
Change in unrealized gain (loss) on securities
available for sale (note 3)................... -- -- (114,482) (114,482)
Net income for 1994............................ -- -- 2,324,797 -- 2,324,797
------------- ------------- -------------- ------------ --------------
Balance at December 31, 1994................... 2,000,000 9,000,000 4,994,409 (152,028) 15,842,381
Cash dividends on common stock................. -- -- (800,000) -- (800,000)
Change in unrealized gain (loss) on securities
available for sale (note 3)................... -- -- -- 148,728 148,728
Net income for 1995............................ -- -- 1,884,109 -- 1,884,109
------------- ------------- -------------- ------------ --------------
Balance at December 31, 1995................... $ 2,000,000 $ 9,000,000 $ 6,078,518 $ (3,300) $ 17,075,218
------------- ------------- -------------- ------------ --------------
------------- ------------- -------------- ------------ --------------
</TABLE>
See accompanying notes to financial statements.
F-121
<PAGE>
THE BORDER BANK
STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, 1995, 1994 AND 1993
<TABLE>
<CAPTION>
1995 1994 1993
--------------- --------------- ---------------
<S> <C> <C> <C>
Cash flows from operating activities:
Net income........................................................ $ 1,884,109 $ 2,324,797 $ 2,075,444
Adjustments to reconcile net income to net cash provided by
operating activities:
Depreciation and amortization of bank premises and
equipment................................................... 163,603 128,798 119,435
Net discount accretion on investment securities............... (131,534) (31,290) (7,677)
Provision for loan losses..................................... 485,283 396,523 265,219
Losses on sales of other real estate owned.................... 6,029 11,192 6,256
(Increase) decrease in accrued interest receivable, other
assets and deferred federal income taxes.................... (410,806) 337,241 (124,353)
Increase in accrued interest payable and other liabilities.... 18,047 24,535 107,346
Write-downs of other real estate.............................. -- 12,509 --
--------------- --------------- ---------------
Total adjustments......................................... 130,622 879,508 366,226
--------------- --------------- ---------------
Net cash provided by investing activities................. 2,014,731 3,204,305 2,441,670
--------------- --------------- ---------------
Cash flows from investing activities:
Proceeds from investment security maturities and principal
repayments...................................................... 8,678,114 5,115,000 7,595,000
Proceeds from called investment securities........................ 6,905,000 4,785,000 4,742,487
Purchase of investment securities................................. (10,742,018) (14,371,015) (20,153,723)
Net (increase) decrease in loans.................................. (1,964,429) 2,179,765 (6,112,667)
Recoveries on loans charged off................................... 18,507 12,537 33,104
Purchases of bank premises and equipment.......................... (240,696) (1,519,306) (229,354)
Proceeds from sales of other real estate owned.................... 152,129 178,447 83,386
--------------- --------------- ---------------
Net cash provided by (used in) investing activities............... 2,806,607 (3,619,572) (14,041,767)
--------------- --------------- ---------------
Cash flows from financing activities:
Increase in deposits.............................................. 1,130,487 343,854 6,692,667
Dividends paid on common stock.................................... (800,000) (400,000) (400,000)
--------------- --------------- ---------------
Net cash provided by (used in) financing activities....... 330,487 (56,146) 6,292,667
--------------- --------------- ---------------
Net increase (decrease) in cash and cash equivalents...... 5,151,825 (471,413) (5,307,430)
Cash and cash equivalents at beginning of year........................ 7,579,938 8,051,351 13,358,781
--------------- --------------- ---------------
Cash and cash equivalents at end of year.............................. $ 12,731,763 $ 7,579,938 $ 8,051,351
--------------- --------------- ---------------
--------------- --------------- ---------------
Supplemental disclosure of cash flow information:
Interest paid..................................................... $ 4,415,325 $ 3,746,012 $ 3,922,076
Taxes paid........................................................ 437,000 506,666 497,572
--------------- --------------- ---------------
--------------- --------------- ---------------
Supplemental schedule of noncash investing and financing activities --
foreclosure of assets in partial satisfaction of loans receivable.... $ 174,517 $ 211,098 $ 238,534
--------------- --------------- ---------------
--------------- --------------- ---------------
</TABLE>
See accompanying notes to financial statements.
F-122
<PAGE>
THE BORDER BANK
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1995, 1994 AND 1993
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The accounting and reporting policies of the Bank conform to generally
accepted accounting principles and to prevailing practices within the banking
industry. A summary of the more significant accounting policies follows:
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
CASH AND CASH EQUIVALENTS
For purposes of reporting cash flows, cash and due from banks and federal
funds sold are considered to be cash equivalents. Federal funds sold generally
have one-day maturities.
INVESTMENT SECURITIES
In May 1993, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards No. 115 ("Statement 115"),
"Accounting for Certain Investments in Debt and Equity Securities." Statement
115 establishes standards of financial accounting and reporting for investments
in equity securities that have a readily determinable fair value and for all
investments in debt securities. At acquisition, a bank is required to classify
debt and equity securities into one of three categories: held to maturity,
trading or available for sale. At each reporting date, the appropriateness of
the classification is reassessed. Investments in debt securities are classified
as held to maturity and measured at amortized cost in the 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 balance sheet with unrealized holding gains and losses included in
earnings. Investments not classified as held to maturity nor trading are
classified as available for sale and measured at fair value in the balance sheet
with unrealized holding gains and losses, net of applicable income taxes,
reported in a separate component of stockholders' equity until realized.
Effective January 1, 1994, the Bank adopted Statement 115, which had no
impact on the Bank's income statement as all securities were classified as
either held to maturity or available for sale. Accounting for securities
classified as held to maturity will continue on the basis of amortized cost.
Securities classified as available for sale will be measured at market value
with the net unrealized holding gains and losses reported in a separate
component of stockholders' equity until realized. Purchases of investment
securities are classified as available for sale or held to maturity at time of
purchase as determined by management.
Premiums and discounts are amortized and accreted using a method which
approximates level yield. Gains and losses on available for sale investment
securities sold are recognized in operations at the time of sale based on the
specific identification method. Security purchases and sales are recorded on the
trade date.
LOANS
Management continually reviews the loan portfolio to identify loans which,
with respect to principal or interest, have or may become collection problems. A
loan is generally placed on nonaccrual status when principal or interest is past
due 90 days or more, and the loan is not both well-secured and in the process of
collection. A loan is also placed on nonaccrual status immediately if, in the
opinion of management, full collection of principal or interest is unlikely. At
the time a loan is placed on nonaccrual
F-123
<PAGE>
THE BORDER BANK
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
status, interest previously recognized but uncollected is reversed and charged
against current income. Subsequent interest payments received on nonaccrual
loans are either applied against principal or reported as income, depending on
management's assessment of the ultimate collectibility of principal.
Unearned interest on installment loans is recognized as income over the
terms of the related loans on a basis which results in approximately level rates
of return over the terms of the loans.
In May 1993, the FASB issued Statement of Financial Accounting Standards No.
114 ("Statement 114"), "Accounting by Creditors for Impairment of a Loan," which
addresses the accounting by creditors for impairment of certain loans, as
defined. In October 1994, Statement 114 was amended by Statement of Financial
Accounting Standards No. 118, "Accounting by Creditors for Impairment of a Loan,
Income Recognition and Disclosures." Implementation of these pronouncements in
the first quarter of 1995 did not have a material effect on the Bank's financial
statements.
ALLOWANCE FOR LOAN LOSSES
The allowance for loan losses is established by a charge to operations as
deemed necessary by management to maintain the allowance for loan losses at an
amount considered adequate to absorb known or possible loan losses in the Bank's
loan portfolio. The provision is determined based on management's evaluation of
the loan portfolio, giving consideration to existing economic conditions,
changes in the loan portfolio, historical loan loss factors and other relevant
information. Management believes that the allowance for loan losses is adequate.
Loans are charged against the allowance for loan losses when management
believes the collection of principal is unlikely. Recoveries of amounts
previously charged off are credited to the allowance.
BANK PREMISES AND EQUIPMENT
Bank premises and equipment are recorded at cost. Expenditures for
improvements are capitalized. Repairs and maintenance which do not extend the
life of bank premises and equipment are charged to expense as incurred.
Depreciation and amortization are calculated using the straight-line method over
the estimated useful lives of the assets. Any gain or loss resulting from
disposition of premises and equipment is reflected in earnings.
OTHER REAL ESTATE OWNED
Other real estate owned is recorded at fair value at the date of foreclosure
which is subsequently considered cost. At subsequent dates, other real estate is
carried at the lower of fair value minus estimated costs to sell or cost. Fair
values are determined generally by reference to appraisals. Rental income earned
and expenses incurred related to real estate owned are recognized during the
period earned or incurred and are included in noninterest expense at their net
amount.
FEDERAL INCOME TAXES
Deferred tax assets and liabilities are recognized for estimated future tax
consequences attributable to differences between the financial statement
carrying amounts of existing assets and liabilities and their respective tax
bases, and operating loss and tax credit carryforwards. Deferred tax assets and
liabilities are measured using tax rates expected to apply to taxable income in
the years in which those temporary differences are expected to be recovered or
settled. Deferred tax expense or benefit is recognized as a result of the change
in the asset or liability during the year.
F-124
<PAGE>
THE BORDER BANK
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
(2) RESERVE REQUIREMENTS
The Bank is required to maintain certain daily reserve balances on hand or
on deposit with the Federal Reserve Bank in accordance with Federal Reserve
Board requirements. These deposits are noninterest bearing and not available for
investment purposes. Cash and due from bank balances maintained in accordance
with such requirements at December 31, 1995 was approximately $25,000.
(3) INVESTMENT SECURITIES
The amortized cost and estimated market value, which is the carrying value,
of investment securities available for sale at December 31, 1995 and December
31, 1994 are as follows:
<TABLE>
<CAPTION>
1995
-------------------------------------------------------
GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED ESTIMATED
AVAILABLE FOR SALE COST GAINS LOSSES MARKET VALUE
- ---------------------------------------------- ------------- ----------- ------------ -------------
<S> <C> <C> <C> <C>
U.S. treasuries............................... $ 3,004,777 $ 5,927 $ (4,104) $ 3,006,600
U.S. government agencies...................... 3,778,740 9,186 (16,011) 3,771,915
------------- ----------- ------------ -------------
$ 6,783,517 $ 15,113 $ (20,115) $ 6,778,515
------------- ----------- ------------ -------------
------------- ----------- ------------ -------------
<CAPTION>
1994
-------------------------------------------------------
GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED ESTIMATED
AVAILABLE FOR SALE COST GAINS LOSSES MARKET VALUE
- ---------------------------------------------- ------------- ----------- ------------ -------------
<S> <C> <C> <C> <C>
U.S. treasuries............................... $ 1,995,054 $ -- $ (58,304) $ 1,936,750
U.S. government agencies...................... 6,960,640 -- (172,040) 6,788,600
------------- ----------- ------------ -------------
$ 8,955,694 $ -- $ (230,344) $ 8,725,350
------------- ----------- ------------ -------------
------------- ----------- ------------ -------------
</TABLE>
At December 31, 1995 and 1994, the Bank has recorded net unrealized holding
losses on securities available for sale, net of income tax, as a decrease in
stockholders' equity of $3,300 and $152,028, respectively.
The amortized cost, which is the carrying value, and estimated market value
of investment securities held to maturity at December 31, 1995 and December 31,
1994 are as follows:
<TABLE>
<CAPTION>
1995
-------------------------------------------------------------
GROSS GROSS
UNREALIZED UNREALIZED ESTIMATED
HELD TO MATURITY AMORTIZED COST GAINS LOSSES MARKET VALUE
- ---------------------------------------- -------------- ------------- -------------- --------------
<S> <C> <C> <C> <C>
U.S. government agencies................ $ 27,247,565 $ 156,236 $ (345,402) $ 27,058,399
Obligations of state and political
subdivisions........................... 18,633,086 1,265,601 (3,361) 19,895,326
Other................................... 1,576,747 66,429 -- 1,643,176
-------------- ------------- -------------- --------------
$ 47,457,398 $ 1,488,266 $ (348,763) $ 48,596,901
-------------- ------------- -------------- --------------
-------------- ------------- -------------- --------------
<CAPTION>
1994
-------------------------------------------------------------
GROSS GROSS
UNREALIZED UNREALIZED ESTIMATED
HELD TO MATURITY AMORTIZED COST GAINS LOSSES MARKET VALUE
- ---------------------------------------- -------------- ------------- -------------- --------------
<S> <C> <C> <C> <C>
U.S. government agencies................ $ 27,689,133 $ 9,648 $ (1,176,060) $ 26,522,721
Obligations of state and political
subdivisions........................... 20,232,429 527,174 (414,166) 20,345,437
Other................................... 2,073,220 12,341 (82,746) 2,002,815
-------------- ------------- -------------- --------------
$ 49,994,782 $ 549,163 $ (1,672,972) $ 48,870,973
-------------- ------------- -------------- --------------
-------------- ------------- -------------- --------------
</TABLE>
F-125
<PAGE>
THE BORDER BANK
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
(3) INVESTMENT SECURITIES (CONTINUED)
The amortized cost and estimated market value of investment securities at
December 31, 1995, by contractual maturity, are shown below. Expected maturities
will differ from contractual maturities because issuers may have the right to
call or prepay obligations with or without call or prepayment penalties.
<TABLE>
<CAPTION>
ESTIMATED
AVAILABLE FOR SALE AMORTIZED COST MARKET VALUE
- ----------------------------------------------------------------------- -------------- --------------
<S> <C> <C>
Due in one year or less................................................ $ 3,492,918 $ 3,474,200
Due after one year through five years 3,290,599 3,304,315
-------------- --------------
$ 6,783,517 $ 6,778,515
-------------- --------------
-------------- --------------
<CAPTION>
HELD TO MATURITY
- -----------------------------------------------------------------------
<S> <C> <C>
Due in one year or less................................................ $ 3,552,921 $ 3,550,443
Due after one year through five years.................................. 32,518,814 32,856,305
Due after five years through ten years................................. 7,676,266 8,229,114
Due after ten years.................................................... 3,709,397 3,961,039
-------------- --------------
$ 47,457,398 $ 48,596,901
-------------- --------------
-------------- --------------
</TABLE>
Included in held to maturity and available for sale securities at December
31, 1995 are approximately $2,500,000 and $987,000, respectively, of investment
securities that pay interest based on a set coupon rate with a foreign exchange
rate adjustment or based directly on a foreign index. The held to maturity
securities have a market value of $2,472,000. All of the securities mature
during 1996 and 1997, with the exception of one security maturing in the year
2000. The securities are paying interest at a rate of approximately 2.76%. One
security of approximately $500,000 has an interest rate floor of 3.00%. The
interest rate on the other securities could reset to zero. No loss of principal
is anticipated by management on any of the aforementioned securities.
There were no sales for the years ended December 31, 1995 and 1994 from
either the available for sale or held to maturity categories.
Securities with a carrying value of approximately $13,437,000 and
$12,614,000 were pledged at December 31, 1995 and 1994, respectively, to secure
public deposits of $10,049,000 and $9,796,000
(4) LOANS
Loans at December 31, 1995 and 1994 are as follows:
<TABLE>
<CAPTION>
1995 1994
-------------- --------------
<S> <C> <C>
Commercial............................................................. $ 15,452,457 $ 15,416,038
Real estate:
Construction....................................................... 751,231 956,662
Commercial......................................................... 20,216,699 15,903,244
Agriculture........................................................ 1,130,755 629,500
1-4 single family residence........................................ 7,206,746 8,362,315
Consumer............................................................... 2,557,042 3,418,871
Overdraft and other.................................................... 270,000 1,537,503
-------------- --------------
47,584,930 46,224,133
Less unearned discount................................................. (240,412) (365,174)
-------------- --------------
$ 47,344,518 $ 45,858,959
-------------- --------------
-------------- --------------
</TABLE>
F-126
<PAGE>
THE BORDER BANK
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
(4) LOANS (CONTINUED)
The majority of the Bank's loans are to companies and individuals which are
headquartered or are employed in the Rio Grande Valley, but may conduct business
on a statewide national or international scale. Repayment of those loans is
dependent on the economy in that area, the economic situation in Mexico and
surrounding areas.
The Border Bank makes loans to individuals or companies that are residents
of, or domiciled in, Mexico. Such loans may be secured or unsecured. Secured
loans include loans secured by deposits in the Bank, real estate in the United
States or Mexico, or equipment. At December 31, 1995 and 1994, the Bank had
outstanding approximately $11,826,000 and $12,178,000, respectively, of such
loans. Interest income related to such loans for the years ended December 31,
1995, 1994 and 1993 was approximately $1,329,000, $732,000 and $1,110,000,
respectively.
All loans to officers, directors and stockholders of the Bank and associates
of such persons are, in the opinion of management, made in the ordinary course
of business on substantially the same terms, including interest rates and
collateral, as those prevailing at the time for comparable loans of like quality
and risk of collectibility. The outstanding balance of direct and indirect
personal borrowings of executive officers and directors of the Bank at December
31, 1995 and 1994 was approximately $1,704,000 and $2,403,000, respectively.
Nonaccrual loans approximated $189,000 and $226,000 at December 31, 1995 and
1994, respectively. If interest on these loans had been accrued at the original
contractual rates, interest income would have been increased by approximately
$2,400 and $34,000 for the years ended December 31, 1995 and 1994. There were no
renegotiated loans outstanding at December 31, 1995 and 1994.
In the normal course of business, the Bank enters into various transactions
which, in accordance with generally accepted accounting principles, are not
included on the balance sheets. These transactions are referred to as
"off-balance sheet commitments." The Bank 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. The
Bank minimizes its exposure to loss under these commitments by subjecting them
to credit approval and monitoring procedures.
Outstanding commitments and letters of credit at December 31, 1995 and 1994
are approximately as follows:
<TABLE>
<CAPTION>
1995 1994
------------- -------------
<S> <C> <C>
Commitments to extend credit.............................................. $ 2,151,000 $ 1,663,000
Letters of credit......................................................... 470,000 279,000
------------- -------------
------------- -------------
</TABLE>
(5) ALLOWANCE FOR LOAN LOSSES
A summary of the activity in the allowance for loan losses for the years
ended December 31, 1995 and 1994 is as follows:
<TABLE>
<CAPTION>
1995 1994
------------- -----------
<S> <C> <C>
Balance at beginning of year................................................ $ 900,663 $ 623,778
Provision for loan losses................................................... 485,283 396,523
Loans charged off........................................................... (304,353) (132,175)
Recoveries.................................................................. 18,507 12,537
------------- -----------
Balance at end of year...................................................... $ 1,100,100 $ 900,663
------------- -----------
------------- -----------
</TABLE>
F-127
<PAGE>
THE BORDER BANK
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
(6) BANK PREMISES AND EQUIPMENT
Bank premises and equipment and related accumulated depreciation and
amortization at December 31, 1995 and 1994 are as follows:
<TABLE>
<CAPTION>
ESTIMATED
USEFUL LIVES 1995 1994
------------ -------------- --------------
<S> <C> <C> <C>
Land..................................................... -- $ 630,757 $ 500,785
Premises................................................. 40 years 2,990,006 2,914,459
Furniture, fixtures and equipment........................ 10 years 987,740 965,797
Automobiles.............................................. 3 years 52,230 46,636
Less accumulated depreciation and amortization........... (1,363,484) (1,207,521)
-------------- --------------
$ 3,297,249 $ 3,220,156
-------------- --------------
-------------- --------------
</TABLE>
Depreciation expense was approximately $164,000, $148,000 and $119,000 for
the years ended December 31, 1995, 1994, and 1993, respectively.
(7) INTEREST-BEARING DEPOSITS
Interest-bearing deposits at December 31, 1995 and 1994 are as follows:
<TABLE>
<CAPTION>
1995 1994
-------------- --------------
<S> <C> <C>
Savings, money market and NOW accounts................................. $ 28,668,215 $ 29,279,190
Certificates of deposit less than $100,000............................. 21,520,413 19,458,632
Certificates of deposit of $100,000 or more............................ 44,669,492 45,114,650
-------------- --------------
$ 94,858,120 $ 93,852,472
-------------- --------------
-------------- --------------
</TABLE>
Interest expense for certificates of deposit of $100,000 or more for the
years ended December 31, 1995, 1994 and 1993 was approximately $1,649,000,
$1,980,000 and $1,476,000, respectively.
(8) INCOME TAXES
The components of income tax expense for the years ended December 31, 1995,
1994 and 1993 are as follows:
<TABLE>
<CAPTION>
1995 1994 1993
----------- ----------- -----------
<S> <C> <C> <C>
Federal:
Current tax expense.......................................... $ 446,766 $ 570,177 $ 460,787
Deferred tax (benefit) expense............................... (66,376) 33,955 40,053
----------- ----------- -----------
Income tax expense....................................... $ 380,390 $ 604,132 $ 500,840
----------- ----------- -----------
----------- ----------- -----------
</TABLE>
The income tax expense for the years ended December 31, 1995, 1994 and 1993
differs from the amount computed by applying the federal income tax rate of 34%
to income before income tax expense as follows:
<TABLE>
<CAPTION>
1995 1994 1993
------------ ------------ ------------
<S> <C> <C> <C>
Computed "expected" tax expense............................... $ 769,930 $ 995,836 $ 875,937
Increase (reduction) in tax resulting from:
Tax-exempt interest, net.................................. (423,414) (405,528) (405,384)
Other, net................................................ 33,874 13,824 30,287
------------ ------------ ------------
$ 380,390 $ 604,132 $ 500,840
------------ ------------ ------------
------------ ------------ ------------
</TABLE>
F-128
<PAGE>
THE BORDER BANK
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
(8) INCOME TAXES (CONTINUED)
The tax effects of temporary differences that give rise to deferred tax
assets and deferred tax liabilities at December 31, 1995 and 1994 are as
follows:
<TABLE>
<CAPTION>
1995 1994
----------- -----------
<S> <C> <C>
Deferred tax assets:
Allowance for loan losses................................................. $ 282,431 $ 215,392
Deferred compensation..................................................... 36,584 36,584
Other real estate......................................................... 4,250 4,250
Unrealized losses on investment securities................................ 1,701 78,317
Alternative minimum tax carryforward...................................... 94,831 94,831
----------- -----------
419,797 429,374
----------- -----------
Deferred tax liabilities:
Premises and equipment.................................................... 277,106 254,019
Other assets.............................................................. 32,535 54,960
----------- -----------
309,641 308,979
----------- -----------
Net deferred tax asset................................................ $ 110,156 $ 120,395
----------- -----------
----------- -----------
</TABLE>
Management believes that it is more likely than not that the results of
future operations will generate sufficient taxable income to realize the
deferred tax assets.
(9) EMPLOYEE BENEFITS
The Bank has a deferred compensation plan for the benefit of one individual.
The plan provides for a retirement benefit, payable to the individual (or
designated beneficiary or estate if death occurs prior to payment of the full
amount of deferred compensation), of $13,350 each year beginning March 15, 1995
and continuing thereafter for fourteen years.
The Bank owns and is the beneficiary of a life insurance policy on the
former employee covered by the deferred compensation plan. The face value of the
life insurance policy is approximately equal to the total benefits to be paid
under the plan.
(10) CONTINGENT LIABILITIES
The Bank is involved in certain claims and suits occurring in the ordinary
course of business. Management believes that the probable resolution of such
claims and suits will not have a material adverse affect on the financial
condition of the Bank.
F-129
<PAGE>
THE BORDER BANK
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
(11) FAIR VALUE OF FINANCIAL INSTRUMENTS
The estimated fair values at December 31, 1995 and methods and assumptions
used to determine the estimated fair values are set forth below for the Bank's
financial instruments:
<TABLE>
<CAPTION>
CARRYING OR
NOTIONAL VALUE FAIR VALUE
---------------- ----------------
<S> <C> <C>
Financial assets:
Cash and due from banks......................................... $ 3,981,763 $ 3,981,763
Federal funds sold.............................................. 8,750,000 8,750,000
Investment securities........................................... 54,235,913 55,375,416
Net loans....................................................... 46,244,418 46,121,036
Financial liabilities -- deposits................................... 101,995,338 102,134,065
Off-balance sheet instruments:
Commitments to extend credit.................................... 2,151,000 2,151,000
Letters of credit............................................... 470,100 470,100
---------------- ----------------
---------------- ----------------
</TABLE>
CASH AND DUE FROM BANKS
Carrying value approximates fair value because of the short maturity of
these instruments and no anticipated credit concerns.
FEDERAL FUNDS SOLD
Carrying value approximates fair value because of the short maturity of
these instruments and no anticipated credit concerns.
INVESTMENT SECURITIES
The fair values of investment securities are estimated based on quoted
market prices from investment dealers and companies.
NET LOANS
The fair value of loans is estimated for segregated groupings of loans with
similar financial characteristics. Loans are segregated by type and the fair
value of loans is estimated using current market rates for the type of loan.
DEPOSITS
The fair value of deposits with short-term or no stated maturity, such as
checking, savings, NOW accounts and money market accounts, is equal to the
amounts payable at December 31, 1995. The fair value of certificates of deposits
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.
COMMITMENTS TO EXTEND CREDIT AND LETTERS OF CREDIT
The fair value of commitments to extend credit and letters of credit are
estimated using current interest rates and committed rates.
(12) REGULATORY SUPERVISION
As a result of criticisms reflected in the June 28, 1993 Report of
Examination by the Texas Department of Banking, a Memorandum of Understanding
(the "Memorandum") was entered into between the Board of Directors of the Bank
and the Banking Commissioner of Texas on October 8, 1993. The Memorandum
required that the Bank, among other provisions, increase Board of Director
supervision over loan activities, revise the existing loan policy, increase the
allowance for loan losses and reduce criticized assets. Additionally, the Bank's
Board of Directors are required to submit to the Commissioner and Regional
Director of the FDIC, a written report of the actions taken to comply with the
Memorandum
F-130
<PAGE>
THE BORDER BANK
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
(12) REGULATORY SUPERVISION (CONTINUED)
within fifteen days after the end of each calendar quarter. Failure to comply
with the requirements of the Memorandum could subject the Bank to additional
action by bank regulatory authorities. Management has made efforts to comply
with the requirements of the Memorandum and believes such additional action will
not be taken by regulatory authorities.
(13) PENDING TRANSACTION
On January 9, 1996, a definitive agreement was signed under which the Border
Bank will be purchased by Texas State Bank, the principal operating subsidiary
of Texas Regional Bancshares, Inc. The agreement has been approved by the Boards
of Directors of the Border Bank, Texas State Bank and Texas Regional Bancshares,
Inc. The sale of the Bank is subject to approval by the appropriate regulatory
agencies and contingent upon, among other things, Texas Regional Bancshares,
Inc. having successfully raised additional capital to partially fund the
transaction.
(14) SUBSEQUENT EVENT
On January 12, 1996, the Bank declared and paid a dividend of $2.50 per
share, or $500,000 in the aggregate, to shareholders of record at that date.
F-131
<PAGE>
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
NO PERSON HAS BEEN AUTHORIZED IN CONNECTION WITH THE OFFERING MADE HEREBY TO
GIVE ANY INFORMATION OR TO MAKE ANY REPRESENTATION NOT CONTAINED IN THIS
PROSPECTUS AND, IF GIVEN OR MADE, SUCH INFORMATION OR REPRESENTATION MUST NOT BE
RELIED UPON AS HAVING BEEN AUTHORIZED BY THE COMPANY OR ANY UNDERWRITER. THIS
PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO SELL OR A SOLICITATION OF ANY OFFER
TO BUY ANY OF THE SECURITIES OFFERED HEREBY TO ANY PERSON OR BY ANYONE IN ANY
JURISDICTION IN WHICH IT IS UNLAWFUL TO MAKE SUCH OFFER OR SOLICITATION. NEITHER
THE DELIVERY OF THIS PROSPECTUS NOR ANY SALE MADE HEREUNDER SHALL, UNDER ANY
CIRCUMSTANCES, CREATE ANY IMPLICATION THAT THE INFORMATION CONTAINED HEREIN IS
CORRECT AS OF ANY DATE SUBSEQUENT TO THE DATE HEREOF.
--------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
---------
<S> <C>
Available Information.......................... 2
Prospectus Summary............................. 3
Risk Factors................................... 8
Use of Proceeds................................ 11
The Company.................................... 12
Proposed Mergers............................... 14
Price Range of Common Stock and Dividend
Policy........................................ 18
Capitalization................................. 19
Texas Regional Bancshares, Inc. Selected
Consolidated Financial Information............ 20
Texas Regional Bancshares, Inc. Pro Forma
Combined Condensed Financial Information...... 21
Texas Regional Bancshares, Inc. Management's
Discussion and Analysis of Financial Condition
and Results of Operations..................... 28
Business....................................... 62
Management..................................... 79
Principal Holders of Capital Stock............. 86
Selling Shareholder............................ 88
Description of Capital Stock................... 89
Shares Eligible for Future Sale................ 89
Underwriting................................... 91
Legal Matters.................................. 92
Experts........................................ 92
Index to Financial Statements.................. F-1
</TABLE>
2,200,000 SHARES
[TEXAS REGIONAL BANCSHARES LOGO]
TEXAS REGIONAL
BANCSHARES, INC.
COMMON STOCK
------------
PROSPECTUS
------------
ALEX. BROWN & SONS
INCORPORATED
FIRST SOUTHWEST COMPANY
May 9, 1996
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
