<PAGE>
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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------
FORM 10-Q
<TABLE>
<S> <C>
/X/ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED MARCH 31, 1996
/ / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF
THE SECURITIES EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM TO
</TABLE>
COMMISSION FILE NO. 0-14517
------------------------
TEXAS REGIONAL BANCSHARES, INC.
(Exact name of Registrant as specified in its charter)
<TABLE>
<S> <C>
TEXAS 74-2294235
(State or other jurisdiction (I.R.S. Employer
of Identification No.)
incorporation or
organization)
</TABLE>
P.O. BOX 5910
3700 N. TENTH, SUITE 301
MCALLEN, TEXAS 78502
(Address of principal executive offices)
210/631-5400
(Registrant's telephone number, including area code)
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes _X_ No ____
INDICATE THE NUMBER OF SHARES OUTSTANDING OF EACH OF
THE ISSUER'S CLASSES OF COMMON STOCK, AS OF THE LATEST
PRACTICABLE DATE.
Class A Voting Common Stock 6,196,791 shares $1 par
value, outstanding as of April 16, 1996.
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1
<PAGE>
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
The information called for by Item 1. are included herein.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.
The information called for by Item 2. are included herein.
PART II. OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
(a)Exhibits.
27. Financial Data Schedule
(b)Reports on Form 8-K.
A report on Form 8-K and an Amended Form 8-K report were filed by Texas
Regional Bancshares, Inc. on January 23, 1996 and March 20, 1996, respectively.
2
<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
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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
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Total Assets $ 655,886 $ 539,005 $ 646,769
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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
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Total Liabilities 591,323 481,664 584,049
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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 Shares at
March 31, 1996, 6,193,629 Shares at March 31, 1995 and
6,196,791 Shares at December 31, 1995 (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
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Total Shareholders' Equity 64,563 57,341 62,720
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Total Liabilities and Shareholders' Equity $ 655,886 $ 539,005 $ 646,769
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The accompanying notes are an integral part of the consolidated financial statements.
</TABLE>
3
<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>
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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
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Total Interest Income 12,970 10,179
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Interest Expense
Deposits 5,275 3,707
Federal Funds Purchased and Securities Sold Under Repurchase Agreements 6 14
Short-Term Borrowing -- 8
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Total Interest Expense 5,281 3,729
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Net Interest Income 7,689 6,450
Provision for Loan Losses 461 366
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Net Interest Income After Provision for Loan Losses 7,228 6,084
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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
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Total Noninterest Income 1,946 1,590
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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
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Total Noninterest Expense 5,314 4,594
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Income Before Income Tax Expense 3,860 3,080
Income Tax Expense 1,306 1,093
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Net Income $ 2,554 $ 1,987
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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
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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
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The accompanying notes are an integral part of the consolidated financial statements.
</TABLE>
4
<PAGE>
Texas Regional Bancshares, Inc. and Subsidiary
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY (UNAUDITED)
For the Year Ended December 31, 1995
And the Three Months Ended March 31, 1996
<TABLE>
<CAPTION>
Unrealized
Class A Gain (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>
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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
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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
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</TABLE>
5
<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
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Net Cash Provided by Operating Activities 4,087 3,225
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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)
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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)
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Net Cash Provided by Financing Activities 5,486 3,386
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Increase in Cash and Cash Equivalents 10,214 2,015
Cash and Cash Equivalents at Beginning of Year 34,533 41,777
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Cash and Cash Equivalents at End of Quarter $ 44,747 $ 43,792
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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
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The accompanying notes are an integral part of the consolidated financial statements.
</TABLE>
6
<PAGE>
Texas Regional Bancshares, Inc. and Subsidiary
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 is 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.
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.
7
<PAGE>
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 $57.0
million net purchase price ($99.5 million less $42.5 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.
8
<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 $ 42,533A $ 54,001
(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 (57,469) 78,751
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
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Total Assets $ 655,886 $ 426,081 $ 119,945 $ (32,231) $1,169,681
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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
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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
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Total Liabilities 591,323 364,447 102,780 4,035 1,062,585
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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 40,353A 69,592
(30,000)E
Retained Earnings 29,102 36,682 6,170 (42,852)F 29,102
Unrealized Gain (Loss) on Securities
Available for Sale 26 (48) (5) 53F 26
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Total Shareholders' Equity 64,563 61,634 17,165 (36,266) 107,096
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Total Liabilities and Shareholders'
Equity $ 655,886 $ 426,081 $ 119,945 $ (32,231) $1,169,681
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</TABLE>
9
<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>
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Interest Income $ 12,970 $ 8,192 $ 2,341 $ (613)J $ 22,890
Interest Expense 5,281 3,283 1,138 33K 9,735
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Net Interest Income 7,689 4,909 1,203 (646) 13,155
Provision for Loan Losses 461 290 71 -- 822
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Net Interest Income After Provision for Loan
Losses 7,228 4,619 1,132 (646) 12,333
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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
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Total Noninterest Income 1,946 338 94 -- 2,378
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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
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Total Noninterest Expense 5,314 1,766 462 457 7,999
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Income Before Income Tax Expense 3,860 3,191 764 (1,102) 6,713
Income Tax Expense 1,306 914 172 (253)N 2,139
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Net Income $ 2,554 $ 2,277 $ 592 $ (849) $ 4,574
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Primary Earnings Per Common Share
Net Income $ 0.41 $ 0.54
Weighted Average Number of Common Shares
Outstanding (In Thousands) 6,290 8,470
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Fully Diluted Earnings Per Common Share
Net Income $ 0.41 $ 0.54
Weighted Average Number of Common Shares
Outstanding (In Thousands) 6,295 8,475
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</TABLE>
10
<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 $ (4,059)J $ 87,271
Interest Expense 17,041 2,817 13,103 4,415 131K 37,507
- ---------------------------------------------------------------------------------------------------------------
Net Interest Income 26,464 3,520 19,369 4,601 (4,190) 49,764
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 (4,190) 45,169
- ---------------------------------------------------------------------------------------------------------------
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 2,189M 12,361
- ---------------------------------------------------------------------------------------------------------------
Total Noninterest Expense 17,847 3,008 6,264 2,167 2,483 31,769
- ---------------------------------------------------------------------------------------------------------------
Income Before Income Tax Expense 13,270 1,083 12,082 2,265 (6,673) 22,027
Income Tax Expense 4,630 367 3,436 381 (2,105)N 6,709
- ---------------------------------------------------------------------------------------------------------------
Net Income $ 8,640 $ 716 $ 8,646 $ 1,884 $ (4,568) $ 15,318
- ---------------------------------------------------------------------------------------------------------------
Primary Earnings Per Common Share
Net Income $ 1.39 $ 1.82
Weighted Average Number of Common
Shares Outstanding
(In Thousands) 6,218 8,398
- ---------------------------------------------------------------------------------------------------------------
Fully Diluted Earnings Per Common
Share
Net Income $ 1.39 $ 1.82
Weighted Average Number of Common
Shares Outstanding (In
Thousands) 6,227 8,407
- ---------------------------------------------------------------------------------------------------------------
</TABLE>
11
<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 $42.5 million net capital raised through the
offering based on an assumed sale of 2,180,000 shares of Class A Voting
Common Stock for a price of $21.00 per share, the closing price as of April
19, 1996 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 $57.0 million net purchase
price ($99.5 million less $42.5 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 $57.0 million net purchase
price ($99.5 million less $42.5 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.
12
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
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 reduced by an
increase in noninterest expense. A more detailed description of the results of
operations is included in the material that follows.
During August 1995, Texas State Bank,(the "Bank") a subsidiary of Texas Regional
Bancshares, Inc. (collectively the "Company"), acquired two branch bank
locations, one in Rio Grande City, Texas, and the other in Roma, Texas (the
"RGC/Roma Branch Acquisitions"). The RGC/Roma Branch Acquisitions included the
purchase of $43.7 million in loans and the assumption of approximately $79.7
million in deposit liabilities of these branches. This transaction was accounted
for as a purchase; therefore, the results of operations of the two branches are
included in the consolidated financial statements from the date of acquisition.
The following table presents selected financial data regarding results of
operations:
<TABLE>
<CAPTION>
Condensed Quarterly Income Statements 1996 1995
Taxable Equivalent Basis ----------- ------------------------------------------
(Dollars in Thousands, FIRST Fourth Third Second First
Except Per Share Data) QUARTER Quarter Quarter Quarter Quarter
<S> <C> <C> <C> <C> <C>
- -----------------------------------------------------------------------------------------------------------
Interest Income $ 13,176 $ 12,804 $ 11,904 $ 10,880 $ 10,218
Interest Expense 5,281 5,171 4,857 4,295 3,729
- -----------------------------------------------------------------------------------------------------------
Net Interest Income 7,895 7,633 7,047 6,585 6,489
Provision for Loan Losses 461 625 372 322 366
Noninterest Income 1,946 1,729 1,623 1,576 1,590
Noninterest Expense 5,314 5,035 4,694 4,654 4,594
- -----------------------------------------------------------------------------------------------------------
Income Before Taxable-Equivalent Adjustment and
Income Tax 4,066 3,702 3,604 3,185 3,119
Taxable-Equivalent Adjustment 206 105 35 35 39
Income Tax Expense 1,306 1,177 1,292 1,109 1,093
- -----------------------------------------------------------------------------------------------------------
Net Income $ 2,554 $ 2,420 $ 2,277 $ 2,041 $ 1,987
- -----------------------------------------------------------------------------------------------------------
Net Income Per Common Share
Primary $ 0.41 $ 0.39 $ 0.37 $ 0.33 $ 0.32
Fully Diluted 0.41 0.39 0.36 0.33 0.32
- -----------------------------------------------------------------------------------------------------------
</TABLE>
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
13
<PAGE>
outstanding improved earnings. Total average 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.
The following table presents for the three months ended March 31, 1996, December
31, 1995 and March 31, 1995, the total dollar amount of interest income from
average interest-earning assets and the resultant yields, reported on a tax-
equivalent basis, as well as the interest-bearing liabilities, expressed both in
dollars and rates. Average balances are derived from average daily balances and
the yields and costs are established by dividing income or expense by the
average balance of the asset or liability. Income and yield on interest-earning
assets include amounts to convert tax-exempt income to a taxable-equivalent
basis, assuming a 35% effective income tax rate for 1996 and a 34% effective
income tax rate for 1995.
<TABLE>
<CAPTION>
Three Months Ended
Summary of Interest-Earning -------------------------------------------------------------------------------------------------------
Assets and Interest-Bearing March 31, 1996 December 31, 1995 March 31, 1995
Liabilities --------------------------------- --------------------------------- ---------------------------------
Taxable-Equivalent Basis AVERAGE Yield/ Average Yield/ Average Yield/
(Dollars in Thousands) BALANCE Interest Rate* Balance Interest Rate* Balance Interest Rate*
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
- ------------------------------------------------------------------------------------------------------------------------------------
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
- ------------------------------------------------------------------------------------------------------------------------------------
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
- ------------------------------------------------------------------------------------------------------------------------------------
Net Interest Income $ 7,895 $ 7,633 $ 6,489
- ------------------------------------------------------------------------------------------------------------------------------------
Net Yield on Total
Interest-Earning Assets 5.38% 5.28% 5.54%
- ------------------------------------------------------------------------------------------------------------------------------------
* Annualized
</TABLE>
14
<PAGE>
The following table presents the effects of changes in volume, rate and
rate/volume on interest income and interest expense for major categories of
interest-earning assets and interest-bearing liabilities for the three month
period ended March 31, 1996 as compared to the three month period ended March
31, 1995. Nonaccrual loans are included in assets, thereby reducing yields. See
"Nonperforming Assets". The allocation of the rate/volume variance has been made
pro rata on the percentage that volume and rate variances produce in each
category.
<TABLE>
<CAPTION>
Analysis of Changes in Net Interest Income
Taxable-Equivalent Basis
Three Months Ended March 31, Due to Change in
1996 Compared to March 31, 1995 -------------------------------------
(In Thousands) Net Change Volume Rate Rate/Volume
<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) $ --
- --------------------------------------------------------------------------------------------------------------
</TABLE>
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.
See "Allowance For Loan Losses."
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 the 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 the three months ended March 31, 1995 is attributable to an
increase volume of business.
15
<PAGE>
The following table summarizes the major noninterest income categories:
<TABLE>
<CAPTION>
1996 1995
----------- --------------------------------------------------
Noninterest Income FIRST Fourth Third Second First
(In Thousands) QUARTER Quarter Quarter Quarter Quarter
<S> <C> <C> <C> <C> <C>
- -------------------------------------------------------------------------------------------------------------------
Service Charges on Deposit Accounts $ 939 $ 955 $ 899 $ 837 $ 781
Other Service Charges 236 171 192 223 273
- -------------------------------------------------------------------------------------------------------------------
Total Service Charges 1,175 1,126 1,091 1,060 1,054
Trust Service Fees 366 339 314 316 287
Investment Securities Gains (Losses) 1 (98) -- -- (13)
Data Processing Service Fees 220 171 112 85 73
Other Operating Income 184 191 106 115 189
- -------------------------------------------------------------------------------------------------------------------
Total $ 1,946 $ 1,729 $ 1,623 $ 1,576 $ 1,590
- -------------------------------------------------------------------------------------------------------------------
</TABLE>
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.
16
<PAGE>
The following table displays the major noninterest expense categories:
<TABLE>
<CAPTION>
1996 1995
----------- --------------------------------------------------
Noninterest Expense FIRST Fourth Third Second First
(In Thousands) QUARTER Quarter Quarter Quarter Quarter
<S> <C> <C> <C> <C> <C>
- -------------------------------------------------------------------------------------------------------------------
Salaries and Employee Benefits
Salaries and Wages $ 2,163 $ 2,076 $ 1,954 $ 1,808 $ 1,767
Employee Benefits 574 483 500 484 491
- -------------------------------------------------------------------------------------------------------------------
Total Salaries and Employee Benefits 2,737 2,559 2,454 2,292 2,258
- -------------------------------------------------------------------------------------------------------------------
Net Occupancy Expense 317 279 277 260 253
- -------------------------------------------------------------------------------------------------------------------
Equipment Expense 643 564 535 498 431
- -------------------------------------------------------------------------------------------------------------------
Other Real Estate (Income) Expense, Net
(Rent Income) (33) (22) (27) (26) (71)
(Gain) Loss Sale of Other Real Estate -- (71) (6) (1) 81
Expense 23 48 34 27 22
Write-Downs -- -- 59 60 --
- -------------------------------------------------------------------------------------------------------------------
Total Other Real Estate (Income) Expense, Net (10) (45) 60 60 32
- -------------------------------------------------------------------------------------------------------------------
Other Noninterest Expense
Advertising and Public Relations 212 187 203 144 238
Amortization of Intangibles 123 123 88 56 56
Data Processing and Check Clearing 151 132 147 104 108
Director Fees 74 75 74 67 68
Franchise Tax 74 49 50 49 50
Insurance 43 39 38 67 84
FDIC Insurance 1 47 (29) 261 261
Legal and Professional 258 251 221 207 191
Stationery and Supplies 194 184 182 170 122
Telephone 67 77 66 58 49
Other Losses 122 239 117 124 144
Miscellaneous Expenses 308 275 211 237 249
- -------------------------------------------------------------------------------------------------------------------
Total Other Noninterest Expense 1,627 1,678 1,368 1,544 1,620
- -------------------------------------------------------------------------------------------------------------------
Total $ 5,314 $ 5,035 $ 4,694 $ 4,654 $ 4,594
- -------------------------------------------------------------------------------------------------------------------
</TABLE>
BALANCE SHEET ANALYSIS
Average interest-earning assets of $590.5 for the three month 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 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 levels of $344.3 million and increased $44.6 million
or 10.8% compared to the three months ended December 31, 1995 levels 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
of $120.5 million and decreased $24.1 million or 16.7% compared to the three
months ended December 31, 1995 levels 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 and $20.7 million
or 3.3% compared to the three months ended December 31, 1995 levels of $634.9
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 levels of $372.3 million and $15.6 million or 3.4% compared
to the three months ended December 31, 1995 levels 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 levels 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.
17
<PAGE>
Management attributes the strong growth in average assets and deposits for the
three months ended March 31, 1996 compared to the three months ended March 31,
1995 primarily to the RGC/Roma Branch Acquisitions.
The following table presents the consolidated average balance sheets:
<TABLE>
<CAPTION>
1996 1995
--------- ------------------------------------------
Average Balance Sheets FIRST Fourth Third Second First
(In thousands) QUARTER Quarter Quarter Quarter Quarter
<S> <C> <C> <C> <C> <C>
- ----------------------------------------------------------------------------------------------------
Assets
Loans $ 457,394 $ 412,841 $ 372,511 $ 351,465 $ 344,279
Investment Securities
Taxable 115,525 139,688 130,504 118,675 115,477
Tax-Exempt 4,920 4,889 4,797 4,919 5,023
Federal Funds Sold 12,628 16,615 34,971 17,821 9,821
- ----------------------------------------------------------------------------------------------------
Total Interest-Earning Assets 590,467 574,033 542,783 492,880 474,600
Cash and Due from Banks 35,081 31,520 31,538 29,871 31,675
Bank Premises and Equipment, Net 18,680 17,739 16,535 15,573 15,613
Other Assets 16,215 15,967 14,419 11,845 11,797
Allowance for Loan Losses (4,804) (4,347) (4,331) (4,211) (3,743)
- ----------------------------------------------------------------------------------------------------
Total $ 655,639 $ 634,912 $ 600,944 $ 545,958 $ 529,942
- ----------------------------------------------------------------------------------------------------
Liabilities
Demand Deposits
Commercial and Individual $ 111,171 $ 95,864 $ 105,812 $ 92,804 $ 92,612
Public Funds 5,393 17,377 2,109 5,582 3,208
- ----------------------------------------------------------------------------------------------------
Total Demand Deposits 116,564 113,241 107,921 98,386 95,820
- ----------------------------------------------------------------------------------------------------
Savings
Commercial and Individual 36,872 36,810 32,332 27,364 28,018
Public Funds 481 547 369 -- --
Money Market Checking and Savings Accounts
Commercial and Individual 107,433 106,498 104,128 95,042 101,856
Public Funds 28,337 25,577 27,563 25,853 29,531
Time Deposits
Commercial and Individual 285,402 273,127 246,797 218,479 193,461
Public Funds 11,332 11,662 16,610 17,130 19,402
- ----------------------------------------------------------------------------------------------------
Total Interest-Bearing Deposits 469,857 454,221 427,799 383,868 372,268
- ----------------------------------------------------------------------------------------------------
Total Deposits 586,421 567,462 535,720 482,254 468,088
- ----------------------------------------------------------------------------------------------------
Federal Funds Purchased and Securities
Sold Under Repurchase Agreements 685 799 997 1,228 1,348
Short-Term Borrowings -- -- 75 429 429
Other Liabilities 4,375 4,310 4,231 3,626 3,168
Shareholders' Equity 64,158 62,341 59,921 58,421 56,909
- ----------------------------------------------------------------------------------------------------
Total $ 655,639 $ 634,912 $ 600,944 $ 545,958 $ 529,942
- ----------------------------------------------------------------------------------------------------
</TABLE>
18
<PAGE>
RISK ANALYSIS OF THE LOAN PORTFOLIO
Total loans at March 31, 1996 of $467.1 million increased $112.6 million or
31.8% compared to March 31, 1995 levels of $354.4 million and increased $16.2
million or 3.6% compared to December 31, 1995 levels of $450.9 million. The
increase in total loans at March 31, 1996 compared to total loans at 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.
The increase in Commercial loans in general, and Commercial Tax Exempt loans in
particular, for the three months 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 equivalent assets.
The Company's loans are widely diversified by borrower and industry group. Loan
demand remains strong which is reflective of the positive economic growth in the
Company's trade area.
The following table presents the composition of the loan portfolio for the last
five quarters:
<TABLE>
<CAPTION>
1996 1995
--------- ------------------------------------------
Loan Portfolio Composition FIRST Fourth Third Second First
(In Thousands) QUARTER Quarter Quarter Quarter Quarter
<S> <C> <C> <C> <C> <C>
- ----------------------------------------------------------------------------------------------------
Commercial $ 116,816 $ 112,042 $ 105,395 $ 99,961 $ 106,655
Commercial Tax-Exempt 34,401 34,419 397 -- --
- ----------------------------------------------------------------------------------------------------
Total Commercial Loans 151,217 146,461 105,792 99,961 106,655
- ----------------------------------------------------------------------------------------------------
Agricultural 28,447 25,097 19,247 17,325 19,982
- ----------------------------------------------------------------------------------------------------
Real Estate
Construction 28,682 29,967 25,998 23,228 20,720
Commercial Mortgage 136,057 129,953 128,979 114,232 113,120
Agricultural Mortgage 17,785 17,057 15,284 12,771 12,277
1-4 Family Mortgage 61,704 59,052 54,836 49,704 49,524
- ----------------------------------------------------------------------------------------------------
Total Real Estate Loans 244,228 236,029 225,097 199,935 195,641
- ----------------------------------------------------------------------------------------------------
Consumer 43,167 43,267 44,471 33,242 32,132
- ----------------------------------------------------------------------------------------------------
Total Loans $ 467,059 $ 450,854 $ 394,607 $ 350,463 $ 354,410
- ----------------------------------------------------------------------------------------------------
</TABLE>
NONPERFORMING ASSETS
Nonperforming assets are comprised of loans for which the accrual of interest
has been discontinued, loans for which the interest rate has been reduced to
less than normal rates due to a serious weakening in the borrower's financial
condition, and other assets which consist of real estate and other property
which have been acquired in partial or full satisfaction of loan obligations and
which are awaiting disposition. A loan is generally placed on nonaccrual status
when payment of principal or interest is contractually past due 90 days, or
earlier when concern exists as to the ultimate collection of principal and
interest. At the time a loan is placed on nonaccrual status, interest previously
accrued but uncollected is reversed and charged against current income. 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.
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 of $533,000 reflects an
increase of $227,000 or 74.2% compared to the March 31, 1995 level of $306,000.
19
<PAGE>
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.
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 has 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 loans during the
three months ended March 31, 1996.
An analysis of the components of nonperforming assets for the last five quarters
is presented in the following table:
<TABLE>
<CAPTION>
1996 1995
----------- --------------------------------------------------
Nonperforming Assets FIRST Fourth Third Second First
(Dollars in Thousands) QUARTER Quarter Quarter Quarter Quarter
<S> <C> <C> <C> <C> <C>
- -------------------------------------------------------------------------------------------------------------------
Nonaccrual Loans $ 2,855 $ 2,092 $ 1,519 $ 1,490 $ 1,753
Renegotiated Loans 5 6 8 9 11
- -------------------------------------------------------------------------------------------------------------------
Nonperforming Loans 2,860 2,098 1,527 1,499 1,764
Other Nonperforming Assets
(Primarily Other Real Estate) 1,463 1,489 1,502 1,762 1,700
- -------------------------------------------------------------------------------------------------------------------
Total Nonperforming Assets 4,323 3,587 3,029 3,261 3,464
Accruing Loans 90 Days or More Past Due 533 642 244 879 306
- -------------------------------------------------------------------------------------------------------------------
Total Nonperforming Assets and Accruing Loans
90 Days or More Past Due $ 4,856 $ 4,229 $ 3,273 $ 4,140 $ 3,770
- -------------------------------------------------------------------------------------------------------------------
Nonperforming Loans as a % of Total Loans 0.61% 0.47% 0.39% 0.43% 0.50%
Nonperforming Assets as a % of Total Loans and
Other Nonperforming Assets 0.92 0.79 0.76 0.93 0.97
Nonperforming Assets as a % of Total Assets 0.66 0.55 0.49 0.60 0.64
Nonperforming Assets Plus Accruing Loans 90 Days
or More Past Due as a % of Total Loans And Other
Nonperforming Assets 1.04 0.94 0.83 1.18 1.06
- -------------------------------------------------------------------------------------------------------------------
</TABLE>
Management continues to emphasize maintaining a low level of nonperforming
assets and returning nonperforming assets to an earning status.
ALLOWANCE FOR LOAN LOSSES
The allowance for loan losses at 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. 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.
20
<PAGE>
The following table summarizes the transactions in the allowance for loan
losses:
<TABLE>
<CAPTION>
1996 1995
Allowance for Loan ----------- --------------------------------------------------
Loss Activity FIRST Fourth Third Second First
(Dollars in Thousands) QUARTER Quarter Quarter Quarter Quarter
<S> <C> <C> <C> <C> <C>
- --------------------------------------------------------------------------------------------------------------------
Balance at Beginning of Period $ 4,542 $ 4,121 $ 3,980 $ 3,995 $ 3,511
Balance from Acquisitions -- -- 450 -- --
Provision for Loan Losses 461 625 372 322 366
Charge-Offs
Commercial 60 93 236 420 64
Agricultural -- -- 405 11 --
Real Estate 4 50 -- 12 49
Consumer 106 119 85 66 30
- --------------------------------------------------------------------------------------------------------------------
Total Charge-Offs 170 262 726 509 143
- --------------------------------------------------------------------------------------------------------------------
Recoveries
Commercial 33 42 30 81 248
Agricultural -- 1 -- 64 1
Real Estate 7 -- 2 2 --
Consumer 17 15 13 25 12
- --------------------------------------------------------------------------------------------------------------------
Total Recoveries 57 58 45 172 261
- --------------------------------------------------------------------------------------------------------------------
Net Charge-Offs (Recoveries) 113 204 681 337 (118)
- --------------------------------------------------------------------------------------------------------------------
Balance at End of Period $ 4,890 $ 4,542 $ 4,121 $ 3,980 $ 3,995
- --------------------------------------------------------------------------------------------------------------------
Ratio of Allowance for Loan Losses to Loans
Outstanding, Net of Unearned Discount 1.05% 1.01% 1.04% 1.14% 1.13%
Ratio of Allowance For Loan Losses to Nonperforming
Assets 113.12 126.62 136.05 122.05 115.33
Ratio of Net Charge-Offs (Recoveries) to Average
Total Loans Outstanding, Net of Unearned Discount 0.10 0.30 0.18 0.09 (0.03)
- --------------------------------------------------------------------------------------------------------------------
</TABLE>
DEPOSITS
Total deposits at March 31, 1996 of $586.0 million increased $110.0 million or
23.1% compared to the March 31, 1995 levels 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 compares favorably to the $3.9 million or 0.8% increase for
total deposits at March 31, 1995 compared to total deposits at December 31,
1995.
21
<PAGE>
The following table presents the composition of total deposits for the last five
quarters:
<TABLE>
<CAPTION>
1996 1995
--------- ------------------------------------------
Total Deposits FIRST Fourth Third Second First
(In Thousands) QUARTER Quarter Quarter Quarter Quarter
<S> <C> <C> <C> <C> <C>
- ----------------------------------------------------------------------------------------------------
Demand Deposits
Commercial and Individual $ 113,072 $ 113,345 $ 102,733 $ 97,593 $ 94,735
Public Funds 7,015 7,069 5,407 4,395 2,661
- ----------------------------------------------------------------------------------------------------
Total Demand Deposits 120,087 120,414 108,140 101,988 97,396
- ----------------------------------------------------------------------------------------------------
Interest-Bearing Deposits
Savings
Commercial and Individual 38,427 35,521 36,428 27,346 27,520
Public Funds 423 612 496 -- --
Money Market Checking and Savings
Commercial and Individual 106,861 105,409 103,704 94,096 97,728
Public Funds 20,361 22,278 24,078 20,540 23,886
Time Deposits
Commercial and Individual 287,827 285,545 265,728 221,100 211,123
Public Funds 12,008 9,952 15,128 15,462 18,332
- ----------------------------------------------------------------------------------------------------
Total Interest-Bearing Deposits 465,907 459,317 445,562 378,544 378,589
- ----------------------------------------------------------------------------------------------------
Total Deposits $ 585,994 $ 579,731 $ 553,702 $ 480,532 $ 475,985
- ----------------------------------------------------------------------------------------------------
</TABLE>
CAPITAL AND LIQUIDITY
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.
The Company is dependent on dividend and interest income from the Bank and the
sale of stock for its liquidity. Applicable Federal Reserve Board regulations
provide that bank holding companies are permitted by regulatory authorities to
pay cash dividends on their common or preferred stock if consolidated earnings
and consolidated capital are within regulatory guidelines.
The risk-based capital standards as established by the Federal Reserve Board of
Governors apply to Texas Regional and Texas State Bank. The numerator of the
risk-based capital ratio for bank holding companies includes Tier I capital,
consisting of common shareholders' equity and qualifying cumulative and
noncumulative perpetual preferred stock; and Tier II capital, consisting of
other preferred stock, reserve for possible loan losses and certain subordinated
and term-debt securities. 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 ratio aggregates generic classes of balance sheet and off-balance
sheet exposures, each weighted by one of four factors, ranging from 0% to 100%,
based on the relative risk of the exposure class.
Ratio targets are set for both Tier I and Total Capital (Tier I plus Tier II
capital). The minimum level of Tier I capital to total assets is 4.0% and the
minimum total capital ratio is 8.0%. The Federal Reserve Board has guidelines
for a leverage ratio that is designed as an additional evaluation of capital
adequacy of banks and bank holding companies. The leverage ratio is defined to
be the company's Tier I capital divided by its quarterly average total assets
less goodwill and other intangible assets. An insured depository institution is
"well capitalized" for purposes of FDICIA if its Total Risk-Based Capital Ratio
is equal to or greater than 10%, and Tier I Risk-Based Capital Ratio is equal to
or greater than 6%, and Tier I Leverage Capital Ratio is equal to or greater
than 5%. The Company's Tier I Risk-Based Capital Ratio was approximately 11.66%
and 14.59% as of March 31, 1996 and 1995, respectively. The Company's Total
Risk-Based Capital Ratio was approximately 12.63% and 15.63% as of 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. Based on capital
ratios, the Company is within the definition of "well capitalized" for Federal
Reserve purposes as of March 31, 1996.
22
<PAGE>
Liability liquidity is provided by access to core funding sources, principally
various customers' interest bearing and noninterest bearing deposit accounts in
the Company's trade area. The Company does not have or solicit brokered
deposits. Federal funds purchased and short-term borrowings are additional
sources of liquidity. These sources of liquidity are short-term in nature, and
are not used to fund asset growth.
For the 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.
SELECTED FINANCIAL DATA
<TABLE>
<CAPTION>
Three Months
Ended
March 31,
-------------------- December 31,
Ratio Analysis (Annualized) 1996 1995 1995
<S> <C> <C> <C>
- ---------------------------------------------------------------------------------------------------
Return On Average Assets 1.57% 1.52% 1.51%
Return On Average Equity 16.01 14.16 14.69
Dividend Payout Ratio 24.39 31.25 28.57
Net Interest Income To Total Average Earning Assets* 5.38 5.54 5.33
Efficiency Ratio* 54.11 56.38 54.88
Total Average Loans to Total Average Deposits 78.00 73.55 72.12
Average Equity to Average Assets 9.79 10.74 10.28
- ---------------------------------------------------------------------------------------------------
</TABLE>
* Taxable-Equivalent Basis Assuming a 35% Effective Income Tax Rate for 1996 and
a 34% Effective Income Tax Rate for 1995.
<TABLE>
<CAPTION>
COMMON STOCK TRADING DATA (NASDAQ National Market System)
<S> <C> <C> <C> <C> <C> <C> <C>
- --------------------------------------------------------------------------------------------------
Trading Volume (1996)
Price
March 31, 1996 $22.00* Book Value $10.42 January 211,822 shares
1996 price range $17.00-$23.50 Price/Book Value 111.13% February 135,689 shares
December 31, 1995 $17.25* March 49,189 shares
- --------------------------------------------------------------------------------------------------
</TABLE>
*Closing price.
23
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Texas Regional Bancshares, Inc.
<TABLE>
<S> <C>
April 22, 1996 /s/ G. E. Roney
- ------------------------ -------------------------------------------
Date G. E. Roney
CHAIRMAN OF THE BOARD,
PRESIDENT & CHIEF
EXECUTIVE OFFICER
April 22, 1996 /s/ George R. Carruthers
- ------------------------ -------------------------------------------
Date George R. Carruthers
EXECUTIVE VICE PRESIDENT
& CHIEF FINANCIAL OFFICER
24
</TABLE>
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 9
<LEGEND>
This schedule contains summary financial information extracted from the
Consolidated Balance Sheets, Consolidated Statements of Income found on pages 4
and 5 of the Company's Form 10Q filed April 23, 1996.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1995
<PERIOD-START> JAN-01-1996
<PERIOD-END> MAR-31-1996
<CASH> 31,547
<INT-BEARING-DEPOSITS> 0
<FED-FUNDS-SOLD> 13,200
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 57,453
<INVESTMENTS-CARRYING> 55,913
<INVESTMENTS-MARKET> 56,081
<LOANS> 467,059
<ALLOWANCE> 4,890
<TOTAL-ASSETS> 655,886
<DEPOSITS> 585,994
<SHORT-TERM> 0
<LIABILITIES-OTHER> 4,729
<LONG-TERM> 0
0
0
<COMMON> 6,196
<OTHER-SE> 58,367
<TOTAL-LIABILITIES-AND-EQUITY> 655,886
<INTEREST-LOAN> 11,011
<INTEREST-INVEST> 1,789
<INTEREST-OTHER> 170
<INTEREST-TOTAL> 12,970
<INTEREST-DEPOSIT> 5,275
<INTEREST-EXPENSE> 5,281
<INTEREST-INCOME-NET> 7,689
<LOAN-LOSSES> 461
<SECURITIES-GAINS> 0
<EXPENSE-OTHER> 5,314
<INCOME-PRETAX> 3,860
<INCOME-PRE-EXTRAORDINARY> 3,860
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 2,554
<EPS-PRIMARY> 0.41
<EPS-DILUTED> 0.41
<YIELD-ACTUAL> 5.38
<LOANS-NON> 2,855
<LOANS-PAST> 533
<LOANS-TROUBLED> 5
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 4,542
<CHARGE-OFFS> 170
<RECOVERIES> 57
<ALLOWANCE-CLOSE> 4,890
<ALLOWANCE-DOMESTIC> 4,156
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 734
</TABLE>
